BEA RUN ENDS, LEHMAN MINIBOND COMPLAINTS GATHER STEAM

UNCLAS SECTION 01 OF 02 HONG KONG 001801 SIPDIS STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA E.O. 12958: N/A TAGS: ECON EFIN EINV ETRD HK CH SUBJECT: BEA RUN ENDS, LEHMAN MINIBOND COMPLAINTS GATHER STEAM REFS: A) HONG KONG 1790, B) HONG KONG 1776, C) HONG KONG 1757 ¶1. SUMMARY: Support from the Hong Kong Government, Bank of China (Hong Kong) and tycoon Li Ka-shing appear to have put an end to the run on Bank of East Asia (BEA). BEA Chairman David Li put cash withdrawals at less than one percent of BEA's total deposits. Holders of Lehman Bros.-issued "minibonds" continue to press their case through political parties, with the Democratic Party, Democratic Alliance for the Betterment of Hong Kong (DAB),and the Civic Party all organizing minibond investors to petition the government. Inflation was stable in August, but slow export growth could portend harder times ahead for Hong Kong firms. Property stocks led all Hong Kong equities down again, the Hang Seng Index closed down 1.3 percent at 18,682. End Summary. BEA Depositors draw down HKD 2 billion ¶2. BEA Chairman David Li confirmed to the media this morning (September 26) that depositors have withdrawn about HKD 2 billion from the bank over the past two days, accounting for 0.67 percent of the bank's total deposits of HKD 300 billion. Li emphasized that the bank's operations have returned to normal in all branches. He said all 17 board directors have reconfirmed their support for BEA; at least two tycoons, Henderson Land Development Chairman Lee Shau-kee and Sun Hung Kai Properties Vice Chairman Thomas Kwok, have indicated interest to join Cheung Kong Holdings owner Li Ka-shing in increasing their stakes in the bank. Beijing says BEA's Mainland operations run well ¶3. The China Banking Regulatory Commission (CBRC) joined in the chorus of support for BEA saying that the bank's Mainland operations are stable and healthy; the CBRC echoed the Hong Kong Monetary Authority's support for BEA. Headquartered in Shanghai, BEA China has a network of 57 outlets that includes 17 branches and 39 sub-branches in Shanghai, Shenzhen, Xiamen, Guangzhou, Zhuhai, Dalian, Xi'an, Beijing, Chengdu, Hangzhou, Chongqing, Qingdao, Shenyang, Wuhan, Nanjing, Tianjin, and Urumqi. Bank of China Hong Kong, which owns a five percent stake in BEA, said yesterday it would support BEA and closely monitor its situation. BEA share prices stabilized in the morning ¶4. After a 7 percent plunge on Wednesday and 3.4 percent rebound on Thursday, BEA share prices stabilized today, though Hang Seng Index lost 1.3 percent or 252.34 points to close at 18682.09. The three Mainland banks that received support from CIC earlier in the week (ICBC, BOC HK and CCB) also saw prices fall by 1-3 percent. While there is no way to track how many BEA shares Li Ka-shing, Lee Shau-kee and Thomas Kwok have actually purchased over the past two days, it appears that BEA depositors found the public support of the three tycoons more reassuring than announcements from Hong Kong Chief Executive Donald Tsang and HKMA Chief Executive Joseph Yam. ¶5. Short-term liquidity eased after HKMA's decision to inject HKD 3.88 billion (USD 500 million) in the interbank market yesterday. HIBOR overnight and one week rates, quoted by Hang Seng Bank at 4pm, were 1.50 percent and 2.25 percent respectively, compared with 1.75 percent and 3.50 percent yesterday. Three month HIBOR also dropped to 3.35 percent from yesterday's 3.75 percent. Lehman "minibond" holders may not lose everything ¶6. Ming Pao September 26 said HSBC, the trustee bank for the controversial Lehman "minibonds," might demand a liquidation of the minibonds by October 8. This would be two weeks after Lehman failed to honor the dividend payout scheduled for September 21 on one of its minibonds. Lehman minibond-holders in Hong Kong might have a chance to get some money back if HSBC is able sell the back-up CDO assets in the market. ¶7. Newly elected Legislative Council member Paul Chan, representing the Accountancy functional constituency, urged Secretary for Financial Services and the Treasury KC Chan, HKMA and the SFC to bring the financial institutions involved in the selling and distribution of the minibonds to the table to negotiate a plan to alleviate the losses of inexperienced and innocent investors misled by what he portrayed as unscrupulous bank sales officers. Newly elected Civic Party legislator Tanya Chan confirmed that her party would also be meeting with aggrieved minibond holders, following in the wake of the Democratic Party and the DAB. Minibond-holders reportedly plan to take to the street on Sunday to voice their grievances against the Hong Kong government's failure to properly supervise the distributor banks. Hong Kong's export trade growth drops to 1.9 percent in August ¶8. According to trade statistics released September 25 by the Census and Statistics Department, Hong Kong's total exports HONG KONG 00001801 002 OF 002 increased by only 1.9 percent from a year ago. Re-exports were up 2.7 percent and Hong Kong domestic exports down 17.1 percent. Hong Kong's exports to the U.S. in August dropped by 4.6 percent while imports from the U.S. in August went up by 21 percent, confirming anecdotal reports from port operators that trade flows have shifted. A Hong Kong government spokesman said that export performance has fluctuated over the past few months, reflecting "a highly uncertain external environment." ¶9. Hong Kong's inflation rate for August fell to 4.6 percent as the government's one-off administrative measures took effect. Discounting these factors leaves the inflation rate stable at 6.3 percent for August, the same as in July. Food price increases slowed, but were still up by 17 percent y-o-y.