* U.S. govt working on plan to deal with toxic assets
* Dollar up, Treasury prices fall as risk aversion eases
* China govt efforts propel stocks in Shanghai, Hong Kong
By Kevin Plumberg
HONG KONG, Sept 19 (Reuters) - Asian stocks and the U.S.
dollar rose sharply on Friday as U.S. policymakers met to
design a broad plan to resolve a crisis that has reshaped the
banking industry and threatened the global financial system.
U.S. Treasury Secretary Henry Paulson and Federal Reserve
Chairman Ben Bernanke would work through the weekend on a plan
that congressional leaders said would focus on dealing with
illiquid assets -- the toxic source that has shattered balance
sheets, pushed Lehman Brothers <LEHMQ.PK> to file for
bankruptcy protection and prompted the U.S. bailout of American
International Group <AIG.N> this week.
However, analysts wondered what the price tag would be and
whether there was enough time for a law to be passed as some
members of Congress plan to leave by the end of the month to
campaign for the presidential election.
"If you can separate the bad debt and housing overhang from
the profitable parts of the banking sector, that would be
viewed as an exceptionally positive development -- if they are
able to do that," said Tony Moriss, senior currency strategist
with ANZ Bank in Sydney.
Government debt prices, which have served as a safe harbour
for investors throughout the 13-month-old credit crisis,
tumbled on news of the plan.
However, U.S. Treasuries with maturities of less than a
year were stable and losses in Japanese government bonds were
tame, reflecting how a sense of caution remains embedded in
markets ahead of the weekend.
The Chinese government was also actively trying to
stabilise its markets, saying it would buy shares in three of
the biggest state-owned banks and ditching a tax on purchases
of stocks.
That helped propel Shanghai's composite index 9.5 percent
higher <> after it closed on Tuesday at a 22-month low.
Hong Kong's Hang Seng index <> rose 6.6 percent, led by
a revived financial sector. Shares of Industrial and Commercial
Bank of China <1398.HK>, China's largest lender which has a
listing in Hong Kong, surged 13.7 percent and was among the
biggest gainers on the index.
Japan's Nikkei share average <> was up 3.7 percent,
after plumbing a three-year low on Thursday. Shares of the
country's top bank Mitsubishi UFJ Financial <8306.T> leapt 10.6
percent after a volatile week.
Outside Japan, Asia-Pacific stocks were up 5.7 percent,
rebounding from a 2-year low hit on Thursday, according to an
MSCI index <.MIAPJ0000PUS>. The index was down 3.2 percent on
the week.
RELIEF, AGAIN
The plan under discussion by U.S. policymakers reportedly
could involve setting up a fund to buy distressed assets from
the banks, something like the Resolution Trust Corp that was
formed to buy and then sell impaired assets during the Savings
and Loan Crisis a decade ago.
In addition, efforts to thwart the crisis have become
multi-pronged and global.
Central banks in the United States, Europe, Japan and
elsewhere have injected massive amounts of liquidity into money
markets, culminating in a coordinated offer on Thursday of $180
billion in funding.
Further, the top U.S. regulatory body was working with
Britain to crack down on abusive short selling. []
"These actions definitely mean some relief for the market,
at least temporarily," strategists at Calyon in Hong Kong said
in a note. "In particular, there must be some quick follow-up
on this U.S. bank recapitalisation initiative for it to
contribute to calm the market on a sustained basis."
However, the one-month yield on U.S. Treasury bills was
still close to zero, reflecting heavy demand for short-term
liquidity, and the overnight U.S. dollar lending rate was still
elevated at 5 percent <USDOND=>, 3 percentage points above the
target federal funds rate.
Also, the spread <TED> of the interest rate on three-month
U.S. dollar-denominated deposits used outside the United States
over the three-month U.S. Treasury bill yield moved above 300
basis points this week, the highest since the credit crisis
began. This is significant since it shows the premium the
market demands over a so-called "risk-free" rate.
"You can talk to the market for a while, but the action in
the market doesn't show they are that successful," said Sean
Darby, chief Asia strategist with Nomura in Hong Kong.
The dollar rose broadly on hopes for a crisis resolution.
The euro dropped 0.8 percent to $1.4212 <EUR=>, and the
dollar climbed 1.1 percent to 106.78 yen <JPY=> after hitting a
3-1/2-month low around 103.50 yen on Tuesday.
In the bond market, the 10-year U.S. Treasury note
<US10YT=RR> dropped 11/32 in price, lifting its yield to 3.60
percent from 3.53 percent late on Thursday in New York.
The 10-year Japanese government bond yield <JP10YTN=JBTC>
ticked up 2.5 basis points to 1.51 percent.
Gold slipped 0.6 percent in the spot market <XAU=> to
$843.40 an ounce after rising to a six-week high above $902 on
Thursday.
