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INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASH DC
RUEAEPA/HQ EPA WASHDC
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UNCLAS SECTION 01 OF 02 GUANGZHOU 000028 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR CHINA OFFICE 
 
 
E.O. 12958: N/A 
TAGS: EFIN SENV PGOV ECON CH
SUBJECT: Environment a Top Priority at Guangdong-Hong Kong Leaders 
Meeting 
 
 
(U) This document is sensitive but unclassified.  Please protect 
accordingly. Not for release outside U.S. government channels. Not 
for internet publication. 
 
¶1. (SBU) Summary: Environmental issues were at the top of the agenda 
for new Party Secretary Wang Yang during his January 4 meeting with 
Hong Kong Chief Executive Donald Tsang, according to Peter Pak-yan 
Leung, Director of Hong Kong's Economic and Trade Office (ETO) in 
Guangzhou.  Appreciating renminbi, rising costs, and government 
policies are making conditions more difficult for Hong Kong 
investors in the Pearl River Delta (PRD), but Leung expects most 
Hong Kong companies to stay, even as some expand in other parts of 
China.  He is optimistic about future integration in the PRD, 
especially in financial services, but noted that Beijing, out of 
concern for regional economic disparities, was circumspect about any 
proposal that would offer additional economic advantage to the PRD. 
End summary. 
 
Making Environmental Protection a Priority 
------------------------------------------ 
 
¶2. (SBU) Wang told Tsang that his first month as Guangdong's Party 
Secretary had seen 20 days of "dirty" air, and he expressed 
 
SIPDIS 
dissatisfaction with the current level of environmental protection 
in Guangdong.  HK ETO Director Leung believes that Wang is committed 
to improving environmental protection in the PRD during his tenure 
as Party Secretary.  He called Wang's comments representative of the 
attitudes of many Guangdong provincial and local government 
officials who are working with Hong Kong to address environmental 
problems.  Leung attributed this attitude in part to Chinese 
government policies that use environmental measures to rate the 
performance of local government officials in addition to growth and 
other economic measures. 
 
¶3. (SBU) Leung said Hong Kong and Guangdong officials had agreed in 
a separate January 8 meeting to final emissions targets for sulfur 
dioxide and other air pollutants and planned for them to fully 
implemented by 2010.  In addition, he noted that the Hong Kong 
Legislative Council was considering a bill to provide HK$93 million 
(USD 12 million) to assist Hong Kong-owned factories in the Pearl 
River Delta increase energy efficiency and reduce emissions. 
 
HK Factories Feeling Squeezed but Staying Put 
--------------------------------------------- 
 
¶4. (SBU) A combination of rising costs and government policies is 
making it harder for Hong Kong companies in the Pearl River Delta to 
stay profitable, according to Leung.  Hong Kong investment is 
heavily concentrated in the PRD, accounting for 80 per cent of Hong 
Kong's total investment in the mainland.  Leung told us that 98,000 
Hong Kong firms operate in Guangdong province, of which 60,000 are 
factories.  The total value of Hong Kong private investment is 
approximately USD 120 billion. 
 
¶5. (SBU) Leung estimated that the cost of production had been 
increasing by an annual rate of 20 percent in the Pearl River Delta 
due in large part to higher wages and energy costs.  At the same 
time, appreciation of the renminbi makes the region's exports less 
competitive.  Leung cited the new Labor Contract Law and government 
policies encouraging export processing industries to move up the 
value chain or inland from the PRD as challenges for Hong Kong 
investors. 
 
¶6. (SBU) Some Hong Kong firms are now considering investing 
elsewhere as they expand in China.  Many are looking north to 
locations like northern Guangdong, Hunan and Jiangxi provinces. 
Nevertheless, Leung emphasized that the PRD still offers Hong Kong 
investors considerable advantages and most firms will continue to 
use it as a manufacturing base.  Even as some firms move 
labor-intensive operations elsewhere, he expects them to keep 
management and other headquarters functions in the PRD.  He also 
pointed out that the advantage of cheap labor offered by places like 
Hunan and Jiangxi appears to be narrowing.  Wages were as much as 40 
percent cheaper in those locations in the past, but Leung said 
recent site visits and research suggested that the gap had narrowed 
to only 20 percent.  In addition, transportation and other 
infrastructure are still much better in the PRD. 
 
¶7. (SBU) Leung commented that the Chinese government was aware of 
the challenges facing Hong Kong investors and was making an effort 
to address their concerns.  He described extensive opportunities for 
Hong Kong government and business leaders to submit comments on each 
 
GUANGZHOU 00000028  002 OF 002 
 
 
draft of Beijing's new labor legislation, claiming that the final 
version was acceptable to most Hong Kong businesses. 
 
Increasing Integration in the PRD 
--------------------------------- 
 
¶8. (SBU) Leung is optimistic about further cooperation and 
integration between Hong Kong and the rest of the PRD.  He told us 
that Wang and Tsang had discussed the service sector, especially 
financial services, as a potential area of partnership.  Leung said 
the Hong Kong SAR government might propose further opening of the 
financial services sector in Guangdong as a pilot program for the 
rest of China.  However, he noted that Guangdong leaders were 
cautious about proceeding too far on such initiatives without clear 
guidance from Beijing.  He explained that the central government in 
Beijing, out of concern for regional economic disparity, was 
circumspect about any proposal that would offer additional economic 
advantage to the PRD. 
 
GOLDBERG