INFLATION, BDA POSE PROBLEMS FOR MACAU MONETARY

C O N F I D E N T I A L SECTION 01 OF 02 HONG KONG 001276

SIPDIS

STATE FOR EAP/CM, EAP/K, AND EEB/ESC; TREASURY FOR LEVEY,
GLASER, DEGERBEDIAN AND DOHNER

E.O. 12958: DECL: 07/15/2028
TAGS: EFIN ECON MO NK CH
SUBJECT: INFLATION, BDA POSE PROBLEMS FOR MACAU MONETARY
AUTHORITY

REF: A. HONG KONG 1126

B. HONG KONG 576

C. HONG KONG 459

Classified By: EP Section Chief Laurent Charbonnet, Reason 1.4 b/d


1. (C) Summary: Inflation and the future of Banco Delta Asia
(BDA) are the Macau Monetary Authority's (AMCM) most pressing
problems. BDA's anti-money laundering (AML) regime has
regressed since AMCM was forced to return management control
of the bank in September 2007. Controlling shareholder
Stanley Au is "stubborn and defiant," said Teng, and will
continue to use the courts to try to push back
regulator-imposed restrictions on his bank operations in
Macau and Hong Kong. Au will not sell BDA; rumors of a deal
with Bank of China are false, said Teng. Aside from BDA, the
Macau banking system is in good shape. But rapid growth and
rising food and fuel prices are driving high inflation. The
Macau government is sending mixed messages on its willingness
to tackle inflation; moving to slow fiscal spending on one
hand, but also promising to give all Macau residents a 5000
pataca (US$625) bonus. The AMCM opposes a government
proposal to cap mortgages as a means to slow growth,
preferring to rely on banks to practice sound risk
management. End Summary.

============================================
BDA Defiant, Refuses to Address AML Concerns
============================================


2. (C) Macau Monetary Authority Chief Executive Anselmo Teng
met with Econoff July 2 to discuss the implications of the
U.S. decision to lift sanctions on North Korea associated
with the Trading With the Enemy Act (TWEA) and remove North
Korea from the list of Sponsors of State Terrorism (SST).
Teng was pleased to understand that U.S. actions did not
affect BDA's designation as a "primary money-laundering
concern." Teng noted that BDA had taken no substantive
measures to improve its AML regime since AMCM was obligated
by Macau law to return BDA to the control of its shareholders
in September 2007. At that time, AMCM presented BDA with a
list of 23 specific measures necessary to improve its AML
regime, said Teng. A recently completed audit of BDA by AMCM
bank supervisors showed that BDA had made no improvements and
had moved backwards in several areas, he said.


3. (C) Instead of taking measures to address weaknesses in
BDA's AML regime, primary shareholder Stanley Au is pursuing
legal action against both the AMCM and the Hong Kong Monetary
Authority (HKMA). Au has filed suit against AMCM for
exceeding its authority in appointing outside managers from
2005-2007 and is preparing the same type of complaint against
the HKMA for appointing outside managers for Au's Hong
Kong-based financial institution, Delta Asia Credit.


4. (C) Au is stubborn and defiant, said Teng, and still
considers himself a victim of American persecution. He has
rejected suggestions by AMCM that he consider selling the
bank. Teng discounted rumors that the Bank of China might be
interested in purchasing BDA. He noted that the 2007
appointment of former Bank of China (Macau) Deputy General
Manager Cai Xiao Feng as Executive Director and CEO of BDA
had sparked this rumor, but that Bank of China (Macau) had
publicly denied interest in BDA. Cai has stepped down as CEO
after less than one year, said Teng, and has been replaced by
Michael Leung Chi-ping, formerly an independent non-executive
director of BDA.


5. (C) Teng insisted that, excepting BDA, the Macau banking
system is in good shape. Macau's growing wealth and rapidly
increasing money supply means that even BDA has increased its
deposit base over the past year. The Macanese banking system
is dominated by international banks that easily meet global
standards for due diligence and AML compliance. The
International Monetary Fund will conduct a review of the
Macanese bank regulatory system in July, said Teng.

==================================
Macau's Mixed Message on Inflation
==================================


6. (U) Inflation has become the AMCM's most pressing
concern. Rising food and fuel prices, combined with
unemployment rates below 3% and massive amounts of money
flowing into Macau's economy, have pushed prices up 8.95%
year on year. Because the Macau pataca is pegged to the Hong

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Kong dollar, the AMCM has very little room to maneuver on
interest rates. The government has begun to slow projects
and issue statements designed to slow the pace of investment.
The recent announcement limiting additional gaming tables
and freezing development were part of this effort, said Teng.



7. (U) Local contacts report that real estate development
approvals have also slowed dramatically. Teng would not
speculate as to whether that was a result of government
efforts to slow growth or increased wariness by civil
servants in the wake of the corruption conviction of former
Secretary for Transport and Public Works Ao Man Long. The
AMCM does not support proposals to place a cap on the
loan-to-value ratio for residential mortgages, similar to
Hong Kong's 70% of value limit on property lending. Macau
currently has no administrative or statutory limits on
loan-to-value ratios. Banks should be free to judge and
manage their own risk, he said. Capping mortgages will not
significantly slow growth and leave some worthy borrowers
unable to purchase homes.


8. (U) The government has undermined its own efforts to
brake the economy by recently announcing that it would give
every Macau resident 5000 patacas (US$625) as a bonus after
receiving record tax revenues in 2007. The government
collects 39% of gross gaming revenues; in 2007 total revenue
exceeded MOP 40 billion (apx. US$5 billion) against
expenditures of just under MOP 19 billion (US$2.38 billion).
The cash rebates, which will begin to be distributed later
this year, will help people to adjust to higher prices for
imported food and fuel, said Teng. The government is also
trying to help traders find new sources for imported goods in
an attempt to lower prices for consumers, he said.
Cunningham