Hong Kong Market Report - Officials Encourage Banks to

UNCLAS SECTION 01 OF 02 HONG KONG 002129 SIPDIS STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA E.O. 12958: N/A TAGS: ECON EFIN EINV ETRD HK CH SUBJECT: Hong Kong Market Report - Officials Encourage Banks to Consider Social Responsibilities ¶1. Summary: Hong Kong Monetary Authority Chief Joseph Yam told Legco members this morning that he would introduce two new measures to encourage additional bank lending to SMEs in Hong Kong. Despite the global financial turmoil, the HKMA managed to minimize its investment losses. The HKMA controlled Exchange Fund has lost 5.8 percent this year, compared to losses of over 20 percent reported by the Mandatory Provident Fund, the government-sponsored retirement fund for Hong Kong employees. In response to HSBC's decision to lay off 450 employees on Monday, Chief Executive Donald Tsang and Financial Secretary John Tsang called on Hong Kong bankers to consider their social responsibilities during times of economic crisis. The HKMA intervened ten times this week to sell Hong Kong dollars, allowing HIBOR to fall below two percent for three month lending. The Hang Seng Index lost 6.5 percent this week, but was up almost 3 percent in Friday trading. Weak volumes have encouraged volatility in the market, with swings of over 1000 points becoming commonplace. End Summary. Pressure on Hong Kong Dollar Continues ¶2. The Hong Kong dollar remained wedged against the strong side of its trading band all week at HKD 7.75/USD. The HKMA sold Hong Kong dollars ten times this week, raising the aggregate balance in the interbank market to a record high of over HKD 84 billion. HKMA Chief Executive Joseph Yam speculated that the growing demand for Hong Kong dollars is a result of investors unwinding long US dollar positions and possible repatriation of funds by domestic corporations. With the increasing supply of Hong Kong dollar deposits, HIBOR for three-month and one-month lending fell below 2 percent and 1 percent respectively on Friday, while the overnight rate dipped to just 0.25 percent. HKMA Announces Two New Measures for SMEs ¶3. Yam told Legislative Council (Legco) Financial Affairs Panel members Friday that HKMA will take a flexible approach to bank capital adequacy ratios. This echoes statements Yam has been making for several weeks, as he encourages banks to resume lending to small and medium enterprises. Though the average capital adequacy ratio of locally incorporated banks fell slightly from 14.2 percent by the end of June to 13.8 percent at the end of September, Hong Kong's banking sector remained well capitalized compared with the 8 percent Basel II standard. Two weeks ago, Yam suggested to banks that the HKMA would not look unfavorably on higher NPL ratios if banks were increasing lending to SME borrowers. ¶4. HKMA also announced an agreement with the People's Bank of China (PBOC) on expanding credits for Mainland branches or subsidiaries of locally incorporated banks. Both HKMA and PBOC will accept collateral from these banks if they apply for an increase in liquidity. Yam told the Legco that he hopes this arrangement will help Hong Kong's SMEs to apply for bank loans for their Mainland operations. Hong Kong Exchange Fund Investment Loses 5.8 percent ¶5. Yam also told the Legco that the HKMA-managed Exchange Fund has lost 5.8 percent or HKD 83.3 billion (US$ 10.75 billion) in the first three quarters of 2008. The majority of the Exchange Fund is managed by a collection of private fund management companies, with a small portion managed by the HKMA itself. The Exchange Fund lost HKD 100.1 billion (US$ 12.9 billion) on its equities investments and HKD 13.8 billion (US$ 1.8 billion) on foreign exchange investments. But those losses were offset by a gain of HKD 30.6 billion (US$ 3.95 billion) from bond investments. Though still hoping that HKMA's performance in 2008 would beat the market average, Yam advised Legco members that additional losses in the fourth quarter are likely. ¶6. The annual performance of the Exchange Fund investment portfolio has only a limited impact on the Hong Kong government budget, as the Fund is committed to allocate a fixed amount of revenues to the government based on the average yield in the past six years. With record profits in recent years, the Exchange Fund will have to perform badly over a period of several years to significantly affect Hong Kong government revenues. More Bank Layoffs ¶7. On Monday, November 17, local banking leader HSBC announced plans to lay off 450 Hong Kong employees immediately from its retail and investment banking departments, including some branch managers. The pro-Beijing Wen Wei Po (Nov.18) editorialized that the unprecedented move by HSBC reflects the need for commercial banks to shift their business strategy away from high-leverage, high-risk investments and return to their traditional lending businesses. Wen Wei Po reported on Nov. 20 that Bank of China Hong Kong will also cut 500 positions by the end of November. Bank of China Hong Kong HONG KONG 00002129 002 OF 002 refused to comment. Bank of East Asia and Hang Seng Bank denied that they would lay off workers. CE promises No Cuts in Government Spending ¶8. CE Donald Tsang, in London for meetings with British Government counterparts, told the press yesterday that the Hong Kong government will not cut public spending. (Note: most economists expect Tsang to announce an additional fiscal stimulus package in the near future to prop up local consumption spending and reduce unemployment pressure. End Note.) Tsang called on Hong Kong companies to consider their social responsibilities during the economic downturn. Donald Tsang noted that the impact of the financial crisis is likely to last for some time; he advised Hong Kong people to prepare for the worst while hoping for the best. Hang Seng Up 3 percent On Friday, but Down 6.5 percent for the Week ¶9. The Hang Seng Index closed at 12659.20 today, up 2.93 percent or 360.64 points from Thursday. For the week, the Index lost 6.5 percent, or 883.46 points, from last Friday's close. The Index opened 480 points lower in the morning, slipping to just 11,814 as it tracked the drop in the Dow. But rumors that the Chinese government would announce details of their RMB 4 trillion stimulus package and the U.S. Congress would announce a program to support the auto industry pushed the market up; it briefly topped 13,000, before falling back slightly in late trading.