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Following is the full text of the speech (English only) by the Director-General of the Hong Kong Economic and Trade Office in London, Mr John C Tsang, at the Hong Kong Maritime Services Seminar held in London today (Thursday, November 19, London time):
"HKSAR -- Breaking the Waves"
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Ladies and Gentlemen,
Good morning and welcome to the Hong Kong Maritime Services Seminar.
First of all, I must thank the Chamber of Shipping, the International Chamber of Shipping and the International Shipping Federation for their expert assistance and enthusiastic support in the organisation of this seminar. It is the first time that my office in London has organised a dedicated seminar for the maritime sector and related services here. We are heartened by the encouraging response and no doubt this seminar will open the door for future contacts between the Hong Kong Special Administrative Region and the maritime community in the United Kingdom.
It has almost been a year and a half since the reunification of Hong Kong with China. Contrary to the predictions of the doom-merchants, the political transition has simply been plain sailing. The handover has been so seamless that even some of our most ardent well wishers have been caught by surprise. Hong Kong, as ever, works. The unprecedented principle of "One Country, Two Systems" is working extremely well. Hong Kong people are running Hong Kong, and we are exercising our rights and freedoms as we have always done. Our Government, institutions and way of life remain intact. The rule of law continues to be the pillar of our success, with the common law system underpinned by an independent and internationally respected judiciary. Our Legislative Council elections 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.
Yet, as you are all too well aware, the political stability has not provided Hong Kong with a trouble free year. We have probably had a more adventurous year than Sinbad the Sailor. We had the bird flu which we bravely contained; we had bouts of red tide which did not dampen for long the zealous enthusiasm of the world famous seafood lovers in Hong Kong; we had a massive drop in tourist figures which are now coming out of a reversed J curve; we had the unfortunate problem-laden opening of our spectacular airport which is now operating as intended; and above all, we had the fall-out from the Asian financial crisis which precipitated a sharp downturn in our economy. Like Sinbad, Hong Kong survives through all the turmoil, and hopefully, we'll bring home the princess at the end as well.
Today, the Hong Kong dollar 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. In the face of the concerted regional currency devaluation exercise, sceptics have questioned whether we will be able to maintain the link to the US Dollar. Our position is clear and simple: we cannot afford to lose the link and we have the means to defend it. Exchange rate stability is our life-line. Hong Kong's economy is very much externally driven with the total value of our trade at some two and a half times our GDP. There is no doubt in our mind that we will defend the link with every determination.
Despite our firmly articulated commitment to the linked exchange rate, Hong Kong dollar was ferociously attacked again in August this year as a result of the unstable external conditions around the world. Rumours also emerged in the market about the possible devaluation of the Renminbi and the subsequent delinking of the Hong Kong Dollar from the US Dollar. The pattern suggested a well co-ordinated attack involving very large funds. The shorting of Hong Kong dollar was accompanied by shorting of 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. It was under these extreme and unprecedented circumstances that the Hong Kong Monetary Authority launched its counter-manipulation activities in the markets in the second half of August. The aim of our incursion was to maintain the integrity of our linked exchange rate and to restore a level playing field in our markets. Claims that we have intervened to prop up the stock market at a certain level are simply not true. It did not, by any stretch of imagination, signal a departure from our commitment to free and open market principles. It was simply the implementation of a set of extraordinary measures during an extraordinary period.
In September, my Government announced a number of measures to strengthen 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 and help restore a level playing field for our investors.
Our counter-manipulation activities have succeeded in restoring order in the markets. The stock market has turned around and is now less volatile. The Hong Kong dollar has remained firm, and there has not been any selling pressure. My Government has not been active in the market since August 28. An independent limited company has recently been established 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.
These measures, together with the strengthening of the yen in recent weeks, have let the pressure off the Hong Kong dollar. However, sceptics may still doubt the long-term sustainability of the Hong Kong dollar in the event of a devaluation of the RMB in future. This is completely misconceived. First of all, there is simply no perceived economic need for a devaluation on the part of China. Labour costs in the Mainland are still the lowest in Asia, except for Indonesia, and that is after the massive devaluation of the rupiah. A competitive devaluation by China would lead only to higher import costs, higher interest rates and higher inflation which in turn will push up manufacturing costs. It will also stimulate another round of vicious competitive devaluations in Asia before returning to the original relativity, and tarnish along the way China's hard-won reputation as a responsible player in the global trading and financial scene. All these explain why the leadership in Beijing has repeatedly affirmed with a great deal of confidence their determination not to devalue the RMB. After all, the RMB is not fully convertible and the leaders have the power to determine the exact exchange rate of the RMB administratively. Even in the unlikely scenario that the RMB were devalued, there is no apparent reason why the Hong Kong dollar should follow suit. As a matter of fact, the Hong Kong dollar is linked to the US dollar, and not the RMB. Moreover, since we have instituted the linked exchange rate in 1983, the RMB has devalued by more than half over a number of occasions without any adverse effect on the value of the Hong Kong dollar.
But will Hong Kong price itself out under the scenario of a major realignment of currency values in the region? Suffice to say that cost is only one of the factors in competitiveness. There are other significant elements as well, such as stable government, the rule of law, a corruption-free society, and the free flow of information and capital. Moreover, Hong Kong no longer relies on price cutting as the key to survival. Our exporters are renowned for their reliability, strong design capability, advanced production techniques, high quality of workmanship and diversity of product range. We also do not sell the same products as our Asian neighbours. As a global merchandiser, Hong Kong can take advantage of the low cost manufacturing bases on the Mainland and in neighbouring countries in the region which provide exporters with more room to mitigate the impact of a strong currency.
We do realise that where Hong Kong had become uncompetitive was in relation to property prices. The years of high inflation and negative real interest rates had created a bubble economy that needed to be corrected if Hong Kong were to retain its commercial and economic vibrancy. The Asian financial crisis has hastened the pace of this correction. Hong Kong is now undergoing a major economic adjustment - property prices had fallen by as much as 50 per cent; stock market capitalisation had reduced at one stage by over 40 per cent; unemployment had risen to a 15-year high of 5.3 per cent and year-on-year inflation is now at a record low of 2.5 per cent. We experienced negative growth in the first half of this year, and for 1998 as a whole the economy is estimated to shrink by 4 per cent. This process of adjustment is no doubt painful. But what we are seeing is the reaction of a free market at work, and the cleansing will force Hong Kong to emerge leaner and more competitive in the end.
What gives us this confidence?
First and foremost, our people. Hong Kong people have shown time and time again in the past that they have the resilience and resourcefulness to negotiate the twists and turns of economic cycles. We make the most of good times but we also have an admirable capacity to cope better than most in the face of adversity. We are sailing across rough waters now, but I have no doubt that we will disembark wiser and stronger.
Second, our strategic location. China has historically provided the impetus for Hong Kong's economic growth. Following our reunification, our unique political status gives us a commercial edge in developing Mainland business, and in capturing the advantages flowing from her sustained economic growth, forecast at some 8 per cent this year. Hong Kong will also stand to benefit from the Chinese Government's determination to reform its 350 000 state-owned enterprises. As far as the maritime industry is concerned, given its current momentum of economic development, the Mainland demand for sea transport in the next century will be massive. The cultural similarity, the geographical proximity, and the global expertise of our shipowners will give Hong Kong a head start in serving the transport needs of the Mainland.
Despite the current economic adjustment, Hong Kong has not come to a standstill. Our long term plans have not been derailed by the economic turmoil. We are continuing to invest in our future, in our infrastructure and in our human capital. Following the completion of the ten airport core projects which change fundamentally the landscape of Hong Kong, shifting the centre to the west, we will be spending over the next five years some 20 billion pounds in new infrastructure projects, specifically in the transport sector. 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 per cent, the bulk of which will go into health, education and welfare. It may surprise you, but with our long history of fiscal discipline, we were still able this year to cut taxes 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 per cent.
To help Hong Kong's economy better respond to changes, our strategy is to increase the diversity of the economy by encouraging the development of technology and innovative applications. To enhance our appeal as a tourist destination, we will develop facilities which will make Hong Kong the Asian centre for arts and culture, as well as for entertainment and sporting events. We will step up our efforts to protect the environment for a better and healthier quality of life, and to enhance our reputation as a pleasant destination for tourists and international business travellers.
Ladies and Gentlemen, Hong Kong was founded as a port, and throughout our history, shipping has been the principal part of our growth and prosperity. Today, maritime related industries in Hong Kong still employ about a fifth of the workforce, accounting for a similar share of the GDP. It is my Government's objective to further promote Hong Kong as a major international port and shipping centre. We are putting a high priority on this objective, and no one appreciates the importance of this initiative more than our Chief Executive, Mr C H Tung. He is fully behind this initiative and I have no doubt that you too will share his unbridled optimism in the future growth potential of this exciting sector in Hong Kong.
Thank you.
End/Thursday, November 19, 1998
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