Demand for HK$ Increases, Hang Seng Moves Up Steadily

UNCLAS HONG KONG 002034 SIPDIS STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA E.O. 12958: N/A TAGS: ECON EFIN EINV ETRD HK CH SUBJECT: Demand for HK$ Increases, Hang Seng Moves Up Steadily ¶1. Summary: The Hong Kong stock market responded positively to Barack Obama's victory in the U.S. Presidential election, though commentators raised concerns that U.S. trade policy would become more protectionist. The HKMA has intervened several times over the past three days as demand for HK$ increases. HIBOR has also loosened, although analysts disagree whether the two are linked. The Hang Seng Index gained 3.17 percent or 455.82 points today, closing at 14,840.16 with a daily trade of HKD 63.4 billion. End Summary. ¶2. Following the extreme volatility of the last week of October, The Hang Seng Index has stabilized in first three trading days of November. The Index has gained 6.2 percent since closing last Friday at 13968.67. Still, no analyst dared to predict the end of the roller-coaster ride. The 40 percent rebound from the intraday low recorded Monday last week (October 27),when the Hang Seng touched 10676, was described by cautious investors as "too strong and too quick". HKMA Intervenes - HIBOR Falls -------------- -------------- ¶3. The Hong Kong Monetary Authority intervened for the third time in four days as the Hong Kong dollar approached the strong side (HKD 7.7500/USD) of the pegged rate. After selling US$ 363 million (HKD 2.813 billion) last Friday, HKMA added injections of US$ 110 million (HKD 853 million) on Monday and US$ 105 million (HKD 814 million) on Tuesday to check the increasing demand for Hong Kong dollars. The HKMA noted that the calls for HK$ were small and diffuse, suggesting several investors were seeking relatively small amounts of the currency. Officials speculated that Hong Kong investors were bringing money back to boost local liquidity. On Thursday the interbank market in Hong Kong will have an aggregate balance of over HKD 30 billion, more than double the recent average. ¶4. HIBOR quoted by Hang Seng Bank at 4:43 pm today dropped to 0.50 percent for overnight and one week (0.75 percent on Monday),1.4 percent for 1-M (2.15 percent on Monday),2.55 percent for 3-M (3.2 percent on Monday),and 2.85 percent for 6-M (3.4 percent on Monday) borrowings. ¶5. Hang Seng Bank General Manager Andrew Fung told Hong Kong Cable TV this afternoon that HIBOR would fall gradually as the Hong Kong Monetary Authority continued to inject liquidity. Fung admitted, however, that the fall in HIBOR would not immediately affect banks' lending rate to retail customers. Bank of East Asia Chairman David Li told Hong Kong Economic Journal (Nov. 4) that the fall in HIBOR could reflect the return of confidence among Hong Kong bankers. However, Li did not see any room for cutting interest rates on new mortgage loans, as property prices are expected to fall in coming months. HKMA officials dismissed the effect of their recent interventions on HIBOR, noting that the sales of US$ were far too small to significantly affect interest rates in Hong Kong. They attributed falling interest rates to increased confidence in the local banking system, in part due to improvements abroad.