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RHEHNSC/NSC WASHDC

C O N F I D E N T I A L SECTION 01 OF 04 HONG KONG 003911 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
STATE FOR UNDER SECRETARY JOSEPH 
STATE FOR EAP/CM, EB/TRA 
STATE FOR ISN/CPI RUGGIERO 
TREASURY FOR DAS GLASER/SHARMA 
NSC FOR STEPHENS 
 
E.O. 12958: DECL: AFTER KOREAN REUNIFICATION 
TAGS: ECON EFIN EWWT HK KN MC OVIP PARM PREL PTER
SUBJECT: SCENESETTER FOR UNDER SECRETARY JOSEPH'S VISIT TO 
HONG KONG OCTOBER 18-20 
 
Classified By: Consul General James Cunningham.  Reasons: 
1.4 b,d. 
 
¶1. (SBU) Summary: We look forward to your visit next 
month.  Hong Kong works closely with us on the 
security front.  Your visit provides a timely 
opportunity to push ahead our agenda with Hong Kong in 
three linked areas: 
 
-- Our shared commitment to secure trade, particularly 
through improving container screening programs. 
 
-- Our work to ensure that Hong Kong maintains its 
effective counter-proliferation and export control 
regimes, autonomous from the PRC. 
 
-- Our efforts to ensure Hong Kong's (and Macau's) 
vigilance against money laundering and illicit 
financial activities related to North Korea. 
 
End Summary. 
 
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SECURE TRADE 
------------ 
 
¶2.  (SBU) A key theme for your visit would be our 
shared commitment to secure trade.  As the largest 
source of U.S.-bound containers, Hong Kong was among 
the first in Asia to participate in the Container 
Security Initiative (CSI).  Cooperation between Hong 
Kong Customs and Department of Homeland 
Security/Customs and Border Protection on CSI is 
exemplary and paved the way for CSI programs in 
Shanghai and Shenzhen.  Two port operators, Hong Kong 
International Terminal and Modern Terminal, have each 
established a pilot of the Integrated Container 
Inspection System (ICIS), which combines radiological 
mapping, x-ray images, container tagging and makes a 
digital record for each container passing through its 
portals.  Hong Kong's port operators, along with the 
Government (HKG), are considering whether to purchase 
this integrated port security system, but are waiting 
for U.S. government guidance as to whether the ICIS 
system meets U.S. requirements. The Port Security 
Improvement Act of 2006 passed by the U.S. Senate on 
September 14 directs the Department of Homeland 
Security to designate three foreign ports for the 
establishment of pilot integrated scanning systems 
that couple non-intrusive imaging and radiological 
detection equipment.  In this regard, Hong Kong 
appears to be a world leader and we should encourage 
them to continue their efforts as they move toward the 
shared goal of strengthening port/container security. 
 
--------------------------------- 
PROLIFERATION AND EXPORT CONTROLS 
--------------------------------- 
 
¶3.  (SBU) Hong Kong is a cooperative partner in 
preventing the transfer of goods through its ports 
that could be used by the DPRK in its missile and WMD 
programs.  Hong Kong authorities emphasize that their 
Anti-Terrorism, Weapons of Mass Destruction, Narcotics 
and Serious Crime ordinances provide the necessary 
legal powers to act and convict persons engaging in 
illicit activities involving the DPRK.  Hong Kong 
maintains an effective, highly autonomous, and 
transparent export control regime.  In September, the 
Bureau of Industry and Security (BIS) Assistant 
Secretary Darryl Jackson congratulated the Hong Kong 
 
SIPDIS 
government for obtaining a conviction of a Hong Kong 
company for violations of Hong Kong's Strategic Goods 
Law in a case for which BIS provided Hong Kong key 
information.  Hong Kong continues to be an important 
partner in protecting the smooth functioning of the 
global trading system.  Its contributions reflect 
understanding of its role as a premier transportation 
center. 
 
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HONG KONG 00003911  002 OF 004 
 
 
MONEY LAUNDERING 
---------------- 
 
 
¶4.  (C) The Treasury Department's 2005 designation of 
Macau's Banco Delta Asia (BDA) as an institution "of 
primary money laundering concern" under Section 311 of 
the Patriot Act reverberated throughout the region. 
Macau authorities, cognizant of the attention the BDA 
designation had generated worldwide and the possible 
negative effects on investment and tourism revenues, 
immediately assumed control of BDA.  In March 2006, 
Macau's legislature passed Anti-Money Laundering and 
Counter-Terrorism bills and in September announced the 
formation of a Financial Investigation Unit.  Macau 
authorities are cooperating with U.S. Treasury/IRS 
Officials in the ongoing investigation of BDA.  In 
September, investigators completed the task of 
scanning and digitizing 220,000 BDA documents and are 
now beginning the process of examining the data.  In 
early September, Chief Executive Edmund Ho told the CG 
that Macau is willing to extend its control over BDA 
for another six months, but both Ho and the PRC's 
Ministry of Foreign Affairs Commissioner in Macau Wan 
Yongxiang told the CG that they hoped the BDA case 
would be resolved quickly. Asia's financial world will 
be watching carefully how our government resolves this 
case. 
 
¶5. (C) Hong Kong's Monetary Authority (HKMA) appointed 
a manager to oversee BDA's Hong Kong subsidiary, Delta 
Asia Credit (DAC).  The ultimate disposition of DAC 
will depend on how Macau decides to treat BDA.  As the 
second largest financial market in Asia, after Japan, 
Hng Kong?s cooperation in preveting financial 
transactions related to the DPRK's WMD and missile 
programs is crucial.  HKMA has implemented a rigorous 
AML/CTF regime in line with international standards. 
HKMA has alerted Hong Kong banks to exercise vigilance 
regarding North Korean financial transactions and HKMA 
officials have conducted reviews of North Korean 
transactions moving through Hong Kong banks.  In 
September, as we briefed them on UNSCR 1695, Hong Kong 
Monetary and Police authorities expressed their 
willingness to continue to support these efforts. 
They urged the U.S. Government to provide specific, 
detailed, evidentiary information so that they can 
more effectively monitor, investigate, stop and 
prosecute illicit activities related to North Korea?s 
missile and WMD programs. More general information on 
patterns and trends would also be very useful, said 
the Hong Kong officials. 
 
--------- 
Itinerary 
--------- 
 
¶6.  (SBU) We are arranging meetings with Hong Kong's 
Chief Executive Donald Tsang, Secretary for Security 
Ambrose Lee and Hong Kong Monetary Authority Chief 
Executive Joseph Yam on October 19. 
 
¶7.  (U) We have also arranged for you to give a 
luncheon speech to members of the Asia Society.  The 
topic of your speech, "Defensive Measures: Combatting 
Weapons of Mass Destruction and Missile Proliferation" 
fits in well with our ongoing efforts here in Hong 
Kong. 
 
¶8.  (SBU) On October 20, we are arranging for the 
Treasury officials in your delegation to travel to 
Macau to meet with Chief Executive Edmund Ho, 
Secretary of Administration Florinda Chan, Macau 
 
SIPDIS 
Monetary Authority Chairman Anselmo Teng and Financial 
Investigation Unit Head Deborah Ng. 
 
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Politics 
-------- 
 
¶9. (C) We have requested a meeting with Chief 
 
HONG KONG 00003911  003 OF 004 
 
 
Executive (CE) Donald Tsang, who heads the government 
of the Hong Kong Special Administrative Region 
(HKSAR).  Tsang took office on June 21, 2005, 
following an interim election to fill the remaining 
two years of the term of former Chief Executive Tung 
Chee Hwa.  Tung resigned in March 2005 due to 
widespread dissatisfaction over his management and 
political style. During his first eighteen months in 
office, Tsang has enjoyed high public approval 
ratings, reflecting confidence in Tsang's 
administrative competence, his deliberate outreach 
efforts and Hong Kong's robust economy. 
 
¶10. (C) Your visit comes as Tsang prepares for what 
should be an easy reelection campaign.  Under Hong 
Kong's partially democratic electoral system, in 
December various constituencies will select the 800 
members of the Chief Executive Election Commission, 
which in turn will select the next Chief Executive in 
March 2007.  Barring any severe political, economic, 
or social crisis, Tsang -- who enjoys strong support 
from the central government in Beijing -- will win 
reelection by a wide margin, and possibly will run 
unopposed.  Many in the pan-democratic opposition 
parties had hoped that former Chief Secretary Anson 
Chan, a retired, highly respected career civil 
servant, would contest the election on their behalf, 
but she has declined to do so.  Now, they will select 
one of their leaders to attempt to gain at least one 
hundred nominations from the Election Commission, 
which would force Donald Tsang to face an opponent and 
presumably to debate the future of democratic reform 
and other issues; both Tsang and Beijing would prefer 
to avoid such debate.  Further progress toward 
universal suffrage, required by Hong Kong's Basic Law, 
has been deferred until at least 2012. 
 
---------- 
Economics 
---------- 
 
¶11.  (U) Hong Kong is a valuable United States partner 
on trade liberalization and other economic issues. 
Hong Kong's transparent regulatory regimes, modern 
financial systems, rule of law, open society, and long 
experience with capitalism serve as a model for 
mainland China's own development.  Hong Kong is a 
global nexus of people, goods and finance.  Like the 
United States, Hong Kong is confronting the challenges 
of continuing to effectively move goods, people and 
money and providing reliable and secure communications 
systems, while at the same time controlling the spread 
of WMD, drugs and diseases such as Avian Flu. 
 
¶12.  (U) Hong Kong suffered a series of economic 
shocks after the 1997 handover, including the Asian 
Financial Crisis, the migration of its manufacturing 
sector to mainland China, and the SARS outbreak. 
These economic crises dented public confidence in the 
first post-handover government headed by Tung Chee 
Hwa.  The economy rebounded in 2003 amidst strong 
growth in China, increased tourism, and a healthy 
global economy.  The Hong Kong government is deepening 
its economic interaction with the Pearl River Delta 
(PRD) in Southern China to maintain its position as a 
gateway to China.  Services industries make up 90 
percent of Hong Kong's GDP (US$ 180 billion in 2005) 
with a focus on financial and professional services, 
transportation and logistics and tourism.  Hong Kong 
faces sharpening competition from mainland rivals in 
services industries; however, its strong rule of law 
record, modern practices and transparent society 
suggest that it will remain a key finance and services 
hub. 
 
¶13.  (U) Hong Kong consistently advocates for open 
global trade.  In the U.S. - Hong Kong trade arena, 
textiles, civil aviation and IPR continue to be key 
issues.  We have negotiated an MOU with Hong Kong to 
combat illegal transshipments of Chinese textiles.  We 
urge Hong Kong to further liberalize its civil 
 
HONG KONG 00003911  004 OF 004 
 
 
aviation market, which Cathay Pacific continues to 
dominate.  Hong Kong has dramatically improved its 
enforcement of IPR, but there are ongoing concerns 
about pending changes to the Copyright Law, end-user 
software piracy, and pharmaceutical-related 
infringements. 
 
----------- 
Environment 
----------- 
 
¶14.  (U) Hong Kong's air quality has deteriorated 
dramatically over the past ten years due to pollution 
that can be traced to the tremendous growth of 
factories across the border in the Peal River Delta of 
mainland China.  There is growing concern among Hong 
Kong residents that pollution is having an 
increasingly negative impact on health, quality of 
life and the economy. 
 
--------------- 
Avian Influenza 
--------------- 
 
¶15. (SBU) Hong Kong has experienced two human 
outbreaks of the highly pathogenic H5N1 subtype of the 
AI virus.  The city's earliest case of bird-to-human 
transmission was in 1997 when eighteen people were 
infected with H5N1; six died. In the 2003 outbreak, 
two Hong Kong citizens died while traveling in Southern 
China.  Between 1997 and 2005, Hong Kong slaughtered 
over 4 million birds to prevent spread of AI.  Although 
there have been no recent human cases in Hong Kong, 
since January the virus has resurfaced in a number of 
native wild birds and in two chickens, which may have 
come from mainland China.  Health experts believe that 
H5N1 is present in Hong Kong's natural environment. 
 
¶16. (SBU) Hong Kong has some of the world's leading AI 
researchers, extensive experience in dealing with 
SARS, and a well-organized AI response plan.  The 
Centre for Health Protection (CHP) leads the HKG's AI 
preparations.  After SARS, the HKG formed the CHP to 
deal with infectious disease threats.  The HKG plans 
to acquire 20 million doses of Tamiflu by 2007 and is 
talking to manufacturers about purchasing a H5N1 
vaccine when it is produced.  Continually updating its 
AI response plan, the HKG works with the private 
sector and community groups. 
Cunningham