BEIJING INCREASES STAKES IN MAINLAND BANKS, HANG SENG

UNCLAS HONG KONG 001747 SIPDIS STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA E.O. 12958: N/A TAGS: ECON EFIN EINV ETRD HK CH SUBJECT: BEIJING INCREASES STAKES IN MAINLAND BANKS, HANG SENG RISES SHARPLY REF: A. HONG KONG 1746; B. HONG KONG 1728; C. HONG KONG 1737 ¶1. Summary: Hong Kong's Hang Seng Index (HIS) closed up 9.6 percent on September 19 and ended the week down only 25 points at 19,328. Market gains were heavily influenced by Beijing's publicly announced purchase of shares in three large state-owned banks. Short-term interbank loan rates eased and market liquidity improved. HKG officials urged investors to calmly assess market conditions and remember lessons learned from the Asia financial crisis ten years ago. Analysts expected more market stimulus measures from Beijing, and they reacted positively to Secretary Paulson's September 19 meeting with U.S. lawmakers to discuss the USG's next steps in dealing with deflating property prices. End summary. Central Government Stimulus -------------- ¶2. Hong Kong's Hang Seng Index (HSI) opened 7 percent higher on September 19 and closed up 9.6 percent at 19,328, following the Central Government's announcement that it would increase its holdings in three state-owned banks -- Industrial and Commercial Bank of China (ICBC),Bank of China (BOC),and China Construction Bank (CCB) -- and cut share trading taxes. The three banks rose 16-17 percent on September 19, as the HSI's trading volume rose to US$ 16 billion (HKD 125 billion; double the average of the past few months). ¶3. Short term HIBOR rates eased and interbank market liquidity improved, compared with the previous trading day. As of 1753 HRS local time on September 19, the overnight HIBOR rate fell a full point to 2.5 percent, while the one week and one month rates declined to 3.25 percent and 3.5 percent, respectively. HKG Officials Continue to Calm Investors -------------- ¶4. Financial Secretary John Tsang reiterated that the Hong Kong government has no plans to intervene in the stock market, and he told the media on September 19 that he would brief Hong Kong's Legislative Council members that evening about current market conditions. He refused to comment about the Central Government's new market stimulus measures. Secretary for Financial Services and the Treasury K.C. Chan stated that market sentiment would not fundamentally improve, until the USG introduces "real measures" to save its financial market. Chief Executive Donald Tsang said local investors should remain calm and use the lessons learned from the Asian financial turmoil ten years ago. Hong Kong Monetary Authority Chief Executive Joseph Yam warned investors to take note of the change in the global economic climate, saying three of the five top American investment banks were eliminated by a "Financial Tsunami." See reftels A and B for Post reporting about recent private conversations with senior HKG officials about the financial crisis, including a conversation on September 19 with Joseph Yam. More Stimulus Measures From Mainland Expected -------------- ¶5. JP Morgan China Equities Head Jing Ulrich told pro-Beijing Chinese language newspaper Wen Wei Po on September 19 that she expects the Central Government to launch more measures to boost the stock market, such as liberalizing stock trading regulations. Respected free-lance local economist Andy Xie (formerly of Morgan Stanley) dismissed the Central Government's share purchases of the Mainland banks as a temporary expedient that will, at most, "prevent Mainland stocks from falling too far and too fast." Xie told the Hong Kong Commercial Daily on September 19 that Beijing has been devising means to "rescue" the market, but he said the measures would fail as long as the global economic environment remains unfavorable. Bank of East Asia Shares Unscathed -------------- ¶6. Shares of Bank of East Asia (BEA) rose 12 percent on September 19, as trading resumed in its shares. Trading of BEA shares were suspended on September 18, after the company disclosed unauthorized manipulation in the valuation of its equity derivatives and restated its earnings (ref C).