Identifier
Created
Classification
Origin
08HONGKONG1261
2008-07-11 07:47:00
CONFIDENTIAL
Consulate Hong Kong
Cable title:  

NEW FINANCE AND TREASURY UNDERSECRETARY ASSAILS

Tags:  ECON EFIN PGOV HK 
pdf how-to read a cable
VZCZCXRO4448
RR RUEHCN RUEHGH RUEHVC
DE RUEHHK #1261/01 1930747
ZNY CCCCC ZZH
R 110747Z JUL 08
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 5286
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC
C O N F I D E N T I A L SECTION 01 OF 02 HONG KONG 001261 

SIPDIS

STATE FOR EAP/CM, EEB FOR OMA; TREASURY FOR DOHNER; NSC FOR
WILDER AND TONG

E.O. 12958: DECL: 07/08/2028
TAGS: ECON EFIN PGOV HK
SUBJECT: NEW FINANCE AND TREASURY UNDERSECRETARY ASSAILS
PAN-DEM POLITICKING

Classified By: Deputy Principal Officer Chris Marut, Reason 1.4 b

C O N F I D E N T I A L SECTION 01 OF 02 HONG KONG 001261

SIPDIS

STATE FOR EAP/CM, EEB FOR OMA; TREASURY FOR DOHNER; NSC FOR
WILDER AND TONG

E.O. 12958: DECL: 07/08/2028
TAGS: ECON EFIN PGOV HK
SUBJECT: NEW FINANCE AND TREASURY UNDERSECRETARY ASSAILS
PAN-DEM POLITICKING

Classified By: Deputy Principal Officer Chris Marut, Reason 1.4 b


1. (C) Summary: Newly appointed Undersecretary for Finance
and the Treasury Julia Leung criticized the political
controversy that surrounded the appointment of the six
Political Undersecretaries, their salaries and their
passports (discussed septel). In a recent meeting with the
Deputy Principal Officer and Econ Unit Chief, she claimed she
had been considering giving up her British passport even
before the controversy erupted. Her priorities will include
managing efforts to expand and diversify Hong Kong's
financial services sector. Leung said competition from
Chinese regulatory agencies eager to protect their own
interests derailed the "Through-Train" scheme that would
allow mainland residents to invest directly in the Hong Kong
stock market. While Hong Kong's Hang Seng index has fallen
over 20% this year, the subprime crisis is not really
affecting most Hong Kong banks. HKMA Joseph Yam's recent
warning to banks to avoid deals that involved property
companies "topping up" mortgage loans To cover up to 90% of
the purchase price has, according to Leung, prevented
borrowers from becoming over-leveraged. Leung will leave her
current position as Executive Director at the Hong Kong
Monetary Authority on July 25 and take up her new
responsibilities in early August. End Summary.


2. (SBU) Comment: Leung has been a valuable interlocutor for
the United States in her role as Executive Director
(International) at HKMA, regularly providing frank insight
into HKMA positions and relations with the Chinese financial
authorities. Of all of the newly appointed Undersecretaries,
she is among the most qualified to take up her new position.
Nevertheless, she has been criticized by pan-Democrats as one
of Norman Chan's "proteges." (Note: Prior to becoming chief
of staff for Chief Executive Tsang, Chan was Deputy Director
of the HKMA and has been tipped as the favorite to succeed
HKMA Chief Executive Joseph Yam when Yam is forced to retire
in 2009. End note.) While not a political party member,

Leung's appointment makes her a strong candidate for a
Secretary-level position in the next administration. End
Comment.


3. (U) Deputy Principal Officer and Econ Unit Chief met June
27 with newly appointed political Undersecretary for Finance
and Treasury Julia Leung. Leung is currently the Executive
Director (International) at the HKMA but will resign that
position July 25 and assume her new duties on August 11.
Leung was a journalist with the Asian Wall Street Journal
before joining HKMA in 1994, rising to her current position
in 2000.

==========================================
Politics, Not Substance, Driving Criticism
==========================================


4. (C) Leung observed that the political Undersecretary
appointment process had become far too politicized. Although
she expected the political appointees to be scrutinized
closely, the furor over salaries and foreign passports was
clearly driven by election year politicking. She noted that
there is no requirement in the Basic Law for
Undersecretary-level appointees to give up their foreign
passports, but that she had been considering doing so since
she learned of her appointment and it was not a difficult
decision. (Note: Leung and her two children became UK
citizens through her husband, a Hong Kong civil servant and a
senior manager at Radio Television Hong Kong (RTHK) who was
offered British citizenship prior to 1997. End Note.)


5. (C) Criticism of the government's selection process as
non-transparent is misguided, said Leung. Nominations for
political Undersecretaries were accepted from individuals or
groups. These were vetted and a short-list of candidates was
interviewed by a panel that in her case included Chief
Executive Tsang, Tsang's chief of staff Norman Chan,
Financial Secretary John Tsang and Finance and Treasury
Secretary KC Chan, among others. Leung dismissed criticism
that Norman Chan's proteges dominated the Undersecretary
appointments. Of all those appointed, she is the only one
who worked directly with Chan for any length of time while
both were senior officials at the HKMA. The objections by
the pan-Democrats about passports, salaries, and ties to
Norman Chan are driven by electoral politics in the run-up to
the September Legislative Council elections, she said.


6. (U) Given her experience at HKMA, Leung expected that
promoting Hong Kong's financial services sector would be her

HONG KONG 00001261 002 OF 002


primary focus as Undersecretary. Hong Kong is uniquely
positioned to become the premier financial services provider
to a large and rapidly developing hinterland, much as New
York relies on the rest of the United States and London
relies on European business. The dipping equity markets
combined with consistent renminbi appreciation has cooled
Chinese companies appetite for international stock listings,
she said. In the near term, Hong Kong must seek to diversify
its financial services sector and seek business opportunities
in Southeast Asia, the Middle East, Russia and other emerging
markets. The newly announced plan to launch Hong Kong
Depository Receipts is a good way to begin to tap these new
markets. Hong Kong authorities are also seeking to offer
Islamic financial services, she said.

============================================= =====
Through-Train Not Likely to Get Back on Track Soon
============================================= =====


7. (C) In response to questions about the "Through-Train"
scheme to allow mainland residents to invest directly in the
Hong Kong Stock Market, Leung replied that the scheme was
derailed by competition from Chinese regulatory agencies
eager to protect their own fiefdoms. The Chinese Banking
Regulatory Commission (CBRC),State Administration for
Foreign Exchange (SAFE),and the Chinese Securities
Regulatory Commission (CSRC) all supported the concept, she
said, but couldn't agree on the mechanism. Before they could
reach agreement, the market shifted and demand for Hong Kong
equities dried up. Hong Kong's market can compete with
Shanghai, but not with Chinese regulators, she said. CSRC is
still strictly controlling Chinese company applications to
list in Hong Kong; while they have told HKMA they will relax
restrictions, it is likely to take some time, said Leung.

=============================================
Hong Kong Dodges Subprime/Real Estate Bubbles
=============================================


8. (U) The subprime crisis in the U.S. is not really
affecting most Hong Kong banks, she said. Although equity
markets are down sharply and financial services companies are
not seeing much new business, most have posted only minimal
losses so far. (Note: Hong Kong's Hang Seng Index has fallen
by over 20% since the beginning of 2008. End Note.) Much of
the emerging market equity price increase in 2007 was
speculative and was a result of capital flight from developed
markets. As that capital has moved on in search of higher
returns, most emerging market equities are returning to more
sustainable levels, she said. Most Hong Kong banks and
financial service companies are not highly leveraged nor were
they heavily exposed to structured debt products. Bank
business in Hong Kong appears to be reasonably good, despite
lower rates of growth and higher inflation. However, if
prime U.S. assets like FannieMae or FreddieMac are affected
by the subprime fallout, Hong Kong-based financial companies
will feel some pain, according to Leung.


9. (U) The rapid flow of capital into Hong Kong in the
second half of 2007 had some regulators worried that equity
and property price bubbles could create problems for the Hong
Kong economy. Hong Kong luxury property prices moved past
their 1997 peaks late last year. Low U.S. interest rates and
rising inflation mean that Hong Kong's real interest rates
are now negative. In spite of this, the new property market
has remained relatively stagnant. Hong Kong investors have
been through this before, said Leung. HKMA Chief Executive
Joseph Yam's recent warning to banks to avoid deals that
involved property companies "topping up" mortgage loans to
cover up to 90% of the purchase price had effectively stifled
these offers and prevented borrowers from becoming
over-leveraged. Banks have improved their due diligence,
making defaults unlikely, she said.
Cunningham