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