VZCZCXRO5742
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHHK #1737/01 2621041
ZNR UUUUU ZZH
R 181041Z SEP 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 5823
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 001737 
 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT: HANG SENG ON WILD RIDE; BANK OF EAST ASIA SHARES SUSPENDED 
 
REF: HONG KONG 1726 
 
¶1. Summary: Hong Kong's Hang Seng Index (HSI) fell 7.4 percent 
during the morning trading session on September 18, before 
recovering to close roughly flat for the day.  Trading in shares 
of HK's largest independent local bank, Bank of East Asia (BEA), 
were suspended related to an "unauthorized manipulation" in the 
recorded value of BEA's equity derivatives.  Interbank lending 
tightened, and the Hong Kong Monetary Authority (HKMA) stepped 
in with US$ 200 million of overnight liquidity for local banks. 
The HKG announced that it now receives the balance sheet of AIA, 
the large local operating subsidiary of AIG, on a daily basis, 
and that it is closely monitoring international transfers of 
funds from insurance companies registered in Hong Kong. 
Meanwhile, KPMG began the liquidation of two large Lehman 
Brothers subsidiaries in Hong Kong.  End summary. 
 
Wild Ride for Stocks; Bank of East Asia Shares Suspended 
-------------------------------------- 
 
¶2. Hong Kong's Hang Seng Index (HSI) declined 7.4 percent in the 
morning trading session to a two-year low, before heavy buying 
in the afternoon allowed the market to recover and finish down 
only 0.03 percent for the day.  Mainland banking, insurance and 
property company shares led the morning decline, with several 
major firms falling more than 10 percent. 
 
¶3. HK's largest independent local bank, Bank of East Asia (BEA), 
announced the suspension of trading in its shares at 1430 HRS 
local time, pending "an announcement by the Bank in relation to 
"an unauthorized manipulation of the valuation of certain equity 
derivatives held by the Bank."  BEA's press release stated that 
the bank's interim profit, as announced on August 5, will be 
restated to reduce pre-tax profit by HK$131 million.  The 
release stated, "There is no material effect on the Bank's 
balance sheet or capital, which remain significantly in excess 
of regulatory requirements." (Note: David Li, Chairman of BEA, 
reached a 
settlement with the U.S. Securities and Exchange Commission (SEC) in 
January 
2008, related to SEC allegations of insider trading.  Li paid a US$ 
8.1 million 
fine, but admitted no wrongdoing. End note.) 
 
HKG Augments Inter-Bank Lending Market 
-------------------------------------- 
 
¶4. HIBOR loan rates quoted by Hang Seng Bank at 1813 HRS local time 
were: 3.5 
percent overnight; 4.0 percent for one week and one month; 2.8 
percent for three 
months; and 2.75 percent for six months.  The overnight rate rose 50 
basis 
points from the previous trading day, and short-term liquidity in 
Hong Kong 
remained tight.  Hang Seng Bank CEO Raymond Or confirmed in a 
television 
interview on September 18 that his bank is restricting its lending 
activity in 
the inter-bank market "for the time being."  Or said HIBOR rates 
would likely 
remain high in the near term.  In response to this tightening 
mentality, the 
Hong Kong Monetary Authority (HKMA) announced on September 18 that 
it injected 
approximately US$ 200 million (HKD 1.56 billion) into the overnight 
inter-bank 
loan market, in an effort to boost its liquidity. 
 
AIG Local Subsidiary Firmly Under HKG's Wing 
-------------------------------------------- 
 
¶5. AIG's large local subsidiary, AIA, called a press conference 
on September 18 to reassure its customers.  AIA Chairman Alwin 
Lam and General Manager Derek Yung claimed AIA is financially 
sound, with no liquidity problems.  Yung confirmed reports from 
September 17 that AIA Hong Kong has been placed under the daily 
supervision of the HKG Commissioner of Insurance.  The HKG took 
this extraordinary step to ensure that the financial strength of 
AIA is not transferred to its parent company, or to other AIG 
Group entities (reftel).  He said AIA Hong Kong is operating 
without "interference" from the parent company AIG.  He revealed 
that 2,000 policy holders canceled their insurance with AIA 
during the previous 48 hours.  Yung said AIA's exposure to 
"subprime investments" accounted for less than two percent of 
the company's total assets. 
 
¶6. Commissioner of Insurance Clement Cheung told local media on 
 
HONG KONG 00001737  002 OF 002 
 
 
September 18 that the HKG is monitoring the financial status of 
Hong Kong's insurance operators.  He said he requested AIA to 
deliver 
its balance sheet to his office on a daily basis.  Cheung noted 
that the Commissioner of Insurance may seek help from locally 
registered banks, if necessary, to track down international 
financial transfers by insurance companies operating in Hong 
Kong. 
 
¶7. Adding to local sensitivity about AIA's financial strength is 
the company's role as a registered trustee of the Hong Kong 
Mandatory Provident Fund (HKMPF), a retirement program 
established by the HKG in 1998 for Hong Kong's workers.  Cheung 
emphasized that AIA's trustee role for the HKMPF is unrelated to 
AIA's insurance business, and that AIA has been well supervised 
and monitored by the Mandatory Provident Fund Scheme Authority. 
 
Lehman Liquidation Launched 
--------------------------- 
 
¶8. The Hong Kong Securities and Futures Commission appointed 
KPMG as a provisional liquidator for two major Lehman operating 
subsidiaries on September 18 -- Lehman Brothers Securities Asia 
Limited and Lehman Brothers Futures Asia Limited.  KPMG's 
mandate is to ensure an orderly liquidation of the companies' 
outstanding contracts and other assets.