Speech by the Financial Secretary

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Following is a speech by the Financial Secretary, Mr Donald Tsang, at a dinner in Geneva today (Thursday, Geneva time):

Ambassadors, distinguished guests, ladies and gentlemen,

Thank you for the warm welcome. I have many fond memories of Geneva going back to the mid-'80s when multi-lateral trade negotiations first brought me here, and later in the early '90s when I was Hong Kong's Director-General of Trade and Chief Trade Negotiator. I have been back several times since I took up the post of Financial Secretary in 1995 but, believe it or not, this is the first time since then that I have given a speech in this beautiful city.

I am honoured to be addressing such an esteemed gathering, representing as you do, many of Hong Kong's most important trading partners. And I am especially happy for the opportunity to give you a 'first-hand' account of how Hong Kong has been developing since the historic reunification on July 1 last year. I am sure all of you are interested to hear how Hong Kong has coped - and coped very well - throughout the current financial turmoil besetting the East Asian region.

Asia, like the rest of the world, has benefited greatly from the multi-lateral trading system. World trade flows have increased 14-fold since 1950. Trade liberalisation has had a tremendous and positive impact in many parts of the world, improving living standards, prosperity and stability. I think the current economic woes in Asia are good examples of what happens when markets are not open, or very well regulated. I will talk more about this later.

The multi-lateral trade system has been considerably strengthened in recent years with the establishment of the World Trade Organisation. The WTO has already scored some notable successes, such as the recent conclusion of negotiations on basic telecommunications and financial services. Inclusion of services is particularly important to Hong Kong, given that some 84 per cent of our GDP comes from this sector. Strengthened dispute settlement procedures have already shown their worth and this, too, bodes well for the future.

The rule-based multi-lateral trading system has been one of the cornerstones of Hong Kong's economic policy and success. Adherence to it is an article of faith as far as we are concerned.

It is an article of faith to us because Hong Kong's economy is so heavily reliant on external trade. Trade in goods is 250 per cent of our GDP. We are the seventh largest trading economy in the world - fifth if you count the European Union as one. We are the 12th largest in services. That is one reason why, at the opening ceremony earlier, I described Hong Kong as 'territorially challenged' rather than 'small'.

I must stress - so there is no doubt on your part - that you can rely on Hong Kong to show the same degree of commitment to trade liberalisation in the future. Trade liberalisation is our bread and butter, it is the air we breathe and the water we drink. It is our life.

That commitment is outlined in our Basic Law - a constitutional document - which guarantees Hong Kong's continued status as a 'free port' and our policies of 'free trade and safeguarding the free movement of goods, intangible assets and capital'.

Despite the achievements so far, the multi-lateral system cannot rest on its laurels. It must be further strengthened. A key issue is expanding membership of the WTO, to make it truly 'global'. The Hong Kong Special Administrative Region has a number of very good reasons for hoping that our sovereign state, China, in particular, will accede very soon.

First, we are proud to be part of China. We in Hong Kong very much want to see a successful and stable China playing an important role in world affairs. Second, the Mainland China is our biggest trading partner - we have a vested interest, that's clear. Third, the Mainland Chinese market is so huge that it is surely a matter of necessity, and for the system itself, that it should be fully incorporated. We wish to see steady but faster progress being made towards China's accession. This will not only preserve the integrity of the multi-lateral trading system, but also enhance it considerably.

I should add that under the 'One Country, Two Systems' principle outlined in the Basic Law, the Hong Kong SAR is a separate Customs territory with its own economic system, which is obviously very different from that in the Mainland of China. Our Economic and Trade Office here in Geneva, and those elsewhere in Europe, North America, Japan, Singapore and Australia - represent the commercial interests of the Hong Kong SAR alone. This will remain the case after our sovereign state joins the WTO.

This is just one example of how Hong Kong has developed, and will continue to move forward, under the unique concepts of 'One Country, Two Systems' and 'Hong Kong people running Hong Kong' with a 'high degree of autonomy'.

Another excellent example of Hong Kong's autonomy -- and how the Basic Law works -- is Hong Kong's handling of the 'Asian Contagion'. From very early on, when the first signs of the crisis were emerging in August last year, the Central Government has been very supportive of Hong Kong. However, it was also very clear that it was up to Hong Kong to plot its own course throughout the turmoil. And we would have wished it no other way.

It is a fact we have undergone a baptism of fire in our first year as a Special Administrative Region and when you think about it, that's not such a bad thing. In this regard, I am reminded of the words of the US poet and philosopher Ralph Waldo Emerson, who once commented: "Every calamity is a spur and valuable hint."

We have learnt several valuable lessons from the financial crisis, and we have been spurred to take action in areas that have been found lacking, most notably the way in which the markets operated during extremely volatile periods and speculative attacks against the Hong Kong Dollar.

Generally, though, Hong Kong is riding out the storm much better than most. There are several reasons for this and I would like to give you an insight into some of them.

Firstly, we have a stable currency and a linked exchange mechanism backed up by more than US$98 billion in foreign reserves, the world's third largest such holdings, and eight times the money in circulation. If the attacks on the Hong Kong Dollar proved one thing, it was the resolve of the Hong Kong SAR Government to defend the linked exchange rate. I'm sure the speculators who got burnt in October last year learnt that lesson.

Hong Kong's economy is highly externally-oriented and a stable currency is absolutely essential if we are to maintain confidence among investors and the public. During such turbulent times business looks for, and needs, stability and that is what they have in the Hong Kong Dollar - a rock solid linked exchange rate.

The second reason Hong Kong has fared better than most is that we have very open and well-regulated markets. But while operating under battle conditions the volatility of the market also showed us where we needed to strengthen the regulatory framework, to protect investors while ensuring and maintaining the fast, free flow of information and funds. This led us to review our currency defence mechanisms and the operation of our securities and futures markets. We released the report on this review last month and are setting in train a number of improvements to enhance the Government's ability to withstand market volatility and strengthen investor education. These improvements are premised on two fundamental principles. First, consistent with the mandate of the Basic Law, our constitution, we must maintain our status as an international financial centre. Secondly, consistent with the objective of maintaining the stability of the Hong Kong dollar, the linked exchange rate system which has served Hong Kong very well must be preserved.

The third reason why Hong Kong has been able to ride out this storm is our long history of prudent fiscal management - that is, limiting Government spending to within the trend GDP growth rate over time. Simply put we spend what we earn and we rarely, if ever, borrow money. Budget surpluses are the norm. Our fiscal reserves now stand at US$57 billion. Such considerable reserves have given us the confidence - and the means - to press ahead with medium and long term initiatives to make Hong Kong an even better place in which to live and work. The Budget I delivered in February included new spending - that is, real increases - in education, health, housing and social welfare. I was able to announce substantial new spending on rail and road projects to further enhance our position as a regional transport hub and the pre-eminent gateway to the Mainland markets. On top of that there were tax breaks for business and individuals, which mean that 99 per cent of all taxpayers in Hong Kong will pay less tax this financial year. Most economies would be flat out achieving that during good times.

The fourth reason is the rule of law and a level playing field for all who do business in Hong Kong. Our common law system remains intact, and our courts rule on the law as impartially as they ever have. Cronyism is not, and will not, be tolerated in Hong Kong.

The level playing field remains an overriding principle and practice governing all commercial dealings in Hong Kong.

As you can see we are not marking time in Hong Kong - we have never had enough time, to simply 'mark time'. We're moving ahead, we're changing, we're adapting when others around us are clawing their way back to break even point. When the dust finally settles - and I hope that is the not too distant future - Hong Kong will be moving ahead from a much higher base and with that much more of an advantage over its regional competitors.

In ending my speech tonight, given the current turmoil in Asia and the nervousness of markets around the world, I leave you to ponder the words of the French satirist and philosopher Voltaire, who some 240 years ago mused: "Individual misfortunes give rise to the general good; so that the more individual misfortune exists, the more all is fine." Unfortunately, I think he might have been a little off the mark this time!

Thank you all, and good luck with the Ministerial conference.

End/Friday, May 8, 1998

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