HK BUSINESSES WARN TREASURY CONFIDENT CHINESE

C O N F I D E N T I A L HONG KONG 000212

SIPDIS

STATE FOR EAP/CM, EEB/IFD/OMA, STATE PASS USTR FOR
STRATFORD AND ALTBACH, NSC FOR BADER

E.O. 12958: DECL: 02/04/2035
TAGS: EFIN ECON CH HK
SUBJECT: HK BUSINESSES WARN TREASURY CONFIDENT CHINESE
BOOSTING ASIAN TIES

REF: A. HONG KONG 182

B. 09 HONG KONG 1280

Classified By: Acting Consul General Christopher Marut, Reason 1.4 b/d


1. (C) Begin Summary: Treasury Senior Coordinator for China
and the U.S.- China Strategic and Economic Dialogue (S&ED)
David Loevinger led a Treasury and Consulate General team in
meetings with Blackstone Asia Chairman Anthony Leung, Credit
Suisse Asia CEO Kai Nargolwala, Hong Kong Monetary Authority
(HKMA) Chief Executive Norman Chan and Hong Kong Financial
Services and Treasury Bureau (FSTB) Undersecretary Julia
Leung on January 28 to discuss recent Chinese economic
developments, U.S.-China relations, and China's efforts to
build stronger ties in Asia, including the
internationalization of the Chinese Yuan.


2. (C) Summary Continued: Blackstone's Leung and Credit
Suisse's Nargolwala warned visiting officials that the global
financial crisis and slow U.S. recovery had badly damaged
America's economic leadership in Asia. Our interlocutors
were concerned about increasingly obvious friction in the
U.S.-China relationship, and remarked on China's rising
assertiveness in light of the country's continued growth and
positive role in the global recovery. They saw strengthened
regional economic relationships and continuing developments
in the internationalization of the renminbi (RMB) as part of
a Chinese strategy to shift trade and investment away from
Western countries to more friendly regimes in Asia. End
summary.


3. (C) Comment: The uncertainty inherent in U.S. financial
and regulatory reforms was of greater concern for our private
sector contacts than developments in China. Despite the
concerns raised by our private sector interlocutors, we see
little evidence that Chinese authorities are actively
discouraging investment in or trade with the West, though
perceived barriers to Chinese investment in the U.S.
undoubtedly push some of these firms to look for
opportunities in Asia. Expanding trade ties and increased
use of the RMB in the region, combined with local worries
about U.S. protectionism, are likely to promote even closer
economic relations between China and the rest of Asia. End
Comment.

Chinese Confidence Changing the Game
====================================


4. (C) Both public and private interlocutors agreed that
growing Chinese confidence and economic nationalism were
encouraging PRC leaders to take more aggressive international
positions. Blackstone's Anthony Leung warned that trade
friction had the potential to derail the U.S.-China
relationship. Though the Chinese needed both U.S. markets to
support their export-led economy and U.S. military power to
guarantee stability in the region, Chinese leaders were
becoming more confident and seemed increasingly likely to
respond to a growing populist nationalism that encouraged an
aggressive international posture. FSTB's Julia Leung agreed
that Chinese leaders were becoming both more assertive abroad
and more attuned to protectionist pressures at home. Anthony
Leung noted that some influential Hong Kong business leaders
were publicly calling for Asia to reject western, and by
extension, U.S. leadership. He noted that Japan was often
cited as an example of what could happen when countries bend
to Western pressure to allow their currencies to appreciate,
and suggested that China would be unlikely to make the same
mistake.


5. (C) U.S. financial firms in particular were facing
Chinese reluctance to engage with foreign firms, said
Blackstone's Leung. He complained that Blackstone was
investing RMB in China, but was unable to raise funds in
China due to their inability to get needed approvals from the
National Development and Reform Commission (NDRC). He
suggested this was at least partly a reflection of Chinese
efforts to develop and protect their own financial services
companies. The Chinese were eager to develop their own
financial infrastructure in order to present an alternative
in global discussions of financial architecture and
regulatory reform. He acknowledged that private equity firms
saw some prospects for liberalization, including the
possibility of raising RMB funds in China. Leung also
suggested that a proposal to approve Qualified Foreign
Limited Partnerships, ostensibly modeled on the Qualified
Foreign Institutional Investor (QFII) framework, was under
consideration by Chinese regulators. This would make it

easier for foreign firms to raise RMB funds for investment in
China, he said.

U.S. Image Bruised; Asians Strengthening Regional Ties
============================================= =========


6. (C) Chinese leaders were cultivating Asian partners by
promoting trade and investment in Southeast Asia and India
and were actively discouraging business in the West, where
they may face increased regulatory or security-related
scrutiny, said Nargolwala. Although the U.S. still had
considerable influence in the region, security reviews that
made it difficult for some travelers to obtain U.S. visas and
high profile CFIUS-related cases had damaged America's
reputation in Asia for openness. Following the financial
crisis, Asians' tolerance for being lectured by the West had
markedly declined, he said. Though the Chinese wanted to
avoid the responsibility of leading an Asian bloc in
international economic fora, they seemed comfortable acting
as a balance between the U.S., European Union and the
developing world. Asian countries recognized that any
"Asian" position was untenable without Chinese support, and
appeared to be building stronger relationships with China,
which was in a position to advocate for regional interests,
he said. Nargolwala also opined that RMB
internationalization was part of a Chinese strategy to more
closely tie regional economies to China.


7. (C) FSTB's Leung acknowledged that Chinese firms were
looking for opportunities to expand into Hong Kong and the
region, and noted that a Chinese firm recently purchased a
Hong Kong broker-dealer, perhaps laying the groundwork for
additional Chinese financial activity in Hong Kong. RMB
internationalization in Hong Kong was moving even faster than
expected, she said. Measures to allow Chinese firms to use
RMB to purchase Hong Kong-based companies could be in place
soon. RMB settlement for trade in services and extending RMB
trade settlement to third countries could also be in the
works this year, according to Leung.

Chinese Economy Looking Strong
==============================


8. (C) Julia Leung was optimistic about the prospects for
the Chinese economy in 2010. Asset bubbles in some sectors
of the Chinese real estate market were growing, but currently
seemed manageable, she said. Overall, the risks to the
Chinese economy were low, but inflationary pressures on the
horizon would likely lead China to tighten access to credit.
HKMA's Norman Chan agreed and noted that China was already
using administrative measures to slow loan growth. He
discounted concerns about excessive loan growth in the first
three weeks of January, noting that many of the bigger banks
had sold loans to smaller banks late in 2009 to avoid
breaching capital requirements and were now buying these
back. This type of "stop-go" lending was typical in the
Chinese economy and both banks and firms were used to dealing
with it, said Chan.

Stay Low Key on RMB
===================


9. (C) FSTB's Leung warned against public pressure to allow
the RMB to appreciate. U.S. statements on currency issues
were counterproductive, she said. Blackstone's Leung agreed
that currency issues were best discussed quietly. He doubted
that RMB appreciation would substantively shrink the
U.S.-China trade balance, but acknowledged that it could help
defuse pressure for protectionist measures directed at China.
He encouraged Treasury Secretary Geithner to make public
statements opposing protectionism while privately encouraging
Chinese leaders to allow the RMB to appreciate.


10. (U) Special Coordinator Loevinger's Office cleared this
message.
MARUT