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Cablegate: Environment a Top Priority at Guangdong-Hong Kong Leaders

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R 170752Z JAN 08
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 6806
INFO RUEHOO/CHINA POSTS COLLECTIVE
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RUEATRS/DEPT OF TREASURY WASH DC
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UNCLAS SECTION 01 OF 02 GUANGZHOU 000028

SIPDIS

SENSITIVE
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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

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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

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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

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