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Following is a speech by the Financial Secretary, Mr Donald Tsang, at the opening of the Hong Kong Economic Forum today (Monday):

Mr Yip, Dr Fung, Minister Shi, distinguished guests,

ladies and gentlemen,

Good morning.

On behalf of the Chief Executive, who is in our national capital and cannot be here, I extend my warmest welcome to you all, especially to those visiting Hong Kong for the first time. You have a very busy programme over the next few days and I trust you will achieve everything you set out to do here.

You come at a very interesting time in the development of our economy. On Wednesday we will celebrate the first anniversary of our re-unification with the mainland. Those of you who have been here before can see for yourselves that Hong Kong has carried on very much as usual since we became a Special Administrative Region of China last July.

A sharp downturn in our economic future as a result of the Asian financial turmoil has however overshadowed these historic political developments.

Indeed, last Monday the SAR Government outlined a package of special measures to smooth the path of economic adjustments. I will return to these later but, looking at the long term, our own history offers great insight and considerable reassurance.

We have enjoyed 36 consecutive years of economic growth. In real terms, our GDP has recorded an average annual growth rate of 7.5%. This is more than twice as fast as that of the OECD economies as a whole. On a per capita basis it was valued at US$26,500 last year and remains one of the highest in Asia. We are now the eighth-largest trading entity in the world. We are also a leading international financial and business services centre.

It was not all plain sailing for Hong Kong. Critical points that remain indelible in our recent memory include the global oil crisis in the 1970s, the political uncertainty about the future of Hong Kong in the early 1980s, the world-wide stock market crash in 1987, and the Mexico Peso crisis in 1995.

At least three main factors have helped us through these difficult periods. First and foremost is the high degree of resilience and flexibility that our economy demonstrated in adapting and adjusting to the various external and internal shocks.

Before October 1983 we ran a floating exchange rate regime. Adjustment mainly worked through movements in the exchange rate of the Hong Kong dollar. Since the adoption of the linked exchange rate system in October 1983, there has been remarkable stability in the exchange rate of our currency around the link rate of 7.8 Hong Kong dollars to 1 US dollar. Consequently, economic adjustment has been achieved instead through movements in the domestic wage and price levels, against movements in the US dollar itself and the interest rate trends. These adjustments, though often uncomfortable and at times painful, have proved essential in restoring competitiveness and thus vitality of our economy.

The second key factor lies in the mainland's open-door policy and progressive economic reforms since 1978. This has provided a completely new dimension to our overall economic growth and development. Indeed, it has facilitated our successful transformation from a manufacturing economy into a services-oriented one.

The third factor is our dedicated and consistent pursuit of free market policies. This has led the Heritage Foundation, for example, to rank us as the freest and most unencumbered economy in the world for four consecutive years.

We have never had exchange rate controls; there are no barriers to trade; our tax rates have been consistently low and our tax system simple. The Government has concentrated on developing a supportive infrastructure and a business-friendly environment, while avoiding interference in markets or in commercial decision-making.

This free market configuration is certainly in Hong Kong's best interests in today's increasingly globalised and competitive economy which engenders a new international discipline, greater co-operation between governments and central banks, and diversified market development beyond the traditional focus of the United States and Europe.

Buttressed by our benign policies, our commitment to the rule of law and freedoms of the press and of speech, Hong Kong's economic fundamentals have remained strong. We have a robust exchange rate regime, a sound financial system and a well-supervised banking sector. Our savings rate remains high. Our private sector is creative, entrepreneurial, flexible, responsive and lively even during very testing times. We possess a large cumulative fiscal surplus, substantial foreign exchange reserves, and remarkable productive capacity underpinned by a competent labour force and first-rate infrastructure.

These facts perhaps explain why we were the last and relatively the least affected in the region by the repercussions of the financial turmoil.

Besides our exchange rate stability, our interest rates are relatively lower than in most of the region; our share prices have fallen far less than most in US dollar terms and our inflation is on a moderating trend.

What, then, brought about the Asian financial turmoil? I can see two main lines of analysis. One line attributes the crisis to wrong government policies and therefore sees it as emanating from within the domestic economy.

Poor allocation of resources is widely identified as the main culprit. In particular, bank loans have been channelled to various vested interest parties, often with little regard to viability, productivity and repayment ability. A lack of effective bank supervision has exacerbated this situation.

The other view holds that easy credit, externally and internally, reflected a gross neglect of financial risks. This resulted in serious over-lending and a severe mismatch between the maturity structure of the banks' long-term assets and short-term liabilities. With the fragile banking sector, speculative attacks on the currencies concerned caused the financial system to crumble, with a domino effect spreading across the entire region.

Both analyses contain some truth. With hindsight, some of the East Asian economies were perhaps just too eager to maximise growth. They attracted major capital inflows to finance their development projects without paying sufficient regard to the question of sustainability and the risk involved. They over-extended themselves, asset price bubbles developed and currencies became highly vulnerable.

Hong Kong's previous crises have taught us one key lesson: there is every merit in letting market forces play their fullest part through the aftermath of a shock or the phases of a business cycle, but we cannot dispense with prudential supervision and regulation.

We have been doing this all along. As a result, our financial markets measure up to the global standards of efficiency, transparency and supervision quality.

Moreover, due to prudent risk management, adoption of best practices and vigorous supervision, our banks are able to absorb the impact of the sharp asset price deflation and the tough financial environment in recent months.

Hong Kong has developed into the region's most resilient and healthy financial centre. Besides keeping our own house in order, we share the consensus that the severity of the Asian financial crisis and its grave ramifications call for the establishment of a new international financial architecture, with the following pillars for new international monetary order as cited by the International Monetary Fund:

* Fuller disclosure of economic and financial data;

* Regional surveillance of each other's economic policies;

* Financial sector reform, including strengthened prudential supervision and regulation;

* Effective procedures for orderly debt workouts, including effective bankruptcy laws;

* Orderly liberalisation of capital account transactions;

* Good governance and measures to tackle corruption; and

* Adequate resourcing of multilateral lending institutions, including the IMF.

While welcoming these stipulations, I would like to offer a few comments. First is the question of resourcing. The IMF deserves every credit for mobilising in a matter of days total financing amounting to US$110 billion to deal with the Asian crisis. However, against the rapidly growing size of the global financial system, the total resources in hand with the international financial institutions remain small: a total of US$400 billion for the IMF, World Bank and Asian Development Bank put together. Thus, the quota increases agreed in Hong Kong last September for the IMF are, in my view, the minimum necessary for maintaining global financial stability.

I would therefore urge the major contributors to ratify the New Arrangements to Borrow, which Hong Kong was the first to do. I believe the international community should likewise fully support the quota increase for the IMF, which should be done as quickly as possible.

Secondly, a favourite excuse of those who are not inclined towards increased funding for the international financial institutions is the argument of moral hazard. Some argue that the very existence of official funding induces the private sector to lend recklessly.

While I do not dispute the conceptual validity of this argument, I must point out that when we are faced with real and mounting financial problems with dangerous repercussions, speedy and decisive corrective action is essential for preventing a widespread systemic collapse. Certainly those being rescued will still have to pay their price afterwards.

Thirdly, there is the issue of going for a single global standard of financial "best practice". In macro terms, this means greater transparency and disclosure, greater accountability, stronger domestic financial systems, liberal trade, open financial markets, a high quality of regulation, and independent legal processes. It also encompasses micro improvement at the corporate level, which means moving closely to the changing market and its advancing technology in corporate governance or in the institutional framework within which businesses operate.

The challenge ahead is to promote shared growth, to forestall future crises, and to design a new international financial architecture that promotes resilient financial systems, efficient global resource allocation and a level playing field. We may even achieve a unified global standard. As one of the freest market economies in the world and as a leading financial centre, Hong Kong is enthusiastic to play its part and, naturally, will be happy to share the benefits produced.

At the moment, we are still suffering from the contagion effect of the regional financial turmoil and from the pains of consequential adjustments. Public confidence has been seriously shaken by the drastic correction in local share and property prices, 2% negative GDP growth for the first quarter of 1998 and an unemployment rate of 4.2% for the quarter ended May.

Contrary to what the critics say, the Government has all along been sensitive to the difficulties faced by the whole community and by particular sectors in the economy. We feel their pains and strains. This is why we have introduced a series of redress measures over the past few months.

In February, my 1998 Budget sought to address the adverse impact of a downturn in the economy. It secured our largest-ever package of tax concessions, infrastructure investment and public expenditure. This was followed by a package of seven measures I announced at the end of May, to help ease the immediate liquidity problem, to increase flexibility of transactions in the property market, and to boost tourism.

Then, as I mentioned earlier, the administration announced a further substantive package of measures last Monday. These are designed to ease the credit and liquidity crunch, to stabilise property prices, to ease the cost burden to families and businesses, and to help adapt to the economic adjustment process generally for the next three quarters.

We want to demonstrate once again that the HKSAR Government acts firmly and consistently, and is alert and responsive to the needs of the community. As our fellow citizens now know very well, the package comprises measures to exempt interest income earned locally from profits tax, help small and medium-sized enterprises to obtain loans from lending institutions, suspend the public land sales programme for nine months, expand a number of subsidised home purchase schemes, cut duty on diesel, lower declaration charges for merchandise trade, and provide a rebate of rates.

In drawing up this package of measures, we are guided by the following principles:

* Maintain investors' and international community's confidence in Hong Kong;

* Observe market discipline and uphold prudent business practices;

* Ensure no adverse impact on the linked exchange rate system; and

* Uphold prudent management of public finances.

Adherence to these crucial principles for the Hong Kong economy is of utmost importance. To dispel some of the misconceptions which critics have aired since last Monday, I feel I must reiterate what I have clearly said earlier.

Our latest package does not, in any way, depart from the Government's long-standing policy of non-interference with the operations of the market. We are just responding to market conditions. Our aim is to facilitate economic adjustment, not to tamper with normal market activities. Take the case of temporary suspension of our land sales programme. This measure is adopted because, triggered by the regional financial turmoil, our property market is undergoing a major correction rarely seen before in terms of both speed and scale.

We are keenly aware that to most property owners, their property is not just their home. It is also their life-long investment. For many, it is also their bank collateral for business credits. The decision to suspend land sale was therefore taken to forestall a continuous downward spiral leading to full-scale collapse. This will have crucial stabilising effect on the economy. Yet adjustment to the property market will continue to take its natural course.

Inevitably, implementation of the package will worsen the Budget balance for the current financial year. Discounting other deviations in revenue and expenditure in the course of the year, this package is expected to turn an estimated surplus of $10.7 billion into an estimated deficit of $21.4 billion in the 1998-99 financial year. The deficit represents just 1.5% of the GDP for the year. Moreover, taking this deficit with last year's surplus of $80.9 billion, the combined balance for two years is still well in the positive. Let me emphasise that our move in no way signifies loosening our fiscal discipline or compromising our sound financial management.

I also stress ( yet again ) that we staunchly stand by the linked exchange rate system. There is always a price to pay for maintaining any monetary system. Our system, which requires greater self discipline and less subjective manipulation, is no exception. But it is also clear that the liquidity crunch and high interest rates facing us today are induced largely by the regional financial situation, not locally. The Hong Kong dollar link is a vital anchor to us when the sea is rough. The consequence of an anchorless drift would be very much worse.

Finally, I hope that through collective and concerted international co-operation, the affected East Asian economies can gradually restore their strength. With the Japanese Government exerting its efforts, the Japanese economy can pick up its growth pace and the Yen can restore stability. By that time, Hong Kong, underpinned by its own sound economic fundamentals and backed by the robust mainland economy, should be better placed than most in the region to recover and resume its normal growth path.

Thank you.

End/Monday June 29, 1998

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