VZCZCXRO5322
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHHK #1726/01 2620017
ZNR UUUUU ZZH
R 180017Z SEP 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 5807
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 HONG KONG 001726 
 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT: HKG ASSUMES WATCH OVER AIG'S LARGE LOCAL SUBSIDIARY 
 
¶1. Summary: Sharp declines in locally listed Mainland banking and 
insurance stocks drove the Hang Seng Index (HSI) down 3.6 percent on 
September 17, while HKG authorities intensified their oversight of 
AIG's very large local operating subsidiary, AIA.  Local media 
reported that the HKG's Office of the Commissioner of Insurance 
instructed AIA to seek the Commissioner's approval, prior to 
transferring material assets or capital to its parent company or 
related entities.  Hong Kong's Chief Executive and other senior 
government officials sought to calm nervous AIA policy holders, 
while editorials on September 17 in two large Chinese language daily 
newspapers urged the HKG to take extraordinary measures, if 
necessary, to protect AIA's financial strength.  Market participants 
in Hong Kong remain unsure whether AIG still seeks funding from its 
global operating subsidiaries, following the USG's recent extension 
of credit to AIG and its assumption of control over the company. 
End summary. 
 
Hang Seng Continues Sharp Decline 
--------------------------------- 
 
¶2. The Hang Seng Index (HSI) opened 390 points higher, reflecting 
the market's initial positive response toward the USG's decision to 
provide AIG with a significant credit line, in exchange for majority 
ownership of the company.  Nervous investors in Hong Kong soon began 
selling, however, and the HSI was further impacted by sharp declines 
in locally listed Mainland banking and insurance stocks.  The HSI 
closed down 3.6 percent at 17,637, its lowest trading point of the 
day.  The HIBOR overnight loan rate, as quoted by Hang Seng Bank at 
1624 HRS local time, stood at 3.0 percent -- a 50 basis point 
decline from the previous day's rate, but still high by recent 
standards. 
 
AIG's Operations in Hong Kong and Macau 
--------------------------------------- 
 
¶3. AIA, a wholly-owned subsidiary of AIG, is a key insurance company 
in both Hong Kong and Macau.  Local Chinese press reported on 
September 17 that AIA accounts for 25 percent of the life insurance 
business in Hong Kong, and one-third of the total in Macau. 
According to the Ming Pao and Apple Daily newspapers, AIA has 8,700 
employees in Hong Kong, with two million customers paying USD 1.7 
billion (HKD 13 billion) of annual premiums.  Meanwhile, Macau Daily 
reported on September 17 that AIA has 1,000 agents in Macau and 
approximately 115,000 customers paying USD 100 million (MOP 780 
million) of annual premiums.  In response to AIG-related 
developments in the United States, AIA issued a short press release 
on September 16 that emphasized AIA's solid capital base and good 
reputation.  An unnamed HKG source stated that 1,400 AIA customers 
canceled their policies on September 16, and HKG Commissioner of 
Insurance Clement Cheung told local media that his office is closely 
monitoring the AIG/AIA situation. 
 
HKG May Block Financial Transfers by AIA to Parent 
--------------------------------------------- ----- 
 
¶4. On September 17, Radio Metro Finance and RTHK radio reported that 
the HKG instructed AIA to seek the approval of the Office of the 
Commissioner of Insurance, before AIA transfers material assets or 
capital to other entities, including its parent company and sister 
companies under the AIG umbrella.  Hong Kong authorities became 
concerned by U.S. media reports that AIG will seek to draw on funds 
from its global subsidiaries, as a means to stabilize AIG's 
financial situation in the United States.  Also on September 17, 
Commissioner of Insurance Cheung said, "Based on the current 
accounting statements and related information, AIA has sufficient 
assets to handle the insurance liabilities of its portfolio in Hong 
Kong.  We will exercise the necessary powers to ensure that policy 
holders in Hong Kong are protected." 
 
HKG Officials Reassure Policy Holders 
------------------------------------- 
 
¶5. Financial Secretary John Tsang told local media on September 16 
that the HKG has been monitoring the financial problems of AIG and 
their impact upon AIA in Hong Kong.  Tsang said the HKG Office of 
the Commissioner of Insurance has maintained close contacts with 
regulatory organizations in the United States, senior management of 
AIG, and the leadership of AIA in Hong Kong, in an effort to assess 
the impact of AIG's problems on AIA's operations and financial 
health.  Tsang said, "The insurance authority here has a wide range 
of statutory powers to protect the interests of policyholders.  Hong 
Kong has a healthy insurance system and should be able to handle the 
current situation." 
 
¶6. Meanwhile, Chief Executive Donald Tsang said on September 16 that 
Hong Kong would maintain a "free economy" and refrain from 
government intervention, despite the current financial turbulence. 
Hong Kong Monetary Authority Chief Executive Joseph Yam did not 
 
HONG KONG 00001726  002 OF 002 
 
 
directly address the difficulties of AIG/AIA, while meeting with 
local media on September 17.  He stressed the HKG's "strong systems" 
for supervising the operations and financials of banks, securities 
firms and insurance companies.  Yam said AIG's problems will 
probably not be resolved by government intervention alone, and he 
stressed the importance of market-based solutions for the current 
global financial difficulties. 
 
Chinese Language Newspapers Urge "Exceptional Approach" 
--------------------------------------------- ---------- 
 
¶7. Editorials on September 17 in two large dailies, Ming Pao and 
Sing Tao Daily, urged the HKG to take extraordinary measures to 
protect the interests of AIA policyholders.  Ming Pao's editorial 
suggested the government should freeze AIA's assets, if necessary, 
to prevent its assets or financial reserves from being shifted to 
AIG in the United States.  Sin Tao Daily recommended that the HKG 
"show its courage" and adopt an "exceptional approach to handle the 
crisis."  Market participants remained unsure about whether AIG 
still needed substantial funding from its operating susidiaries, 
following the USG's decision to extend a US$ 85 billion line of 
credit to AIG and take over majority ownership of the firm. 
 
DONOVAN