VZCZCXRO4200
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHHK #0063 0120015
ZNR UUUUU ZZH
R 120015Z JAN 09
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 6622
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS HONG KONG 000063 
 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT: Lehman Report Disappoints, HK Outlook Dreary 
 
¶1. Summary: The Hong Kong Monetary Authority (HKMA) and Securities 
and Futures Commission (SFC) each issued reports on their 
investigations of Lehman Bros. minibond complaints.  Most 
complainants have been asked to provide additional information; just 
238 cases have been referred for additional investigation so far. 
The government is considering new legislation to protect investors. 
The HKMA has added over USD 20 billion to the Hong Kong money supply 
since September 2008; although interest rates have dropped, lending 
activity has yet to pick up.  The Hang Seng Index was virtually 
unchanged from December 31, 2008, closing January 9 at 14,377 on 
volume of HKD 45 billion.  End Summary. 
 
Lehman Report Disappoints Investors 
 
¶2.  On January 8, the HKMA and the SFC delivered their investigation 
reports on the Lehman Bros. minibond investigation to Financial 
Secretary John Tsang.  Minibond investors said they were 
disappointed as parts of the two reports relating specifically to 
on-going investigations of retail bank mis-selling of Lehman 
products were excised.  Tsang promised that the "temporarily 
confidential contents" would be made public when investigations are 
complete. 
 
¶3.  The HKMA, which received nearly 20,000 complaints from 
purchasers of Lehman products, made 19 recommendations for improving 
coordination with the SFC and improving education but insisted that 
the current disclosure-based regulatory system for new investment 
products should remain in place.  The SFC recommendations were more 
aggressive, favoring changes in Hong Kong's regulatory structure, 
educational activities and enforcement powers.  The SFC also 
recommended referring to the United Kingdom Financial Services 
Authority's Treating Customers Fairly (TFC) principles.  In an 
interview on January 9, HKMA Chief Executive Joseph Yam denied that 
the Lehman Bros. minibond problem was related to local regulations 
and warned of "blindly" copying foreign regulatory systems. 
 
¶4.  KC Chan, Secretary for Financial Services and the Treasury, has 
been tasked with conducting a review of the two reports and drafting 
a consultation paper based on the recommendations made by the  HKMA 
and SFC to balance necessary regulation and financial innovation. 
 
Bears Abound in Hong Kong 
 
¶5.  On January 6, HKMA's Yam told the Hong Kong Chinese General 
Chamber of Commerce that he is pessimistic about the chances of Hong 
Kong's economy recovering in 2009.  Yam predicted that the first six 
to nine months of 2009 would be difficult as the economy is certain 
to contract.  He announced that HKMA has purchased USD 20.8 billion 
worth of foreign currency since September 2008, raising the 
aggregate balance of the Hong Kong interbank market to over HKD 175 
billion.  Although the flooding of Hong Kong dollars into the 
interbank market has pushed HIBOR rates down, local bankers remain 
very cautious and lending has not picked up.  As of Friday, January 
09, HIBOR overnight, 1-week and 2-week rates all stood at 0.1 
percent; the three month rate dropped to 0.85 percent. 
 
¶6.  Hong Kong University economist Dr. Alan Siu released a report 
January 7, predicting Hong Kong's economy would contract throughout 
¶2009.  Hong Kong General Chamber of Commerce economist David O'Rear 
agreed that zero growth in Hong Kong would be a very good year. 
HSBC Economic Advisor George Leung is even more pessimistic.  Leung 
told the pro-Beijing Wen Wei Po (Dec. 30) that global credit markets 
would need five years to recover fully.  He predicted the U.S. and 
Hong Kong wouldn't see the bottom for another three years.  Credit 
Suisse Chief Economist Tao Dong told Hong Kong Commercial Daily 
(Jan. 7) that the recovery process of the Hong Kong economy in the 
next 12 months would mainly depend on banks willingness to resume 
lending. 
 
Hang Seng Falls 50 percent in 2008 
 
¶7.  The Hang Seng Index closed at 14, 377.44 on Friday, January 09, 
down 38.47 points or 0.27 percent from Thursday's close.  Daily 
volume was HKD 45 billion.  The Hang Seng Index closed at 14,387.48 
on December 31, the last trading day of 2008 with a record low 
transaction volume of HKD 19.5 billion (in half-day trading).  The 
Hang Seng Index lost 48.3 percent in 2008; it had closed at 
27,812.65 at the end of 2007.  Analysts estimated that the total 
fall in market capitalization in 2008 was over HKD 10 trillion 
(about USD 1.3 trillion).