VZCZCXRO6100
PP RUEHCN RUEHGH RUEHVC
DE RUEHHK #1800/01 1900040
ZNR UUUUU ZZH
P 090040Z JUL 07
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC PRIORITY 2209
INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 04 HONG KONG 001800 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM 
STATE PASS TO HUD SECRETARY JACKSON 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PREL PTER EINV KIPR HK CH SENV MC
SUBJECT: HONG KONG SCENESETTER FOR HUD SECRETARY JACKSON 
 
¶1. (SBU) Summary:  The U.S. Consulate General Hong Kong 
warmly welcomes to your visit next week.  U.S. trade, 
investment, and business with Hong Kong flourish in a largely 
open environment.  Hong Kong is our 15th largest export 
market, and the United States enjoyed a USD 9.8 billion trade 
surplus in 2006.  Cooperation between the Hong Kong Special 
Administrative Region Government (HKG) and the U.S. Consulate 
General remains broad, effective, and mutually beneficial. 
Key U.S. interests in Hong Kong include the expansion of 
democracy and protection of human rights;  the enhancement of 
transportation security, particularly through improvements to 
the existing container security screening programs;  the 
maintenance of effective counter-proliferation and export 
control regimes (autonomous from the PRC); continued 
vigilance against money laundering and other illicit 
financial activities in Hong Kong; strong protections for 
intellectual property rights; and the improvement of regional 
air quality.  We work closely with the HKG, civil society, 
and the media to support the growth of democracy and respect 
for Hong Kong's autonomy, both of which are stipulated in 
Hong Kong's Basic Law and which the central government in 
Beijing has pledged to maintain. 
 
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Advancing Democracy 
------------------- 
 
¶2. (SBU) Hong Kong remains a society in transition, under the 
"one country, two systems" commitment contained in the Basic 
Law.  The people of Hong Kong continue to enjoy a broad range 
of civil and social freedoms, strong legal institutions, the 
free flow of information, and a highly professional civil 
service.  However, the development of greater democracy and 
movement toward the goal of universal suffrage, promised in 
the Basic Law, are proving to be difficult.  Hong Kong's 
achievements and its potential future development form the 
foundation for its "high degree of autonomy" within China. 
The U.S. position on universal suffrage has been clear and 
consistent.  The United States supports progress toward 
universal suffrage in accordance with the Basic Law and the 
aspirations of the Hong Kong people, who should determine the 
pace and scope of moving to universal suffrage.  The United 
States has stated publicly and privately that the sooner a 
roadmap and timetable for universal suffrage are set, the 
better. 
 
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Politics 
-------- 
 
¶3. (SBU) Your visit follows the ten year anniversary of the 
establishment of the Hong Kong Special Administrative Region 
(HKSAR) and the inauguration of Donald Tsang to serve a full 
five-year term as Chief Executive.  Tsang was re-selected as 
Chief Executive in March 2007.   Tsang has pledged publicly 
to resolve the issue of democratization during his term; his 
government is expected to issue a "green paper" outlining his 
proposals this month.  Tsang's new cabinet was sworn in on 
July 1 and includes many experienced civil servants with 
limited political party representation, which several 
political parties claim would stunt the growth of political 
talent in the HKSAR.  Later this year and in early 2008, Hong 
Kong will hold District Council and Legislative Council 
(Legco) elections; we anticipate that these contests will 
build on the heightened public interest in politics generated 
by the contested 2007 Chief Executive race between Donald 
Tsang and Alan Leong. 
 
SIPDIS 
 
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Economics 
--------- 
 
¶4. (SBU) As before the 1997 handover, Hong Kong remains a 
valuable 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 continue to serve as a model for 
other regional economies.  42% of mainland Chinese trade 
passes through Hong Kong's ports and airport.  But, Hong 
Kong, like the United States, confronts the multiple 
challenges of striving to be an efficient transportation and 
financial center, while at the same time controlling the 
spread of Weapons of Mass Destruction, drugs and diseases 
such as Avian Flu. 
 
¶5. (SBU) Hong Kong suffered a series of economic shocks after 
the handover, including the Asian Financial Crisis, the 
migration of its manufacturing sector to mainland China, and 
the SARS outbreak.  However, the economy has rebounded in the 
 
HONG KONG 00001800  002 OF 004 
 
 
last three years amidst strong growth in China, an increasing 
number of mainland companies listing on the Hong Kong Stock 
Exchange (HKEx), increased tourism, and a healthy global 
economy.  Nonetheless, Hong Kong residents are beginning to 
voice concern over Hong Kong's ability to compete with other 
regional centers, particularly those in mainland China. 
 
¶6. (SBU) The Closer Economic Partnership Agreement (CEPA), a 
limited free trade agreement between Hong Kong and mainland 
China, provides tariff-free import to Mainland China of Hong 
Kong-origin goods and preferential access for Hong Kong 
registered companies in 27 services sectors (e.g., logistics, 
distribution).  U.S. and other foreign firms with a 
significant presence in Hong Kong also are eligible to take 
advantage of CEPA concessions to enter the mainland market. 
Through CEPA, Hong Kong is deepening its economic interaction 
with the Pearl River Delta (PRD) in Southern China to 
maintain its position as the international gateway to China. 
Hong Kong faces sharpening competition from mainland rivals 
in services industries, which currently make up 90% of its 
GDP; however, its strong rule of law, civil liberties, and 
transparent society suggest that it will remain China's key 
finance and services hub. 
 
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Secure Trade 
------------ 
 
¶7. (SBU) As the world's largest source of U.S.-bound 
containers, Hong Kong was among the first in Asia to 
participate in the Container Security Initiative (CSI), 
designed to detect containers that may be carrying Weapons of 
Mass Destruction (WMD) or their components.  Cooperation 
between Hong Kong Customs and the Department of Homeland 
Security/Customs and Border Protection on CSI is exemplary. 
Two port operators, Modern Terminals and Hutchison 
International Terminal, have conducted private sector trials 
of the Integrated Container Inspection System (ICIS), which 
combines radiological mapping, x-ray images and container 
tagging and makes a digital record for each container passing 
through its portals.  Hong Kong is a world leader in 
implementing the Integrated Container Security System.  The 
USG and HKG are currently discussing HKG's participation in 
the U.S. Secure Freight Initiative.  Recent negotiations 
indicate that we could have an agreement this summer with 
implementation following shortly thereafter. 
 
--------------------------------------------- ------------- 
Proliferation, Export Controls, Anti-Money Laundering, CTF 
--------------------------------------------- ------------- 
 
¶8. (SBU) The HKG cooperates in preventing the transfer 
through its ports of goods that could be used by the North 
Korea (DPRK) in its missile and WMD programs, and Iran in its 
nuclear and missile 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 and Iran. 
Hong Kong maintains an effective, highly autonomous, and 
transparent export control regime.  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. 
 
¶9. (SBU) As a major international financial center, money 
laundering is a criminal offense in Hong Kong and money 
laundering ordinances apply to banks and non-banking 
financial institutions, such as law and accounting firms. 
Hong Kong passed counterterrorism financing legislation in 
¶2002. 
 
¶10. (SBU) Under the "one country, two systems" reunification 
model, Hong Kong has authority over all matters except for 
defense and foreign policy (including U.N. affairs).  The PRC 
ratified both UNSCR 1718 on North Korea and UNSCR 1737 on 
Iran, and forwarded implementation instructions to the HKG. 
The HKG finalized its legislation for implementing UNSCR 1718 
and is in the process of finalizing legislation to implement 
UNSCR 1737. 
 
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Intellectual Property Rights 
---------------------------- 
 
¶11. (SBU) Hong Kong is a regional leader in the protection of 
intellectual property rights (IPR).  New legislation and 
crackdowns on the production and retail levels in the late 
1990's resulted in manufacturing moving across the border to 
 
HONG KONG 00001800  003 OF 004 
 
 
mainland China.  This trend, however, has forced the HKG to 
increase its efforts to combat the influx of smuggled fake 
goods with counterfeit pharmaceuticals as the most dangerous 
items.  A large percentage of medications at non-chain 
pharmacies in Hong Kong sell fake drugs, such as Viagra, diet 
pills, panadol and even medications used to treat epilepsy, 
diabetes and other serious disorders.  Given Hong Kong's role 
as a regional shipping and logistics center, Hong Kong must 
struggle against the endless supply of counterfeit 
medications and other goods that enter or are transshipped 
through Hong Kong.  Information sharing between the Hong Kong 
Customs and Excise Department (CED) and U.S. Customs and 
Border Patrol remains robust, although some U.S. stakeholders 
in the pharmaceutical and software industries say CED should 
take a more proactive approach in investigating IPR 
violations. 
 
----------- 
Environment 
----------- 
 
¶12. (SBU) Hong Kong's air quality has deteriorated noticeably 
over the past ten years due to pollution related to the 
tremendous growth of factories across the border in the Pearl 
River Delta (PRD) of mainland China.  It is estimated that 
80% of Hong Kong's air pollution comes from factories in the 
PRD (many of which are owned by Hong Kong investors), while 
the remaining 20% is produced locally.  Concern is growing 
among Hong Kong residents and business leaders that pollution 
is having an increasingly negative impact on health, the 
quality of life, and the economic potential of the city. 
Business leaders have claimed that the pollution problems 
make it increasingly difficult for them to attract and retain 
top international talent to Hong Kong, with the city losing 
out to Singapore and other regional centers.  Local chambers 
of commerce, NGOs, and other groups have criticized the 
government for responding slowly to the problem.  For the 
past year, the Consulate and visiting USG officials have 
highlighted the importance of improved air quality to promote 
human health and maintain a sustainable pro-growth economy. 
 
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P2E2 
---- 
 
¶13. (SBU) To address deteriorating air quality, the Consulate 
launched the Pollution Prevention and Energy Efficiency 
("P2E2") initiative to promote a financing model to support 
clean technology for mainland Chinese enterprises.  P2E2 uses 
loan guarantees from the Asian Development Bank (ADB) or 
International Finance Corporation (IFC), as well as credits 
from the U.S. Export-Import Bank, to facilitate loans by Hong 
Kong commercial banks for the purchase of green and energy 
efficient equipment for businesses in mainland China.  Upon 
installation of this equipment, mainland businesses will not 
only produce less pollution, but also increase savings by 
becoming more energy efficient.  These savings are used to 
pay back loans -- usually within one to three years -- after 
which on-going savings accrue to the mainland business.  The 
program is geared for power generation, aluminum, cement, 
ceramics, chemicals, electronics, plastic, metalworking and 
other sectors.  Given American expertise in environmental 
technology and service firms, the program is well suited to 
American partners, but does not depend solely on U.S. 
technology or financing. 
 
-------------------------- 
Avian Influenza and Health 
-------------------------- 
 
¶14. (SBU) Hong Kong experienced two human outbreaks of the 
highly pathogenic H5N1 subtype of the Avian Influenza (AI) 
virus.  The earliest known case of bird-to-human transmission 
occurred in Hong Kong in 1997 when eighteen people were 
infected with the H5N1 virus; six died.  In a subsequent 2003 
outbreak, two Hong Kong citizens died while traveling in 
southern China.  Since 2003, Hong Kong has increased 
biosanitation controls at poultry farms, slaughterhouses and 
retailers.  Hong Kong health officials have publicly stated 
the main AI threat comes from migratory birds and birds 
smuggled in from mainland China.  The HKG recently closed the 
Kowloon bird market after a bird was discovered with the H5N1 
virus.  The market will reopen soon with new biosanitation 
measures in place. 
 
¶15. (SBU) Hong Kong has some of the world's leading AI 
researchers, extensive experience in dealing with SARS, and a 
well-organized AI preparedness plan.  As a WHO testing center 
for AI, it is a regional leader in AI prevention, monitoring 
 
HONG KONG 00001800  004 OF 004 
 
 
and response.  The HKG is close to meeting its target of 20 
million doses of tamiflu and is developing plans to establish 
a commercial vaccine production facility in the SAR.  Working 
with the private sector, community groups and counterparts in 
mainland China and Macau, the HKG continually updates its AI 
response plan. 
Cunningham