PREMIER WEN TOPS ALIBABA AS HK STOCK EXCHANGE

UNCLAS SECTION 01 OF 02 HONG KONG 002807 SIPDIS SIPDIS STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR LOWERY, DOHNER, HARSAAGER, WINTON, YANG, AND CUSHMAN, NSC FOR TONG AND WILDER E.O. 12958: N/A TAGS: ECON EFIN HK CH SUBJECT: PREMIER WEN TOPS ALIBABA AS HK STOCK EXCHANGE REMAINS VOLATILE REF: HONG KONG 2742 ¶1. Summary: Comments by Chinese Premier Wen Jiabao on preconditions for Chinese investors to purchase individual Hong Kong stocks drove the benchmark Hang Seng index down 1526 points on Monday, November 5, the largest one-day drop in the history of the Hong Kong exchange. Local observers were mixed on whether Wen's remarks spelled the end of the Hong Kong market's rapid rise. Hong Kong shares rebounded quickly as property stocks rose sharply and Mainland on-line business-to-business giant Alibaba.com's initial public offering almost tripled in price, but failed to reach previous levels. Bad news in U.S. markets and rising oil prices pushed Hong Kong shares down again, they fell another 950 points on Thursday before bouncing back in Friday morning trading. End Summary. ¶2. Comment: Wen's remarks temporarily threw some needed cold water on a market that most analysts agree is too hot. Demand for Hong Kong dollars to invest in stocks has pushed the currency to its highest level since 2005 and forced the Hong Kong Monetary Authority to intervene, buying US$1.2 billion in the past two weeks. The most recent intervention on October 31 pushed the Hong Kong dollar down and drove the Hong Kong Interbank Offer Rate (HIBOR) to its lowest level this year. Skyrocketing valuations have distracted many observers from the Hong Kong market's increasing volatility. HKMA assures us that the banking system is well-capitalized and does not face structural risks. Falling U.S. interest rates and weak U.S. stockmarket performance make investments in Hong Kong stocks and property attractive. Add the prospect (no matter how distant) of large amounts of Chinese capital pouring into the Hong Kong market in search of "bargains" and it is difficult to see where the bubble will end, in spite of efforts by the Chinese government to slow it. End comment. =========================================== Premier Wen Puts the Brakes on "Thru Train" =========================================== ¶3. Chinese Premier Wen Jiabao, while on an official visit to Uzbekistan, told Hong Kong reporters the "Through Train" scheme to allow Chinese investors to purchase individual Hong Kong stocks would be postponed while the Chinese government studies the risks to both the Shanghai and Hong Kong stock markets, increase Chinese investors' awareness of the risks of investing in Hong Kong equities, and prepare regulations to manage the program. Hong Kong stocks fell sharply in Monday trading, dropping 1526 points, the largest fall since September 11, 2001. Investors also cited reports that the China Securities Regulatory Commission (CSRC) had instructed Chinese Qualified Domestic International Investor (QDII) funds to reduce their exposures to Hong Kong stocks. ¶4. Local observers had mixed reactions to Wen's comments and the subsequent plunge in Hong Kong share prices. Some, including Morgan Stanley's Hong Kong equity strategist Robert Hart, saw the drop as a much needed correction and predicted the benchmark Hang Seng index would continue to fall. Hart claimed mainland retail investors account for more than a quarter of Hong Kong stock turnover and were fueling the drop in prices but that institutional investors were still receiving fund inflows to invest in the Hong Kong market. Others, such as JP Morgan Chase China Equities chairwoman Jing Ulrich said the impact would be limited as investors were already expecting a delay in implementation of the "Through Train" scheme. ¶5. George Leung, Strategy and Economics Advisor at Hong Kong and Shanghai Banking Corp. (HSBC),saw Wen's comments as a positive development for the Hong Kong and Shanghai exchanges. Chinese officials are most concerned about avoiding instability, said Leung. The rapid run up in Hong Kong market suggests that investors could be tempted to shift money away from Shanghai to Hong Kong, with negative effects for the Shanghai A share market. Increasing A share prices are bolstering confidence in Shanghai's market, allowing small and medium enterprises to raise capital without burdening the banking system, he said. Increasing flows to Hong Kong will boost volatility in the Hong Kong market and force the Hong Kong Monetary Authority to intervene in the currency market as the Hong Kong dollar appreciates to the strong end of its trading band. ============================================= ============ Chinese Authorities Directing a Pullback from HK Market? HONG KONG 00002807 002 OF 002 ============================================= ============ ¶6. Managing Director at the Bank of China International (BOCI) Anthony Lok, agreed that the Chinese government was trying to slow growth in the Hong Kong market. He noted that Wen's comments are just one part of a recent pattern that has Chinese authorities ordering a pull back from equity markets. The Chinese National Social Security Fund (NSSF) has reportedly been ordered to cut its position in equity markets, he said. Lok repeated reports that QDII funds have been ordered to cut exposure to equity markets to less than 30 percent of their total portfolios, adding that while the CSRC has approved US$42 billion in eleven licensed QDII funds, most of these funds have not yet been allowed to invest. (Note: HKMA Chief Executive Joseph Yam confirmed that Chinese financial regulators had told at least one QDII fund to decrease its exposure to the Hong Kong market to no more than 30%. End Note) Chinese officials mistakenly believe they can control the Hong Kong market through administrative controls and jawboning, said Lok. The official approval of Chinese insurers Ping An and Huatai to invest in the Hong Kong stock market will not lead to actual investments in the near term, he said. Lok added that Qualified Foreign Institutional Investor (QFII) funds have been pulling investments out of Shanghai in favor of the Hong Kong market. Greater transparency and liquidity in Hong Kong, combined with rocketing valuations, will continue to draw investors away from riskier Shanghai shares, regardless of Wen's statements and the administrative measures taken so far. ¶7. As predicted, Premier Wen's remarks didn't hold back Hong Kong shares for long. The launch of the Alibaba.com IPO and buoyant property stocks led an almost 780 point rebound on November 6 and 7. The highly sought shares of Alibaba.com, 250 times oversubscribed, soared 200 percent in opening day trading before falling back slightly on November 7. Hong Kong property shares rose strongly in response to international investment bank reports optimistic about growth prospects in Hong Kong. Falling U.S. shares, worries about additional fallout from the subprime crisis, and concerns about the effect of the depreciating U.S. dollar on interest rates were blamed for Thursday's 950 point slide. Shares closed Friday relatively unchanged. Cunningham