HK OFFICIALS LOOK TO G-20, REGIONAL FINANCIAL

C O N F I D E N T I A L HONG KONG 000438


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

E.O. 12958: DECL: 03/09/2034
TAGS: ECON EFIN PREL HK CH
SUBJECT: HK OFFICIALS LOOK TO G-20, REGIONAL FINANCIAL
LIBERALIZATION

REF: HONG KONG 421

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


1. (C) Summary: Hong Kong officials will participate in
upcoming G-20 meetings as part of the Chinese delegation,
focusing on advising senior PRC officials on regulatory and
financial sector reforms, U.S. Treasury officials heard
during a February 20-24 visit to Hong Kong. Comments by
Treasury Secretary Geithner accusing China of manipulating
its currency are unlikely to significantly damage his
relationship with senior Chinese officials, but former
Secretary Paulson's suggestion that Chinese current account
imbalances contributed to the U.S. boom and bust have
severely damaged his standing in China, Hong Kong contacts
told visting Treasury officials. Chinese financial
authorities are worried about the value of their overseas
investments, but the economic crisis has spurred additional
financial liberalization between Hong Kong and mainland
China. In October, officials activated a currency swap to
help Hong Kong-based Bank of East Asia secure remminbi
financing. End Summary.


2. (SBU) U.S. Treasury Officials from Washington, DC, U.S.
Embassy Beijing Finatts, and U.S. Consulate General Hong Kong
Economic Unit Chief met with Hong Kong-based analysts,
bankers, and Hong Kong financial officials from February
20-24 to discuss Chinese and Hong Kong preparations for
upcoming G-20 meetings, U.S-China economic relations, and
regional integration, as well as macroeconomic and banking
issues (reported septel).

============================================= ========
Hong Kong Officials will Participate in G-20 Meetings
============================================= ========


3. (C) Hong Kong's Undersecretary for Financial Services
and the Treasury Bureau (FSTB) Julia Leung and Deputy Chief
Executive of the Hong Kong Monetary Authority (HKMA) Peter
Pang informed Treasury Deputy Assistant Secretary (DAS)
Robert Dohner that the Chinese Central government had invited
Hong Kong to join the Chinese delegation at G-20 meetings in
London this April. Financial Secretary John Tsang will lead
the Hong Kong team, said Leung. HKMA Chief Executive Joseph
Yam will also attend. The Chinese Ministry of Foreign
Affairs will take charge of the logistics. PRC regulatory
bodies, in coordination with Hong Kong bureaus and agencies,
are continuing discussions on Chinese positions. Leung noted
that Hong Kong authorities highly value their participation
in the G-20 meetings, as it allows for additional cooperation
on international policy matters through both the HKMA and the
FSTB.


4. (C) Hong Kong expects to play an active role in G-20
discussions about international standards and regulatory
reform (Working Group One) and financial sector reforms
(Working Group Two),but would have less to offer in
discussions of IMF and multilateral development bank (MDB)
reforms (Working Groups Three and Four),said Leung. Hong
Kong's own financial regulatory review, currently underway,
could be a useful reference. HKMA's Pang added that Hong
Kong's strong regulatory regime and experience as an
international financial center lend it credibility in
conversations with Beijing counterparts. Many G-20 members
will be lobbying for inclusion in the Financial Stability
Forum (FSF - of which Hong Kong is a member),said Pang. He
thought it likely that the BRIC countries (Brazil, Russia,
India, and China) would be included and added that South
Korean officials have been lobbying Hong Kong quite strongly,
claiming support from Japan and Singapore. South Korea will
chair the G-20 in 2010, which might be reason enough to
support their participation in the FSF, he said.

=========================================
Protectionist Language Sparks Nervousness
=========================================


5. (C) China and Hong Kong officials have been actively
discussing the potential for the United States to adopt
protectionist policies in response to the economic downturn,
said Pang. Comments by U.S. Treasury Secretary Geithner
suggesting China was manipulating the value of its currency,
combined with well-publicized "Buy America" provisions in the
stimulus package originally passed by the U.S. House of
Representatives have agitated observers in the region most
heavily affected by slowing trade flows. The recent G7
statement was a "good" one, including its references to
China's exchange rate regime, said Pang, and settled nerves
here. He hoped the G-20 statement would contain similarly
strong language opposing protectionist policies, which could
"put this issue to bed."

=======================================
Naming, Blaming and Shaming Not Helpful
=======================================


6. (C) Pang noted Secretary Geithner's comments during his
Senate confirmation hearing accusing China of manipulating
its currency had ruffled feathers in the region and were not
a good start to the relationship. U.S. Embassy Beijing
Financial Attach David Loevinger noted to Pang that
Secretary Geithner told Chinese Vice Premier Wang that
Geithner admired how China had managed the transition of its
exchange rate regime. Subsequent conversations with senior
Chinese officials have been cordial and have not discussed
currency issues.


7. (C) Pang welcomed Secretary Clinton's visit to China and
the region, saying that the timing and the message of mutual
reliance was "just right." He noted however, that her
comment on the U.S. need for China to buy Treasury bonds sent
the wrong signal. China's State Administration of Foreign
Exchange (SAFE) is concerned about maintaining the value of
its U.S. Treasuries and is worried about the potential for
additional losses on foreign investments, particularly after
Chinese losses on investments in Benelux financial services
company Fortis. Chinese leaders believe foreign
shareholders' interests were sacrificed to the interests of
domestic constituents and will likely be even more cautious
in future foreign investments, said Pang.


8. (C) Goldman Sachs Managing Director Fred Hu told DAS
Dohner that he believes Secretary Geithner's "manipulation"
comment will not hurt his relationship with senior Chinese
officials in the long run. Senior leaders understand the
U.S. Senate confirmation process, he said, and will give
Secretary Geithner the benefit of the doubt for now. Hu
added that senior Chinese officials understand the U.S. role
in the G-7 and will take the G-7 statement as reflecting the
U.S. position. Hu was less optimistic that former Treasury
Secretary Paulson's image will quickly recover from his
comments, reported in the Financial Times last fall,
suggesting Chinese current account imbalances had fueled the
U.S. economic boom and bust. Paulson's comments were widely
viewed here as trying to shift the blame for the U.S.-created
financial crisis to China, Hu said, adding that Paulson's
subsequent clarifications have yet to gain much traction in
China. It will require much more effort to rehabilitate his
image. In the current economic climate, discussions with the
Chinese leadership about imbalances will not be helpful, he
offered.

============================================= ==============
Crisis an Opportunity for China/HK Financial Liberalization
============================================= ==============


9. (C) FSTB Undersecretary Leung told Dohner that Hong
Kong's government is working hard to position the Special
Administrative Region as a renminbi (RMB) financial center
and plans to use the recently announced Pearl River Delta
development plan to push for greater RMB liberalization.
Hong Kong Securities and Futures Commission Deputy Chief
Executive Officer Alexa Lam added that large Chinese
companies now listed solely on the Hong Kong Stock Exchange
(known locally as Red Chips) and other Hong Kong companies
could soon pursue A-share or depository receipt listings in
mainland China markets. It is a question of timing, rather
than policy, she said. This would be another step in
integrating the Hong Kong and mainland financial markets.


10. (C) HKMA's Pang told DAS Dohner that the recent
financial turmoil has provided an opportunity for Hong Kong
and Mainland authorities to increase cooperation. In
October, when Hong Kong-based Bank of East Asia (BEA) faced
RMB shortages in its mainland China operations, HKMA and the
People's Bank of China (PBOC) arranged a currency swap to
provide BEA with RMB financing. HKMA received RMB in its
PBOC account in Beijing, while PBOC was credited with Hong
Kong dollars in Hong Kong. HKMA then lent the RMB to BEA for
use in China. Although China has negotiated formal swap
arrangements with South Korea and Malaysia, only the
arrangement with Hong Kong has entered into force and been
used, said Pang.


11. (SBU) The Treasury delegation has cleared this cable.


DONOVAN