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The following is the speech by Mr John Tsang, Director-General of the Hong Kong Economic and Trade Office in London
at the Hong Kong Major Transport Projects Seminar held in London today ( Wednesday ):
"Hong Kong: Coping with the Asian Financial Crisis"
Mr Chairman, Secretary of State, Distinguished Guests, Ladies and Gentlemen,
It is my great pleasure this morning to address the Hong Kong Major Transport Projects Seminar organised by the UK Department of Trade and Industry. I am heartened by the importance that DTI attaches to the Hong Kong market and the encouraging response we have seen in the audience today.
As you all know, the past year has been one of the most difficult periods the Hong Kong people have ever encountered. It has nothing to do whatsoever with the political transition which many feared. Instead, we were struck hard on the economic front which few had foreseen.
The doomsayers were predicting at the time of our reunification with China some 17 months ago that Hong Kong would be swept down some political blackhole and disappear forever from the face of the earth. We did not. We are still here, alive and well and kicking. We did not fall into the trap of self-fulfilling prophecy by talking ourselves into misery. In fact, the political transition was so seamless that even some of our most ardent well wishers were caught by surprise. The "One Country, Two Systems" principle has been scrupulously carried out by the Beijing leadership. Their hands-off approach has been exemplary and Hong Kong people have been running Hong Kong with a high degree of autonomy as stipulated in the Basic Law. We are exercising our rights and freedoms as we have always done. Our Legislative Council elections held in May, with record turn-out rates on all counts, produced a legislature which includes all shades of political affiliation and all sectors of society.
Whilst we in Hong Kong were soaking up the euphoria of the reunification on 1 July, the Thai Baht began its free fall on 2 July spreading the financial turmoil across the region. Like most of us in Asia, we were caught off-guard. The impact of the Asian contagion, coupled with our hitherto overheated economy, triggered an unprecedented and extremely painful process of economic adjustment. Tourism receipts dwindled; property prices and rentals dropped by half; stock market capitalisation went down at one stage by over 40%; and unemployment rose to a 15-year high of 5.3%. We experienced negative growth in the first half of this year, and for 1998 as a whole the economy is expected to shrink by 4%.
So Hong Kong is hurting, and hurting quite badly in some sectors. But we cannot think of too many economies that would still be functioning normally and smoothly after such a drastic turnaround in economic fortune over such a short time span. The speed at which the Hong Kong economy has adjusted reflects our flexibility, our efficiency and our robustness. The financial crisis exposed some fundamental weaknesses in the East Asian economies. But for all our difficulties, it also highlighted the fundamental strengths of Hong Kong.
First of all, it showed the merits of prudent fiscal management which eliminates the need for government borrowing and which allows us to accumulate a sizeable reserve. Despite the current economic adjustment, Hong Kong has not come to a standstill. We are continuing to invest in our future, in our infrastructure and in our human capital. We will be spending over the next five years some ¢G20 billion in new infrastructure projects, the very subject of today's seminar. The site of the Kai Tak airport will take off into the 21st century as a garden city for more than 300,000 people. In the next financial year, recurrent government expenditure is to rise by 4%, the bulk of which will go into health, education and welfare. With our long history of fiscal discipline, we were still able to cut taxes earlier this year for both individuals and corporations, and introduce the largest ever range of tax concessions in our history. Top rate for corporate tax now stands only at 16%.
Secondly, it showed that we have well-regulated banking and financial systems. Despite the financial shock waves in the region, our banking system continues to operate normally with no sign of breaking down. Our banks are prudently managed with very high capital adequacy ratios and they are not in any danger of being dragged under by the abundance of bad debts in the region.
Thirdly, it showed that our fixed exchange rate and currency board system can withstand the enormous pressure of a regional financial meltdown. Despite the many speculative attacks, the Hong Kong dollar today is the only freely convertible currency in the region that has survived the storm without a devaluation. We still maintain an enviable foreign exchange reserve of some US$90 billion, the third largest in the world. And we have every determination to maintain the Hong Kong Dollar link with the US Dollar. The reason is very simple. In a highly externally oriented economy such as ours, with trade accounting for more than 250% of GDP, currency stability is of utmost importance. Indeed, it is a necessity. That is why the Hong Kong Monetary Authority took the unprecedented step of buying a sizeable amount of equities in the second half of August.
The unprecedented step was taken under extreme market conditions. The Hong Kong SAR Government was obliged to enter into the markets to protect and to reinforce the integrity of our linked exchange rate, and to restore order and a level playing field in the markets for the investors. We bought shares not to prop up the markets at a specified level, but to stop the contrived shorting of the Hong Kong dollar and equities in the stock and futures markets. The double play was designed by the manipulators to create panic for the short positions to be profitable. Our actions did not, by any stretch of imagination, signal a departure from our commitment to free trade and open markets. It was just an exceptional measure during an exceptional period.
Following our surgical incursion into the markets, which lasted less than two weeks, my Government introduced a series of measures to strengthen further the currency board arrangements for our linked exchange rate with a view to boosting liquidity in the interbank market, dampening excessive interest rate volatility as well as providing greater transparency in the system. The Hong Kong Monetary Authority provided a clear undertaking to all licensed banks in Hong Kong to convert Hong Kong dollars in their clearing accounts into US dollars at the fixed exchange rate. This explicit convertibility undertaking is a clear demonstration of my Government's commitment to and confidence in the linked exchange rate system. We also put forward a programme of measures in the securities and futures markets to enable us to better withstand cross-market manipulation. An independent limited company has recently been formed to manage the stocks acquired in the August operation. The company, custodial in nature, will not conduct active trading of the portfolio. It is responsible for identifying value-added opportunities for the eventual disposal of the shares with minimum disruption to the market.
Our counter-speculation activities have succeeded in its objective in restoring order in the markets. The stock market has now turned around and is less volatile. Shorter-term liquidity has eased and interest rates are coming down following recent rate cuts in the United States. However, there is still a myth in the market that our linked exchange rate would not survive the event of a devaluation of the Renminbi. This notion is misconceived. First of all, there is simply no perceived economic need for a devaluation of the RMB. The Chinese economy which is growing at some 8% for 1998 as a whole has a trade surplus of US$30 billion for the first three quarters of the year. It has foreign exchange reserves of US $140 billion - the world's second largest. These are clearly not the classical conditions for a devaluation. China is also taking a long-term view. If the RMB were devalued, it would simply trigger another round of competitive devaluations in the region which would retain the original relativity at the end, and tarnish along the way China's hard-won reputation as a responsible player in the global trading and financial scene. All these factors explain why the leadership in Beijing has repeatedly affirmed with a great deal of confidence their determination not to devalue the RMB.
Even in the unlikely scenario that the RMB were devalued, there is no apparent reason, economic or psychological, why Hong Kong Dollar should follow suit. We are linked to the US Dollar and not the RMB. We are at different stages of economic development. We have separate currency systems operating under completely different conditions. As a matter of fact, since we introduced the linked exchange rate in 1983, the RMB has devalued several times and its exchange rate against the US Dollar is about half of what it was a decade ago while the Hong Kong dollar remained fixed at the original rate. Furthermore, it is not difficult to comprehend that a RMB devaluation would actually benefit Hong Kong's economy. The devaluation would increase exports from the Mainland, many of which would pass through Hong Kong using our services and infrastructure facilities.
Some may wonder whether the linked exchange rate has undermined Hong Kong's competitiveness. Yes, we may be more expensive than some of our Asian neighbours, but first rate profitable business locations do not come cheap. Look at London, New York, Frankfurt and Tokyo. Moreover, businesses look at bottom lines, and not just costs. Today, there are thousands of overseas companies based in Hong Kong, many with regional headquarters there. Why? Because they see the value of Hong Kong. They see the merit of locating in a city with a stable government, a free and open economy, free flow of information, the rule of law and superb infrastructure facilities. The current economic adjustment, which has considerably brought down the cost of doing business in Hong Kong, would provide excellent opportunities for overseas investors.
The seminar today is about opportunities in Hong Kong's transport sector. Let me use this sector as an example of how Hong Kong provides the right environment for private enterprises to flourish. First and foremost, my Government believes in the market. We encourage the private sector to participate to the maximum extent possible. An excellent example is our "Build, Operate and Transfer" approach which we use in constructing our tunnels. Under the BOT scheme, a company awarded the franchise will construct and then operate the tunnel for a specified time before the tunnel is transferred back to government ownership. This approach allows us to utilise the resources and expertise of the private sector. It also saves the taxpayers' money and allows the costs of construction to be recovered by tolls charged on road-users under the "user pays" principle.
My Government is also committed to introducing even further competition in the market. The bus service on Hong Kong Island, for instance, used to be a monopolistic market. We have widened the field in recent years. Less than three months ago, a new bus operator - New World First Bus Services Limited - was formed to take over some of the routes from the old franchisee and became a new operator. Closely associated with our pro-competition stance is the Government's determination to provide a level playing field. Hong Kong is an international city. We welcome foreign participation in major public transport projects in the roles of consultants, planners, contractors, investors, operators, franchisees or suppliers. Take our Airport Core Projects as an example. In value terms, contractors from 17 different countries shared about three quarters of all the contracts awarded. Needless to say, British companies, with your knowledge and long history of doing business in Hong Kong, took up a substantial share. Indeed, the buses for the New World First Bus Services Limited that I have just mentioned were supplied by a UK company.
Ladies and Gentlemen, Hong Kong has seen the vicissitudes of fortune. We have successfully overcome previous economic hardship, emerging each time stronger and wiser. The current financial turmoil, though painful, should be no exception. Indeed, recent signs have been most encouraging. The Hang Seng Index has rebounded. The local property market has become more active with more transactions and greater price stability. Inbound tourism has improved for three consecutive months. Unemployment and underemployment rates have stabilised. Insofar as the external conditions are concerned, the Japanese Yen has strengthened and stabilised. There have been noticeable improvements in the regional financial environment. The G7 economies, under the leadership of the UK Government, have taken concerted efforts to stimulate the global economy and to build a better regulated international financial architecture. We see flickers of light at the end of the tunnel.
In conclusion, I would like to add that as we have done so many times before, I am confident that the usually resilient and resourceful Hong Kong people will ride out this storm. There is an abundance of opportunities and challenges in Hong Kong. This is a good time to make a head start if you have not already done so. We look forward to working with you in this most business friendly and most rewarding location.
Thank you.
End/Wednesday, November 18, 1998
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