VZCZCXRO7452
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHVC
DE RUEHHK #1847/01 2730108
ZNR UUUUU ZZH
R 300108Z SEP 09
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 8650
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 03 HONG KONG 001847 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT: PRD COOPERATION BUILDING BUT LOCAL GOVERNMENTS 
IMPEDE SERVICE SECTOR INTEGRATION 
 
REF: A. HONG KONG 880 
     ¶B. GUANGZHOU 237 
 
¶1. (SBU) Summary and Comment: Seeking to foster deeper 
economic integration with the Greater Pearl River Delta 
(GPRD), Hong Kong government (HKG) and industry leaders have 
built productive ties over the past several years with 
Mainland counterparts.  Hong Kong contacts say that both 
sides support implementation of the Closer Economic 
Partnership Arrangement (CEPA), although Hong Kong industry 
complains that execution of CEPA at municipal levels in 
Guangdong could be significantly improved.  Guangdong local 
officials' ignorance of CEPA agreements as well as their fear 
of potential business dislocations caused by entry into local 
markets by Hong Kong's world-class service providers have 
slowed the development of service sector integration.  In the 
long term, Hong Kong increasingly sees its future linked to 
the GPRD, the world's fastest growing region.  Both sides are 
at early stages of building business synergies and symbiotic 
relationships that will complement their respective 
strengths.  Hong Kong, therefore, stands to gain much and 
remain relevant to the Mainland.   The GPRD's rapid 
urbanization and rising incomes will generate significant 
demand for good governance, world-class service sector 
providers, knowledge-intensive businesses, branding, and 
creative industries -- areas in which Hong Kong excels.  The 
pace and scope of success, however, will greatly depend on 
education, information sharing, and smooth implementation at 
the local level.  End Summary and Comment. 
 
Hong Kong's Major Role in Explosive GPRD Growth 
--------------------------------------------- -- 
 
¶3. (U) The Greater Pearl River Delta (GPRD) includes Hong 
Kong, Macau and the Pearl River Delta Economic Zone (PRDEZ) 
made up of Guangzhou, Shenzhen, Dongguan, Foshan, Zhongshan, 
Zhuhai, Jiangmen and parts of Huizhou and Zhaoqing.  It 
continues to be one of the most economically dynamic regions 
in the world since the launch of China's reform program in 
¶1979.  The PRDEZ owes its success largely to its proximity to 
Hong Kong, which has provided capital, management, 
technology, market knowledge, and access to international 
markets.  According to the HKG's InvestHK Department, Hong 
Kong has been the source of approximately two-thirds of the 
cumulative FDI into the PRDEZ since 1979.  These 
contributions from Hong Kong played a major role in the 
PRDEZ's boom, while supporting Hong Kong's development into a 
management, coordination, information, business service, 
logistics and financial center of global importance.  The 
PRDEZ's GDP grew from just over USD8 billion in 1980 to more 
than USD89 billion in 2000 and USD269 billion in 2006. 
During those 26 years, the average real rate of GDP growth in 
the PRDEZ was 16.3 percent, compared with 9.8 percent for the 
PRC as a whole.  Although the PRDEZ contains only 3.5 percent 
of the PRC's population, in 2006 it accounted for 18.8 
percent of foreign direct investment and 28.8 percent of 
total trade (latest statistics available). 
 
CEPA and Transportation Infrastructure 
-------------------------------------- 
 
¶4. (U) The Closer Economic Partnership (CEPA) was signed in 
2003 by the PRC and HKG and came into effect on January 1, 
¶2004.  Under CEPA, zero-tariff treatment has been extended to 
most products, and preferential access to the Chinese 
Mainland was granted across a broad spectrum of service 
sectors.  Annual supplemental agreements extend these 
priveleges even further.  To facilitate further economic 
cooperation and integration, with an eye toward developing 
concrete measures to incorporate into the PRC's next Five 
Year Plan, senior HKG and Guangdong officials in August 2009 
participated in the latest annual Hong Kong-Guangdong 
Cooperation Joint Conference.  They reiterated their full 
support of the sixth annual supplement to CEPA that will take 
effect on October 1 (ref A).  They also pledged to rapidly 
complete planned construction of multi-billion dollar 
cross-border infrastructure projects.  These include the Hong 
Kong-Macau-Zhuhai bridge and the Guangzhou-Shenzhen-Hong Kong 
Express Rail Link. 
 
HK, PRC and Guangdong Officials Support Integration Goals 
--------------------------------------------- ------------ 
 
¶5. (SBU) HKG Trade and Industry Department (TID) Principal 
Trade Officer Doris Chan told Econoff on September 4 that HKG 
and PRC economic integration efforts are guided by The 
Outline of the Plan for the Reform and Development (OPRD) of 
 
HONG KONG 00001847  002 OF 003 
 
 
the Pearl River Delta for 2008-2020, published by the PRC's 
National Development and Reform Commission (NDRC) in December 
2008 (ref B).  Chan said TID meets with PRC Ministry of 
Commerce officials 3-4 times per year on policy issues 
related to economic integration, while maintaining a "very 
good" working relationship with Guangdong officials.  "They 
are as serious as we are about pursuing economic 
liberalization," she said.  Government-to-government, 
business, academic, and interpersonal exchanges between Hong 
Kong and PRDEZ cities continue to grow.  Visa restrictions 
for PRDEZ residents visiting Hong Kong have never been 
looser, record numbers of Mainland students (7,712 as of 
September 2008) study in Hong Kong, and strong statements 
from Guangdong's leadership in recent years have called for 
greater cooperation with Hong Kong and Macau. 
 
¶6. (SBU) Asked whether she had any criticism of Guangdong's 
dealings with the HKG on economic integration issues, Chan 
responded that they needed to enact new regulations at a 
faster pace to meet the timing expectations of Beijing and 
Hong Kong.  Chan also stated city officials in Guangdong 
sometimes either ignored agreements reached at the national 
and provincial levels with the HKG or were simply not aware 
of them.  "Provincial and local rules, regulations and 
procedures are not necessarily synchronized and sometimes the 
message from senior Guangdong officials isn't delivered to 
city officials in an accurate and timely manner," she said. 
Chan suggested that more training of local level officials 
was needed in Guangdong, especially with regard to specific 
CEPA-related agreements and obligations. 
 
"Gate is Open, But Door is Shut" 
-------------------------------- 
 
¶7. (SBU) The Chairman of Hong Kong think tank Bauhinia 
Foundation Research Centre, Anthony Wu, told Econoff on 
September 9 that Guangdong's "bureaucracy and fiefdoms, 
especially at the local level," impeded progress toward 
economic integration with Hong Kong.  "The big gate is open, 
but the small door is shut," he said, citing a local proverb. 
 Trade and Development Council (TDC) Chief Economist Edward 
Leung told Econoff on September 14 that local business 
interests in Guangdong felt threatened by the incursion of 
"Hong Kong pros" into their respective markets.  He cited the 
difficulties faced by Hong Kong investors in setting up 
wholly-owned outpatient clinics in Guangdong, as allowed by 
Supplement V to CEPA.  "They face local resistance such as 
anti-competitive zoning restrictions and rules, and city 
officials typically don't process the necessary paperwork in 
a timely manner," he said. 
 
HK Cooperates with China to Court Investment 
-------------------------------------------- 
 
¶8. (U) InvestHK is the HKG entity tasked with promoting and 
facilitating foreign direct investment in Hong Kong. 
InvestHK uses its four Mainland branch offices (in Beijing, 
Guangzhou, Shanghai and Chengdu) to field Hong Kong 
investment inquiries from Mainland companies, liaise with 
provincial and local officials, and arrange joint 
participation in FDI promotion events.  To support their 
joint FDI marketing trips abroad, InvestHK and Guangdong 
officials often invite banks, accounting firms and 
multinational corporate professionals to share their 
companies' positive GPRD operating experiences with potential 
investors.  She said, "They're good at providing concrete 
examples of how the strengths of Hong Kong and Guangdong 
complement each other." 
 
Mainland Investment in HK Accelerating 
-------------------------------------- 
 
¶9. (U) Mainland companies increasingly invest in Hong Kong. 
InvestHK Associate Director General Victoria Tang told 
Econoff on September 16 that investment inquiries from 
Mainland China-based companies account for approximately 15 
percent of her group's workload.  Tang said, "We support 
China's 'Going Out Policy' by encouraging Mainland companies 
to operate first in Hong Kong for 3-5 years, before they 
venture out into foreign markets.  Here they establish 
international contacts, gain experience and build the 
confidence necessary to operate in a different environment." 
She said 250 Mainland companies commenced "significant" 
operations in Hong Kong since 2002, including several law 
firms, with the investment pace accelerating in the past 
couple years.  Tang also noted Mainland companies comprise 
almost 25 percent of the 1,109 names listed on the Hong Kong 
 
HONG KONG 00001847  003 OF 003 
 
 
Stock Exchange (HKSE) and just under half of the HKSE's total 
market capitalization. 
MARUT