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FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC PRIORITY 9558
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C O N F I D E N T I A L HONG KONG 000212 
 
SIPDIS 
 
STATE FOR EAP/CM, EEB/IFD/OMA, STATE PASS USTR FOR 
STRATFORD AND ALTBACH, NSC FOR BADER 
 
E.O. 12958: DECL: 02/04/2035 
TAGS: EFIN ECON CH HK
SUBJECT: HK BUSINESSES WARN TREASURY CONFIDENT CHINESE 
BOOSTING ASIAN TIES 
 
REF: A. HONG KONG 182 
     ¶B. 09 HONG KONG 1280 
 
Classified By: Acting Consul General Christopher Marut, Reason 1.4 b/d 
 
¶1. (C)  Begin Summary: Treasury Senior Coordinator for China 
and the U.S.- China Strategic and Economic Dialogue (S&ED) 
David Loevinger led a Treasury and Consulate General team in 
meetings with Blackstone Asia Chairman Anthony Leung, Credit 
Suisse Asia CEO Kai Nargolwala, Hong Kong Monetary Authority 
(HKMA) Chief Executive Norman Chan and Hong Kong Financial 
Services and Treasury Bureau (FSTB) Undersecretary Julia 
Leung on January 28 to discuss recent Chinese economic 
developments, U.S.-China relations, and China's efforts to 
build stronger ties in Asia, including the 
internationalization of the Chinese Yuan. 
 
¶2. (C)  Summary Continued: Blackstone's Leung and Credit 
Suisse's Nargolwala warned visiting officials that the global 
financial crisis and slow U.S. recovery had badly damaged 
America's economic leadership in Asia.  Our interlocutors 
were concerned about increasingly obvious friction in the 
U.S.-China relationship, and  remarked on China's rising 
assertiveness in light of the country's continued growth and 
positive role in the global recovery.  They saw strengthened 
regional economic relationships and continuing developments 
in the internationalization of the renminbi (RMB) as part of 
a Chinese strategy to shift trade and investment away from 
Western countries to more friendly regimes in Asia.  End 
summary. 
 
¶3. (C)  Comment: The uncertainty inherent in U.S. financial 
and regulatory reforms was of greater concern for our private 
sector contacts than developments in China.  Despite the 
concerns raised by our private sector interlocutors, we see 
little evidence that Chinese authorities are actively 
discouraging investment in or trade with the West, though 
perceived barriers to Chinese investment in the U.S. 
undoubtedly push some of these firms to look for 
opportunities in Asia.  Expanding trade ties and increased 
use of the RMB in the region, combined with local worries 
about U.S. protectionism, are likely to promote even closer 
economic relations between China and the rest of Asia.  End 
Comment. 
 
Chinese Confidence Changing the Game 
==================================== 
 
¶4. (C)  Both public and private interlocutors agreed that 
growing Chinese confidence and economic nationalism were 
encouraging PRC leaders to take more aggressive international 
positions.  Blackstone's Anthony Leung warned that trade 
friction had the potential to derail the U.S.-China 
relationship.  Though the Chinese needed both U.S. markets to 
support their export-led economy and U.S. military power to 
guarantee stability in the region, Chinese leaders were 
becoming more confident and seemed increasingly likely to 
respond to a growing populist nationalism that encouraged an 
aggressive international posture.  FSTB's Julia Leung agreed 
that Chinese leaders were becoming both more assertive abroad 
and more attuned to protectionist pressures at home.  Anthony 
Leung noted that some influential Hong Kong business leaders 
were publicly calling for Asia to reject western, and by 
extension, U.S. leadership.  He noted that Japan was often 
cited as an example of what could happen when countries bend 
to Western pressure to allow their currencies to appreciate, 
and suggested that China would be unlikely to make the same 
mistake. 
 
¶5. (C)  U.S. financial firms in particular were facing 
Chinese reluctance to engage with foreign firms, said 
Blackstone's Leung.  He complained that Blackstone was 
investing RMB in China, but was unable to raise funds in 
China due to their inability to get needed approvals from the 
National Development and Reform Commission (NDRC).  He 
suggested this was at least partly a reflection of Chinese 
efforts to develop and protect their own financial services 
companies.  The Chinese were eager to develop their own 
financial infrastructure in order to present an alternative 
in global discussions of financial architecture and 
regulatory reform.  He acknowledged that private equity firms 
saw some prospects for liberalization, including the 
possibility of raising RMB funds in China.  Leung also 
suggested that a proposal to approve Qualified Foreign 
Limited Partnerships, ostensibly modeled on the Qualified 
Foreign Institutional Investor (QFII) framework, was under 
consideration by Chinese regulators.  This would make it 
 
easier for foreign firms to raise RMB funds for investment in 
China, he said. 
 
U.S. Image Bruised; Asians Strengthening Regional Ties 
============================================= ========= 
 
¶6. (C)  Chinese leaders were cultivating Asian partners by 
promoting trade and investment in Southeast Asia and India 
and were actively discouraging business in the West, where 
they may face increased regulatory or security-related 
scrutiny, said Nargolwala.  Although the U.S. still had 
considerable influence in the region, security reviews that 
made it difficult for some travelers to obtain U.S. visas and 
high profile CFIUS-related cases had damaged America's 
reputation in Asia for openness.  Following the financial 
crisis, Asians' tolerance for being lectured by the West had 
markedly declined, he said.  Though the Chinese wanted to 
avoid the responsibility of leading an Asian bloc in 
international economic fora, they seemed comfortable acting 
as a balance between the U.S., European Union and the 
developing world.  Asian countries recognized that any 
"Asian" position was untenable without Chinese support, and 
appeared to be building stronger relationships with China, 
which was in a position to advocate for regional interests, 
he said.  Nargolwala also opined that RMB 
internationalization was part of a Chinese strategy to more 
closely tie regional economies to China. 
 
¶7. (C)  FSTB's Leung acknowledged that Chinese firms were 
looking for opportunities to expand into Hong Kong and the 
region, and noted that a Chinese firm recently purchased a 
Hong Kong broker-dealer, perhaps laying the groundwork for 
additional Chinese financial activity in Hong Kong.  RMB 
internationalization in Hong Kong was moving even faster than 
expected, she said.  Measures to allow Chinese firms to use 
RMB to purchase Hong Kong-based companies could be in place 
soon.  RMB settlement for trade in services and extending RMB 
trade settlement to third countries could also be in the 
works this year, according to Leung. 
 
Chinese Economy Looking Strong 
============================== 
 
¶8. (C)  Julia Leung was optimistic about the prospects for 
the Chinese economy in 2010.  Asset bubbles in some sectors 
of the Chinese real estate market were growing, but currently 
seemed manageable, she said.  Overall, the risks to the 
Chinese economy were low, but inflationary pressures on the 
horizon would likely lead China to tighten access to credit. 
HKMA's Norman Chan agreed and noted that China was already 
using administrative measures to slow loan growth.  He 
discounted concerns about excessive loan growth in the first 
three weeks of January, noting that many of the bigger banks 
had sold loans to smaller banks late in 2009 to avoid 
breaching capital requirements and were now buying these 
back.  This type of "stop-go" lending was typical in the 
Chinese economy and both banks and firms were used to dealing 
with it, said Chan. 
 
Stay Low Key on RMB 
=================== 
 
¶9. (C)  FSTB's Leung warned against public pressure to allow 
the RMB to appreciate.  U.S. statements on currency issues 
were counterproductive, she said.  Blackstone's Leung agreed 
that currency issues were best discussed quietly.  He doubted 
that RMB appreciation would substantively shrink the 
U.S.-China trade balance, but acknowledged that it could help 
defuse pressure for protectionist measures directed at China. 
 He encouraged Treasury Secretary Geithner to make public 
statements opposing protectionism while privately encouraging 
Chinese leaders to allow the RMB to appreciate. 
 
¶10. (U)  Special Coordinator Loevinger's Office cleared this 
message. 
MARUT