HK Market Report, March 30: Trade Stats Drive Insecurity

UNCLAS SECTION 01 OF 02 HONG KONG 000594

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

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TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT: HK Market Report, March 30: Trade Stats Drive Insecurity


1. Summary: February trade statistics reflected Hong Kong's worst
monthly performance since the 1950s. Li & Fung Managing Director
William Fung expressed worries about growing trade protectionism in
the U.S., but Cheung Kong Group Chairman Li Ka-shing was more
optimistic, expecting the U.S. and EU markets would improve in April
and May as inventories are depleted. Hong Kong Chief Executive
Donald Tsang and Financial Secretary John Tsang reassured Hong Kong
residents after Beijing announced its decision to turn Shanghai into
an international financial and shipping center by 2020. Interest
rates remained low as the Hang Seng Index gained 8 percent last
week; the Hang Seng gave back 4.7 percent in Monday trading. End
Summary.

Hong Kong's February Exports Down 23 Percent


2. Trade figures released by the Census and Statistics Department
on Thursday March 26 showed Hong Kong's total February exports,
including both domestic exports and re-exports, plunged 23 percent
from a year ago. Three Chinese dailies, Sing Tao, Wen Wei Po and
Hong Kong Commercial Daily, reported that the fall in exports in
February was the sharpest decrease since the mid-1950s. Hong Kong's
exports to the U.S. in February fell by over one-third, down 36.7
percent from a year ago, while exports to Japan dropped over 24
percent, and shipments to China fell 14.1 percent. Even after
combining January and February statistics to mitigate the effects of
the Chinese New Year holiday, Hong Kong's export trade still fell by
22.4 percent from a year ago.


3. Hong Kong's import trade fared no better, dropping 22.8 percent
in the first two months of 2009. Shipments to Hong Kong's top three
markets, China, the U.S., and Japan, recorded decreases of 25.8
percent, 19.6 percent and 9.9 percent, respectively, over January
and February. A Hong Kong government spokesman said the "sharp
fall" in Hong Kong's exports in the first two months was not unique,
as countries in the region also recorded 20-40 percent decreases in
their export trade.

Protectionist Worries?


4. William Fung, Managing Director of the Li & Fung Group, told the
press on March 25 that many customers have not placed their normal
spring orders because they delayed fourth-quarter shipments to the
first quarter of this year. Fung blamed the downturn on the loss of
U.S. retailer confidence in the wake of the Lehman Bros. bankruptcy.
Li & Fung, a key trading firm in Hong Kong with interests in
clothes, toys, and consumer goods, reported a 21 percent drop in
profits for 2008. Fung worried that trade protectionism would limit
his firm's access to the U.S. market.

Or Tempered Optimism?


5. On the other hand, Cheung Kong Holdings and Hutchison Whampoa
Chairman Li Ka-shing is optimistic about the rapid recovery of the
global economy, despite Cheung Kong and Hutchison Whampoa 2008
profits dropping by 44 percent and 42 percent, respectively. Li
told the press on March 26 that inventories in the U.S. and EU
markets have been drawn down, providing room for both Hong Kong and
mainland China to see a trade rebound in coming months. Hong Kong
Shipping Council Executive Director Sunny Ho told the Sing Tao Daily
March 27 that local bankers have started to provide credit to the
factories again. Some manufacturers have been able to get as much
as half of their pre-September 2008 credit lines (issued before
September 2008) back again.

Local responses to PBOC Governor Zhou's SDR Proposal


6. In a March 26 editorial, pro-Beijing daily Wen Wei Po said that
recent events show China is willing to participate in and promote
the reform of the international monetary system. Wen Wei Po opined
that PBOC Governor Zhou Xiaochuan's proposal to expand the role of
IMF SDRs would put pressure on the U.S. Federal Reserve to be
cautious about increasing the supply of U.S. dollars. An exclusive
report from Ming Pao's Beijing correspondent quoted U.S. Government
sources as saying that the U.S. has agreed to expand the SDR system
and will support Chinese moves to strengthen the Renminbi's
international status, particularly encouraging use of Renminbi as a
settlement currency in the Asian trade.

Is Shanghai a threat to Hong Kong?


7. Chief Executive Donald Tsang and Financial Secretary John Tsang
told the Hong Kong people not to worry about the State Council
announcement that Shanghai will be developed into an international
finance and shipping center by 2020. A big country like China could
afford to have two international finance centers, said CE Tsang.
Executive Council member Professor Lawrence Lau said the Central
Government's decision was not a surprise, as China will eventually
have to allow Renminbi convertibility. Hong Kong will then lose

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some of its competitive advantages vis-`-vis Shanghai. Lau said
Hong Kong and Shanghai should focus on providing different services
to their natural hinterlands.

Rates and Returns


8. HIBOR remained very low and as Hong Kong dollar moved toward the
upper peg band of HKD 7.75/USD as equity investors continued buying
Hong Kong stocks. Overnight HIBOR, as quoted by Hang Seng Bank on
March 27 was 0.08 percent, one-week borrowing was 0.20 percent,
one-month ended the week at 0.3 percent, with three-month lending at
0.88 percent and six months at 1.18 percent. The Hang Seng Index
closed at 14119.50 on Friday, up 10.52 points or 0.08 percent with a
daily trade of HKD 58.9 billion. For the week, the market was up 8
percent, with average daily trading of HKD 59.2 billion as investors
welcomed both the U.S. Treasury plan to buy toxic assets and the
positive response in other markets around the world. Local analysts
expected a correction when the market fully digests the U.S.
Treasury's plan and on Monday, March 30, they got what they were
looking for as the Hang Seng dropped 663 points or 4.7 percent.
DONOVAN