HONG KONG: Hong Kong stocks recovered from losses as fears about Dubai's solvency subsided after the United Arab Emirate pledged to support banks that may suffer from a looming Dubai World default.

Shares of HSBC Holdings and Standard Chartered, two Hong Kong market's heavyweight players with large exposure to Dubai, had a strong day. The benchmark Hang Seng Index HIS gained 3.25 percent, or 687 points, to end at 21,821.5, in the biggest single-day gain in percentage terms in more than four-months.

The gauge dropped 1,075.91 points, or 4.84 percent, to close at 21,134.5 points last Friday when investors worried that a Dubai debt default might lead to a credit crisis again.

HSBC Holdings, which is one of Dubai World's creditors, gained 4.25 percent and closed at HK$90.70. The lender said last Friday it had $15.9 billion in loans and advances to customers in the United Arab Emirate as of the end of June, compared with $19.3 billion in deposits. Standard Chartered, which makes most of its profits in emerging markets, advanced 4.15 percent to HK$193.20.

Industrial and Commercial Bank of China, the country's largest lender by market value, and Bank of China, the nation's third-largest lender, advanced over 4 percent after announcing that they had not issued loans to Dubai World.

Analyst Castor Pang, research director of CINDA International Holdings, said the market is rebounding because "investors seemed to have overreacted to the news of Dubai World's possible loan default. The pledge of support from the United Arab Emirates' central bank should help restore investor confidence."

"Investors overreacted last Friday," said Rock Lam, an analyst at Phillips Securities. "Over the weekend, the United Arab Emirates has shown support to Dubai's debt issue, so the market is quieting down and shares are rebounding," he said.

He thinks Dubai World is only extending its repayment period; and will not pose a threat to banks' earnings.

The United Arab Emirates' central bank said in a statement that it "stands behind" the country's local and foreign banks as they face the prospect of rising losses from Dubai World's possible default. The United Arab Emirates' banking regulator said it could offer loans for half a percentage point above the three-month local benchmark interest rate.

Dubai World, the conglomerate that has led the emirate's expansion, had $59 billion of liabilities as of August, which accounted for most of Dubai's total debt of $80 billion.

(HK Edition 12/01/2009 page4)