VZCZCXRO2575
PP RUEHCN RUEHGH RUEHVC
DE RUEHHK #3881/01 2710427
ZNY CCCCC ZZH
P 280427Z SEP 06
FM AMCONSUL HONG KONG
TO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 8817
INFO RUEHOO/CHINA POSTS COLLECTIVE
RHEHNSC/NSC WASHDC
RUCPDOC/USDOC WASHDC C O N F I D E N T I A L SECTION 01 OF 02 HONG KONG 003881 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EAP/CM AND EB 
NSC FOR DENNIS WILDER 
USDOC FOR 4420 
MANILA PASS AMBASSADOR PAUL SPELTZ 
TREASURY FOR U/S TADAM, A/S TFRATTO 
BEIJING FOR DLOEVINGER 
 
E.O. 12958: DECL: 09/28/2016 
TAGS:          
SUBJECT: HONG KONG OFFICIALS AND FINANCE STRATEGISTS 
DISCUSS PRC ECONOMY, RMB VALUATION WITH TREASURY U/S ADAMS 
 
 
Classified By: E/P Chief Laurent Charbonnet; REASONS: 1.4 (B/D) 
 
SUMMARY 
------- 
 
 1. (C) Summary: Hong Kong Monetary Authority (HKMA) Deputy 
Chief Executive William Ryback told U.S. Treasury Under 
Secretary for International Affairs Timothy Adams on 
 
SIPDIS 
September 9 that increasing tensions in the Beijing/Shanghai 
rivalry are preventing Shanghai from achieving its aim of 
overtaking Hong Kong as a financial center.  Additionally, 
Ryback stated that if Hong Kong can upgrade its money 
laundering controls and help the mainland to do the same, 
Hong Kong will remain in a good position to serve as a 
regional financial platform.  Hong Kong based financial 
strategists commented on the stable state of China's economy 
and predicted that there will be little change in renminbi 
(RMB) valuation for the next 12 months.  End Summary. 
 
VISIT DETAILS 
------------- 
 
 2. (U) U.S. Treasury Under Secretary for International 
Affairs Timothy Adams visited Hong Kong September 8-9.  He 
was accompanied by Treasury Assistant Secretary for Public 
Affairs Tony Fratto and U.S. Embassy Beijing Treasury Attache 
David Loevinger.  U/S Adams held the following substantive 
meetings: 
 
o William Ryback, Deputy Chief Executive, Hong Kong Monetary 
Authority(HKMA) 
 
o Roundtable Discussion with Financial Strategists 
 
Participants: 
Jonathan Anderson, Head of Asia Pacific Economics, UBS 
Frank Gong, Chief Economist, JP Morgan 
Hong Liang, Executive Director, Asia-Pacific Economic 
Research, Goldman Sachs 
Andy Xie, Managing Director, Morgan Stanley 
 
HONG KONG MONETARY AUTHORITY 
----------------------------- 
 
 3. (C) HKMA Deputy Chief Executive William Ryback told U/S 
Adams that political tensions in mainland China are 
preventing Shanghai from achieving its aim of overtaking Hong 
Kong as a financial center.  Although PRC officials 
originally thought that Beijing and Shanghai could follow a 
Washington-New York model, with one city the political center 
and one the economic/financial center, Beijing now feels 
threatened by Shanghai's economic ascent, Ryback surmised. 
Further, Shanghai lacks the financial infrastructure and 
legal controls to become a truly international center of 
finance.  Ryback noted that when Shanghai tried to implement 
a more "Hong Kong-style financial control structure," it was 
strongly opposed by conservative elements in China's State 
Administration for Foreign Exchange (SAFE), the People's Bank 
of China (PBOC), and the China Banking Regulatory Commission 
(CBRC). 
 
 4. (C) Ryback had recently urged his mainland counterparts to 
push for greater Chinese participation in Asian regional 
financial cooperation.  Certain Chinese government officials 
were reluctant to engage, however - "China is ready but not 
willing to take the next step."  The Japanese government, 
said Ryback, also was throwing up obstacles to the formation 
of an Asian regional financial platform, mostly by deluging 
all new proposals with questions regarding funding, location, 
and other logistical issues.  Despite all this, he concluded, 
if Hong Kong upgrades its money laundering controls and helps 
mainland China to do the same, it will be well placed to 
serve as a regional financial platform. Hong Kong Chief 
Executive Donald Tsang strongly supports this concept and, 
"understands the issues in a way his predecessor did not." 
 
FINANCIAL STRATEGISTS 
---------------------- 
 
 5. (SBU) U/S Adams and four China-focused financial 
strategists discussed China,s economy during a 90-minute 
meeting.  The analysts agreed that the economic situation in 
 
HONG KONG 00003881  002 OF 002 
 
 
China is relatively calm and do not expect major shifts in 
the next two years.  Growth rates of 9 to 10 percent  would 
likely continue over the next two years, with no appreciable 
gains in inflation, currently at 1.3 percent.  Some analysts 
have cited the post-2008 Beijing Olympic period for a 
possible economic slowdown in China.  These four economists 
favorably compared China,s current economic situation to 
2003-04 when money was being &shoveled8 into real estate 
and infrastructure development projects.  During 2003-04 
construction boomed, while transportation (rail) and energy 
(electric) bottlenecks constituted serious concerns and steel 
and concrete shortages became prevalent.  To slow investment 
in fixed assets, the PRC implemented a series of 
administrative measures to restrict capital and slow growth. 
Currently, the situation is much more stable as overheating 
and inflation concerns have dissipated and the quality of 
investments is much better.  While the central government 
remains concerned about speculation in real estate and 
continued investment in luxury buildings, construction of 
middle- and low-class housing continues in an attempt to meet 
the needs of citizens migrating to the cities. 
 
 6. (SBU) China,s economy remains export driven, thus a U.S. 
economic slowdown is a serious concern.  The four economists 
agreed that a moderate U.S. slowdown would not have a major 
negative impact on China, though smaller Asian economies 
would suffer more severely.  Domestically, PRC bureaucrats 
still exert a major influence on the economy as government 
spending remains a major driver of economic growth and 
development.  Real Estate is a big part of economic growth in 
China, "anyone making money in China is involved in real 
estate."  For China to truly rebalance its economy it must 
increase imports.  The economists agreed that the PRC 
leadership seems convinced that the RMB needs to appreciate, 
a substantial change from a couple of years ago; however, no 
consensus exists on the speed of that appreciation and hence 
the currency has moved little.  So, while the RMB remains 
undervalued, the situation has not reached a &tipping 
point8 and the four economists expected little change in the 
next twelve months. 
 
PRESS COVERAGE 
--------------- 
 
 7. (U) During an interview with Phoenix TV (approximate 
viewership 150 million in Hong Kong and mainland China), U/S 
Adams was asked about Treasury Secretary Paulson's upcoming 
trip to China and for his views on RMB valuation.  The 
interview was aired five times between September 9 and 
September 10. 
 
 8. (SBU) This report was cleared by Embassy Beijing Financial 
Minister-Counselor David Loevinger. 
Cunningham