HKMA: HONG KONG'S SHARE MARKET SLIDE NOT

UNCLAS HONG KONG 002158 SIPDIS SENSITIVE SIPDIS STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR LOWERY, SOBEL, HARSAAGER, NSC FOR WILDER, TONG E.O. 12958: N/A TAGS: ECON EFIN HK PGOV SUBJECT: HKMA: HONG KONG'S SHARE MARKET SLIDE NOT STRUCTURAL PROBLEM ¶1. (U) Summary: Hong Kong shares dropped for the third straight day on August 17, falling through the 20,000 barrier before recovering on strong buying pressure just before the market closed. The Hong Kong Monetary Authority (HKMA) is monitoring the market closely, but sees no evidence of structural weakness at this time. One HKMA official told us that investors were hoping for some proactive moves from the U.S. and that would go some ways toward restoring investor confidence in Hong Kong. End Summary. ¶2. (U) In response to concerns about U.S. dollar liquidity and volatile global equities markets, Hong Kong's Hang Seng Index has fallen by over 3000 points since touching a record high of 23,557 on July 26. The Hang Seng fell below 20,000 after mid-day trading on August 17, but recovered slightly on massive buying just before the market closed to finish the day at 20,387.13. ¶3. (U) Trading volumes early in the week of August 13 were low, reflecting investor concerns that sub-prime mortgage problems in the U.S. would spill over into Asian markets, despite positive statements from analysts that local fundamentals remained strong. After sliding in a typhoon-shortened session on August 10, share prices climbed slightly higher on August 13 and 14. But by August 15, volatile movement in the foreign exchange market, a falling Dow Jones Index, and dipping regional markets drove the Hang Seng down over 2%. The slide continued on Thursday, August 16 and Friday, August 17, as the index dropped 3.3% and 1.4% respectively. ¶4. (U) Foreign investment firms were rumored to be offloading Hong Kong stocks to take book profits accumulated in the Hang Seng's rapid appreciation over the past few months. Export-oriented stocks have been among the hardest hit in recent days, reflecting investor concerns about the possibility of lower U.S. demand in coming months. Credit markets appeared to be functioning normally, with the Hong Kong Interbank Offer Rate (HIBOR) overnight rate coming down from 5.7% on August 10 to 4.55% on August 17. ¶5. (U) Hong Kong Financial Secretary John Tsang, in Beijing for consultations with senior PRC officials, tried to assuage investor concerns on August 16, telling the press in Beijing that the Hong Kong Monetary Authority (HKMA) has been closely monitoring the situation and believes that Hong Kong's financial markets will not suffer any "system risk" from U.S. sub-prime mortgage exposure. ============================================= ================ HKMA Sees No Abnormal Currency Pressures, Structural Problems ============================================= ================ ¶6. (SBU) The HKMA's Eddie Yue, Executive Director forMonetary Management and Infrastructure, said the HMA is watching the situation carefully, but thusfar believes there are no money market concerns. There are no problems in the operations or settlment processes and there is no indication of maret manipulation. The futures mrket is following the cash market and volumes are well within norms. ¶7. (SBU) Yue speculated that that investors were unwinding carry trades and moving out of emerging markets generally, but noted that there had been no abnormal pressures on the Hong Kong dollar to suggest investors were moving out of Hong Kong dollar denominated assets. Instead, investors seemed to be taking earlier realized gains and parking their money in Hong Kong. The Hong Kong dollar strengthened to 7.8068 late on August 17 and morning Hong Kong dollar bond yields were down slightly. ¶8. (SBU) The most important gauge of market health is exchange rate stability, said Yue. He pointed to the slight appreciation of the Hong Kong dollar and the stability of the HIBOR as signs that the Hong Kong stock market decline was not a structural issue. He admitted concerns that market fears could increase volatility and eventually lead to panic dumping of shares, but saw no signs of that happening to date. He added that investors were hoping for some proactive moves from the U.S. and that such a move would go some ways toward restoring investor confidence in Hong Kong. Cunningham