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

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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
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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

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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
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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
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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
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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

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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
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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