VZCZCXRO4737
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHHK #2238 3471210
ZNR UUUUU ZZH
R 121210Z DEC 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 6444
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS HONG KONG 002238 
 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT: US Auto Bailout Drives Hang Seng Volatility 
 
¶1. Summary: The Hong Kong government's announcement that it would 
greatly expand an SME loan guarantee program pushed Hong Kong stocks 
higher this week, before profit taking and news that the U.S. Senate 
had rejected a bill to bail out U.S. automakers drove the market 
down on Friday.  Hong Kong economists and bankers cited basic 
economic principles as they agreed that the RMB's recent 
depreciation is a short-term correction and predicted the RMB will 
strengthen further as the U.S. economy weakens.  End Summary. 
 
Support for SME's Good for Hang Seng 
 
¶2.  Hong Kong's Hang Seng Index rose sharply this week as the 
government announced that it would expand a loan guarantee facility 
for Small and Medium Enterprises (SMEs) from HKD 10 billion (US$ 
1.29 billion) to HKD 100 billion (US$ 12.9 billion) and raise the 
limit for each borrower from HKD 1 million (US$ 129,000) to HKD 6 
million (US$ 774,000).  The HKD 100 billion pledge commits about 25 
percent of Hong Kong government reserves.  The markets reacted 
positively, gaining over 11 percent from the previous Friday close, 
before sliding sharply on Friday, December 12. 
 
¶3.  The Hang Seng lost over 1000 points in Friday morning trading 
before recovering in the afternoon to close at 14758.39, down 855.51 
points or 5.48 percent from Thursday.  For the week, the Hang Seng 
Index was still up 6.6 percent or 912.30 points.  Volume on Friday 
was a relatively brisk HKD 58.8 billion.  Market watchers blamed 
profit taking and the failure of the U.S. Senate to reach an 
agreement on loans to the big three U.S. automakers.  HIBOR quoted 
by Hang Seng Bank this afternoon stood at 0.15 percent for 
overnight, 0.95 percent for one-month and 1.65 percent for three 
month borrowing. 
 
¶4.  The SME loan guarantee proposal will reportedly be extended to 
all privately held companies.  If the Legco approves, commercial 
banks in Hong Kong could begin to accept applications from Hong Kong 
enterprises for loans up to HKD 6 million each as early as next 
Monday, December 15.  The Hong Kong government estimated that 10 
percent of enterprises might be unable to repay loans, but judged 
this an acceptable non-performing loan risk. 
 
¶5.  In response to the government's call to loosen credit for SMEs, 
HSBC, Standard Chartered Bank, Bank of China, and Bank of East Asia 
all announced plans this week to reserve a special pool of funds for 
SME loans.  However, the banks declined to commit to fixed low 
interest rates for SME borrowers.  SME loans are expected to carry 
an interest rate of prime (currently 5 percent) plus one to four 
percent, depending on the borrower. 
 
RMB Depreciation Short-Term Only Say HK Observers 
 
¶6.  Local economists and bankers agreed that the RMB's recent 
depreciation is most likely a short-term adjustment.  They predicted 
that the RMB would continue to appreciate against the U.S. dollar 
next year as China's economy remains stronger than many others more 
affected by the global financial crisis.  Standard Chartered's 
Senior Economist Nicholas Kwan told pro-Beijing newspaper Wen Wei Po 
Friday that the RMB would not depreciate sharply, though it might 
soften over the next year due to the slowing Chinese domestic 
market.  Kwan added that he believes the HKD will also weaken next 
year.  He projected Hong Kong's economic outlook in 2009 will 
continue to deteriorate but that the damage will not be comparable 
to the economic impacts of SARS in 2003 or the Asian financial 
crisis in 1998. 
 
¶7.  Credit Suisse Economist Tao Dong told the Chinese press that the 
current RMB depreciation is a normal correction after appreciation 
of over 20 percent since the end of the peg.  Tao predicted that the 
RMB will continue to depreciate for another 6 months before 
strengthening again.  BOCHK Chief Executive He Guangbei told Wen Wei 
Po that the RMB could float upward or downward in accordance with 
its international trade balance.  (Note: That obviously doesn't 
explain why the RMB would depreciate after China announced yet 
another large trade surplus.  Pro-Beijing press didn't comment on 
speculation that the Chinese government might consider pushing the 
RMB down to promote export competitiveness.  End Note.)  He added 
that no regulations forbid the RMB from depreciating.