CONSUL GENERAL'S FAREWELL CALL ON FINANCIAL

C O N F I D E N T I A L SECTION 01 OF 02 HONG KONG 001331 SIPDIS STATE FOR EAP/CM E.O. 12958: DECL: 07/16/2024 TAGS: ECON EFIN PGOV HK SUBJECT: CONSUL GENERAL'S FAREWELL CALL ON FINANCIAL SERVICES AND TREASURY SECRETARY K.C. CHAN REF: HONG KONG 1266 Classified By: Consul General Joe Donovan, reasons 1.4 b/d. ¶1. (C) Summary. In the Consul General's farewell call on Hong Kong Secretary for Financial Services and Treasury K.C. Chan on July 17, Chan stated that China appears to be coming out of the financial crisis. "We have hit rock bottom and are now coming back;" however, U.S. consumer spending is still lacking, preventing a full recovery. Chan downplayed the Hong Kong vs. Shanghai competition to be China's dominant financial center, and instead emphasized that Hong Kong should focus on maintaining its place in the international financial system. Chan acknowledged that the Lehman minibonds issue brought to light deficiencies in Hong Kong's regulatory regime that the government and banks should fix. Chan commented on China's RMB trade settlement program, stating that "Chinese authorities are using a cautious approach," feeling their way and gauging "how far they can go in internationalizing the RMB." The CG spoke appreciatively of Hong Kong banks' and Monetary Authority's support for maintaining vigilance against illicit North Korean financial activities during Under Secretary of Treasury Levey's visit to Hong Kong on July 9-10 (reftel),to which Chan responded that the U.S. could count on Hong Kong. Chan also noted that Hong Kong continues to follow economic discussions taking place in Washington, Brussels and London and that Hong Kong sees signs of protectionism behind some of these discussions. End Summary. ¶2. (C) During the Consul General's farewell call on Financial Services and Treasury Secretary K.C. Chan the two discussed economic and financial issues. In response to the CG's observation that mainland China's 7.9% economic growth in the 2nd Qtr (figures released July 16) was quite positive, Chan commented that China appears to be coming out of the financial crisis. "We have hit bottom and are now coming back;" however, U.S. consumer spending is still lacking and preventing a full recovery, he said. Chan read more optimism in mainland export figures, and noted Singapore's "surprising" export jump - up 20% from 1st Qtr to 2nd Qtr ¶2009. Chan told the CG that the Hong Kong economy is fundamentally sound, the financial system is not broken and there have been no recent major bank failures. Hong Kong can take time to analyze the economic numbers, but Chan did not foresee any major adjustments in Hong Kong's economic/fiscal policies. ¶3. (C) Chan downplayed the frequently remarked upon competition between Hong Kong vs Shanghai to become China's dominant financial center. Chan stated, "Why worry specifically about Shanghai? If not Shanghai, then another Chinese city will emerge as a financial center. Shanghai can rise up and capture mainland domestic business, but currently cannot compete with Hong Kong for international business. Shanghai in turn must also compete with Beijing, Shenzhen and other Chinese cities for this domestic business. Hong Kong should not worry about Shanghai, Hong Kong should worry about maintaining its place in the international financial system." ¶4. (C) Regarding Lehman Bros. minibonds, Chan acknowledged that Hong Kong would need to strengthen its regulations covering the retail investment market. He listed three regulatory deficiencies that the Lehman issue brought to light: --The Hong Kong's Futures and Securities Commission approved the Lehman Bros. minibonds disclosure materials and trusted credit bureau ratings, without adequate appreciation of the explosiveness of these types of investments. --The Hong Kong Monetary Authority's supervision of the banks selling these products was not sufficient. --In 2007, a year prior to Lehman's meltdown, there were market indications and HKMA was aware that retail sales of these products were problematic. This was not specific to Lehman products but to these general classes of investments. HKMA intended to issue guidelines but did not do so in time. ¶5. (C) Chan stated that Hong Kong would strengthen its regulations, but it would be difficult to dictate that certain products could not be sold. Hong Kong is an international financial center where major international banks operate. Hong Kong can only regulate a small sliver of these banks' operations, said Chan. Hong Kong's regulators would demand greater transparency and the banks themselves are starting to self-regulate. Chan cited the sale of RMB bonds in Hong Kong, as evidence that banks have grasped the HONG KONG 00001331 002 OF 002 need to better inform customers; banks are providing a very thorough and lengthy (up to 45 minute) explanation of the product and the risk to potential buyers. ¶6. (C) Moving on to mainland China's RMB trade settlement program, Chan pointed out that this new initiative is highly regulated, restricted to five cities (Shanghai, Guangzhou, Shenzhen, Dongguan and Zhuhai) and 400 mainland companies. Chinese authorities are using a cautious approach, feeling their way and gauging "how far they can go in internationalizing the RMB." In Hong Kong, we have the financial infrastructure and technical ability to handle this initiative with no problem. Strategically, Hong Kong could do very well as its banks take advantage of regional contacts to execute the scheme, Chan stated. ¶7. (C) The CG raised Treasury U/S Levey's visit to Hong Kong July 9-10 and noted that several Hong Kong banks told Levey that they did not need to wait for instructions on how to implement UNSCR 1874 in Hong Kong to exercise vigilance against illicit North Korean financial operations. Both the banks and HKMA's Chief Executive Joseph Yam, stressed their international reputations depended on their successful efforts to combat these types of illicit transactions. The CG expressed appreciation for these sentiments to which Chan responded that the U.S. could count on Hong Kong. ¶8. (C) On a final note, Chan stated that Hong Kong continues to follow the economic discussions taking place in Washington, Brussels and London. The big debates continue, Chan said, and Hong Kong sees signs of protectionism behind some of these discussions. DONOVAN