VZCZCXRO1419
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHHK #2156/01 3331024
ZNR UUUUU ZZH
R 281024Z NOV 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 6324
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 002156 
 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT: HK Market Update, Nov. 28 -- More RMB Business in HK? 
 
¶1. Summary: In recent meetings, HKMA Chief Joseph Yam asked Beijing 
officials to allow expanded RMB business in Hong Kong, but local 
analysts are skeptical that Beijing will respond positively. 
Standard Chartered Bank is proposing to raise HKD 20 billion in the 
equity markets in a plan that could spell the end of their right to 
issue Hong Kong currency.  The minibond saga continues, as reports 
suggest U.S. bankruptcy law may prevent Lehman Bros.'s CDS's from 
being liquidated, throwing a wrench into plans for Hong Kong banks 
to buy back CDS-backed minibonds.  Hong Kong's Securities and 
Futures Commissions defended short-selling as the Hang Seng Index 
gained almost 10 percent on the week.  End Summary. 
 
Yam Advocates for RMB Business in Hong Kong 
 
¶2.  HKMA Chief Executive Joseph Yam, returning to Hong Kong from 
meetings in Beijing with the Association of Hong Kong Banks, told 
the press Tuesday that Hong Kong bankers were lobbying the Chinese 
government to permit expanded RMB business in Hong Kong, including 
the use of RMB as the settlement currency for Mainland-Hong Kong 
trade and allowing both financial and non-financial institutions to 
issue RMB bonds in Hong Kong.  Bank of China (Hong Kong) Chief 
Executive and Chairman of the Association of Hong Kong Banks He 
Guangbei cautiously confirmed Yam's announcement, adding that 
"discussions are going on and no details can be given for the time 
being." 
 
¶3.  The pro-Beijing Hong Kong Commercial Daily on Wednesday, 
November 26 quoted independent local economist Andy Xie saying he 
did not expect any progress on Yam's proposal as it would require 
liberalization of the Mainland foreign exchange market.  Xie added 
that China is not likely to make a change in trade settlement policy 
in the current environment.  On November 28, local press reported 
PBOC officials, including Vice Governor Ma Delun and Research 
Department Head Zhang Jianhua, saying they were concerned about the 
impact on the Hong Kong dollar if large volumes of RMB flood into 
Hong Kong. 
 
StanChart Thinking Creatively About RMB Lending 
 
¶4.  Standard Chartered Bank economist Nicholas Kwan told the press 
on Monday that it might be more useful to persuade PBOC officials to 
allow Hong Kong banks to take the 70 billion RMB in deposits that 
they currently hold and make RMB loans to Hong Kong factories in 
Mainland.  At present, the Hong Kong banks are permitted to accept 
RMB deposits but not allowed to issue RMB loans.  Kwan estimated 
that Hong Kong-based borrowers market could be as much as 300 
billion RMB, if Chinese officials would grant the green light. 
 
Raising Capital, Losing Currency? 
 
¶5.  Standard Chartered, one of three currency issuing banks in Hong 
Kong, announced this week that it would seek to raise HKD 20 billion 
to strengthen its capital base through a rights issue.  HKMA's Yam 
reiterated longstanding government policy that prohibits foreign 
governments from controlling over 20 percent of a note issuing bank. 
 Analysts warned that the announced terms of the offer could force 
Singapore's Temasek Holdings to raise its stake in Standard 
Chartered Hong Kong from 19 to 22 percent if the rights issue is not 
taken up by the market.  Standard Chartered Bank Hong Kong Chief 
Executive Benjamin Hung assured the press that Standard Chartered 
definitely wants to maintain its status as a note issuer and that he 
saw no reason to believe the rights issue would not be welcomed by 
the market. 
 
Minibond Buyback Plan in Peril 
 
¶6. On Thursday, November 27, local press reported that HSBC might 
not be allowed to liquidate credit default swaps (CDSs) backing 
minibonds issued by Lehman Bros.' in light of claims filed against 
Lehman by creditors in the U.S.   Lehman Bros.' is reportedly 
seeking authority from the court to assume and sell off derivative 
contracts it entered into before its bankruptcy.  If granted, the 
motion would make it illegal for Hong Kong banks to terminate credit 
default swaps that underlie minibonds sold in Hong Kong. 
 
¶7.  Hong Kong banks' plan to compensate minibond investors requires 
them to terminate swap arrangements involving the minibonds and then 
sell off the minibonds' underlying assets.  The US Bankruptcy Court 
in New York will reportedly hear Lehman's motion on Wednesday, 
December 3.  A spokesman from the Association of Hong Kong Banks 
told the Hong Kong Economic Journal that banks are currently seeking 
legal opinions on the feasibility of the buyback plan.  Financial 
Secretary John Tsang said Thursday that the buyback plan remains the 
best option for investors and banks. 
 
Hong Kong SFC Defends Short-Selling 
 
¶8.  On Monday, November 24, the Hong Kong Securities and Futures 
 
HONG KONG 00002156  002 OF 002 
 
 
Commission participated in a telephone conference with other market 
regulators, including the U.S., to discuss short-selling activities. 
 The Hong Kong Securities and Futures Commission argued strongly in 
support of short-selling as a tool for hedging purposes.  Statistics 
released by the Commission indicated that the value of short-selling 
transactions remained stable in recent months, accounting for less 
than 10 percent of the average daily turnover of the Hong Kong stock 
market. 
 
Hang Seng Up on PBOC Rate Cut, Citi Bailout 
 
¶9.  The Hang Seng Index gained 9.7 percent or 1229.04 points this 
week, closing at 13888.24 as investors responded positively to 
Chinese interest rate cuts and news of the U.S. Government's plan to 
bail out Citibank.  Turnover on Friday was HKD 42.3 billion, about 
60 percent less than the daily volume of HKD 104.1 billion recorded 
on Nov. 28, 2007.  China's aggressive 108 basis point interest rate 
cut, announced on Wednesday, only pushed up the Hang Seng Index by 
1.4 percent or 182.61 points on Thursday. 
 
¶10.  HIBOR closed Friday at 0.5 percent for overnight, 0.7 percent 
for 1-W, 1.10 percent for 1-M and 1.95 percent for 3-M.  Though the 
cost for borrowing money from the interbank market has been sliding 
down as the HKMA intervenes, business leaders in Hong Kong have 
continued to push the government to increase its guarantee for SME 
borrowers from 70 to 100 percent to encourage additional bank 
lending to smaller enterprises.  Some analysts are predicting that 
25 percent of Hong Kong enterprises running factories in the Pearl 
River Delta might have to close their businesses after Chinese New 
Year.  HKMA Chief Executive Joseph Yam is reportedly planning to 
accompany the Federation of Hong Kong Industries to visit Guangdong 
to explore ways to assist Hong Kong factories short of capital.