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Following is a speech by the Financial Secretary, Mr Donald Tsang, in the debate of the "Motion of Thanks" in the Legislative Council today (Wednesday):

Madam President,

A wide range of views have been expressed on the Policy Address which the Chief Executive announced in this Council last month. Honourable Members have debated on the Address at great length. The Administration is grateful to all for the concern they have shown for the Policy Address.

This is the second Policy Address by the Chief Executive. Let me stress that the formulation of the Policy Address is not a routine matter year after year. Nor is it some empty talk which leads us nowhere. It is the most important and serious task of the Special Administrative Region Government on its annual agenda. The Policy Address gives an account of the Administration of the SAR and sets out our plans for the future. Under Article 64 of the Basic Law which deals with accountability to the legislature, the SAR Government should present regular Policy Addresses to this Council. This also underlines the importance of the Policy Address to the SAR.

The first and foremost principle in formulating the Policy Address is to assess accurately Hong Kong's present situation and its future needs so that the most appropriate macro policies can be worked out within the availability of resources. The Policy Address reflects the Chief Executive's thinking in governing Hong Kong and his ideas about our future development. It also embodies the policy objectives and future directions for each and every Policy Bureaux. The Policy Address is produced after a long but extremely careful process, starting from the deliberations on resource allocation in May and June each year. Under the leadership of the Chief Secretary for Administration and in consultation with the Directors of Bureaux, consensus is reached on the overall allocation of resources after careful consideration. With a view to meeting the Chief Executive's undertakings and vision for our future, we will decide on the priorities in public expenditure for the coming year. It is only after that will the drafting of the Policy Address start. So it is in fact a collective effort and is an expression of the team spirit in the civil service. It also signifies our total support for and commitment to the Chief Executive's vision. The Policy Address can therefore be said to be the collective view of the Administration on how to lead Hong Kong into the future. We are all gratified for the support from Honourable Members and the public for the Policy Address. For everyone of us who have been involved in the formulation of the Policy Address, we are equally mindful of the criticisms from Honourable Members and the public on the contents of the Policy Address, whether these criticisms are fair or not.

Let me now turn to a few points on our economy raised by Honourable Members.

A review of the economic situation

I of course share Members' concern about the economic situation. We have discussed this matter often in this very chamber, and in other fora, since the beginning of the year. I have pointed out in previous debates in this Council and in meetings of the Financial Affairs Panel that the financial crisis has hit our economy hard. We are going through a prolonged and painful, but necessary adjustment. Over the past 12 months or so, we have witnessed major blows brought about by the adjustment which in many ways are unprecedented in Asia's development. The extent and severity of the ensuing economic fallout has been considerably worse than anyone's initial expectations.

The government has faced criticism about its economic forecasts. Some have said- that we have been complacent, myopic, unable to keep track on development and inaccurate in our forecasts. We estimate that GDP will contract about 4% in 1998. This is a substantial downward adjustment on the figures released in the Budget when the full scope of the Asian financial crisis was not yet known. We are not alone in this regard - private sector analysts, banks and renowned organisations such as the International Monetary Fund have all adjusted their GDP forecasts. Governments in Asia, America and Europe are doing the same. Clearly we need to do better in the future. The events have also taught each one of us, senior civil servants and Honourable Members alike, to be more self-critical, more constructive and more respectful to the jobs the Hong Kong public has entrusted to us.

We have also learnt that the Asian financial crisis is more complicated than two recent and similar events - the crisis of the Exchange Rate Mechanism in Europe in 1992 and the Mexican peso crisis in 1995. Domestic financial laxity and economic policy distortions were common factors in Asia. The wild swings of fast-flowing and highly-leveraged speculative capital in narrower emerging markets led to strong overshoots which were highly destabilising and severely eroded investor and consumer confidence.

In Hong Kong, we had the added pressure of an attack by manipulators, who created a double-play in the stock and money markets with the sole intention of profiting from the instability they themselves created. We owe a duty to the public to protect the linked exchange rate system and to restore order and a level playing field to the markets. As a government we could not stand idly by and allow manipulators to wreck our markets and I believe the community shared that concern. Exceptional circumstances require exceptional measures. The recent market conditions show that the measures we have introduced is taking effect. But, we are far from complacent and we know we might not have seen the end game yet.

As Members know, we have introduced several packages to help stimulate the economy. Tax and other concessions announced in the Budget will cost $13.6 billion in the current year. Relief measures announced in June will result in a swing in the fiscal balance of over $32 billion. Together, they represent more than 3.5% of the GDP. We will reap the full benefits of these measures within the next 24 months during, hopefully, the recovery of our economy. In addition, over the next five years, we will spend $235 billion on infrastructure development which will provide tens of thousands of jobs. All of these measures are designed to stimulate the economy and their benefits will become apparent once sentiment improves.

We must, however, recognise the constraints against which the Budget and its related fiscal measures are operating. Any unduly large fiscal deficit in the current financial year may frighten investors and outside observers in regards to our excellent record for fiscal prudence. There are also the strict fiscal disciplines enshrined in the Basic Law.

As always, I welcome Members' input on ways in which the government can best make use of its limited resources during such trying times. Fiscal measures are not the only option. What we really need is a concerted effort of the government , Honourable Members and the community as a whole. If we make the best out of our own economic potential, we will be able to grasp the earliest opportunity for recovery.

Recent signs have been encouraging, though. Our financial markets have stabilised somewhat. Shorter-term liquidity has eased and interest rates are coming down following recent cuts in the United States. The Hang Seng Index has rebounded. The Japanese Yen has strengthened and stabilised and there have been noticeable improvements in the regional financial environment. The local property market has become more active - there have been more transactions, greater price stability and in some cases even a slight reversal of earlier price declines. Inbound tourism has improved for three consecutive months. Unemployment and underemployment rates have tended to stabilise.

For the time being, the economy will still be overshadowed by some distressing indicators. As one of the world's most externally-oriented economies our recovery is dependent as much upon an international recovery as it is on improving local market sentiment. Nevertheless, Hong Kong has successfully overcome previous economic hardship, each time emerging stronger and wiser for the experience. As our Chief Executive highlighted in his Policy Address, we should look beyond current difficulties and cast our vision far and wide. His policy initiatives are pertinent and far-sighted. There are no gimmicks, because there are no quick fixes to the global financial crisis. Our Chief Executive's proposals are what the economy needs for lasting, longer-term development.

Financial Regulation

As you know, we announced a series of measures in September to improve the supervision on and operations of the financial markets. Some of these measures have been put in place. Consultation with the industry on others is taking place to enable their early implementation. The Chief Executive highlighted the need to take a strategic view of what needs to be done to ensure that our financial market can support the expansion of our role as an international financial centre and fund raising centre for the Mainland. Strengthening of our financial regulatory regime is essential to facilitate market development. The CE has asked the Secretary for Financial Services to take a more active role in co-ordinating the efforts of the regulators and market operators. I am glad to note Members' support for this approach. Obviously, the strengthening may entail additional resource requirements and may also need the back up of statutory powers. I hope these proposals, once formulated by the Administration, will have the support of this Council.

I heard the strong call for constant improvement in the quality of the public service, including the making and delivery of important financial and monetary policy decisions. I can assure you that your Administration is doing just that. Our actions are on the record. They have attracted extensive comments worldwide in addition to those expressed in this Chamber. In this connection I find it necessary to react to an interesting notion raised by one or two Members to the effect that this Administration is incapable of making the right decisions affecting the markets because incumbent senior financial policy officials do not possess prior market experience. If I may invite these one or two Members to visit the curriculum vitae of Finance Ministers of the G7 or indeed the top 12 economies with a significant financial services sector besides Hong Kong. You will find that only two of them came to their present job with direct market experience. The rest of them learned about their markets in their jobs and they all seen to serve their financial services sector remarkably well. Most of these advanced economies realise that the decision makers, with the broader vision of the economy and society, and the public interest at heart, are assisted by the most professional people in the field. In our case, the Administration operates on the advice and help of the Hong Kong Monetary Authority, the Securities and Futures Commission and the many advisory bodies, which tender the full spectrum of professional and market views. Indeed the private sector tends to select their CEOs largely on the basis of their administrative and business skills and leadership quality, rather than the specialist knowledge of individual products.

I have raised this specific issue to illustrate my earlier point that we all need a greater measure of humility, self criticism and collaborative spirit in the debate in this Chamber in order to best serve our community at these critical times.

Thank you Madam President.

End/Wednesday, November 4, 1998

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