VZCZCXRO0782
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHHK #2276/01 3541209
ZNR UUUUU ZZH
R 191209Z DEC 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 6487
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 002276 
 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT: A Beijing Bailout for Hong Kong 
 
¶1. Summary:  The Hong Kong Monetary Authority cut its Base Rate to 
0.5 percent, following the US Fed's cut earlier this week.  Local 
banks did not follow suit.  The Hong Kong monetary base continued to 
expand as investors seek a safe haven for their cash.  Both Bank of 
China (Hong Kong) and HSBC were hit by bad news as lower profits and 
Madoff exposure dented profits.   Hong Kong Chief Executive Donald 
Tsang's annual trip to Beijing netted new commitments from the 
Central Government to support Hong Kong's economy: expansion of RMB 
business and additional Mainland tourists are in the cards.  Macau 
Chief Executive Edmund Ho was assured all measures will equally 
apply to his city.  End Summary. 
 
HKMA Cuts Rates, Banks Don't Follow 
 
¶2.  The Hong Kong Monetary Authority (HKMA) announced a 100 basis 
point cut in Hong Kong's Base Rate for the Discount Window to 0.5 
percent on Wednesday, December 17.  The HKMA's move follows the U.S. 
Federal Reserve's announcement that it would cut its benchmark 
Federal Funds rate to 0.25 or zero percent.  Commercial banks in 
Hong Kong, however, did not change their prime lending rates, which 
continued to range from 5.0 to 5.25 percent.  Some local banks are 
considering increases in property mortgage rates, reflecting 
concerns about declining asset prices and increased credit risk. 
 
¶3.  The past week saw continuing U.S. dollar inflows into Hong Kong, 
pushing the pegged rate of Hong Kong dollar against the high end of 
the trading banks at HKD 7.75/USD.  As of Monday, December 22, the 
interbank market will have a record high balance of HKD 142.6 
billion.  HIBOR over-night and one week rates have dropped to 0.1 
percent, confirming reports that commercial banks in Hong Kong are 
stockpiling liquidity as a precaution.  HIBOR for three month and 
six month stood at 1.1 percent and 1.65 percent respectively. 
 
¶4.  A Bank of China report, published in the pro-Beijing Wen Wei Po 
on December 17, said the recent inflow of capital into Hong Kong had 
neither been invested in the property market nor the stock market. 
Investors are just depositing their cash in Hong Kong banks while 
they determine their next move, the report said.  An investment 
consultant from Hang Seng Bank told Wen Wei Po (Dec. 18) that 
investors are remitting money into Hong Kong to support speculative 
trades in Chinese stocks early next year. 
 
BOC (HK) and HSBC Stung by Bad News 
 
¶5.  Two pillars of the Hong Kong banking community, note-printing 
banks Bank of China (Hong Kong) and HSBC, were hit by bad news this 
week.  Bank of China (Hong Kong) issued its first profit-warning 
notice.  In a December 12 announcement, Bank of China (Hong Kong) 
said it expected shareholder profit for 2008 to decrease 
considerably from 2007 as a result of the global economic slowdown 
and the increased volatility in major financial markets.  Bank of 
China, the parent company of Bank of China (Hong Kong), agreed to 
issue a USD 2.5 billion subordinated loan to Bank of China (Hong 
Kong) to strengthen its capital base and meet its business 
development needs. 
 
¶6.  HSBC was also stung by bad news.  Analysts speculated that HSBC 
could have an exposure of USD 1.0-1.5 billion to the Madoff scam.  A 
spokesman from the Hong Kong Monetary Authority told Hong Kong 
Economic Times (Dec. 16) that the HKMA is consulting with local 
banks to determine whether any are exposed to Madoff and his 
company.  Friday, December 19, HSBC closed at HKD 76.55, down 5.05 
percent, tracking its 6-7 percent slide in New York trading 
overnight. 
 
A Beijing Bailout for Hong Kong 
 
¶7.  On Friday, December 19, Chinese Premier Wen Jiabao, meeting Hong 
Kong Chief Executive Donald Tsang in Beijing, announced that Beijing 
would propose 14 measures to assist Hong Kong to overcome economic 
difficulties arising from the global financial crisis. Premier Wen 
indicated that the new measures would improve financial co-operation 
between Hong Kong and Mainland, benefit the Hong Kong SMEs in the 
Pearl River Delta, and boost the Hong Kong tourist industry.   At an 
evening press conference, CE Tsang announced that Beijing will enact 
the following measures in support of Hong Kong's economic 
development: 
 
-- allow "qualified enterprises" to use RMB to settle their trade 
accounts.  The HKMA and PBOC will soon sign a currency swap 
agreement; 
 
--encourage the China Investment Corporation (CIC) and China 
Development Bank to use Hong Kong as an international business 
development platform; 
 
--encourage Mainland enterprises to list their shares on the Hong 
Kong Stock Exchange; 
 
HONG KONG 00002276  002 OF 002 
 
 
 
--accelerate construction of the Hong Kong-Zhuhai-Macau bridge and 
the railway linking the Hong Kong International Airport and the 
Shenzhen Airport; 
 
--consolidate operations of container terminals in Hong Kong and the 
Pearl River Delta and support Hong Kong's role as an international 
shipping center; 
 
--support both Chinese and Hong Kong SMEs by raising the export tax 
rebates and granting credit facilities; and 
 
--allow non-Guangdong native Chinese residents in Shenzhen to apply 
for permits to visit Hong Kong; and grant multi-entry permits to 
Shenzhen residents. 
 
Hong Kong Cable TV News said Premier Wen also reassured Macau Chief 
Executive Edmund Ho at a following-up meeting that all measures 
proposed for Hong Kong would also be applicable to Macau. 
 
¶8.  Investors may need some time to digest what is being seen as 
positive news for the Hong Kong economy.  The Hang Seng Index lost 
370.30 points or 2.39 percent today, closing at 15127.51 with a 
daily volume of HKD 57 billion.  Despite Friday's loss, the Hang 
Seng Index gained 2.5 percent for the week.