copied to ESID and ERD
AF 913 CONFIDENTIAL
GPS...2800
CONFIDENTIAL
FM HONG KONG D43955Z MAR 83
TO ROUTINE BRUSSELS
TELEGRAM NUMBER 009 OF 4 MARCH 1983
AND TO GENEVA AND WASHINGTON
FOR HONG KONG GOVERNMENT REPRESENTATIVES
HKG/GT/12 THE FINANCIAL SECTOR
HK. economey
TOP COPY
HIKK090|1
MAR 1983
BACKGROUND
IN
THE FINANCIAL SECTOR OF HONG KONG HAS BEEN IN AN UNSETTLED STATE IN RECENT MONTHS. A HANDFUL OF REGISTERED DEPOSIT-TAKING COMPANIES HAVE EXPRIENCED LIQUIDITY PROBLEMS AND AS OF END- FEBRUARY, 7 REGISTRATIONS HAVE BEEN REVOKED BY THE COMMISSIONER OF DEPOSIT-TAKING COMPANIES. THIS, AND THE FACT THAT SOME MEMBERS OF THE PUBLIC HAVE BEEN DENIED THEIR DEPOSITS AND THAT IN A NUMBER OF CASES THERE WAS SUSPICION OF FRAUDULENT PRACTICE, HAS AROUSED CONSIDERABLE PUBLIC CONCERN, PARTICULARLY IN FINANCIAL CIRCLES.
(A) EXTENT OF THE PROBLEM
2. TO PUT THE PROBLEMS IN PERSPECTIVE, THE FINANCIAL SECTOR, DEFINING IT TO INCLUDE ALL DEPOSIT-TAKING INSTITUTIONS IN OPERATION, INCLUDED 128 LICENSED BANKS, 18 LICENSED DEPOSIT-TAKING COMPANIES AND 343 REGISTERED DEPOSIT-TAKING COMPANIES AT THE END OF DECEMBER 1982. THESE GROUPS CONSTITUTE WHAT IS NOW KNOWN AS THE 3-TIER
STRUCTURE OF THE FINANCIAL SECTOR. DIFFICULTIES HAVE BEEN EXPER-
IENCED ONLY IN INSTITUTIONS IN THE LOWER TIER. AT THE END OF DECEMBER 1982, THE 7 REGISTERED DEPOSIT-TAKING COMPANIES WHICH SUBSEQUENTLY HAD THEIR REGISTRATIONS REVOKED ACCOUNTED FOR ABOUT
0.33 PER CENT OF CUSTOMERS' DEPOSITS WITH ALL REGISTERED DEPOSIT-
TAKING COMPANIES AND 0.12 PER CENT OF THOSE WITH ALL DEPOSIT-TAKING
INSTITUTIONS.
(B) CAUSES
3. IT IS NOT POSSIBLE TO IDENTIFY CLEARLY A COMMON CAUSE OF
THE DIFFICULTIES ENCOUNTERED. ONE MAJOR FACTOR IS BELIEVED TO BE
THE FAIRLY SHARP DOWNWARD ADJUSTMENT IN PROPERTY PRICES. THUS,
REGISTERED DEPOSIT-TAKING COMPANIES WHICH HAVE OVER EXTENDED LOANS
TO FINANCE PROPERTY DEVELOPMENT WERE FACED WITH A SHARP DEPLETION
OF THEIR ASSETS. THIS IN TURN LED TO OTHER FINANCIAL INSTITUTIONS
WITHDRAWING THEIR CREDIT LINES, CREATING THEREFORE A LIQUIDITY
SQUEEZE. THERE HAVE BEEN CLAIMS THAT THE DIFFICULTIES EXPERIENCED
BY THESE REGISTERED DEPOSIT-TAKING COMPANIES RESULTED FROM THE
REQUIREMENT UNDER THE 3-TIER SYSTEN INTRODUCED IN 1991 THAT THEY
MUST RUN DOWN ALL THEIR SHORT-TERM DEPOSITS IN TWO STAGES BY THE
END OF JUNE 1983. ALTHOUGH IT IS NOT POSSIBLE ENTIRELY TO DISPEL
CONFIDENTIAL
/SUCH