VZCZCXRO9544
RR RUEHCN RUEHGH RUEHVC
DE RUEHHK #1931/01 2040810
ZNR UUUUU ZZH
R 230810Z JUL 07
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 2375
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEHGP/AMEMBASSY SINGAPORE 3596
RUEHIN/AIT TAIPEI 4614
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 HONG KONG 001931 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EAP/CM AMY NICODEMUS AND EB/IFD/OMA DAVID MOORE, 
US TREASURY FOR HARSAAGER, WINSHIP, AND YANG 
 
E.O. 12958: N/A 
TAGS: ECON EFIN HK CH
SUBJECT: HK ECONOMISTS ADVISE CHINA AGAINST SOVEREIGN 
WEALTH FUND TRANSPARENCY, PRAISE CEPA AMENDMENTS 
 
¶1.  (SBU) Summary: A senior Hong Kong private-sector 
economist has been advising the Chinese government that a 
high degree of transparency is not in the best interest of 
China's State Foreign Exchange Investment Corporation (SIC), 
as it will subject the fund to political pressure and media 
second guessing.  HKMA officials thought that Treasury 
Assistant Secretary Lowery,s call for greater transparency 
in sovereign wealth funds was overly critical as the U.S. has 
long rebuffed Asian calls for greater transparency of large 
institutional investors like hedge funds. 
 
¶2.  (SBU) Investment banking executives are grateful for the 
market access commitments achieved in SED II.  Lack of 
regulatory transparency and predictability, along with equity 
caps and the lack of a clear mandate to allow minority 
shareholders management control of domestic firms remain 
their primary market access concerns.  HKMA officials noted 
the benefits of collaboration through the SED-JCCT and CEPA 
to gain greater access for foreign financial services firms 
and described amendments in the most recent CEPA increasing 
access in financial services, notably by: 1) reducing minimum 
asset requirements for Hong Kong banks to purchase strategic 
stakes in Chinese banks; 2) making it easier for foreign 
banks to qualify as "Hong Kong banks" and benefit from CEPA 
provisions; and 3) giving Hong Kong banks priority treatment 
in applications to open branches in west central and 
northeast China and in Guangdong Province.  End Summary. 
 
¶3.  (SBU) Beijing-based Treasury Financial Minister Counselor 
David Loevinger and Econoff Jim Mullinax met July 13 with 
several Hong Kong-based senior economists and representatives 
of international investment banks, fund managers, and the 
Hong Kong Monetary Authority (HKMA). 
 
============================================= ======= 
SIC: Transparency Makes Profitability Harder to Find 
============================================= ======= 
 
¶4.  (SBU) Hong Kong-based economists predicted that the SIC 
would have difficulty reaching profitability in the near 
term, given prospects for the RMB appreciating by up to 5% 
vis--vis the U.S. dollar over the next several years and the 
interest rate on Ministry of Finance bonds issued to finance 
the SIC expected to be about 4.5%.  (Comment:  We noted that 
there is not yet agreement in the Chinese government on 
whether the government,s claim in the SIC will be RMB or 
foreign currency denominated. End comment.)  To finance the 
SIC, Hong Kong economists we spoke to expect the Ministry of 
Finance to issue bonds to either a special purpose vehicle or 
a consortium of State-owned banks, which would then sell the 
bonds to the People,s Bank of China (PBOC).  To ensure 
market pricing, a small quantity of bonds could be auctioned 
publicly. 
 
¶5.  (SBU) One economist has advised the Chinese government 
that a high degree of transparency in the SIC would not be in 
China,s interest.  Regular reporting on the composition and 
performance of SIC investments would make it more difficult 
for the SIC to focus on maximizing long-run returns, 
subjecting it to greater political interference and media 
second-guessing.  In addition, a high degree of transparency 
would allow market players to discern SIC,s investment 
strategy and "front run" it.  The economist advised SIC's 
prospective management that Singapore,s Government 
Investment Corporation (GIC) and most of the world,s central 
banks do not make public the composition of investments or 
returns, suggesting that this was a good model for the SIC to 
follow.  HKMA officials believe U.S. Treasury Assistant 
Secretary Clay Lowery was too critical in his calls for 
 
SIPDIS 
greater transparency in sovereign wealth funds.  They noted 
the irony of the U.S. position advocating greater 
transparency in sovereign funds after having repeatedly 
rebuffed Asian calls for greater transparency in large 
institutional investors like hedge funds. 
 
============================================= ==== 
Export Misreporting Not a Factor in Trade Figures 
============================================= ==== 
 
¶6.  (SBU) The economists noted that expectations that RMB 
appreciation would slow Chinese export growth had proven 
unfounded thus far.  Based on a recent survey of firms, 
China,s State Administration for Foreign Exchange (SAFE) 
believes that disguised capital account transactions in the 
current account are relatively small, accounting for probably 
 
HONG KONG 00001931  002 OF 002 
 
 
less than 1% of the current account surplus.  There are 
incentives for both under-reporting (tax avoidance) and 
over-reporting (access to foreign currency to speculate on 
RMB appreciation) of export receipts.  According to SAFE, 
pre-payments for export receipts (another common tool used to 
gain illicit access to foreign exchange) are down 40%. 
 
============================================= =============== 
Equity Caps, Predictability, Control Top Securities Concerns 
============================================= =============== 
 
¶7.  (SBU) The securities company executives we spoke with are 
grateful for the market access commitments achieved in SED 
II, particularly the removal on the moratorium on new 
securities licenses and the ability for foreign securities 
JVs to expand into brokerage and proprietary trading. 
However, equity caps and the lack of regulatory transparency 
and consistency remain their primary concerns.  The lack of 
regulatory predictability makes long-term planning difficult. 
 Firms cited as examples the moratorium and the ad-hoc nature 
of foreign acquisitions of Chinese-invested securities firms 
to date.  To the bankers, a more restrictive but transparent 
and predicable regulatory regime would be preferable to a 
potentially less restrictive but opaque and volatile one. 
 
¶8.  (SBU) While the raising of equity caps in securities 
remains a priority, and raising the caps even to 49% would be 
helpful, the promulgation of regulations which clearly give 
minority shareholders the right to managerial control would 
be highly welcome, as this appeared to be a major stumbling 
block in the UBS purchase of Beijing Securities. 
Promulgating clear regulations on the ability of financial 
services firms to provide private banking services is also a 
key concern.  Firms advised U.S. officials to point out to 
Chinese counterparts that the current environment gives a 
privileged market position to three foreign securities firms, 
enhancing their ability to extract rents. 
 
============================================= == 
CEPA Amendments Ease HK Firms' Entry into China 
============================================= == 
 
¶9.  (SBU) Senior officials of the HKMA described recent 
amendments to the Mainland/Hong Kong CEPA on financial 
services.  First, while firms still need five years operating 
experience in Hong Kong to qualify as a Hong Kong financial 
services firm and gain the benefits of CEPA, they can now 
count up to two years operating as a foreign affiliated 
branch (with the rest as an incorporated subsidiary) to meet 
the requirement.  Under previous rules, a bank needed to have 
been incorporated in Hong Kong for at least five years. 
Second, the minimum asset requirement for Hong Kong banks to 
acquire a strategic stake in a mainland bank has been reduced 
from US$10 billion to US$6 billion.  Finally, a new "Green 
Lane" procedure will give Hong Kong banks priority treatment 
in considering license applications to set up branches in the 
central western and northeastern regions of China and, most 
importantly, in Guangdong Province. 
Marut