*********************************

Following is a speech (English only) by the Financial Secretary, Mr Donald Tsang, at "FORTUNE CEO" Roundtable this morning (Friday):

Distinguished guests, ladies and gentlemen. Good morning, and a warm welcome to Hong Kong.

I am very happy to be able to talk to such a high-powered gathering. Many of you may have visited Hong Kong before, but this is an opportunity to rediscover for yourselves the underlying strengths of our economy and our weaknesses, particularly the institutions which have withstood a 'test of fire' over the past year or so.

A couple of years ago, I recall Fortune Magazine was predicting the 'Death of Hong Kong'. We of course never believed that would happen, but I suppose our side of the story - a story of stability of seamless transition - hardly made sensational reading. As you can see for yourselves Hong Kong is alive and kicking, despite the economic downturn. And if I can borrow the words of Mark Twain: "The reports of our demise were greatly exaggerated."

What I wish to do this morning is to share with you a few disparate thoughts of mine, freshly conceived through the prism of the current financial turmoil, on the growing and synergistic relationship between the Mainland of China and her unique Special Administrative Region in Hong Kong. These two entities, belonging to the same nation, are developing their respective positions together, and I stress together, in the global economic stage in the 21st Century.

Let's start with the current financial crisis. It is true that the recent global financial shocks have increased investor wariness towards all 'emerging markets', a catch-all - wrongly - applied, in my view, to Hong Kong. The term 'emerging markets' is hardly well-defined and may include places of great diversity, and at different stages of development. It included Hong Kong, with the per capita GDP which exceeds that of the United Kingdom or Canada or Italy. Certainly, not only 'emerging markets' fall prey to international manipulative forces. OECD countries have in the past found their currencies under attack. You must remember for instance what happened in Europe in 1992. And some of them have indeed caved in. I believe what distinguishes a very successful CEO is one who does not take a broad-brush approach when a crisis emerges or when uncertainties take hold, one who discriminates one market from another in the same region, and one who decides how or when to enter a market, or in assessing various investment options, on the basis of calculated economic strengths and dispassionate financial considerations. To a discerning CEO's eyes, Hong Kong with the Mainland of China will be a class act in the 21st Century.

Since the financial turmoil began in July last year, opinion has swung full circle on the development of the East Asian 'Tiger economies'. Where once there was praise, there is now mostly criticism. And in the often simplistic distillation of news and views in the media, the broad brush has again - wrongly - been applied to all of the Tigers. Hong Kong certainly has not been 'declawed'; nor has Singapore. The Mainland of China and Taiwan are faring better than most.

Hong Kong's resilience has been legendary. Over the years, we have consistently achieved substantial growth. One reason is the tremendous work ethic of the Hong Kong people and their entrepreneurial flair. Another is that we have established the necessary legal institutions to safeguard the operation of one of the world's freest economies. These institutions have been reinforced under the 'One Country, Two Systems' formula and our constitutional document the Basic Law. The influential Heritage Foundation of the United States rates Hong Kong highest for openness; the International Institute for Management Development (IMD) ranks Hong Kong among the top three for competitiveness in 1998. Hong Kong is also recognised as one of the least corrupt economies in Asia - thanks in no small measures to the comprehensive public education and awareness programmes developed and promoted by our world-class Independent Commission Against Corruption.

Hong Kong's development over the past two decades has been quite remarkable. Also remarkable - in terms of sheer size and scope alone - has been the economic development of the Chinese Mainland after the open door policy was introduced in 1978. Since then, China's GDP has quadrupled. The Mainland is now the world's biggest producer of grain, cotton, coal, steel, and a number of manufactured products including TV sets. A rising per capita income is also slowly transforming the Mainland into an increasingly attractive consumer market.

Economic statistics best tell the tale of the Mainland of China: the total value of imports and exports increased from US$20 billion in 1978 to US$325 billion last year, an average annual increase of 16%. During the same period GDP grew from 362 billion Renminbi to 7,477 billion Renminbi (US$902 billion). Foreign trade was 9.8% of GDP in 1978, and 36% in 1997. It is a pretty well external oriented economy. China is now among the top 10 trading nations in the world. Expressed in dollar terms, the share of external trade in the Chinese economy may seem even higher than that of the United States, but other methods of calculation, such as 'Purchasing Power Parity', may reflect a different picture. Nevertheless, the successful promotion of foreign trade since 1978 has been a major contributing factor to economic development. For example, it was estimated that nearly 9% GDP growth recorded last year in the Mainland of China, 2.9% was as a result of foreign trade. Given that Guangdong Province accounts for about 40% of China's total foreign trade it is easy to see just how many opportunities there are for us here in the adjoining Hong Kong. This is best seen in the size of Hong Kong's 'external' workforce in Guangdong, where it is estimated some 5,000,000 people are employed by businesses or concerns wholly or partly-owned by Hong Kong companies.

The Mainland has attracted large amounts of foreign investment, most of which is channeled through, or sourced from, Hong Kong. In recent years China, has continuously been the second-largest recipient nation of Foreign Direct Investment in the world after the US. At the end of 1997, total realised FDI in the Mainland stood at US$220 billion, of which US$121 billion was from Hong Kong. Thousands of foreign-funded enterprises have started business in the Mainland. A natural consequence of this is the development of a regime of laws and regulations governing business transactions. Increasingly, more laws are being adopted to standardise the development of a socialist market economy. While the idea of a 'Third Wave' is coming into vogue in Western Europe, the unique experiment of 'socialism with Chinese characteristics' has long been a source of interest in this part of the world.

The regional financial turmoil has had some effect on the Mainland's trade. Exports in the first half of this year are down 6.9% year-on-year, due mainly to depressed sales to Japan and Southeast Asia. To counter the negative effect this will have on GDP, the Central Government has adopted a policy aimed at expanding internal demand. In August, the Central Government announced the issue of 100 billion Renminbi in new long-term bonds to finance infrastructure development. Half of the bonds will be issued before the end of the year; the other half next year. The bulk of the money will be invested in flood-control and environmental protection schemes, as well as communications and urban development. In other words, the historic crisis we faced as a nation because of the flood has been seized upon as an opportunity for economic development. The full investment of these funds, equally matched by banks, will add about 2% to GDP. Total state debt will then be around 10% of GDP. During his official visit to the United Kingdom earlier this year, Premier Zhu Rongji said bad debts in the state banking sector were about 6%. In this regard, the Central Government has this year issued 270 billion Renminbi of special bonds for state banks to strengthen their capital base. By the end of July this year, total savings in the banking sector had risen to 5,074 billion Renminbi, an increase of 743.7 billion Renminbi over last year. Long-term government bond issues will help to channel savings into investment. The package of economic measures implemented by the Central Government to stimulate the economy, including increased investments in infrastructure, further liberalisation and regularisation of the financial sector, you have seen some of that happening, and deepening of reforms of State-owned enterprises, will all provide more business opportunities, and application of the Hong Kong entrepreneur skill in Hong Kong and for international investors.

With a population of 1.2 billion - most of whom are rural 'peasants' - the Mainland's per capita income level is still low, despite the rapid growth in the past 20 years. Recent World Bank figures put China's per capita GDP at US$3,570, which signifies that China has just left the category of poor nations to become a member of the so called middle-income group. At a plenum meeting of the ruling party this month, the leadership stressed again that the Chinese economy is far from being developed, particularly the rural sector. Basic conditions in China - a large population and poor foundations - will continue for a comparatively long period. The fundamental task of the State, in the foreseeable future, will be to concentrate on economic development and modernisation. And what happens over the next 11 years will be crucial. The goal is to double the GDP by 2010. This will lay a solid foundation for the basic modernisation of China by the middle of the 21st century. It is inevitable that China will continue to develop, to open up and to modernise. At the same time it is inevitable that Hong Kong stands to gain greatly from this process.

Our national leaders are keeping their vision long and wide on future development. China has consistently adopted this 'opening-up' policy, which has grown out of a deep sense of history. This Century began for China with humiliation by the Eight-Power Allied Forces occupation of Beijing in 1900. There followed two civil wars, embargo in the 1950s and isolation in the 1960s and most of the '70s. Finally, China abandoned damaging political campaigns to embark on the road to modernisation. This economic development has sprung from a deep sense of national pride. We need to go forward as a nation, and in so doing we need to be more open. Now the nation is looking ahead into the new millennium with renewed self-confidence, willing and wanting to interact with the world on an equal footing. Hong Kong's role in aiding this process will become crucial as China meets the challenges and opportunities of globalisation. We in Hong Kong understand our role and our responsibility in this process.

Hong Kong will continue to make use of, and benefit from, a huge and developing hinterland. At the same time, we will derive our strengths from a socio-economic system distinct from the Mainland under the 'One Country, Two Systems' formula. As an international financial and trading centre, Hong Kong provides the funding, the skills and spark for the development of our nation. We will not only remain, but will build on our role as, the pre-eminent gateway for the world's trade and investment with China.

The strategy for development here and in the Mainland is to focus on science and education. China is attaching great importance to the application of the latest technological achievements, and is encouraging enterprises to engage in research, development and technological upgrading. In March this year, the Science Academy of China presented a paper on the establishment of a system for innovation, to serve as the basis for sustainable development. In Hong Kong, the Chief Executive's Commission on Innovation and Technology has recommended that the Mainland's talent and research capability may supplement the specialised stream of R&D activities in Hong Kong. For example, Hong Kong's entrepreneurial research work is ideal in developing any commercial opportunities which may stem from scientific research results on the Mainland.

Hong Kong will continue to strengthen its fundamentals to take full advantage of China's development. In his annual Policy Address to the Legislative Council earlier this month, the Chief Executive emphasised the commitment of the HKSAR Government to uphold the rule of law and protect the independence of the Judiciary; to facilitate access to information and to guarantee freedom of speech and of the press; to continue to manage our economy on a free-market basis within a regulatory framework which creates a completely 'level playing-field'; to maintain a strong stance against corruption; and to preserve the international character of Hong Kong. These are the qualities, these are the ingredients of Hong Kong which I might suggest are unrivalled in the rest of Asia. To reinforce our links with the international community, the Chief Executive also announced the appointment of a Council of International Advisers, most of whom are CEOs from among the FORTUNE 500. The Council will help the Hong Kong SAR Government broaden its international commercial prospects.

The Mainland is also looking to Hong Kong as a conduit to absorb modern know-how and management skills. In discussions concerning the reform of State Owned Enterprises, Chinese economists have stressed the need to establish a modern enterprise system. They have asked: "Why is that China is the number one producer in the world of coal, steel, cement, and a number of manufactured products, yet not one industrial enterprise has ever made it into the ranks of the FORTUNE 500?" Mergers and reorganisations may eventually address this anomaly. In fact consolidation will lead to that direction in any case. The reforms now in progress will lead to the formation of large but efficient enterprise groups with trans-regional, inter-trade, cross-ownership and trans-national operations, things that cannot be done in Hong Kong. The experiences, successes and failures of major multi-national corporations will undoubtedly be studied with interest by Chinese enterprises. At the same time there is a wealth of experience readily available in Hong Kong which will help take this process forward.

Here lies the prospects of Hong Kong and its motherland.

It would be worth your while - if you have the time - to take a trip to the Mainland to see for yourselves the tremendous change and development taking place. You will find the Chinese people friendly, open and receptive to new ideas. You will be stopped wherever you go by students or young business people wishing to brush up on their English skills and to learn more of the world in which we all live. We believe that we all live on a same boat. You will find in them a desire to work hard to improve their lot. Not much different, in fact, from people the world over. The only difference is that they belong to one nation of 1.2 billion strong.

Cosmopolitan Hong Kong will remain the city of choice for multi-national companies wishing to establish a base in the Asia Pacific region, as well as a foothold in China. And we in Hong Kong will continue to work to create the best environment for CEOs to work and live here. The more the better in my book.

Thank you.

End/Friday, October 30, 1998

NNNN