VZCZCXRO3277
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHHK #1970 2981103
ZNR UUUUU ZZH
R 241103Z OCT 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 6099
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS HONG KONG 001970 
 
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 Falls to Lowest Level in Six Years 
 
¶1.  Summary: The Hang Seng Index dropped over 13 percent the week of 
October 20-24.  On the good side, HIBOR fell to just 0.8 percent for 
overnight but was still 3.6 percent for one month lending, 
suggesting that the recent HKMA liquidity injection was having only 
marginal benefits for interbank lending.   The press reports that 
major Hong Kong banks are tightening terms on credit card payments 
to some very small merchants.  These changes appear to be targeted 
at risky lenders and may be a way for banks to hedge against loan 
defaults.  HKMA warned that banks should continue to exercise sound 
risk management, despite government deposit guarantees.  Hong Kong's 
inflation rate fell slightly as government subsidies cushioned price 
increases.  End summary. 
 
Hang Seng Index drops 13.3 percent for the week; falls below 13,000 
 
¶2. The Hang Seng Index lost 1142.11 points or 8.3 percent on Friday, 
following regional markets down, to close at 12618.38; daily trading 
volume was HKD 56 billion.  Compared to last Friday, October 17, the 
Hang Seng Index lost 13.3 percent or 1935.83 points.  HSBC lost 12.5 
percent today, closing at HKD 88, the lowest level since Hong Kong 
was hit by SARS in 2003.  The Hang Seng Index has lost 55 percent 
this year, and almost 60 percent from last year's historic high on 
October 30.  In the month of October alone, the Hang Seng Index has 
lost 30 percent.  HIBOR quoted by Hang Seng Bank at 5:30 pm was 0.8 
percent for overnight, 2.0 percent for 1-W, 2.75 percent for 2-W, 
3.60 percent for 1-M, 2-M, 3-M and 6-M, all down from October 17 
when HIBOR stood at 1.5 percent for overnight, 2.75 percent for 1-W, 
3.25 percent for 2-W and 4.1 percent for 1-M, 2-M and 3-M. 
 
Banks Changing Credit Card Payment Terms for Very Small Merchants 
 
¶3. Press reports that some Hong Kong banks (HSBC and Hang Seng are 
mentioned specifically) have unilaterally changed credit card 
payment terms for selected very small merchants. Instead of paying 
merchants within two days, these banks reportedly have extended the 
repayment period to 60 days for some small beauty salons and travel 
agents.  Both HSBC and Hang Seng have declined to comment.  If true, 
these reports probably reflect a growing concern that these small 
enterprises will go under without providing already purchased 
services.  Both travel agents and beauty salons in Hong Kong 
typically require payment in advance for packages or services 
provided in the future.  During difficult economic times, these 
businesses often go under quickly and without warning.  To minimize 
the chance that banks will be held liable for tickets or services 
never provided, the banks may be extending the time period for 
reimbursing the companies.  The banks could also be holding these 
receivables against loan payments in order to minimize the risk if 
the merchant goes under.  This new policy may drive some small 
merchants out of business, unless they can shift their accounts to 
another bank.  Currently only very small businesses seem to be 
affected.  It is unlikely that larger merchants or those with decent 
credit histories will be subject to this type of renegotiation. 
 
HKMA Warns on Sound Risk Management 
 
¶4. HKMA Deputy Chief Executive Y.K. Choi told the press today that 
the HKMA would not relax its strict supervision of Hong Kong banks. 
He encouraged banks not to become complacent in their risk 
management processes following the government's promise of blanket 
protection for bank deposits.  Choi said HKMA has requested all 
banks to submit weekly reports on high-risk loans.  Thursday, 
October 23, the HKMA injected HKD 3.9 billion (US$ 500 million) into 
the banking sector as the Hong Kong dollar hit the strong side of 
the pegged rate, trading at HKD 7.7535/USD.  Market sources said in 
recent weeks there was an indication that some deposits have started 
to return to Hong Kong; as a result the demand for Hong Kong dollars 
has been rising.  HKMA's market intervention this week was meant to 
check the rising pegged rate, not to increase liquidity to the 
banks. 
 
September Inflation Checked by Government Subsidies 
 
¶5. Hong Kong's consumer price index in September was 6.1 percent 
(net of the effects of the government's one-off relief measures), 
slightly lower than the 6.3 percent CPI in August.  For the first 
nine months, Hong Kong's consumer price index rose by 5 percent from 
a year ago.  Food prices increased the most, up 14.9 percent from a 
year ago.