VZCZCXRO3758
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHVC
DE RUEHHK #1719/01 2601115
ZNR UUUUU ZZH
R 161115Z SEP 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 5794
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 HONG KONG 001719 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT: LEHMAN TRADING OPERATIONS SUSPENDED IN HONG KONG; 
ECONOMISTS LOOK FOR MAINLAND STIMULUS PACKAGE 
 
¶1. (SBU) Summary: Hong Kong's Hang Seng Index (HSI) closed 
down 5.4 percent on September 16, mirroring losses in other 
major global markets in the wake of Lehman Brother's 
bankruptcy.  HK's market regulatory authorities suspended 
Lehman's stock and option trading licenses and restricted 
financial transactions by Lehman's operating subsidiaries, as 
the company's approximately 1,000 Hong Kong-based employees 
faced an uncertain future.  The HKG's three top finance 
officials sought to reassure investors, while local 
economists told EconOff that the global economic crisis will 
deepen.  The economists believe the PRC government will use 
its substantial financial reserves to cut taxes and boost 
government spending, as a means to sustain a high 
single-digit GDP growth rate.  End summary. 
 
============= 
Market Update 
============= 
 
¶2. (U) Hong Kong's Hang Seng Index (HSI) lost as much as 
1,333 points (6.9 percent) on September 16 -- a level last 
seen in October 2006 -- before late buying enabled the market 
to inch upward off its lows and close down 5.4 percent. 
HIBOR short term loan rates rose sharply from the previous 
trading day, reflecting market uncertainty.  As quoted by 
Hang Seng Bank at 1754 HRS local time, the overnight and 
one-week rates both increased to 3.5 percent and exceeded the 
longer term HIBOR rates for the first time in recent memory. 
One-month, three-month and six-month HIBOR rates increased to 
3.0 percent, 2.25 percent and 2.25 percent, respectively. 
 
========================================== 
Lehman Brothers Trading Licences Suspended 
========================================== 
 
¶3. (U) Following Lehman's Chapter 11 bankruptcy filing in New 
York, the Hong Kong Stock Exchange (HKSE) suspended Lehman's 
trading licenses in both the stock and options markets as of 
September 16, and disallowed Lehman's access to the HKSE's 
automated trading systems for shares and options.  Hong 
Kong's Securities and Futures Commission issued "restriction 
notices" on financial transactions by Lehman's four major 
operating subsidiaries in Hong Kong, in order to preserve the 
assets of the companies and to protect the interest of the 
companies' clients and the investing public.  (Note: The four 
entities are Lehman Brothers Asia Limited, Lehman Brothers 
Securities Asia Limited, Lehman Brothers Futures Asia 
Limited, and Lehman Brothers Asset Management Asia Limited. 
End note.) 
 
¶4. (SBU) Lehman's SVP of Corporate Communications in HK, 
Matthew Russell, told EconOff on September 16 that Lehman 
employs approximately 1,000 individuals in Hong Kong. 
Lehman's HK staff is "greatly disappointed," he said.  "We 
all expected a different outcome, and we've only had a short 
timeframe in which to absorb the impact."  Lehman's staff was 
told on September 16 that their salaries for September would 
be fully paid, and that their workdays would be cut in half 
until further notice. 
 
=========================================== 
Soothing Words From Top Hong Kong Officials 
=========================================== 
 
¶5. (U) Hong Kong's top three officials in charge of banking 
and financial affairs -- Financial Secretary John Tsang, Hong 
Kong Monetary Authority (HKMA) Chief Executive Joseph Yam, 
and Secretary for Financial Services and the Treasury K. C. 
Chan -- talked to the press in the morning of September 16, 
in an attempt to calm nervous investors.  Tsang said, "The 
Hong Kong government has closely monitored the situation of 
Lehman Brothers and will ensure that the operations of the 
Hong Kong stock market are carried out in an orderly manner." 
 K.C. Chan said, "Hong Kong has a good market regulatory 
system, and we have confidence that the regulatory 
organizations will guarantee that the stock market will 
conduct today's business smoothly." 
 
¶6. (U) Meanwhile, Yam noted the obvious, telling local press 
that the bankruptcy of Lehman Brothers would have "negative 
impacts" on Hong Kong, and would result in market corrections 
here.  Yam said he foresees stability in HIBOR and the pegged 
exchange rate of Hong Kong's dollar to the U.S. dollar.  Yam 
stated that Hong Kong would not have liquidity problems, 
noting that the HKMA could provide funds to bolster the 
market, if necessary.  He described the U.S. markets as 
 
HONG KONG 00001719  002 OF 002 
 
 
experiencing a "serious financial crisis," and he said 
developments related to Lehman Brothers in the next few days 
would be crucial.  He made no reference to AIG's financial 
woes. 
 
========================== 
China's Benchmark Rate Cut 
========================== 
 
¶7. (U) Over the weekend, the PRC government announced a 27 
basis point cut in its benchmark lending rate, announced as a 
means to assist small and medium-sized enterprises.  Hong 
Kong-based market analysts agreed that the rate cut -- the 
first since 2002 -- was not designed to boost declining stock 
market shares.  JP Morgan's Chief Economist Frank Gong 
interpreted China's rate cuts as a significant change in 
policy.  He reiterated his opinion that a series of market 
stimulus measures would be launched soon by Beijing. 
 
====================================== 
Global "Armageddon Base-Case" Scenario 
====================================== 
 
¶8. (SBU) Anthony Lok, Head of Research at Bank of China in 
Hong Kong, told EconOff on September 12 that an "Armageddon 
base-case scenario" is the "most likely outcome" for the 
global economy over the next 12-18 months.  Lok foresees the 
global economy entering a severe recession that will be 
exacerbated by USG actions to prop up its financial markets 
by "printing money, bailing out financial institutions, and 
giving tax breaks the government cannot afford."  He believes 
this will weaken the U.S. dollar and create upward pressure 
on commodity prices and inflation, thereby forcing the 
Federal Reserve and European Central Bank to raise interest 
rates as residential home prices continue to slide during the 
envisioned recession.  In contrast to Lok,s pessimistic 
outlook for the Western European and U.S. economies, he told 
EconOff that the Hong Kong market will be somewhat shielded 
from damage by its ever-closer economic relationship with the 
Mainland. 
 
========================================= 
HK Buffered by Integration with Mainland? 
========================================= 
 
¶9. (SBU) According to Lok, over 50 percent of the Hang Seng 
Index,s market capitalization is comprised of companies 
headquartered in the Mainland, and over 60 percent of HSI 
corporate revenues are sourced from the Mainland.  Lok said 
falling oil and food prices in the Mainland have stemmed the 
PRC government,s immediate inflation concerns.  He expects 
the Mainland to be less severely affected than Western 
markets by the coming global downturn, due to the PRC,s 
ability to use its substantial financial reserves for tax 
cuts and increased government spending. 
 
¶10. (SBU) Lok,s comments were echoed by Grace Ng, Chief 
Economist for Greater China at JPMorgan in Hong Kong.  She 
told EconOff on September 12 that the PRC government "is 
looking at 1998 as an example of the benefits of fiscal 
stimulus spending."  Her 9.6 percent Mainland GDP growth 
forecast for 2009 assumes US$21.9 billion (150 billion 
renminbi) of tax cuts and US$36.5 billion (250 billion 
renminbi) of incremental PRC government spending on 
"infrastructure in major cities, and soft infrastructure 
projects such as health and human services."  She said the 
PRC government views instability in foreign markets as a 
threat to national security, and that Beijing will "use its 
surpluses to boost internal demand, if we see a global 
recession." 
DONOVAN