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Following is a speech delivered by the Chief Executive, Mr Tung Chee Hwa, at the Asia Australia Institute in Sydney tonight (Sunday):
Professor FitzGerald, distinguished guests, ladies and gentlemen,
Thank you for the invitation to speak tonight. I arrived this morning from Hong Kong and have been on the go ever since. But that is not a problem when you are in a city as beautiful as Sydney. Like Hong Kong, you have a city by the sea with such a magnificent harbour. And Hong Kong now has a marvellous new suspension bridge which some day might even rival your famous 'Coat Hanger'. This is my first visit to Australia since taking up the job of Chief Executive of the Hong Kong Special Administrative Region on July 1 last year and it is a good way to begin my trip to Australia here in Sydney.
I would like to take this opportunity today to tell you how well Hong Kong has done, as part of China and under the 'One Country, Two Systems' concept. I will talk about the Asian financial turmoil and its impact on Hong Kong. In the process, I will also discuss the economic development in China. Finally, I want to talk about how important Australia is to Hong Kong.
On July 1, 1997, China resumed the exercise of sovereignty over Hong Kong. It was an occasion marked by pride and confidence. Pride in that we are at last part of China. I am glad there is a universal recognition that the concept of 'One Country, Two Systems' is being truly practised in Hong Kong. We in Hong Kong have worked hard to ensure 'One Country, Two Systems' becomes a reality. And the central leadership in Beijing has demonstrated their determination time and again to ensure the successful implementation of 'One Country, Two Systems'.
Before July 1, 1997, there were many skeptics in Hong Kong and around the world, but we proved them wrong. Fundamentally, it is in China's national interest, as a whole, that 'One Country, Two Systems' becomes a reality in Hong Kong, not only because a successful Hong Kong can continue to contribute to China's modernisation. Equally important is the fact that the successful implementation of 'One Country, Two Systems' concept in Hong Kong can help the realisation of early reunification of the entire country. This is a common aim of all Chinese people everywhere. The fact is that Chinese leaders today have very clear vision in the direction in which China will be moving in the 21st century. The results of the policy of economic reform and opening since 1978 have been for everybody to see. The progress made in the decades of the 90's had been especially astounding. Many of the challenges they are currently undertaking will be difficult. But I have full confidence in their ability to ensure the realisation of their vision. Just as important, they have the support of the entire people.
Indeed, it is the solid promises of the Basic Law that gives us confidence in the full implementation of the 'One Country, Two Systems'. It is a comprehensive document that was drafted by people from both Hong Kong and mainland China after some four years of consultation and discussion. The Basic Law provides a constitutional framework for the Hong Kong Special Administrative Region. It institutionalises the concept of 'One Country, Two Systems'. It clearly prescribes that the social, economic and political systems in Hong Kong will be different from those in the mainland of China. It protects the rights, freedoms and lifestyle of Hong Kong people. The Basic Law guarantees the independence of our judiciary and, apart from foreign affairs and defence, it gives us full responsibility to manage our own affairs. It allows us complete financial autonomy, and the independence of our monetary system. It establishes Hong Kong as a separate customs territory, and enables us to work directly with the international community to control trade in strategic commodities, drugs, illegal transhipments, and to protect intellectual property rights.
The Basic Law guarantees that the power of final adjudication is kept in Hong Kong. We have our own Court of Final Appeal, which is now the ultimate arbiter of the common law in Hong Kong. We invite experienced judges from other common law jurisdictions to sit on the Full Court of five judges. This is indeed a unique arrangement.
The current pool of overseas judges is quite an impressive line-up. Actually the Chancellor of this university is one of those helping us, your former Chief Justice of the High Court Sir Anthony Mason and the other person is former High Court Judge Sir Daryl Dawson. The involvement of these experienced overseas judges in our Court of Final Appeal helps Hong Kong to maintain its links with the rest of the common law world. It underlines the importance we place on the rule of law by an independent judiciary.
The establishment of the Court of Final Appeal, the successful election held on May 24 and our active participation in WTO are all solid manifestations of the full implementation of the 'One Country, Two Systems' concept in accordance with the Basic Law.
The confidence and the euphoria of the successful return of Hong Kong to China has been dented by the economic downturn of the Asian Financial turmoil. The turmoil began inconspicuously on July 2 in Thailand. Thailand floated the baht and the Asia Pacific Region entered into a period of dramatic currency turmoil, the ripples of which have even touched these shores. No one has been immune from the deflation and contagion of this turmoil, and distant markets from Russia to Brazil watched with tremor and amazement how this drama is still unfolding. We are yet to see how the ending will come about in the current difficulties facing Japan. Already, in less than 12 months, more than 50 million in Indonesia has been thrown into poverty. How can we work together - how should we work together - to end this crisis and re-build anew? This presents both a challenge and an opportunity for us.
The origins, causes and effects of the Asian crisis are complex, but the broad problems are fairly well known. In those countries which have been badly affected, it was a combination of private sector overborrowing, inadequate bank regulation, poor risk management and tragic policy errors at the corporate and banking levels, both national and international. The growth of derivatives and modern information technology also contributed to this speed of the contagion. No one can deny the impressive record of strong growth, general price stability, high domestic savings, an educated and highly flexible labour force, fiscal prudence and openness to trade and investments that were the hallmarks of Asia for more than a decade. Furthermore, by promoting intra-regional trade and investments, the Region enjoyed unprecedented growth and prosperity during the period. Even authorities such as IMF and World Bank, not too long before the turmoil began, testified to these strengths and successes.
So quite obviously, something else must have happened and that this 'Asian problem' is not unique in Asia and it is indeed international. According to Mr Paul Volcker, it may well be systemic.
It has been pointed out that in the late 80s and early 90s, the capacity and willingness of Western financial institutions to reach out for more exotic high-yielding investment made private sectors of major emerging economies with strong growth potential their prime target. These economies which have become converts to the basic philosophy of open markets for goods and capital welcomed these fundings. These funds come to Asia, some in the form of loans, some in the form of portfolio capital and others in direct investment. But, much of these funds can be moved out in short notice.
On the other hand, the herd instincts of the management of these financial institutions are strong. What began as small amounts of fund flow to these Asian emerging markets grew very rapidly. For the recipient countries, few paid the attention to the fact that this money could leave at short notice.
The BIS Annual Report showed that it was a combination of mutual and hedge funds that pulled out of Asia as well as the sharp reversal of bank lending that did the true damage. Net private capital flows to Other Asia (excluding China and Japan) reversed by US$108 billion in the second half of 1997, compared with an inflow of roughly the same order in the previous 12 months. As far as I know, the IMF or World Bank or anybody has not advised any developing nation or economy to reasonably expect to introduce measures which are necessary to take these kind of stresses.
Indeed financial crises are not unique to emerging markets of Asia. In the last 15 years, large developed economies such as Texas, Norway, Sweden and Japan - all with OECD quality of bank supervision and accounting standards - well, maybe exclude Japan, also suffered financial crises. Each crisis had many of the characteristics that we are witnessing in Asia. The important lesson, to quote Paul Volcker again, 'is that small and open economies are inherently vulnerable to the volatility of global capital markets'.
As long as G-3 currencies - that is Dollar, Deutsch Mark and Yen -can move as much as 75% from peak to trough, there is tremendous pressure put on the smaller trading economies. While everyone seems to think that flexible exchange rates are the answer to small volatilities, no one has been able to deal effectively with the problem of competing devaluations that are creating a huge deflationary cycle in Asia. As exchange risks rise, the adjusting economies in Asia with flexible exchange rates are experiencing higher inflation, higher interest rates and severe stresses on their banking systems. I cannot agree more with Mr Volcker and others that new approaches are needed in the new international monetary order, although this will be a long process.
I saw a few essential conditions for an Asian recovery :
First, there must be clear signs that the Asian economies are generating trade surpluses, instead of deficits. The resilience of Asia is such that Thailand this year will run a current account surplus of 8% of GDP, as against a deficit of 8% in 1996. Although, for the time being, much of the surplus comes from a severe cut in imports.
Second, the financial crisis cannot be solved by official funds alone. The IMF must provide funding and conditionality, in combination with voluntary rollovers by private sector banks. Unfortunately, there is still US legislative reluctance to provide capital to the IMF. Hong Kong was the first to subscribe to the New Arrangements to Borrow. This, and other capital increases agreed for the IMF in Hong Kong in September last year, have still not been activated. If I may be so bold, now is not the time not to provide adequate water to the global fireman.
Third, as the largest economy in Asia, and the second largest in the world, Japan must do more to help stabilise the region by maintaining positive growth and stability in the yen. The recent dramatic fall in the value of the yen is very damaging, not just to Asia but to the economy around the world. In addition to economic stimulus packages, the Japanese Government must urgently come out with credible policies in the reform and liberalisation of her banking sector. The stability of the second largest economy in the world is obviously important to everyone.
Fourth, the stability of the Renminbi and the Hong Kong dollar must be maintained as the anchors of currency stability in Asia. No one should doubt the tremendous sacrifice that both Hong Kong and the mainland of China are bearing to prevent the problems of currency depreciation from escalating. We hope that all of our friends appreciate that this is in everyone's interest.
I know we in Hong Kong and the leaders in Beijing have been urged by many around the world to maintain stability of our currencies. There needs to be similar degree to urge the Japanese to stabilise the yen.
Finally, everyone in Asia must press ahead with reforms to cut out the inefficiencies and post-bubble effects that led to the Asian crisis. The adjusting economies, with the help of the IMF are already doing the best they can. But very often, such effort must be accompanied by sensitivity to different social and cultural backgrounds of the countries involved. Greater international co-operative efforts should be made to help this painful adjustment process.
The current economic turmoil in East Asia has understandably prompted concern in Australia. The adjustment process in Asia is likely to be prolonged, but a strong entrepreneurial spirit appears alive and well. There is a willingness to adopt and adapt to new technology and to maintain high rates of saving. All that means low cost and rapidly rising productivity. Indeed, I am confident that after the adjustment, the Asian region as a whole will return to the path of growth.
Now, let me say a few words on Hong Kong. Over the past decades, Hong Kong has achieved, in every respect, most enviable success. At US$25,000, our per capita GDP is the second highest in Asia. This has been achieved principally because of the hard work and entrepreneurial spirit of the people of Hong Kong. This has also been made possible because of the past 20 years of rapid and successful economic development in the mainland of China, which has given our economy boundless opportunities to move forward.
The success has been achieved because we are committed strongly to prudent financial management. We have consistently been able to achieve budget surpluses averaging 2% of GDP per annum. For the past fiscal year ending March 31, 1998, our budget surplus was at an astounding 5.8% of our GDP.
Our robust financial system and monetary management mechanism, modern and prudent supervision have laid a solid foundation for a stable exchange rate. Our banking system is strong, with capital adequacy ratios of locally incorporated banks averaging 17% and bad debt ratios of less than 2%.
Since 1983, Hong Kong, in order to ensure currency stability, has been operating under a currency board system which provides full US Dollar backing for our currency.
Thanks to our prudent financial management, Hong Kong's foreign reserves, which includes our 'fiscal reserve', stood at US$96.2 billion -- the third largest in the world. These huge reserves provide not just 100%, 200%, but a full 800% backing for the currency in circulation.
Many have questioned whether we need to devalue the Hong Kong Dollar to continue to be competitive. I believe it is not in Hong Kong's interest to do so. That fact is that the total value of our trade in goods and services in a year is equal to well over 250% of our GDP. Business engaged in these externally-orientated economic activities want certainty in exchange rates. I realise one of the most important factors of competitiveness is about cost, but there are other important factors too. We know strict adherence to the rule of law, the need for a corruption free society, predictable government policies as well as free flow of information and capital are other important factors which will put investors, local and international at ease. These are the areas where we have done well in the past. I want to assure you these are the areas we will be working hard to preserve and enhance.
As a result of the Asian financial turmoil, we have in Hong Kong a much higher interest rate and a much tighter liquidity situation in the banks. The depreciation of other currencies in Asia has also caused a substantial reduction in tourism. On the other hand, years of high property prices, high inflation and negative interest rates had created a bubble economy which needed to be corrected if we are to retain our commercial and economic vibrance. The Asian financial turmoil accelerated the pace of this correction. Indeed, we are now in the depth of a major economic adjustment, the result of which may be prolonged and painful to many in Hong Kong. We have negative growth in the first quarter and unfortunately, the economy will continue to be difficult for some time yet. In the longer term, after the adjustment process is over, Hong Kong will begin from a much lower base once recovery starts. This will help our competitiveness.
Indeed, we are not allowing the Asian financial turmoil to derail our long-term focus of building a Hong Kong which is fair, free, prosperous and economically competitive. Because of our very strong fiscal reserves - the government has no debt - and with a budget surplus of 5.8% of our GDP in the last fiscal year, we are able to, through the budget recently announced, continue with our massive plan of investment in infrastructure and education which will make Hong Kong much more efficient and competitive in the 21st Century. We can do all that, and still expect to achieve a budget surplus for the year. Indeed, despite the turmoil around us, we continue to build and invest for the future.
We also are continuing to build very heavy, beyond the (inaudible). We are going to spend all together $235 billion in investment in railways, in investment in roads, schools, new technology all the things that will make Hong Kong more competitive as we move into the 21st Century. So as you can see ladies and gentlemen because of our very strong financial position we have not been derailed, we have not been derailed, by the difficulties of the Asian financial turmoil. We will move forward as we originally planned.
I know that in Australia, there has been much debate about your role and your identity in Asia. I look at it this way - Australia has its own unique position. You are a nation in the Asia Pacific community and you have your own special contributions to make in the region. And from our perspective I can tell you that we place a great deal of importance on the Australia-Hong Kong relationship.
If you are talking about trade then certainly, over the years, your total trade mix has become more closely aligned with the Asia-Pacific region - I understand some 70% of your trade is now within APEC, while more than 50% of your total trade is within East Asia. Your abundant natural resources - for example, coal, iron ore and non-ferrous metals - helped fuel the rapid industrial growth in countries such as Japan, South Korea and, more recently, in China. Your excellent primary produce - beef and lamb, wheat and rice, sugar and fruit - is found in shops and supermarkets all over the region. Your wool - the first foundation of Australia's fortunes - is transformed into textiles and garments in mills and factories across the globe, but notably in China (25%), Italy and Japan. We in Hong Kong are big buyers of your gold, telecommunications equipment and transport equipment. So in terms of trade, Australia is firmly anchored as an important partner - and an important player - in the region.
While trade ties have drawn Australia closer to the region, you have also developed a special role promoting regional stability. Australia, more than any other country, has been effective in this regard. Because of Australia's deep knowledge of Asian countries' different histories, cultures and beliefs and your respect on these histories, cultures and beliefs, Australia has carved a reputation for itself as a facilitator and a moderator. You were among the first to initiate APEC, and this forum has not only helped bring down trade barriers but it has kept all of its members engaged in dialogue. It has unified the economies despite their diversity. In fact, you are developing closer and closer ties all throughout Asia.
Australia and Hong Kong have developed a close relationship over the years, and of course one of my main tasks during this visit is to forge even closer ties. We already share the same commitment to the free trade, free market economy and trade liberalisation, and we have many times found ourselves sharing the same views and ideas in such important fora as the World Trade Organisation and APEC. Indeed, we share many of the same values and commitments. With an improving relationship between China and Australia, we are confident that the long-term relationship between Hong Kong and Australia, which has been built up in the past, will be further enhanced.
Thank you very much.
End/Sunday, June 14, 1998
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