VISIT TO HONG KONG OF EAP DAS THOMAS CHRISTENSEN

C O N F I D E N T I A L SECTION 01 OF 03 HONG KONG 003794

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NOFORN
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DEPARTMENT FOR EAP, EAP/CM
NSC FOR DENNIS WILDER, KURT TONG

E.O. 12958: DECL: 09/22/2031
TAGS: PGOV PREL PINR OVIP ECON CH HK
SUBJECT: VISIT TO HONG KONG OF EAP DAS THOMAS CHRISTENSEN

Classified By: Consul General James B. Cunningham; Reasons 1.4 (b, d)


1. (C) Summary: During his September 14-16 visit to Hong
Kong, EAP DAS Thomas Christensen reviewed Hong Kong economic
and political issues with Financial Secretary Henry Tang, who
said the central government leadership in Beijing closely
followed but did not fully understand political developments
in Hong Kong. Tang also inquired about U.S. Treasury
Secretary Paulson's interests in the PRC and addressed the

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need for Hong Kong to implement a goods and services tax
(GST). DAS Christensen exchanged views on a wide range of
local and regional issues with key political and business
leaders. Christensen also discussed economic and political
developments in both Hong Kong and the mainland with members
of the AmCham Board of Governors and with former Hong Kong
Chief Executive Tung Chee-hwa. End Summary.

Financial Secretary Henry Tang
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2. (C) On September 15, DAS Christensen called on Financial
Secretary Henry Tang, the third-ranking official in the Hong

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Kong Government (HKG). Tang advised that Christensen should
"never bet against Hong Kong;" despite the "many challenges"
of the past few years, the Hong Kong Special Administrative
Region's (HKSAR) economic performance "could not have been
much better," with recent GDP growth of nearly eight percent,
unemployment at a five-year low, inflation at just two
percent, and a government budget surplus.


3. (C) Asked about Hong Kong's ability to influence
developments in the mainland, Tang referred to U.S. Treasury
Secretary Paulson's recent speech regarding active engagement

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and its accompanying responsibilities. Tang said the PRC
leadership was conscious of these responsibilities but also
looked to Hong Kong for assistance in raising its standards,
although there remained many systemic barriers and problems
with vested interests. Hong Kong, he believed, could
influence developments in the PRC in some ways, but not in a
huge way. Tang said the Beijing leadership was aware that
the Hong Kong people aspired to directly elect their Chief
Executive in 2012 or 2017, but also understood that such a
change would lead mainlanders to ask why they could not enjoy
the same right. The PRC Government, however, did not
understand why a normal citizen in Hong Kong could bring suit
against the HKG and possibly win a court judgment. For those
sorts of reasons, any changes to Hong Kong's Basic Law
required the approval of the National People's Congress
Standing Committee (NPCSC),and Beijing remained "very
vigilant" regarding political developments in Hong Kong.


4. (C) Again inquiring about Secretary Paulson's speech, Tang
asked if Paulson had a "broader agenda" beyond money
laundering, exchange rates, economic reform, and the
environment. DAS Christensen replied that environmental
protection was an issue of personal importance to Secretary
Paulson. The issue is also important to the PRC's long-term
economic future. Tang replied that it would be beneficial if
the Hong Kong people became more interested in environmental
issues, as Hong Kong suffered more than any other locality
from pollution in Guangdong Province. He acknowledged that
the 90,000 Hong Kong-owned factories in the Pearl River Delta
region were major contributors to the pollution problem, and
that any improvement would require all parties to work
together.


5. (C) Asked about the HKG's GST proposal, Tang said now was
an opportune time for such a measure, despite the
"overwhelming" criticism the plan had received. Hong Kong
faced an aging population, falling tax revenues, and rising
educational expenses that now consumed one-fourth of the
government's expenditures. Under these circumstances, Tang
believed it was important to increase public understanding of
the issue, even if the GST proposal could not succeed at this
time. Somewhat similarly, Tang defended the HKG's recent
apparent retreat from its "positive non-intervention"
economic policy of the 1970s. He said Hong Kong remained
essentially a market economy and a capitalist society, and
quoted former Financial Secretary Antony Leung's description
of the HKG as a "proactive market enabler" in a situation
where the "market leads and the government facilitates."

Lunch with Political and Business Leaders
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6. (C) The Consul General hosted a luncheon for DAS
Christensen at his residence on September 15. Present were a
selection of Hong Kong's economic, political and journalistic

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elite, representing a range of political stances. DAS
Christensen opened the lunch with a short tour of Washington
perspectives on the U.S. China relationship and then briefed
the gathering on some of the conversations he had had in
Beijing. The group generally agreed that U.S.-China
relations were at a relatively positive point, as exemplified
by China's cooperation with the U.S. in voting for UNSCR 1695
on North Korean missile and WMD programs. Several of the
participants noted, however, that the seeming rise of
nationalistic reaction against acquisitions of U.S. firms by
China- or Middle-Eastern-linked corporations, such as the
Unocal and Dubai Ports cases, made Hong Kong and Chinese
business people very uneasy. Democratic Party leader and
Legco member Martin Lee rejoined, however, that a reduction
in China's prosecutions of human rights activists and other
abuses would make it easier for people in the U.S. to be more
sympathetic to such corporate acquisitions. A discussion
ensued about the growing nervousness of the central
government as it dealt with rising civil unrest and growing
income gaps. Journalist and former Liberal Party chairman
Allen Lee remarked that many of his contacts in China are
concerned that conservatives are on the rise in Beijing and
are attempting to push aside the "Shanghai gang." He does
not believe this is coming from Hu Jintao or Wen Jiabao
directly, but they feel compelled to accommodate this drive.
Daniel Fung, chairman of Hong Kong's Broadcasting Authority
and local CPPCC deputy, agreed, saying that there is a broad
sense that the reforms of Zhu Rongji and Jiang Zemin went too
far, too fast, to the benefit of the coasts and detriment of
the hinterland. Businessman, CPPCC delegate and non-official
Hong Kong Exco member C.Y. Leung said his mainland government
contacts are exceedingly concerned about spontaneous
outbursts of public violence, touched off by street arguments
or traffic accidents. Crowds have wrecked police cars and
set them ablaze, in a reaction to grinding poverty and
frustration.

AmCham Briefing
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7. (C) In a September 15 meeting with members of the Hong
Kong American Chamber of Commerce (AmCham) Board of
Governors, one former AmCham chairman emphasized the
importance of senior USG officials visiting Hong Kong to hear
the views of U.S. and Hong Kong business leaders as well as
Hong Kong Government officials, and also to understand
political and economic developments here. One member, a
former U.S. Consul General, noted the importance of keeping
Hong Kong on the US-PRC bilateral agenda, not only for
business issues but also for concerns about the rule of law
and democratization.


8. (C) One Board member observed that recently the HKG
appeared to be "taking a step backward" by "slamming" former
Hong Kong Chief Secretary Anson Chan's possible candidacy for
the 2007 Chief Executive election. The member believed the
HKG was "not so committed" to the cause of liberal democracy,
and that the central government in Beijing both worried about
and distrusted the people of Hong Kong. Another member
opined that Beijing's "greatest fear" was not Hong Kong
independence, but rather that the former colony might descend
into a level of "chaos" similar to that they believed
prevailed in Taiwan.


9. (C) Another Board member noted HK's continuing role as an
"investment management center" for southern China, with a
continuing flow of foreign direct investment through Hong
Kong to the mainland. Although there was growing competition
between Hong Kong and Shanghai for the role of China's
"business center," over the last three years Hong Kong had
offered the largest initial public offerings (IPOs) in the
world, including some for extremely large PRC companies that
were "new" to international business. Hong Kong remained a
good place for foreign investors to enter the PRC and also
for Chinese companies to enter the world. In general, the
AmCham representatives did not view Hong Kong's proposed
goods and services tax (GST) as a major obstacle to foreign
investors, since introduction of the GST could lead to
reductions in other taxes. They believed, however, that the
HKG had mishandled the proposal's roll-out and subsequently
had been surprised by the public's strongly negative
reaction. Further, the Chief Executive's recent remarks
about becoming more interventionist in economic management
resonated unfavorably in the foreign business community.


10. (C) In response to one member's observation that US
companies could transmit a "tremendously positive" message to
the mainland, especially in terms of the potential for an

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individual to rise to the top of an organization, DAS
Christensen said the U.S. could work simultaneously at two
levels, with both the USG and U.S. foreign investors pushing
for democracy. He added that U.S. business leaders in China
could remind the PRC leadership that no other country had
done more to assist the economic growth of the PRC since
1978, and that a collapse of the PRC was not in the interest
of the U.S. or any other western country.


11. (C) Asked about simmering bilateral disputes between the
PRC and Japan, DAS Christensen told the AmCham members that
PRC-Japan relations were at a difficult stage due to a
volatile mix of historical and nationalistic issues. He said
the PRC government tended to "play up" these issues, but
nevertheless remained sincerely troubled by Japan's refusal
to acknowledge historical events. This trend is not helpful
because the PRC would continue to attempt to isolate Japan in
the region. Japan needs to improve its relations with South
Korea in particular. DAS Christensen said the issue of North
Korea remains critical and the USG's pursuit of a
multilateral resolution was absolutely correct, while the
"cost of failure" of this effort for the region would be
enormous.


12. (C) On Taiwan, DAS Christensen told the AmCham governors
that ongoing US-PRC tension, in any area, tended to raise PRC
concerns about USG military cooperation with Japan and South
Korea. Nevertheless, he believed Beijing remained fairly
confident that the USG was not promoting Taiwan independence.
Christensen described his recent meeting in Shanghai with
Fudan University students, during which he argued that while
there were "problems" in Taiwan's democratization process,
the Taiwan people remained able to discuss these issues
freely. On direct links between Taiwan and the mainland,
Christensen said that whoever won Taiwan's 2008 presidential
election would be likely to push for expansion of direct
links, which the USG supported. Before such conditions are
in place, it would be difficult for the United States to
consider seriously a U.S.-Taiwan Free Trade Agreement.

Former Chief Executive Tung
--------------


13. (C) Former Hong Kong Chief Executive Tung Chee-hwa told
DAS Christensen that the Beijing leadership was attempting to
address all the key issues on its agenda, including financial
reform, North Korea, Taiwan, and relations with the U.S. and
Japan. Of these issues, by far the most important for
Beijing was Taiwan. Asked about the recent announcement by
Beijing of apparently increased restrictions on foreign media
operations, Tung noted that the announcement was issued while
Premier Wen Jiabao was in London, forcing him to address the
issue; Tung said Wen's response suggested that the
restrictions could be reversed. Tung was very interested in
the visit to the PRC of Treasury Secretary Paulson, at one
point asking his assistant if she had obtained a copy of
Paulson's speech. Tung also devoted considerable time to
discussion of environmental issues in both the mainland and
Hong Kong, including the general lack of local enforcement of
national laws and regulations in the mainland.


14. (U) This message was cleared by DAS Christensen.

Cunningham