HONG KONG FINANCIAL COMMUNITY REACTS POSITIVELY TO

UNCLAS SECTION 01 OF 02 HONG KONG 001679 SIPDIS STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA E.O. 12958: N/A TAGS: ECON EFIN EINV HK CH SUBJECT: HONG KONG FINANCIAL COMMUNITY REACTS POSITIVELY TO USG TAKEOVER OF FANNIE/FREDDIE ¶1. Summary: Hong Kong's financial community responded positively to the USG's assumption of control over the operations of Fannie Mae and Freddie Mac, believing that the announced arrangement might stabilize the stock, property and credit markets in the U.S. over at least the short term. The chief executives of both the Hong Kong and Macao monetary authorities fully supported the USG's move. One respected local analyst, however, publicly cautioned against over-optimism, saying it is too early to determine the ultimate scale of losses at Fannie/Freddie; he advised the PRC government to reduce its holdings of U.S. Treasuries as soon as possible. Following Wall Street's positive but uninspiring performance on September 8, the HSI fell 1.7 percent as trading opened on September 9 and closed down 1.46 percent for the day. End summary. ============================================= ============ Hong Kong and Macao Monetary Authorities Welcome USG Move ============================================= ============ ¶2. Hong Kong Monetary Authority Chief Executive Joseph Yam told RTHK (Chinese television channel) on September 8 that he supported the USG's assumption of control over Fannie Mae and Freddie Mac, because it could ease market stresses. Yam called Washington's action "unusual" and "controversial," but he said it was a "must-do thing." Yam said it was important that the USG reassured investors that it would continue to back the bonds issued by the two giant mortgage entities. ¶3. Macao Monetary Authority Chairman Anselmo Teng told us September 8 that as a regulator, he thought the takeover was exactly the right thing to do, and that Secretary Paulson's explanations would likely calm Asian markets. =========================== Support From Local Media... =========================== ¶4. An editorial in Pro-Beijing newspaper Ta Kung Pao stated on September 8 that the USG's actions over the weekend would help stabilize the share prices of the Mainland Chinese banks which hold large amounts of debt issued by Fannie Mae and Freddie Mac. Ta Kung Pao said that as of the end of June 2008, HSBC and the six key locally-listed Mainland Chinese banks collectively owned at least USD 42 billion of Fannie Mae and Freddie Mac debt. Share prices of these seven banks, ;including Bank of China, China Construction Bank, Bank of Communications, and ICBC closed 3-6 percent higher on September 8, although they lost a portion of those gains on September 9 along with the declining broader market. =================================== ...And From Hong Kong-Based Bankers =================================== ¶5. Standard Chartered Bank Chief Executive Benjamin Hung called the USG's action "a boost to the capital markets," but he said credit would remain tight worldwide over the near term, and credit ratings institutions would remain cautious toward risk evaluation. Hung told RTHK that it is still too early to say if the USG's latest moves will resolve the problems of Fannie Mae and Freddie Mac, and whether the worst of the sub-prime crisis has passed. He echoed comments from other bankers who cited concerns about the rising U.S. unemployment rate, saying it might reduce U.S. consumers' purchasing power and negatively impact Hong Kong's exports. Hung believes that interest rates in the States would remain unchanged in the next few months, and that 3-month HIBOR is likely to stay at 2.2-2.3 percent. ¶6. Lehman Brothers' Regional Strategist in Hong Kong, Paul Schulte, told RTHK that the potentially heavy USG borrowing related to the weekend moves could ultimately hurt the US dollar. However, Schulte stated that the USG's action could reduce systemic default risk and improve the prospects of other financial assets. ¶7. Bank of East Asia Chairman David Li said he hopes to see a rebound in the market value of various mortgage-related collateralized debt obligations (CDOs),as the USG attempts to resolve the problems of Fannie Mae and Freddie Mac. Li told the Hong Kong Economic Journal on September 8 that several investment banks had recently approached Bank of East Asia to acquire its CDO assets, but their offers totaled only approximately 20 percent of the nominal value of the paper. Li refused to sell at that price, and Bank of East Asia hopes to now benefit from the USG's moves over the weekend, as the HONG KONG 00001679 002 OF 002 value of mortgage-related CDOs improves. ¶8. Other local Hong Kong bankers were also publicly supportive. Margaret Leung, HSBC General Manager, praised the USG's actions with regard to Freddie/Fannie, but she told the Hong Kong Economic Journal on September 9 that Hong Kong's stock and property prices would likely not recover prior to a recovery of U.S. property prices. She confirmed that the HSI has recently not experienced significant flows (in or out) of "hot money" from short term investors. Hang Seng Bank General Manager and Head of Insurance and Investment Andrew Fung said the USG's action would prevent Fannie Mae and Freddie Mac from falling into bankruptcy, relieve the pressure on the US dollar and restore the confidence of foreign investors. Fung told RTHK the assumption of government control, however, could ultimately lead to a large financial burden for the USG. ============================================= == Cautionary Note from Well-Known Local Economist ============================================= == ¶9. Former Morgan Stanley Chief Economist Andy Xie, a well-known commentator on market trends in Hong Kong, told the Oriental Daily News (Chinese language newspaper) on September 9 that any euphoria would be premature concerning the USG's assumption of control over Fannie/Freddie. He said no one, including officials at the U.S. Treasury Department, knows how large the ultimate losses at Fannie/Freddie will become. Fearing that the U.S. Federal Reserve is "psychologically unprepared" to raise rates sufficiently to halt growing inflationary pressures, he urged the PRC government to reduce its holdings of U.S. Treasuries as soon as possible. DONOVAN