A Beijing Bailout for Hong Kong

UNCLAS SECTION 01 OF 02 HONG KONG 002276 SIPDIS STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR OASIA E.O. 12958: N/A TAGS: ECON EFIN EINV ETRD HK CH SUBJECT: A Beijing Bailout for Hong Kong ¶1. Summary: The Hong Kong Monetary Authority cut its Base Rate to 0.5 percent, following the US Fed's cut earlier this week. Local banks did not follow suit. The Hong Kong monetary base continued to expand as investors seek a safe haven for their cash. Both Bank of China (Hong Kong) and HSBC were hit by bad news as lower profits and Madoff exposure dented profits. Hong Kong Chief Executive Donald Tsang's annual trip to Beijing netted new commitments from the Central Government to support Hong Kong's economy: expansion of RMB business and additional Mainland tourists are in the cards. Macau Chief Executive Edmund Ho was assured all measures will equally apply to his city. End Summary. HKMA Cuts Rates, Banks Don't Follow ¶2. The Hong Kong Monetary Authority (HKMA) announced a 100 basis point cut in Hong Kong's Base Rate for the Discount Window to 0.5 percent on Wednesday, December 17. The HKMA's move follows the U.S. Federal Reserve's announcement that it would cut its benchmark Federal Funds rate to 0.25 or zero percent. Commercial banks in Hong Kong, however, did not change their prime lending rates, which continued to range from 5.0 to 5.25 percent. Some local banks are considering increases in property mortgage rates, reflecting concerns about declining asset prices and increased credit risk. ¶3. The past week saw continuing U.S. dollar inflows into Hong Kong, pushing the pegged rate of Hong Kong dollar against the high end of the trading banks at HKD 7.75/USD. As of Monday, December 22, the interbank market will have a record high balance of HKD 142.6 billion. HIBOR over-night and one week rates have dropped to 0.1 percent, confirming reports that commercial banks in Hong Kong are stockpiling liquidity as a precaution. HIBOR for three month and six month stood at 1.1 percent and 1.65 percent respectively. ¶4. A Bank of China report, published in the pro-Beijing Wen Wei Po on December 17, said the recent inflow of capital into Hong Kong had neither been invested in the property market nor the stock market. Investors are just depositing their cash in Hong Kong banks while they determine their next move, the report said. An investment consultant from Hang Seng Bank told Wen Wei Po (Dec. 18) that investors are remitting money into Hong Kong to support speculative trades in Chinese stocks early next year. BOC (HK) and HSBC Stung by Bad News ¶5. Two pillars of the Hong Kong banking community, note-printing banks Bank of China (Hong Kong) and HSBC, were hit by bad news this week. Bank of China (Hong Kong) issued its first profit-warning notice. In a December 12 announcement, Bank of China (Hong Kong) said it expected shareholder profit for 2008 to decrease considerably from 2007 as a result of the global economic slowdown and the increased volatility in major financial markets. Bank of China, the parent company of Bank of China (Hong Kong),agreed to issue a USD 2.5 billion subordinated loan to Bank of China (Hong Kong) to strengthen its capital base and meet its business development needs. ¶6. HSBC was also stung by bad news. Analysts speculated that HSBC could have an exposure of USD 1.0-1.5 billion to the Madoff scam. A spokesman from the Hong Kong Monetary Authority told Hong Kong Economic Times (Dec. 16) that the HKMA is consulting with local banks to determine whether any are exposed to Madoff and his company. Friday, December 19, HSBC closed at HKD 76.55, down 5.05 percent, tracking its 6-7 percent slide in New York trading overnight. A Beijing Bailout for Hong Kong ¶7. On Friday, December 19, Chinese Premier Wen Jiabao, meeting Hong Kong Chief Executive Donald Tsang in Beijing, announced that Beijing would propose 14 measures to assist Hong Kong to overcome economic difficulties arising from the global financial crisis. Premier Wen indicated that the new measures would improve financial co-operation between Hong Kong and Mainland, benefit the Hong Kong SMEs in the Pearl River Delta, and boost the Hong Kong tourist industry. At an evening press conference, CE Tsang announced that Beijing will enact the following measures in support of Hong Kong's economic development: -- allow "qualified enterprises" to use RMB to settle their trade accounts. The HKMA and PBOC will soon sign a currency swap agreement; --encourage the China Investment Corporation (CIC) and China Development Bank to use Hong Kong as an international business development platform; --encourage Mainland enterprises to list their shares on the Hong Kong Stock Exchange; HONG KONG 00002276 002 OF 002 --accelerate construction of the Hong Kong-Zhuhai-Macau bridge and the railway linking the Hong Kong International Airport and the Shenzhen Airport; --consolidate operations of container terminals in Hong Kong and the Pearl River Delta and support Hong Kong's role as an international shipping center; --support both Chinese and Hong Kong SMEs by raising the export tax rebates and granting credit facilities; and --allow non-Guangdong native Chinese residents in Shenzhen to apply for permits to visit Hong Kong; and grant multi-entry permits to Shenzhen residents. Hong Kong Cable TV News said Premier Wen also reassured Macau Chief Executive Edmund Ho at a following-up meeting that all measures proposed for Hong Kong would also be applicable to Macau. ¶8. Investors may need some time to digest what is being seen as positive news for the Hong Kong economy. The Hang Seng Index lost 370.30 points or 2.39 percent today, closing at 15127.51 with a daily volume of HKD 57 billion. Despite Friday's loss, the Hang Seng Index gained 2.5 percent for the week.