VZCZCXRO9961
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHVC
DE RUEHHK #2010/01 3051038
ZNR UUUUU ZZH
R 311038Z OCT 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 6149
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 002010 
 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT: HONG KONG RESIDENTS TOLD TO PREPARE FOR 
"PERSISTENT DIFFICULTIES" 
 
¶1. Summary: Though they continue to assure the public that 
Hong Kong's financial foundation is sound, senior Hong Kong 
government (HKG) finance officials warned the global 
financial crisis would strike further blows to Hong Kong's 
economy.  The latest government interest rate cut of 50 basis 
points (directly tied to the U.S. rate cut on October 30) has 
reportedly failed thus far to spur lending rate cuts by local 
banks; this will delay the rate cut's eventual economic 
benefits for Hong Kong businesses.  Hong Kong's Consumer 
Council has identified 50 retail holders of Lehman 
Brothers-arranged "minibonds" it is prepared to support in a 
lawsuit should mediation efforts between minibond investors 
and the banks which sold the instruments fail.  The Hang Seng 
Index fell 2.5 percent on October 31 but was up 9.4 percent 
for the week, reflecting the sharp mid-week rise in global 
equity markets.  Overnight and one week HIBOR rates remained 
low at 0.6 and 1.0 percent, respectively, while longer-term 
rates remained roughly unchanged from the previous week. End 
summary. 
 
--------------------------------------- 
Preparing for "Persistent Difficulties" 
--------------------------------------- 
 
¶2. In remarks before the Legislative Council on October 30, 
Financial Secretary (FS) John Tsang said he is "not 
optimistic" about Hong Kong's economy next year.  He 
described the current global financial crisis as "the worst 
since the Great Depression in the 1930s."  He urged the 
public to prepare for "persistent difficulties."  On a 
brighter note, FS Tsang restated the HKG's mantra that Hong 
Kong's financial system remains well capitalized, and that 
"the foundation of Hong Kong as a financial center is sound." 
 
¶3. Although the Hong Kong Monetary Authority (HKMA) base rate 
declined 50 basis points to an all-time low of 1.5 percent -- 
in lock step with the rate cut in the United States -- Hong 
Kong banks have thus far not reduced their prime lending 
rates.  Hang Seng Bank General Manager Andrew Fung said Hong 
Kong's banks are fearful of rising individual and systemic 
credit risks.  HKMA Chief Executive Joseph Yam said tight 
lending policies at banks will delay the benefits to Hong 
Kong's economy from the rate cut.  Yam reiterated that the 
HKMA stands ready to inject liquidity into the HIBOR market 
as needed. 
 
¶4. Yam warned that Hong Kong's USD 180 billion (HKD 1.4 
trillion) Exchange Fund -- the reserve that backs the Hong 
Kong dollar -- will post its third consecutive quarterly 
loss, and is likely to record an annual loss for the first 
time in the Fund's history.  Bonds comprised 73.5 percent of 
the Fund as of June 30, 2008, with equities and other 
investments totaling 19.2 percent and 7.3 percent, 
respectively. 
 
-------------------------------------------- 
Contingency Planning for Minibond Litigation 
-------------------------------------------- 
 
¶5. Mediation efforts continue between disgruntled retail 
investors and the banks who sold "minibonds" arranged by 
Lehman Brothers.  Hong Kong's Consumer Council (HKCC) 
announced on October 30 that it has identified 50 
complainants it may support in joint legal proceedings 
against the banks if mediation efforts fail.  (Note: The HKCC 
was created in 1974 and is a statutory body, independent of 
the Hong Kong government.  The HKCC carries out its work 
through over 125 paid staff employed in a number of 
functional divisions, including the Complaints and Advice 
Division and the Trade Practices Division. The HKCC collects 
and disseminates information to consumers and government on 
matters affecting consumers in the marketplace, and receives 
and examines complaints from consumers. End note.) If a Hong 
Kong court were eventually to rule in favor of the joint 
complainants, the decision might set a precedent for handling 
the over 3,600 other complaints received by the HKCC. 
 
-------------- 
Market Wrap Up 
-------------- 
 
¶6. The Hang Seng Index (HSI) closed down 2.5 percent at 
13,969 on October 31.  Despite Friday's losses, mid-week 
gains drove the HSI 9.4 percent higher for the week.  The 
short end of the HIBOR curve remained liquid, with the 
overnight and one week lending rates at 0.6 percent and 1.0 
percent, respectively.  Other HIBOR rates as of 1730 local 
 
HONG KONG 00002010  002 OF 002 
 
 
time: one month 2.3 percent; three months 3.35 percent; and 
six months 3.5 percent. 
DONOVAN