CODEL MCCAIN COURTESY CALL ON CHIEF EXECUTIVE TSANG

C O N F I D E N T I A L SECTION 01 OF 02 HONG KONG 000635

SIPDIS

DEPT FOR EAP/CM

E.O. 12958: DECL: 04/05/2019
TAGS: PREL PGOV ECON EFIN ETRD OREP HK
SUBJECT: CODEL MCCAIN COURTESY CALL ON CHIEF EXECUTIVE TSANG

Classified By: Consul General Joe Donovan for reasons 1.4 (b) and (d).


1. (C) Summary: Hong Kong's system, having restructured
during the Asian Financial Crisis in 1997, is "resilient",
Chief Executive Donald Tsang told CoDel McCain April 5, but
the worst may be yet to come. He hoped the United States
would not turn to protectionism. Regarding China's proposal
for a new reserve currency, Tsang said he envisions an Asian
regional currency on a par with the euro or the dollar, but
believes the prerequisite is a convertible renminbi. Having
"personally secured" the central government's agreement to a
timetable for universal suffrage, Tsang believed his biggest
challenge was to secure the 2/3 majority he needs from LegCo
to advance reform. He believes Asia has not yet found a
model for democracy which works, noting how few political
leaders in Asia complete their elected terms of office. End
summary.


2. (C) Chief Executive Donald Tsang hosted CoDel McCain
(Senators John McCain, Lindsay Graham, and Amy Klobuchar) and
the Consul General at Government House April 5. Tsang told
the CoDel "one country, two systems" is now an established
part of life, although the people of Hong Kong are still part
of one nation. He noted that, in addition to defense and
foreign affairs, which are reserved to the PRC, the Hong Kong
government must consult with the "sovereign" on issues such
as democratic development. Describing the Hong Kong
community as Asia's most cosmopolitan, Tsang said his goal
was to make Hong Kong the financial center of East Asia as a
compliment to London's role for western Europe and New York's
role for the Americas.

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Hong Kong "Resilient"; Worst May Be Yet to Come
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3. (C) Tsang expressed confidence that the lessons Hong Kong
learned during the 1997 Asian Financial Crisis left it in
better shape to face the current crisis. Hong Kong had
adjusted its regulatory environment and, as a result, its
banks remained strong and adequately capitalized. He joked
that he had offered banks government assistance, but "they
don't want my money." Similarly, the stock markets had not
halted for a minute. While there were poor people in Hong
Kong, Hong Kong's comprehensive social security system meant
no one went hungry and no children or seniors were left
vulnerable. Unemployment had risen from 3.5 to 5 percent,
but compared with its Asian peers, Hong Kong was still doing
well. Hong Kong also remained the largest investor in "each
and every one" of China's major cities and provinces,
including Beijing and Shanghai.


4. (C) That said, he told the CoDel he is prepared for worse
to come. Tsang dismissed any notion of "decoupling" of
America from Asia, arguing that any manufacturing in Asia
inevitably seeks a market in the United States or Europe.
Tsang believes the key to recovery will be a successful
adjustment in the U.S. economy accomplished without imposing
protectionist measures. The worst thing, he suggested, would
be "another Smoot-Hawley."


5. (C) Asked by Senator Graham about China's proposal for a
new global reserve currency, Tsang suggested what was needed
was in fact an Asian reserve currency similar to the role of
the euro in the EU and the dollar for NAFTA economies. In a
twenty-four hour cycle, we each work eight hours, he said, so
each time zone will likely develop its own reserve currency.
However, Tsang sees the prerequisite for such a currency as
convertibility of the renminbi, which is not likely in the
next decade. Another requirement, Tsang suggested, was that
Japan reconcile with its neighbors over questions of World
War II history.

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Timetable is Fixed in Law
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6. (C) Having "personally secured" Beijing's agreement to a
timetable on universal suffrage, Tsang noted at several
points his conviction that elections by universal suffrage
for the Chief Executive in 2017 and for the Legislative
Council (LegCo) in 2020 were a done deal. Somewhat
contradictorily, however, he noted the difficulty of securing
consensus within Hong Kong over what constituted universal
suffrage. Of the three required steps to achieve democratic
reform -- support of 2/3 of LegCo, agreement by the Chief
Executive, and ratification by Beijing, he sees LegCo as the
greatest challenge. He noted the paradox that, by insisting
that all LegCo seats be directly elected, the current thirty

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directly-elected members were asking the thirty incumbents in
the "functional constituencies" (economic and social sectors
which elect representatives to LegCo under limited franchise)
to agree to their own abolition.


7. (C) Tsang described the Hong Kong system as a modified
version of the U.S. system, in that the executive is
constituted distinct from the legislature. However, since
the Chief Executive cannot be a member of a party, he has no
ruling party for support, and must work for support from the
entire legislature on each and every vote. Asked by Senator
Klobuchar how the systemic conflict could be resolved, Tsang
chose to look at Asia as a whole, noting that no Asian
country had yet hit on a democratic system which worked.
Very few Asian leaders, even in more developed democracies,
served out their full terms of office. Even in Korea,
presidents were on the defensive six months after taking
office, while places like Thailand were actually moving
backwards. Under such conditions, Tsang contended,
governments spent all their time focused on their immediate
political survival. President Bush may not have been
popular, Tsang noted, but the American people let him finish
his term.

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Defending Capital Spending
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8. (C) While Tsang agreed with Senator McCain that there was
significant waste in capital spending by Japan during its
earlier financial difficulties, he argued nevertheless that
U.S. infrastructure investment was timely. The United
States, Tsang contended, had actually neglected capital
infrastructure for years. He himself reported using capital
investment in his economic stimulus, saying that Hong Kong's
projects aimed to link up Hong Kong and the Mainland in ways
which could not exist prior to 1997.


9. (U) The CoDel did not have the opportunity to clear this
message prior to departure.
DONOVAN