VZCZCXRO3181
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH RUEHVC
DE RUEHHK #0801 1201157
ZNR UUUUU ZZH
R 301157Z APR 09
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 7525
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS HONG KONG 000801 
 
SIPDIS, SENSITIVE 
 
STATE FOR EAP/CM, TREASURY FOR OASIA 
 
E.O. 12958: N/A 
TAGS: ECON PGOV EINV PREL HK MG
SUBJECT:  Hang Seng Recovers from Flu but Trade Volumes Still In ICU 
 
¶1.  SUMMARY: Flu fears pushed down the Hang Seng early in the week, 
but the Index had fully recovered by April 30.  The Hong Kong 
Monetary Authority will include flu-inspired scenarios in its next 
round of bank stress testing.  Hong Kong's ExCo approved plans to 
issue up to HKD 100 billion in government debt over the next five to 
ten years, but there is still no clear indication of how the money 
will be used.  Pending Legco approval, the government bonds could be 
issued before the end of 2009.  Hong Kong trade fell more than 20 
percent again in March.  The Hong Kong Airport Authority will offer 
a 10 percent discount on landing and parking fees to help airlines 
weather the storm.  End summary. 
 
Hang Seng Index Rebounds After Flu-inspired Sell-off 
 
¶2.  The announcement April 26 that a new and deadly flu was quickly 
spreading from Mexico to the U.S., Canada and other regions reminded 
many investors of Hong Kong's calamitous experience with SARS in 
¶2003.  Local investors dumped their shares and pushed the Hang Seng 
Index down by 4.6 percent or 703.74 points on April 27 and 28.  The 
Hong Kong Government's quick response to the potential threat 
appears to have comforted the public and market sentiment improved 
on April 29 and 30, with the Hang Seng Index gaining 2.76 percent 
and 3.8 percent respectively, fully recovering its losses from the 
previous two days.  On April 30, the Hang Seng Index closed at 
15,520.99, up 1.7 percent or 262.14 points from Friday, April 24. 
Daily trading volume increased to HKD 71 billion, up HKD 19 billion 
from the previous Friday.  The Hong Kong Stock Exchange will be 
closed May 1. 
 
¶3.  On April 30, Hong Kong Monetary Authority (HKMA) Chief Executive 
Joseph Yam told the press that the HKMA will conduct stress testing 
for local banks, including assessing the impact of swine flu on the 
banking system.  The news didn't seem to impact banking stocks, with 
both Hong Kong and mainland Chinese banks rebounding strongly. 
Local giants HSBC, ICBC, China Construction Bank and Bank of China 
all gained 2.5 to 3.5 percent.  HIBOR quoted by the Hang Seng Bank 
were 0.05 percent for overnight and one-week, 0.16 percent for 
one-month, 0.76 percent for three-month and 1.06 percent for 
six-month loans. 
 
Bonds... Hong Kong Government Bonds 
 
¶4.  On April 28 the Hong Kong Executive Council approved the issue 
HKD 100 billion worth of Hong Kong Government bonds over the next 
five to ten years aimed at both retail and institutional investors. 
With the approval of Legco, the government is expected to issue HKD 
10 to 20 billion (USD 1.3 to 2.6 billion) in the first tranche of 
bonds before the end of the year.  Secretary for Financial Services 
and the Treasury K.C. Chan told the press that the revenues would be 
credited to a new "Bond Fund" managed by the Hong Kong Monetary 
Authority. 
 
¶5.  Secretary Chan noted that the primary objective of the 
government bonds is  "to increase the breath, depth and liquidity of 
the local bond market, so that it can complement the banking and 
equity markets as an effective channel of financial intermediation". 
 According to Chan, the initial tranche will include maturities of 2 
to 10 years, but he did not comment on yields.  Market observers 
predicted the Hong Kong government would list the new bond issue on 
the Hong Kong Stock Exchange.  With over US$50 billion in fiscal 
reserves, there is no current budgetary need for the government to 
borrow money.  HKMA officials also do not know precisely how the 
money will be handled but expect it will be managed as a part of the 
HKMA Investment Fund. 
 
¶6.  This will not be the first time the Hong Kong Government has 
issued sovereign debt.  Shortly after returning to Chinese control 
in 1997, Hong Kong issued HKD 24 billion (USD 3.2 billion) to fund 
capital works projects.  Two additional government bond offerings in 
2004 were met with strong demand and over-subscribed. 
 
Hong Kong's March Trade Still Down 
 
¶7.  Hong Kong's total exports of goods in March fell 21.2 percent 
from a year ago, with exports to the U.S. down 23.3 percent.  Total 
imports also dropped by 22.7 percent.  Falling cargo and passenger 
volumes have led the Hong Kong Airport Authority to take measures to 
alleviate the burdens of the airlines.  Airlines operating at the 
Hong Kong International Airport are being offered a 10 percent 
reduction in both landing and parking charges till the end of 2009, 
amounting to the revenue reduction of about HKD 200 million to the 
Airport Authority. 
 
Marut