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### Viewing cable 07HONGKONG2807, PREMIER WEN TOPS ALIBABA AS HK STOCK EXCHANGE

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
07HONGKONG2807 | 2007-11-09 08:53 | 2011-08-23 00:00 | UNCLASSIFIED | Consulate Hong Kong

`

    VZCZCXRO2603
    RR RUEHCN RUEHGH RUEHVC
    DE RUEHHK #2807/01 3130853
    ZNR UUUUU ZZH
    R 090853Z NOV 07
    FM AMCONSUL HONG KONG
    TO RUEHC/SECSTATE WASHDC 3397
    INFO RUEHOO/CHINA POSTS COLLECTIVE
    RUEATRS/DEPT OF TREASURY WASHDC

` `

    UNCLAS SECTION 01 OF 02 HONG KONG 002807

    SIPDIS

    SIPDIS

    STATE FOR EAP/CM AND EEB/OMA, TREASURY FOR LOWERY, DOHNER,
    HARSAAGER, WINTON, YANG, AND CUSHMAN, NSC FOR TONG AND
    WILDER

    E.O. 12958: N/A
    TAGS: ECON EFIN HK CH
    SUBJECT: PREMIER WEN TOPS ALIBABA AS HK STOCK EXCHANGE
    REMAINS VOLATILE

    REF: HONG KONG 2742

    ¶1.  Summary: Comments by Chinese Premier Wen Jiabao on
    preconditions for Chinese investors to purchase individual
    Hong Kong stocks drove the benchmark Hang Seng index down
    1526 points on Monday, November 5, the largest one-day drop
    in the history of the Hong Kong exchange.  Local observers
    were mixed on whether Wen's remarks spelled the end of the
    Hong Kong market's rapid rise.  Hong Kong shares rebounded
    quickly as property stocks rose sharply and Mainland on-line
    business-to-business giant Alibaba.com's initial public
    offering almost tripled in price, but failed to reach
    previous levels.  Bad news in U.S. markets and rising oil
    prices pushed Hong Kong shares down again, they fell another
    950 points on Thursday before bouncing back in Friday morning
    trading.  End Summary.

    ¶2.  Comment: Wen's remarks temporarily threw some needed cold
    water on a market that most analysts agree is too hot.
    Demand for Hong Kong dollars to invest in stocks has pushed
    the currency to its highest level since 2005 and forced the
    Hong Kong Monetary Authority to intervene, buying US$1.2
    billion in the past two weeks.  The most recent intervention
    on October 31 pushed the Hong Kong dollar down and drove the
    Hong Kong Interbank Offer Rate (HIBOR) to its lowest level
    this year.  Skyrocketing valuations have distracted many
    observers from the Hong Kong market's increasing volatility.
    HKMA assures us that the banking system is well-capitalized
    and does not face structural risks.  Falling U.S. interest
    rates and weak U.S. stockmarket performance make investments
    in Hong Kong stocks and property attractive.  Add the
    prospect (no matter how distant) of large amounts of Chinese
    capital pouring into the Hong Kong market in search of
    "bargains" and it is difficult to see where the bubble will
    end, in spite of efforts by the Chinese government to slow
    it.  End comment.

    ===========================================
    Premier Wen Puts the Brakes on "Thru Train"
    ===========================================

    ¶3.  Chinese Premier Wen Jiabao, while on an official visit to
    Uzbekistan, told Hong Kong reporters the "Through Train"
    scheme to allow Chinese investors to purchase individual Hong
    Kong stocks would be postponed while the Chinese government
    studies the risks to both the Shanghai and Hong Kong stock
    markets, increase Chinese investors' awareness of the risks
    of investing in Hong Kong equities, and prepare regulations
    to manage the program.  Hong Kong stocks fell sharply in
    Monday trading, dropping 1526 points, the largest fall since
    September 11, 2001.  Investors also cited reports that the
    China Securities Regulatory Commission (CSRC) had instructed
    Chinese Qualified Domestic International Investor (QDII)
    funds to reduce their exposures to Hong Kong stocks.

    ¶4.  Local observers had mixed reactions to Wen's comments and
    the subsequent plunge in Hong Kong share prices.  Some,
    including Morgan Stanley's Hong Kong equity strategist Robert
    Hart, saw the drop as a much needed correction and predicted
    the benchmark Hang Seng index would continue to fall.  Hart
    claimed mainland retail investors account for more than a
    quarter of Hong Kong stock turnover and were fueling the drop
    in prices but that institutional investors were still
    receiving fund inflows to invest in the Hong Kong market.
    Others, such as JP Morgan Chase China Equities chairwoman
    Jing Ulrich said the impact would be limited as investors
    were already expecting a delay in implementation of the
    "Through Train" scheme.

    ¶5.  George Leung, Strategy and Economics Advisor at Hong Kong
    and Shanghai Banking Corp. (HSBC), saw Wen's comments as a
    positive development for the Hong Kong and Shanghai
    exchanges.  Chinese officials are most concerned about
    avoiding instability, said Leung.  The rapid run up in Hong
    Kong market suggests that investors could be tempted to shift
    money away from Shanghai to Hong Kong, with negative effects
    for the Shanghai A share market.  Increasing A share prices
    are bolstering confidence in Shanghai's market, allowing
    small and medium enterprises to raise capital without
    burdening the banking system, he said.  Increasing flows to
    Hong Kong will boost volatility in the Hong Kong market and
    force the Hong Kong Monetary Authority to intervene in the
    currency market as the Hong Kong dollar appreciates to the
    strong end of its trading band.

    ============================================= ============
    Chinese Authorities Directing a Pullback from HK Market?

    HONG KONG 00002807  002 OF 002

    ============================================= ============

    ¶6.  Managing Director at the Bank of China International
    (BOCI) Anthony Lok, agreed that the Chinese government was
    trying to slow growth in the Hong Kong market.  He noted that
    Wen's comments are just one part of a recent pattern that has
    Chinese authorities ordering a pull back from equity markets.
     The Chinese National Social Security Fund (NSSF) has
    reportedly been ordered to cut its position in equity
    markets, he said.  Lok repeated reports that QDII funds have
    been ordered to cut exposure to equity markets to less than
    30 percent of their total portfolios, adding that while the
    CSRC has approved US$42 billion in eleven licensed QDII
    funds, most of these funds have not yet been allowed to
    invest.  (Note: HKMA Chief Executive Joseph Yam confirmed
    that Chinese financial regulators had told at least one QDII
    fund to decrease its exposure to the Hong Kong market to no
    more than 30%.  End Note)  Chinese officials mistakenly
    believe they can control the Hong Kong market through
    administrative controls and jawboning, said Lok.  The
    official approval of Chinese insurers Ping An and Huatai to
    invest in the Hong Kong stock market will not lead to actual
    investments in the near term, he said.  Lok added that
    Qualified Foreign Institutional Investor (QFII) funds have
    been pulling investments out of Shanghai in favor of the Hong
    Kong market. Greater transparency and liquidity in Hong Kong,
    combined with rocketing valuations, will continue to draw
    investors away from riskier Shanghai shares, regardless of
    Wen's statements and the administrative measures taken so
    far.

    ¶7.  As predicted, Premier Wen's remarks didn't hold back Hong
    Kong shares for long.  The launch of the Alibaba.com IPO and
    buoyant property stocks led an almost 780 point rebound on
    November 6 and 7.  The highly sought shares of Alibaba.com,
    250 times oversubscribed, soared 200 percent in opening day
    trading before falling back slightly on November 7.  Hong
    Kong property shares rose strongly in response to
    international investment bank reports optimistic about growth
    prospects in Hong Kong.  Falling U.S. shares, worries about
    additional fallout from the subprime crisis, and concerns
    about the effect of the depreciating U.S. dollar on interest
    rates were blamed for Thursday's 950 point slide.  Shares
    closed Friday relatively unchanged.
    Cunningham

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