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Cablegate: Prd Cooperation Building but Local Governments

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

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