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