CONSUL GENERAL'S FAREWELL CALL ON HONG KONG

S E C R E T HONG KONG 001304

SIPDIS
SENSITIVE

STATE FOR EAP/CM, EAP/K, AND EEB/IFD/OMA, TREASURY FOR OASIA

E.O. 12958: DECL: 07/15/2034
TAGS: PGOV PREL ECON EFIN HK CH
SUBJECT: CONSUL GENERAL'S FAREWELL CALL ON HONG KONG
FINANCIAL SECRETARY TSANG

Classified By: Consul General Joe Donovan, Reasons 1.4 b/d


1. (C) Summary: During the Consul General's farewell call
July 15, Hong Kong Financial Secretary John Tsang said Hong
Kong's low tax rate doesn't mean it is a tax haven. The
government's decision to submit legislation to conform with
the latest tax information standards is meant to simplify
negotiation of double taxation agreements and will bolster
Hong Kong's status as a financial center. Tsang assured the
Consul General of Hong Kong's continued cooperation in
implementing measures to prevent North Korean proliferation.
Hong Kong banks are eager to protect their reputations and
access to the international financial system and are unlikely
to knowingly deal with North Korean entities, said Tsang.
Hong Kong's economic prospects are beginning to look better
and the Special Administrative Region (SAR) should return to
positive growth in 2010 without the need for additional
stimulus packages. End Summary.


2. (C) In the Consul General's farewell call July 15 on FS
Tsang, the CG noted the Hong Kong government's (HKG) recent
move to introduce a bill that would bring Hong Kong into
compliance with OECD 2005 standards for Exchange of
Information on tax matters. Tsang replied that Hong Kong's
low tax rate opens the SAR to incorrect accusations of being
a tax haven. In fact, he said, the low tax rate is the
natural corollary to Hong Kong's small government. Even
with such low taxes, Hong Kong has managed to accumulate a
large fiscal surplus over the past several years. He
promised that the new legislation would bring Hong Kong into
full compliance with the latest (OECD 2005) standards for
Exchange of Information. This measure should clear the way
for Hong Kong to negotiate additional Double Taxation
Agreements with other economies. Tsang expressed hope that
LegCo would pass the bill before the end of the year.


3. (S) The CG thanked Tsang for Hong Kong's support of
United National Security Council Resolutions (UNSCRs)
directed at preventing North Korean proliferation and noted
the recent success of Treasury Undersecretary Levey's visit
to Hong Kong. Levey was most gratified by his opportunity to
meet with Hong Kong-based banks, an opportunity he did not
have during his visit to China. The CG relayed the message
from Hong Kong banks to U/S Levey: they want to protect their
reputations and do not need to wait for UNSCRs to cut
business ties with North Korean entities. Tsang noted that
obligations in the LegCo had prevented him from meeting U/S
Levey. He assured the CG of Hong Kong's continued
cooperation and noted that most Hong Kong banks have an
international profile and high standards of conduct that
prevent them from taking unnecessary risks.


4. (C) In response to the CG's question on Hong Kong's
economic prospects, Tsang noted that Hong Kong had been
severely affected by the collapse of western import demand
since September 2008. But things are starting to look up, he
said, and the export collapse is slowing. Hong Kong's
exports of components and commodities to China are
contracting more slowly than its exports to other regions,
suggesting that China's export sector may recover sooner than
expected. Hong Kong's economy will shrink this year, but
economic growth should return by 2010, he said. The HKG is
still concerned about unemployment, currently stable at 5.3
percent, but things are far better than during the Asian
Financial Crisis. Hong Kong has increased government
spending by HKD 87 billion (US$ 11.1 billion),or about 5.2
percent of GDP, and Tsang saw no need for additional stimulus
measures this year.
DONOVAN