HONG KONG SCENESETTER FOR HUD SECRETARY JACKSON

UNCLAS SECTION 01 OF 04 HONG KONG 001800

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM
STATE PASS TO HUD SECRETARY JACKSON

E.O. 12958: N/A
TAGS: ECON EFIN PREL PTER EINV KIPR HK CH SENV MC
SUBJECT: HONG KONG SCENESETTER FOR HUD SECRETARY JACKSON


1. (SBU) Summary: The U.S. Consulate General Hong Kong
warmly welcomes to your visit next week. U.S. trade,
investment, and business with Hong Kong flourish in a largely
open environment. Hong Kong is our 15th largest export
market, and the United States enjoyed a USD 9.8 billion trade
surplus in 2006. Cooperation between the Hong Kong Special
Administrative Region Government (HKG) and the U.S. Consulate
General remains broad, effective, and mutually beneficial.
Key U.S. interests in Hong Kong include the expansion of
democracy and protection of human rights; the enhancement of
transportation security, particularly through improvements to
the existing container security screening programs; the
maintenance of effective counter-proliferation and export
control regimes (autonomous from the PRC); continued
vigilance against money laundering and other illicit
financial activities in Hong Kong; strong protections for
intellectual property rights; and the improvement of regional
air quality. We work closely with the HKG, civil society,
and the media to support the growth of democracy and respect
for Hong Kong's autonomy, both of which are stipulated in
Hong Kong's Basic Law and which the central government in
Beijing has pledged to maintain.

--------------
Advancing Democracy
--------------


2. (SBU) Hong Kong remains a society in transition, under the
"one country, two systems" commitment contained in the Basic
Law. The people of Hong Kong continue to enjoy a broad range
of civil and social freedoms, strong legal institutions, the
free flow of information, and a highly professional civil
service. However, the 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 potential future development form the
foundation for its "high degree of autonomy" within China.
The U.S. position on universal suffrage has been clear and
consistent. The United States supports progress toward
universal suffrage in accordance with the Basic Law and the
aspirations of the Hong Kong people, who should determine the
pace and scope of moving to universal suffrage. The United
States has stated publicly and privately that the sooner a
roadmap and timetable for universal suffrage are set, the
better.

--------------
Politics
--------------


3. (SBU) Your visit follows the ten year anniversary of the
establishment of the Hong Kong Special Administrative Region
(HKSAR) and the inauguration of Donald Tsang to serve a full
five-year term as Chief Executive. Tsang was re-selected as
Chief Executive in March 2007. Tsang has pledged publicly
to resolve the issue of democratization during his term; his
government is expected to issue a "green paper" outlining his
proposals this month. Tsang's new cabinet was sworn in on
July 1 and includes many experienced civil servants with
limited political party representation, which several
political parties claim would stunt the growth of political
talent in the HKSAR. Later this year and in early 2008, Hong
Kong will hold District Council and Legislative Council
(Legco) elections; we anticipate that these contests will
build on the heightened public interest in politics generated
by the contested 2007 Chief Executive race between Donald
Tsang and Alan Leong.

SIPDIS

--------------
Economics
--------------


4. (SBU) As before the 1997 handover, Hong Kong remains a
valuable 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 continue to serve as a model for
other regional economies. 42% of mainland Chinese trade
passes through Hong Kong's ports and airport. But, Hong
Kong, like the United States, confronts the multiple
challenges of striving to be an efficient transportation and
financial center, while at the same time controlling the
spread of Weapons of Mass Destruction, drugs and diseases
such as Avian Flu.


5. (SBU) Hong Kong suffered a series of economic shocks after
the handover, including the Asian Financial Crisis, the
migration of its manufacturing sector to mainland China, and
the SARS outbreak. However, the economy has rebounded in the

HONG KONG 00001800 002 OF 004


last three years amidst strong growth in China, an increasing
number of mainland companies listing on the Hong Kong Stock
Exchange (HKEx),increased tourism, and a healthy global
economy. Nonetheless, Hong Kong residents are beginning to
voice concern over Hong Kong's ability to compete with other
regional centers, particularly those in mainland China.


6. (SBU) The Closer Economic Partnership Agreement (CEPA),a
limited free trade agreement between Hong Kong and mainland
China, provides tariff-free import to Mainland China of Hong
Kong-origin goods and preferential access for Hong Kong
registered companies in 27 services sectors (e.g., logistics,
distribution). U.S. and other foreign firms with a
significant presence in Hong Kong also are eligible to take
advantage of CEPA concessions to enter the mainland market.
Through CEPA, Hong Kong is deepening its economic interaction
with the Pearl River Delta (PRD) in Southern China to
maintain its position as the international gateway to China.
Hong Kong faces sharpening competition from mainland rivals
in services industries, which currently make up 90% of its
GDP; however, its strong rule of law, civil liberties, and
transparent society suggest that it will remain China's key
finance and services hub.

--------------
Secure Trade
--------------


7. (SBU) As the world's largest source of U.S.-bound
containers, Hong Kong was among the first in Asia to
participate in the Container Security Initiative (CSI),
designed to detect containers that may be carrying Weapons of
Mass Destruction (WMD) or their components. Cooperation
between Hong Kong Customs and the Department of Homeland
Security/Customs and Border Protection on CSI is exemplary.
Two port operators, Modern Terminals and Hutchison
International Terminal, have conducted private sector trials
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 is a world leader in
implementing the Integrated Container Security System. The
USG and HKG are currently discussing HKG's participation in
the U.S. Secure Freight Initiative. Recent negotiations
indicate that we could have an agreement this summer with
implementation following shortly thereafter.

-------------- --------------
Proliferation, Export Controls, Anti-Money Laundering, CTF
-------------- --------------


8. (SBU) The HKG cooperates in preventing the transfer
through its ports of goods that could be used by the North
Korea (DPRK) in its missile and WMD programs, and Iran in its
nuclear and missile 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 and Iran.
Hong Kong maintains an effective, highly autonomous, and
transparent export control regime. 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.


9. (SBU) As a major international financial center, money
laundering is a criminal offense in Hong Kong and money
laundering ordinances apply to banks and non-banking
financial institutions, such as law and accounting firms.
Hong Kong passed counterterrorism financing legislation in

2002.


10. (SBU) Under the "one country, two systems" reunification
model, Hong Kong has authority over all matters except for
defense and foreign policy (including U.N. affairs). The PRC
ratified both UNSCR 1718 on North Korea and UNSCR 1737 on
Iran, and forwarded implementation instructions to the HKG.
The HKG finalized its legislation for implementing UNSCR 1718
and is in the process of finalizing legislation to implement
UNSCR 1737.

--------------
Intellectual Property Rights
--------------


11. (SBU) Hong Kong is a regional leader in the protection of
intellectual property rights (IPR). New legislation and
crackdowns on the production and retail levels in the late
1990's resulted in manufacturing moving across the border to

HONG KONG 00001800 003 OF 004


mainland China. This trend, however, has forced the HKG to
increase its efforts to combat the influx of smuggled fake
goods with counterfeit pharmaceuticals as the most dangerous
items. A large percentage of medications at non-chain
pharmacies in Hong Kong sell fake drugs, such as Viagra, diet
pills, panadol and even medications used to treat epilepsy,
diabetes and other serious disorders. Given Hong Kong's role
as a regional shipping and logistics center, Hong Kong must
struggle against the endless supply of counterfeit
medications and other goods that enter or are transshipped
through Hong Kong. Information sharing between the Hong Kong
Customs and Excise Department (CED) and U.S. Customs and
Border Patrol remains robust, although some U.S. stakeholders
in the pharmaceutical and software industries say CED should
take a more proactive approach in investigating IPR
violations.

--------------
Environment
--------------


12. (SBU) Hong Kong's air quality has deteriorated noticeably
over the past ten years due to pollution related to the
tremendous growth of factories across the border in the Pearl
River Delta (PRD) of mainland China. It is estimated that
80% of Hong Kong's air pollution comes from factories in the
PRD (many of which are owned by Hong Kong investors),while
the remaining 20% is produced locally. Concern is growing
among Hong Kong residents and business leaders that pollution
is having an increasingly negative impact on health, the
quality of life, and the economic potential of the city.
Business leaders have claimed that the pollution problems
make it increasingly difficult for them to attract and retain
top international talent to Hong Kong, with the city losing
out to Singapore and other regional centers. Local chambers
of commerce, NGOs, and other groups have criticized the
government for responding slowly to the problem. For the
past year, the Consulate and visiting USG officials have
highlighted the importance of improved air quality to promote
human health and maintain a sustainable pro-growth economy.

--------------
P2E2
--------------


13. (SBU) To address deteriorating air quality, the Consulate
launched the Pollution Prevention and Energy Efficiency
("P2E2") initiative to promote a financing model to support
clean technology for mainland Chinese enterprises. P2E2 uses
loan guarantees from the Asian Development Bank (ADB) or
International Finance Corporation (IFC),as well as credits
from the U.S. Export-Import Bank, to facilitate loans by Hong
Kong commercial banks for the purchase of green and energy
efficient equipment for businesses in mainland China. Upon
installation of this equipment, mainland businesses will not
only produce less pollution, but also increase savings by
becoming more energy efficient. These savings are used to
pay back loans -- usually within one to three years -- after
which on-going savings accrue to the mainland business. The
program is geared for power generation, aluminum, cement,
ceramics, chemicals, electronics, plastic, metalworking and
other sectors. Given American expertise in environmental
technology and service firms, the program is well suited to
American partners, but does not depend solely on U.S.
technology or financing.

--------------
Avian Influenza and Health
--------------


14. (SBU) Hong Kong experienced two human outbreaks of the
highly pathogenic H5N1 subtype of the Avian Influenza (AI)
virus. The earliest known case of bird-to-human transmission
occurred in Hong Kong in 1997 when eighteen people were
infected with the H5N1 virus; six died. In a subsequent 2003
outbreak, two Hong Kong citizens died while traveling in
southern China. Since 2003, Hong Kong has increased
biosanitation controls at poultry farms, slaughterhouses and
retailers. Hong Kong health officials have publicly stated
the main AI threat comes from migratory birds and birds
smuggled in from mainland China. The HKG recently closed the
Kowloon bird market after a bird was discovered with the H5N1
virus. The market will reopen soon with new biosanitation
measures in place.


15. (SBU) Hong Kong has some of the world's leading AI
researchers, extensive experience in dealing with SARS, and a
well-organized AI preparedness plan. As a WHO testing center
for AI, it is a regional leader in AI prevention, monitoring

HONG KONG 00001800 004 OF 004


and response. The HKG is close to meeting its target of 20
million doses of tamiflu and is developing plans to establish
a commercial vaccine production facility in the SAR. Working
with the private sector, community groups and counterparts in
mainland China and Macau, the HKG continually updates its AI
response plan.
Cunningham