VZCZCXRO6554
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHHK #2129/01 3261113
ZNR UUUUU ZZH
R 211113Z NOV 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 6293
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 002129 
 
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 Market Report - Officials Encourage Banks to 
Consider Social Responsibilities 
 
¶1. Summary: Hong Kong Monetary Authority Chief Joseph Yam told Legco 
members this morning that he would introduce two new measures to 
encourage additional bank lending to SMEs in Hong Kong.  Despite the 
global financial turmoil, the HKMA managed to minimize its 
investment losses.  The HKMA controlled Exchange Fund has lost 5.8 
percent this year, compared to losses of over 20 percent reported by 
the Mandatory Provident Fund, the government-sponsored retirement 
fund for Hong Kong employees.  In response to HSBC's decision to lay 
off 450 employees on Monday, Chief Executive Donald Tsang and 
Financial Secretary John Tsang called on Hong Kong bankers to 
consider their social responsibilities during times of economic 
crisis.  The HKMA intervened ten times this week to sell Hong Kong 
dollars, allowing HIBOR to fall below two percent for three month 
lending.  The Hang Seng Index lost 6.5 percent this week, but was up 
almost 3 percent in Friday trading.  Weak volumes have encouraged 
volatility in the market, with swings of over 1000 points becoming 
commonplace.  End Summary. 
 
Pressure on Hong Kong Dollar Continues 
 
¶2.  The Hong Kong dollar remained wedged against the strong side of 
its trading band all week at HKD 7.75/USD.   The HKMA sold Hong Kong 
dollars ten times this week, raising the aggregate balance in the 
interbank market to a record high of over HKD 84 billion.  HKMA 
Chief Executive Joseph Yam speculated that the growing demand for 
Hong Kong dollars is a result of investors unwinding long US dollar 
positions and possible repatriation of funds by domestic 
corporations.  With the increasing supply of Hong Kong dollar 
deposits, HIBOR for three-month and one-month lending fell below 2 
percent and 1 percent respectively on Friday, while the overnight 
rate dipped to just 0.25 percent. 
 
HKMA Announces Two New Measures for SMEs 
 
¶3.  Yam told Legislative Council (Legco) Financial Affairs Panel 
members Friday that HKMA will take a flexible approach to bank 
capital adequacy ratios. This echoes statements Yam has been making 
for several weeks, as he encourages banks to resume lending to small 
and medium enterprises.  Though the average capital adequacy ratio 
of locally incorporated banks fell slightly from 14.2 percent by the 
end of June to 13.8 percent at the end of September, Hong Kong's 
banking sector remained well capitalized compared with the 8 percent 
Basel II standard.  Two weeks ago, Yam suggested to banks that the 
HKMA would not look unfavorably on higher NPL ratios if banks were 
increasing lending to SME borrowers. 
 
¶4.  HKMA also announced an agreement with the People's Bank of China 
(PBOC) on expanding credits for Mainland branches or subsidiaries of 
locally incorporated banks.  Both HKMA and PBOC will accept 
collateral from these banks if they apply for an increase in 
liquidity.  Yam told the Legco that he hopes this arrangement will 
help Hong Kong's SMEs to apply for bank loans for their Mainland 
operations. 
 
Hong Kong Exchange Fund Investment Loses 5.8 percent 
 
¶5.  Yam also told the Legco that the HKMA-managed Exchange Fund has 
lost 5.8 percent or HKD 83.3 billion (US$ 10.75 billion) in the 
first three quarters of 2008.  The majority of the Exchange Fund is 
managed by a collection of private fund management companies, with a 
small portion managed by the HKMA itself.  The Exchange Fund lost 
HKD 100.1 billion (US$ 12.9 billion) on its equities investments and 
HKD 13.8 billion (US$ 1.8 billion) on foreign exchange investments. 
But those losses were offset by a gain of HKD 30.6 billion (US$ 3.95 
billion) from bond investments.  Though still hoping that HKMA's 
performance in 2008 would beat the market average, Yam advised Legco 
members that additional losses in the fourth quarter are likely. 
 
¶6.  The annual performance of the Exchange Fund investment portfolio 
has only a limited impact on the Hong Kong government budget, as the 
Fund is committed to allocate a fixed amount of revenues to the 
government based on the average yield in the past six years.  With 
record profits in recent years, the Exchange Fund will have to 
perform badly over a period of several years to significantly affect 
Hong Kong government revenues. 
 
More Bank Layoffs 
 
¶7.  On Monday, November 17, local banking leader HSBC announced 
plans to lay off 450 Hong Kong employees immediately from its retail 
and investment banking departments, including some branch managers. 
The pro-Beijing Wen Wei Po (Nov.18) editorialized that the 
unprecedented move by HSBC reflects the need for commercial banks to 
shift their business strategy away from high-leverage, high-risk 
investments and return to their traditional lending businesses.  Wen 
Wei Po reported on Nov. 20 that Bank of China Hong Kong will also 
cut 500 positions by the end of November.  Bank of China Hong Kong 
 
HONG KONG 00002129  002 OF 002 
 
 
refused to comment.  Bank of East Asia and Hang Seng Bank denied 
that they would lay off workers. 
 
CE promises No Cuts in Government Spending 
 
¶8.  CE Donald Tsang, in London for meetings with British Government 
counterparts, told the press yesterday that the Hong Kong government 
will not cut public spending.  (Note: most economists expect Tsang 
to announce an additional fiscal stimulus package in the near future 
to prop up local consumption spending and reduce unemployment 
pressure.  End Note.)  Tsang called on Hong Kong companies to 
consider their social responsibilities during the economic downturn. 
 Donald Tsang noted that the impact of the financial crisis is 
likely to last for some time; he advised Hong Kong people to prepare 
for the worst while hoping for the best. 
 
Hang Seng Up 3 percent On Friday, but Down 6.5 percent for the Week 
 
¶9.  The Hang Seng Index closed at 12659.20 today, up 2.93 percent or 
360.64 points from Thursday.  For the week, the Index lost 6.5 
percent, or 883.46 points, from last Friday's close.  The Index 
opened 480 points lower in the morning, slipping to just 11,814 as 
it tracked the drop in the Dow.  But rumors that the Chinese 
government would announce details of their RMB 4 trillion stimulus 
package and the U.S. Congress would announce a program to support 
the auto industry pushed the market up; it briefly topped 13,000, 
before falling back slightly in late trading.