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

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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
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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
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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
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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

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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
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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
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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.

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EXPANSION OF CEPA
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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
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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

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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
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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