HONG KONG MONETARY AUTHORITY CHIEF SEEKS TO BOOST

C O N F I D E N T I A L SECTION 01 OF 02 HONG KONG 001984

SIPDIS

TREASURY FOR U/S MCCORMICK, A/S LOWERY, DAS DOHNER AND
OASIA;
STATE FOR EAP/CM, EEB/IFD/OMA; NSC FOR WILDER AND TONG

E.O. 12958: DECL: 10/24/2028
TAGS: EFIN ECON HK
SUBJECT: HONG KONG MONETARY AUTHORITY CHIEF SEEKS TO BOOST
CONFIDENCE

REF: HONG KONG 1909

Classified By: Consul General Joseph Donovan, Reason 1.4 b/d


1. (C) Summary: Hong Kong Monetary Authority (HKMA) Chief
Executive Joseph Yam told U.S. Treasury Undersecretary David
McCormick October 23 that Hong Kong's banking system is sound
and that recent HKMA measures are designed to boost investor
and depositor confidence rather than address structural
weaknesses. He noted that Singapore authorities felt they
had been forced to follow Hong Kong's move to temporarily
guarantee 100 percent of bank deposits. Yam said he had
offered to coordinate more closely with regional economies
when the bank deposit guarantee is lifted. End Summary.


2. (U) U.S. Treasury Undersecretary for International
Affairs David McCormick met Hong Kong Monetary Authority
(HKMA) Chief Executive Joseph Yam on Wednesday, October 23 to
discuss global financial turbulence and steps the U.S. and
Hong Kong have recently taken to address liquidity concerns
and boost investor confidence in the banking system.

=========================================
HKMA Actions Designed to Boost Confidence
=========================================


3. (C) Yam began by thanking U/S McCormick for the regular
communication between the Treasury and the HKMA as the U.S.
has taken various measures over the past several months. The
situation in Hong Kong is improving, although the Hong Kong
stock market remains down, said Yam. He noted the recent
HKMA announcement that the Hong Kong Exchange Fund would be
used to guarantee 100% of deposits in the banking system
until 2010 and would also be available to provide capital to
banks as needed. (REFTEL) In fact, there is no immediate
demand for capital in the banking system, but the HKMA needed
to show they had the tools to pre-empt any crisis, said Yam.
Because the Exchange Fund is under the direct control of the
HKMA, there was no need for additional legislation, enabling
them to act quickly.


4. (C) Unlike Singapore's Monetary Authority, the HKMA
purposefully did not announce a limit to the pool of capital
available to inject into the banks, in order to encourage
greater confidence in the Hong Kong measures, Yam said. The
HKMA issued the announcement believing that no Hong Kong bank
would require capital injections, but as the economy
deteriorates, Yam predicted that one or more institutions
would need help in the next two years. The terms for
Exchange Fund capital have not been published. Different
banks will require different treatment, said Yam, but there
will definitely be strings attached. He offered that HKMA
had thought of amending capital requirements to give senior
status to HKMA-provided capital, but finally chose not to do
so since it would take Hong Kong out of compliance with the
Basel Accords.


4. (C) HKMA has also been injecting liquidity into the
market and has stepped forward to provide US dollar liquidity
to foreign banks when local banks have been unwilling to do
so. The figure is not significant, said Yam, just over US$
1.2 billion. More significant is HKMA's willingness to
accept a wide variety of capital, including Treasuries,
mortgages, and rated commercial paper as collateral.


5. (C) U/S McCormick explained the U.S. plan to recapitalize
domestic banks, beginning with the big nine that control 50
percent of U.S. banking system assets, the proposal to
directly purchase whole loans, and plans for mortgage-backed
securities auctions. The credit markets are improving, said
McCormick, but the U.S. equity markets are responding more
slowly. Yam offered that the same was true in Hong Kong. He
noted that the announcement that morning that CITIC Pacific,
one of the largest Chinese-controlled enterprises in Hong
Kong, had been forced to write off US$ 2 billion in soured
foreign currency derivatives will shake Hong Kong investor
confidence.

============================================= ========
Global Financial Discussions Should Include Hong Kong
============================================= ========


6. (C) Chief Executive Yam asked McCormick for his reaction
to suggestions that the world needs a new global financial

HONG KONG 00001984 002 OF 002


architecture. The U/S replied that the United States would
shortly announce a series of meetings to address the issue.
Some in Europe are strongly advocating significant changes,
he said, but the U.S. believes the first meeting should focus
on objectives, rather than proposals. While it is not clear
who will be invited to attend, said McCormick, it should
include emerging market economies and the IMF. He noted that
the Financial Stability Forum has played a very positive role
and that Hong Kong is a valuable member of that Forum.


7. (C) Yam offered that his office would like to contribute
to the discussion on the important issues at stake, noting
that Hong Kong participates fully in the WTO, APEC, and other
bodies. If attendance at the summit is restricted to G-20
countries, would Hong Kong be able to participate as part of
the Chinese delegation, asked McCormick? Yam replied that it
would be difficult unless someone outside of Hong Kong raised
it with Beijing.

=============================================
Chinese Distracted, Won't Take Proactive Role
=============================================


8. (C) Yam told McCormick that financial services
liberalization in China will be much more difficult in the
future. While China has been a responsible partner, it has
not been proactive or particularly constructive in its
response to the crisis, said McCormick. The Chinese
authorities have been more conservative; shortening the
maturity of their dollar asset purchases and pulling back
from lending to foreigners. Yam replied that the mainland
economy has been relatively immune from the financial aspect
of the crisis thus far and Beijing has been distracted by
food safety and other issues.

==========================================
Boosting HK Confidence, Angering Singapore
==========================================


9. (C) Yam agreed with the U.S. decision to inject capital
into large U.S. banks, saying that capital is key to
resolving the confidence crisis. He asked if US$ 700 billion
would be enough, given the flow of questionable assets. Yam
noted that the run on Bank of East Asia was the result of
rumors about BEA's exposure to Lehman Bros., products.
These internet rumors, unless quickly quashed, could spark a
contagious confidence crisis. The HKMA's decision to
announce temporary blanket insurance for Hong Kong depositors
was an important part of the response to boost confidence.


10. (C) The Monetary Authority of Singapore (MAS) was upset
by the HKMA announcement and felt they had been forced to
offer a similar blanket guarantee, said Yam. He tried to
contact them ahead of time but was unable to do so, he said.
He has since had additional discussions with his MAS
counterpart and they have agreed to coordinate the lifting of
their respective deposit insurance schemes in 2010.
DONOVAN