HONG KONG OFFICIALS AND FINANCE STRATEGISTS

C O N F I D E N T I A L SECTION 01 OF 02 HONG KONG 003881 SIPDIS SIPDIS STATE FOR EAP/CM AND EB NSC FOR DENNIS WILDER USDOC FOR 4420 MANILA PASS AMBASSADOR PAUL SPELTZ TREASURY FOR U/S TADAM, A/S TFRATTO BEIJING FOR DLOEVINGER E.O. 12958: DECL: 09/28/2016 TAGS: ECON EFIN PGOV HK CH SUBJECT: HONG KONG OFFICIALS AND FINANCE STRATEGISTS DISCUSS PRC ECONOMY, RMB VALUATION WITH TREASURY U/S ADAMS Classified By: E/P Chief Laurent Charbonnet; REASONS: 1.4 (B/D) SUMMARY -------------- ¶1. (C) Summary: Hong Kong Monetary Authority (HKMA) Deputy Chief Executive William Ryback told U.S. Treasury Under Secretary for International Affairs Timothy Adams on SIPDIS September 9 that increasing tensions in the Beijing/Shanghai rivalry are preventing Shanghai from achieving its aim of overtaking Hong Kong as a financial center. Additionally, Ryback stated that if Hong Kong can upgrade its money laundering controls and help the mainland to do the same, Hong Kong will remain in a good position to serve as a regional financial platform. Hong Kong based financial strategists commented on the stable state of China's economy and predicted that there will be little change in renminbi (RMB) valuation for the next 12 months. End Summary. VISIT DETAILS -------------- ¶2. (U) U.S. Treasury Under Secretary for International Affairs Timothy Adams visited Hong Kong September 8-9. He was accompanied by Treasury Assistant Secretary for Public Affairs Tony Fratto and U.S. Embassy Beijing Treasury Attache David Loevinger. U/S Adams held the following substantive meetings: o William Ryback, Deputy Chief Executive, Hong Kong Monetary Authority(HKMA) o Roundtable Discussion with Financial Strategists Participants: Jonathan Anderson, Head of Asia Pacific Economics, UBS Frank Gong, Chief Economist, JP Morgan Hong Liang, Executive Director, Asia-Pacific Economic Research, Goldman Sachs Andy Xie, Managing Director, Morgan Stanley HONG KONG MONETARY AUTHORITY -------------- ¶3. (C) HKMA Deputy Chief Executive William Ryback told U/S Adams that political tensions in mainland China are preventing Shanghai from achieving its aim of overtaking Hong Kong as a financial center. Although PRC officials originally thought that Beijing and Shanghai could follow a Washington-New York model, with one city the political center and one the economic/financial center, Beijing now feels threatened by Shanghai's economic ascent, Ryback surmised. Further, Shanghai lacks the financial infrastructure and legal controls to become a truly international center of finance. Ryback noted that when Shanghai tried to implement a more "Hong Kong-style financial control structure," it was strongly opposed by conservative elements in China's State Administration for Foreign Exchange (SAFE),the People's Bank of China (PBOC),and the China Banking Regulatory Commission (CBRC). ¶4. (C) Ryback had recently urged his mainland counterparts to push for greater Chinese participation in Asian regional financial cooperation. Certain Chinese government officials were reluctant to engage, however - "China is ready but not willing to take the next step." The Japanese government, said Ryback, also was throwing up obstacles to the formation of an Asian regional financial platform, mostly by deluging all new proposals with questions regarding funding, location, and other logistical issues. Despite all this, he concluded, if Hong Kong upgrades its money laundering controls and helps mainland China to do the same, it will be well placed to serve as a regional financial platform. Hong Kong Chief Executive Donald Tsang strongly supports this concept and, "understands the issues in a way his predecessor did not." FINANCIAL STRATEGISTS -------------- ¶5. (SBU) U/S Adams and four China-focused financial strategists discussed China,s economy during a 90-minute meeting. The analysts agreed that the economic situation in HONG KONG 00003881 002 OF 002 China is relatively calm and do not expect major shifts in the next two years. Growth rates of 9 to 10 percent would likely continue over the next two years, with no appreciable gains in inflation, currently at 1.3 percent. Some analysts have cited the post-2008 Beijing Olympic period for a possible economic slowdown in China. These four economists favorably compared China,s current economic situation to 2003-04 when money was being &shoveled8 into real estate and infrastructure development projects. During 2003-04 construction boomed, while transportation (rail) and energy (electric) bottlenecks constituted serious concerns and steel and concrete shortages became prevalent. To slow investment in fixed assets, the PRC implemented a series of administrative measures to restrict capital and slow growth. Currently, the situation is much more stable as overheating and inflation concerns have dissipated and the quality of investments is much better. While the central government remains concerned about speculation in real estate and continued investment in luxury buildings, construction of middle- and low-class housing continues in an attempt to meet the needs of citizens migrating to the cities. ¶6. (SBU) China,s economy remains export driven, thus a U.S. economic slowdown is a serious concern. The four economists agreed that a moderate U.S. slowdown would not have a major negative impact on China, though smaller Asian economies would suffer more severely. Domestically, PRC bureaucrats still exert a major influence on the economy as government spending remains a major driver of economic growth and development. Real Estate is a big part of economic growth in China, "anyone making money in China is involved in real estate." For China to truly rebalance its economy it must increase imports. The economists agreed that the PRC leadership seems convinced that the RMB needs to appreciate, a substantial change from a couple of years ago; however, no consensus exists on the speed of that appreciation and hence the currency has moved little. So, while the RMB remains undervalued, the situation has not reached a &tipping point8 and the four economists expected little change in the next twelve months. PRESS COVERAGE -------------- ¶7. (U) During an interview with Phoenix TV (approximate viewership 150 million in Hong Kong and mainland China),U/S Adams was asked about Treasury Secretary Paulson's upcoming trip to China and for his views on RMB valuation. The interview was aired five times between September 9 and September 10. ¶8. (SBU) This report was cleared by Embassy Beijing Financial Minister-Counselor David Loevinger. Cunningham