CPPCC CHAIRMAN'S VISIT FOCUSES ON ECONOMIC TIES

C O N F I D E N T I A L SECTION 01 OF 03 HONG KONG 002693 SIPDIS SIPDIS STATE FOR EAP/CM AND EB TREASURY FOR OASIA GKOEPKE STATE PASS USTR USDOC FOR 4420 NSC FOR WILDER E.O. 12958: DECL: 06/29/2031 TAGS: ECON PGOV PREL EFIN HK CH SUBJECT: CPPCC CHAIRMAN'S VISIT FOCUSES ON ECONOMIC TIES WITH THE MAINLAND REF: HONG KONG 2587 Classified By: EP Section Chief Simon Schuchat; Reasons: 1.4 (b/d) SUMMARY/COMMENT -------------- ¶1. (C) Chinese People's Political Consultative Conference (CPPCC) Chairman Jia Qinglin visited Hong Kong June 27-29 and made a point on several occasions of commenting positively on Chief Executive Donald Tsang's leadership. With the exception of the Civic Party, most pan-democratic legislators stayed away from Jia's welcoming banquet. The chairman of PCCW, who has according to several accounts caused concern on the mainland by pondering foreign bids for his firm's assets, was noticeably absent from a meeting of Jia with Hong Kong's CPPCC members. Jia celebrated the third anniversary of China's free trade agreement with Hong Kong, and the Chief Executive announced a small-scale expansion of that agreement, including the possibility of allowing for new (though not necessarily significant) areas of renminbi business in Hong Kong. Jia credited the mainland with boosting Hong Kong's improving economic fortunes, and suggested that further economic development is key to healing local divisions. He did not address calls for political reform or universal suffrage. ¶2. (C) Jia built upon several years of China offering Hong Kong economic carrots, but brought nothing with him that is likely to have a measurable economic impact on the SAR. China has already played this card through several measures to date: expanded tourist flows, enlarged tariff-free trade, and stock listings. There are few policy measures it can now offer Hong Kong that would be of sufficient economic significance to smooth out a future downturn caused by a slowing in the economies of China or the U.S., a development anticipated by many here. END SUMMARY/COMMENT NUMBER FOUR IN TOWN -------------- ¶3. (C) CPPCC Chairman Jia Qinglin led a 700-member delegation to Hong Kong June 27-29 principally to attend the "Mainland, Hong Kong and Macau Trade and Economic Cooperation Forum," which marked the third anniversary of the signing of the Hong Kong-PRC free-trade agreement, known as the Closer Economic Partnership Arrangement (CEPA). Jia unveiled a package of measures that either expand -- or signal consideration of expanding -- a wide range of services preferences and aspects of renminbi business; these are detailed and commented upon at the end of this message. ¶4. (C) This was the first official travel to Hong Kong by Jia, who ranks fourth in the PRC Politburo Standing Committee, since he was appointed CPPCC Chairman in 2003. It was also the first visit to Hong Kong by a high-level central government official since the December 2005 defeat of Chief Executive Donald Tsang's proposals for constitutional reform, which were supported by Beijing. The last senior leader to visit Hong Kong was Vice President Zeng Qinghong, who participated in the opening of the Hong Kong Disneyland theme park in September 2005. GUESS WHO'S NOT COMING TO DINNER -------------- ¶5. (C) During his visit, Jia also met with local political and business leaders and hosted a banquet to which all members of the Legislative Council (Legco) and Executive Council (Exco) were invited. Although most of the Civic Party's Legco membership attended, 15 of the 23 pan-democratic legislators did not show up. Former Chief Secretary Anson Chan was also absent; she has been in the SIPDIS headlines over recent days for announcing her intention to join a pro-democracy march on July 1, the anniversary of the handover, and for encouraging others to join her. PCCW Chairman Richard Li did not attend the dinner; he also skipped a previous meeting of Jia with CPPCC members, of which Li is one. PCCW is Hong Kong's local fixed-line phone company and a major player in local internet and pay television. Li's contemplated sale of the firm's telecom assets (he would retain real estate and other peripheral HONG KONG 00002693 002 OF 003 businesses) to foreign bidders has, according to widely believed accounts, aroused opposition in Beijing. OVERALL THEME: FOCUS ON ECONOMIC DEVELOPMENT, SEEK HARMONY -------------- -------------- ¶6. (C) Jia made no mention of local demands for political reform and universal suffrage, instead focusing on economic development. He used his welcoming banquet address to extol the virtues of One Country, Two Systems, describing "Hong Kong's prosperity and stability as inseparable from that of the motherland." He said that economic growth and improvement of people's lives offer the fundamental solution to Hong Kong's problems and challenges, suggesting that the city can retain its edge and remain an international financial, trade, and shipping center only if it focuses on economic development; in this way, the city will not be "marginalized." (Comment: There is much debate and sensitivity here lately over the question of Hong Kong becoming marginalized as the mainland grows and further develops competitive logistics and services sectors. The apparent corollary of Jia's statements is that marginalization could come with a failure to focus exclusively on economic development, i.e., to focus instead on divisive political issues. End Comment.) Jia went on to acknowledge -- without being specific -- that there are differing views in Hong Kong, emphasizing the importance of ensuring harmony and stability by putting "fundamental interests" above all else. SUPPORT FOR THE CHIEF EXECUTIVE -------------- ¶7. (C) Media noted that Jia repeatedly heaped praise on the Chief Executive, saying that Donald Tsang and his government had helped to raise local confidence to the highest level since the handover. Jia also made positive reference to Tsang's leadership during the CEPA celebration. SIPDIS EXPANSION OF CEPA -------------- ¶8. (C) CE Tsang used the June 29 "Mainland, Hong Kong and Macau Trade and Economic Cooperation Forum" to announce new CEPA measures. Key points: o Liberalization (or further liberalization) of preferential mainland access for Hong Kong companies operating in 10 sectors starting next year, namely: legal, construction, information technology, convention and exhibition, audiovisual, distribution, tourism, air transport, road transport, and individually owned stores. Examples of applicable measures include a reduction in barriers and hiring quotas affecting Hong Kong law firm offices that wish to have Hong Kong-hired staff do business on the mainland; establishment of wholly-owned construction consulting enterprises on the mainland; establishment of wholly-owned or joint venture travel agencies in Guangdong Province to operate group tours to Hong Kong or Macau. o There has been progress on establishing rules of origin for Hong Kong exports to China. (All such products are potentially eligible for tariff free treatment under existing CEPA provisions.) o The State Council will consider the expansion of renminbi business in Hong Kong. Such activities are presently limited to specific transactions and banking services, none of which involve the issuance of loans or securities. Hong Kong importers may soon be permitted to settle direct import trade from the mainland in renminbi. Financial institutions on the mainland may be able to issue renminbi denominated bonds in Hong Kong on a pilot basis. LIMITED IMPACT OF RENMINBI MEASURES -------------- ¶9. (C) Hong Kong Monetary Authority Deputy Chief Executive William Ryback told us he expected the contemplated renminbi reforms to be implemented very gradually and have only a modest impact. The more visible outcome might be more dual pricing of goods in renminbi and HKD and a wider use of renminbi in transactions in Hong Kong. In the long term this HONG KONG 00002693 003 OF 003 could lead to marginalization of the Hong Kong dollar. Other observers have pointed out to us that any issuance of renminbi bonds here will be done very carefully: offshore instruments priced in renminbi potentially open up the prospect of investors essentially making an independent assessment of the renminbi's "real" value by bidding up the bond prices to reflect an imputed value for the currency. This could be seen as a competing assessment to the exchange rate now so carefully managed by the central government in Beijing. NICHE IMPACT FOR CEPA EXPANSION -------------- ¶10. (C) The new CEPA provisions are minor extensions to services provisions that to date have had a minor impact on Hong Kong's economy. CEPA has so far been most visible as a booster of tourism from the mainland, a result of commitments by China to allow individual visits by some of its citizens to Hong Kong. The ensuing expansion of the individual visitors program throughout cities in Guangdong and beyond has been a key element of Hong Kong's above-trend economic growth since the end of the SARS outbreak in the summer of 2003; the new CEPA provisions do not have the potential to significantly boost these tourist inflows. CEPA has also been credited with boosting Hong Kong's image in the eyes of foreign investors, with expanding opportunities in service sectors like banking and logistics, and with niche gains in manufacturing. Taken together, CEPA is estimated to have created 30,000 jobs since it went into effect on January 1, ¶2004. Cunningham