Hang Seng Plummets, HKMA Cuts Base Rate but HIBOR Still Up

UNCLAS HONG KONG 001866

SIPDIS

STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT: Hang Seng Plummets, HKMA Cuts Base Rate but HIBOR Still Up

REFS: A) HONG KONG 1833, B) HONG KONG 1823


1. Summary: The Hang Seng Index followed the other Asian markets
down sharply on Wednesday, falling 8.16 percent. The IMF's warning
that losses from U.S. loans and securitized assets could reach
US$1.4 trillion appeared to drive investors to dump shares. In a
presentation in Hong Kong, the IMF unveiled analysis that suggested
the U.S. financial downturn would be "longer and larger" than
expected, hitting bottom only in Q2 2009. The Hong Kong Monetary
Authority announced it would cut its base interest rate by 100 basis
points, beginning on Thursday. The HKMA's move couldn't stop HIBOR
from rising 75 basis points for overnight lending and 45 basis
points for three month loans. End Summary.


2. The Hang Seng Index plummeted on Wednesday, October 8, falling
1372.03 points to finish at 15431.73, down 8.16 percent, on volume
of HKD 78 billion. Utility stocks, typically seen as a safe harbor
for investors, led the market lower. Financial stocks also fell
sharply. China Construction Bank dropped 12 percent on market
rumors that Bank of America would sell its state when the lock-up
period expires at the end of October. Bank of China (Hong Kong) and
Bank of East Asia slipped 9 percent, ICBC was down 8 percent, Bank
of China fell 6 percent, and HSBC and Hang Seng each slid 4
percent.

IMF Sees Larger, Longer Economic Downturn in 2009


3. In a presentation unveiling this year's World Economic Outlook,
IMF Asia-Pacific Research head Roberto Cardarelli, explained the
Fund's development of a Financial Stresses Index that identified
periods of financial turmoil over the past 20 years. According to
its model, only half of the periods of financial stress identified
led to economic slowdowns. However, those periods of stress that
were preceded by banking crises tended to result in economic
downturns that were longer and larger than expected. The effects
were particularly pronounced when household and corporate borrowing
rates were high, real housing prices were up and credit was a higher
percentage of GDP, said Cardarelli.


4. Cardarelli added that the Fund would release its Global Economic
Forecast on Thursday, October 9. The Fund has revised its earlier
prediction that the U.S. economy would reach the bottom by end 2008
and now expects the economy to continue contracting through the
second quarter of 2009, he said. Those countries that rely on
exports to the U.S. are likely to face mounting difficulties.

HKMA Reduces Base Rate, HIBOR Increases


5. The HKMA announced today that it would reduce its Base Rate, the
reference rate for discount window borrowing, by 100 basis points,
beginning Thursday, October 9. The rate has been set at 150 points
above the U.S. Federal Funds Target Rate and is announced each day
before the opening of the interbank market in Hong Kong. The new
rate tomorrow will be 2.5 percent, down from 3.5 percent today.
HKMA Chief Executive Joseph Yam noted that the Hong Kong rate has
been higher than in other places. Given the stressful global
financial conditions a cut is now justified, he said.


6. The move did not help HIBOR in Hong Kong, which saw overnight
rates jump from 1.75 percent on Monday (Tuesday was a holiday) to
2.5 percent. The benchmark three month rate also moved up, gaining
45 basis points to 4.25 percent. One week rates were 3.75 percent,
one month was 4.7 percent, six months was 3.95 percent and one year
rates were 3.75 percent.
Donovan