Inflation Fears Hit Hang Seng

UNCLAS HONG KONG 000531

SIPDIS

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

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT: Inflation Fears Hit Hang Seng


1. Summary: Hong Kong Financial leaders and the local press are
nervous about the impact of the U.S. Federal Reserve's latest
announcement that it would increase its purchases of mortgage-backed
securities and buy an additional 300 billion of U.S. Treasury bills
over the next six months. In addition to concerns about the U.S.
economy, Hong Kong observers fear a depreciating U.S. dollar will
lead to accelerating inflation in Hong Kong. The Hang Seng fell on
the Fed's announcement, but is up 13 percent over the past two
weeks. End Summary.

Yam Warns of Inflation


2. Hong Kong Monetary Authority Chief Executive Joseph Yam warned
Hong Kong investors to be cautious about market risks after the U.S.
Federal Reserve Board announced its decision to increase its
purchase of mortgage-backed securities and buy USD 300 billion worth
of long-term Treasury Bills over the next six months. While
endorsing the Fed's apparent desire to pursue "quantitative easing"
in the short-run, Yam expressed his concerns about the potential for
rising inflation if the U.S. continued a long-term monetary
expansion policy.


3. Most Chinese dailies in Hong Kong raised concerns about the
Fed's decision to print more money as U.S. dollar depreciation and
resulting inflation in the U.S. would impact Hong Kong through the
local currency's link to the U.S. dollar. The Hong Kong Economic
Journal and Ming Pao suggested both the PRC Central government and
the Hong Kong government should reconsider additional
USD-denominated assets. Ming Pao repeated its regular support for
de-linking the Hong Kong dollar from the U.S. currency. A Wen Wei
Po editorial on Friday, March 20 warned that U.S. dollar
depreciation and inflation would hurt U.S. creditors and developing
countries. It attributed the recent rebound in global stock and
energy prices to investor anticipation of more rapid depreciation of
the U.S. dollar.

Hong Kong Unemployment Up, Air Traffic down


4. The Hong Kong Census and Statistics Department this week
reported that the Hong Kong unemployment rate for the three months
ending February 2009 has increased to 5 percent. The Airport
Authority reported that the decline in Hong Kong airport traffic
continued in February. Air passengers were down 13.7 percent in
February and air cargo fell 19.7 percent from a year ago.


5. The Hong Kong stock market fell on fears that the U.S. Fed's
additional Treasury purchases would force the U.S. dollar lower.
The Hang Seng Index lost 2.27 percent or 297.41 points, closing at
12833.51 with a daily trade of HKD 43.9 billion on Friday but was
has climbed sharply over the past two weeks since bottoming out at
11,344 on March 9. HIBOR quoted by Hang Seng Bank On Friday, March
20 stood at 0.05 percent for overnight, 0.1 percent for one-week,
0.3 percent for one-month, 0.9 percent for three-month and 1.2
percent for six-month borrowing.
Donovan