SCENESETTER FOR ASSISTANT SECRETARY HILL'S VISIT

C O N F I D E N T I A L SECTION 01 OF 04 HONG KONG 004159

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DEPT FOR EAP AND EAP/CM
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E.O. 12958: DECL: 10/19/2031
TAGS: ECON EFIN EWWT HK KN MC OVIP PARM PREL PTER
SUBJECT: SCENESETTER FOR ASSISTANT SECRETARY HILL'S VISIT
TO HONG KONG OCTOBER 21-23

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


1. (SBU) Summary: The U.S. Consulate General Hong Kong looks
forward to your visit this week. The fourteen USG agencies
with representatives here address and protect key U.S.
interests, including expansion of democracy and protection
for human rights; enhancement of transportation security,
particularly through improvements to the existing container
security screening programs; maintenance of effective
counter-proliferation and export control regimes, autonomous
from the PRC; and, continued vigilance against money
laundering and other illicit financial activities in both
Hong Kong and Macau. To advance these interests, we work
closely with the Government, various political entities, and
the media to support the growth of democracy and the respect
for Hong Kong's autonomy, both of which are stipulated in the
Basic Law and which the central government in Beijing has
pledged to maintain. End Summary.

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ADVANCING DEMOCRACY
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2. (SBU) Hong Kong is a society in transition, under the "one
country, two systems" commitment contained in its Basic Law.
The people of Hong Kong enjoy a broad range of civil and
social freedoms, strong legal institutions, the free flow of
information, and a highly professional civil service. They
lack, however, full democracy and a common view of their
political future, and development of greater democracy and
movement toward the goal of universal suffrage, promised in
the Basic Law, are proving to be difficult. Hong Kong's
achievements and its future development form the foundation
for its "high degree of autonomy" within China, and help set
an example for this region coping with China's emerging
economic power and influence.

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PROLIFERATION AND EXPORT CONTROLS
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3. (SBU) In an October 18 meeting, the Consul General told
Secretary of Commerce Joseph Wong that UNSCR 1718 applies to

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North Korean shipping through Hong Kong's ports and we expect
Hong Kong to fully implement the provisions of 1718 in its
port and border operations. Hong Kong is a cooperative
partner in preventing the transfer of goods through its ports
that could be used by the DPRK in its missile and WMD
programs. Hong Kong authorities emphasize that their
Anti-Terrorism, Weapons of Mass Destruction, Narcotics and
Serious Crime ordinances provide the necessary legal powers
to act and convict persons engaging in illicit activities
involving the DPRK. Hong Kong maintains an effective, highly
autonomous, and transparent export control regime. In
September, the Bureau of Industry and Security (BIS)
Assistant Secretary Darryl Jackson congratulated the Hong
Kong government for obtaining a conviction of a Hong Kong
company for violations of Hong Kong's Strategic Goods Law in
a case for which BIS provided Hong Kong key information.
Hong Kong continues to be an important partner in protecting
the smooth functioning of the global trading system. Its
contributions reflect understanding of its role as a premier
transportation center.

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MONEY LAUNDERING
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4. (C) The Treasury Department's 2005 designation of Macau's
Banco Delta Asia (BDA) as an institution "of primary money
laundering concern" under Section 311 of the Patriot Act
reverberated throughout the region. Macau authorities,
cognizant of the attention the BDA designation had generated
worldwide and the possible negative effects on investment and
tourism revenues, immediately assumed control of BDA. In
March 2006, Macau's legislature passed Anti-Money Laundering
and Counter-Terrorism bills and in September announced the
formation of a Financial Investigation Unit. Macau
authorities are cooperating with U.S. Treasury/IRS Officials
in the ongoing investigation of BDA. In September,
investigators completed the task of scanning and digitizing
220,000 BDA documents and are examining the data. In early

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September, Chief Executive Edmund Ho told the CG that Macau
is willing to extend its control over BDA for another six
months, but both Ho and the PRC's Ministry of Foreign Affairs
Commissioner in Macau Wan Yongxiang told the CG that they
hoped the BDA case would be resolved quickly. Asia's
financial world will be watching carefully how our government
resolves this case.


5. (C) Hong Kong's Monetary Authority (HKMA) appointed a
manager to oversee BDA's Hong Kong subsidiary, Delta Asia
Credit (DAC). The ultimate disposition of DAC will depend on
how Macau decides to treat BDA. As the second largest
financial market in Asia, after Japan, Hong Kong's
cooperation in preventing financial transactions related to
the DPRK's WMD and missile programs is crucial. HKMA has
implemented a rigorous AML/CTF regime in line with
international standards. HKMA has alerted Hong Kong banks to
exercise vigilance regarding North Korean financial
transactions and HKMA officials have conducted reviews of
North Korean transactions moving through Hong Kong banks. In
September, as we briefed them on UNSCR 1695, Hong Kong
Monetary and Police authorities expressed their willingness
to continue to support these efforts. They urged the U.S.
Government to provide specific, detailed, evidentiary
information so that they can more effectively monitor,
investigate, stop and prosecute illicit activities related to
North Korea's missile and WMD programs. More general
information on patterns and trends would also be very useful,
said the Hong Kong officials.

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SECURE TRADE
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6. (SBU) As the largest source of U.S.-bound containers, Hong
Kong was among the first in Asia to participate in the
Container Security Initiative (CSI). Cooperation between
Hong Kong Customs and Department of Homeland Security/Customs
and Border Protection on CSI is exemplary and paved the way
for CSI programs in Shanghai and Shenzhen. Two port
operators, Hong Kong International Terminal and Modern
Terminal, have each established a pilot of the Integrated
Container Inspection System (ICIS),which combines
radiological mapping, x-ray images and container tagging and
makes a digital record for each container passing through its
portals. Hong Kong's port operators, along with the
Government (HKG),are considering whether to purchase this
integrated port security system, but are waiting for U.S.
government guidance as to whether the ICIS system meets U.S.
requirements. The Port Security Improvement Act of 2006
signed into law by the President on October 13 directs the
Department of Homeland Security to designate three foreign
ports for the establishment of pilot integrated scanning
systems that couple non-intrusive imaging and radiological
detection equipment. In this regard, Hong Kong appears to be
a world leader and we should encourage them to continue their
efforts as they move toward the shared goal of strengthening
port/container security.

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Itinerary
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7. (SBU) We have arranged meetings for you with leading
politicians and prominent members of Hong Kong society and
activities which will give you a good overview of Hong Kong
economy and people on October 21 and 22.

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Politics
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8. (C) Chief Executive (CE) Donald Tsang formally took office
on June 21, 2005, following an interim election to fill the
remaining two years of the term of former Chief Executive
Tung Chee Hwa. Tung resigned in March 2005 due to widespread
dissatisfaction over his management and political style.
During his first eighteen months in office, Tsang enjoyed
high public approval ratings, reflecting confidence in
Tsang's administrative competence, his deliberate outreach

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efforts and Hong Kong's robust economy. Nevertheless, his
reluctance to put forth a "vision" stretching beyond the five

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months till his expected selection for a second term has
engendered public and media criticism.


9. (C) Your visit comes as Tsang prepares for what should be
an easy reelection campaign. Under Hong Kong's partially
democratic electoral system, in December various
constituencies will select the 800 members of the Chief
Executive Election Committee, which in turn will select the
next Chief Executive in March 2007. Barring any severe
political, economic, or social crisis, Tsang -- who enjoys
strong support from the central government in Beijing -- will
win reelection by a wide margin, and possibly will run
unopposed. Many in the pan-democratic opposition parties had
hoped that former Chief Secretary Anson Chan, a retired,
highly respected career civil servant, would contest the
election on their behalf, but she has declined to do so.
Now, it appears that Alan Leong, a member of the newly formed
pro-democracy group, the Civic Party, will attempt to gain at
least one hundred nominations from the Election Committee,
which would force Donald Tsang to face an opponent and
presumably to debate the future of democratic reform and
other issues; both Tsang and Beijing would prefer to avoid
such debate. Further progress toward universal suffrage,
required by Hong Kong's Basic Law, has been deferred until at
least 2012.

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Economics
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10. (U) Hong Kong is a valuable United States partner on
trade liberalization and other economic issues. Hong Kong's
transparent regulatory regimes, modern financial systems,
rule of law, open society, and long experience with
capitalism serve as a model for mainland China's own
development. Hong Kong is a global nexus for the movement of
people, goods and money. Like the United States, Hong Kong
is confronting the challenges of continuing to be an
efficient transportation and financial center, while at the
same time controlling the spread of WMD, drugs and diseases
such as Avian Flu.


11. (U) Hong Kong suffered a series of economic shocks after
the 1997 handover, including the Asian Financial Crisis, the
migration of its manufacturing sector to mainland China, and
the SARS outbreak. These economic crises dented public
confidence in the first post-handover government headed by
Tung Chee Hwa. The economy rebounded in 2003 amidst strong
growth in China, increased tourism, and a healthy global
economy. The Hong Kong government is deepening its economic
interaction with the Pearl River Delta (PRD) in Southern
China to maintain its position as a gateway to China.
Services industries make up 90 percent of Hong Kong's GDP
(US$ 180 billion in 2005) with a focus on financial and
professional services, transportation and logistics and
tourism. Hong Kong faces sharpening competition from
mainland rivals in services industries; however, its strong
rule of law, modern practices and transparent society suggest
that it will remain a key finance and services hub.


12. (U) Hong Kong consistently advocates for open global
trade. In the U.S. - Hong Kong trade arena, textiles, civil
aviation and IPR continue to be key issues. We have
negotiated an MOU with Hong Kong to combat illegal
transshipments of Chinese textiles. We urge Hong Kong to
further liberalize its civil aviation market, which Cathay
Pacific continues to dominate. Hong Kong has dramatically
improved its enforcement of IPR, but there are ongoing
concerns about pending changes to the Copyright Law, end-user
software piracy, and pharmaceutical-related infringements.

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Environment
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13. (U) Hong Kong's air quality has deteriorated dramatically
over the past ten years due to pollution that can be traced
to the tremendous growth of factories across the border in
the Peal River Delta of mainland China. There is growing
concern among Hong Kong residents that pollution is having an
increasingly negative impact on health, quality of life and
the economy.

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Avian Influenza
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14. (SBU) Hong Kong has experienced two human outbreaks of
the highly pathogenic H5N1 subtype of the AI virus. The
city's earliest case of bird-to-human transmission was in
1997 when eighteen people were infected with H5N1; six died.
In the 2003 outbreak, two Hong Kong citizens died while
traveling in Southern China. Between 1997 and 2005, Hong
Kong slaughtered over 4 million birds to prevent spread of
AI. Although there have been no recent human cases in Hong
Kong, since January the virus has resurfaced in a number of
native wild birds and in two chickens, which may have come
from mainland China. Health experts believe that H5N1 is
present in Hong Kong's natural environment.


15. (SBU) Hong Kong has some of the world's leading AI
researchers, extensive experience in dealing with SARS, and a
well-organized AI response plan. The Centre for Health
Protection (CHP) leads the HKG's AI preparations. After
SARS, the HKG formed the CHP to deal with infectious disease
threats. The HKG plans to acquire 20 million doses of
Tamiflu by 2007 and is talking to manufacturers about
purchasing a H5N1 vaccine when it is produced. Working with
the private sector and community groups, the HKG continually
updates its AI response plan.
Cunningham