TNAG-2028-FCO40-2890-Hong-Kong-freezing-of-Kuwaiti-and-Iraqi-assets-1990 — Page 68

CONFIDENTIAL

FM HONG KONG

TO PRIORITY FCO

TELNO 2471

OF 090805Z AUGUST 90

CONFIDENTIAL

045357

MOLIAN 1851

PERSONAL FOR MARSDEN FROM ACTING GOVERNOR

YOUR TELNO 1499 : FREEZING OF KUWAITI AND IRAQI ASSETS : POSSIBLE DISPOSALS IN HONG KONG BEFORE IMPLEMENTATION OF THE FREEZE

1. THE FALL IN SHARE PRICES IN HONG KONG ON 6 AUGUST OF 7.4 PER CENT WAS NOT ALL THAT OUT OF LINE WITH THAT IN SEVERAL OTHER CENTRES : ZURICH 7.3 PER CENT, SINGAPORE 6.35 PER CENT, FRANKFURT 5.4 PER CENT. IT MUST ALSO BE SEEN IN THE CONTEXT OF OUR MARKET BEING ONE OF THE MOST LIQUID (WITH A ONE-DAY SETTLEMENT PERIOD) AND OF PRICES HERE HAVING RISEN RAPIDLY OVER RECENT MONTHS. OUR MARKET HAD BEEN ONE OF THE BEST PERFORMING IN THE WORLD OVER THE FIRST SEVEN MONTHS OF THE YEAR AND COMMENTATORS HAD BEEN EXPECTING SOME CORRECTION SOONER OR LATER.

2. THIS SAID, HOWEVER, WE CERTAINLY HAVE ANECDOTAL EVIDENCE TO SUGGEST THAT THERE WAS KUWAITI SELLING TAKING PLACE THOUGH, AS IS THE NATURE OF THINGS DURING PERIODS OF CRISIS, THE EXTENT OF THIS MAY WELL HAVE BEEN EXAGGERATED. WE ARE AWARE OF SOME BANKS WHICH STALLED UNTIL TUESDAY, SEEKING CONFIRMATION THAT THE INSTRUCTIONS, EMANATING FROM LONDON, WERE IN ORDER UNDER THE UK FREEZE ORDER AND IT MAY BE NOTED THAT MARKET TURNOVER ON MONDAY WAS LOWER THAN THAT ON EITHER TUESDAY OR WEDNESDAY WHEN OUR FREEZE ORDER WAS IN PLACE. VIRTUALLY ALL THE SELLING ORDERS OF WHICH WE ARE AWARE EMANATED FROM THE KUWAIT INVESTMENT OFFICE (KIO) IN LONDON AND WE DREW THE ATTENTION OF THE BANK OF ENGLAND TO THIS. WE BELIEVE THAT THERE MAY BE A PROBLEM OVER THE FACT THAT THE UK ORDER ONLY COVERS PERSONS RESIDENT IN KUWAIT THAT THAT MAY NOT APPLY TO THE KIO.

3. THERE HAS BEEN VERY LITTLE LOCAL CRITICISM OVER THE DELAY IN BRINGING IN THE FREEZE. THE LINE WE HAVE TAKEN IS THAT WE WERE URGENTLY CONSULTING WITH THE UK GOVERNMENT AND THAT IT WAS IMPORTANT TO CONSIDER ISSUES CAREFULLY BEFORE DECIDING PRECISELY WHAT ACTION TO TAKE, GIVEN HONG KONG'S ADHERENCE TO A FREE MARKET PHILOSOPHY AND THE ENSHRINEMENT OF THAT PHILOSOPHY IN BOTH THE JOINT DECLARATION AND BASIC LAW.

PAGE

1

CONFIDENTIAL