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Transcript of Press Conference by the Chief Executive, Mr Tung Chee Hwa, yesterday (Friday, Davos time) at the World Economic Forum in Davos, Switzerland.

Mr Tung: Good afternoon ladies and gentlemen. I think the best way to start this news conference is by reciting what I have just now said at the get-together upstairs. The title of that get-together was 'Hong Kong: Turning the Tide'. Perhaps I can say a few words on this.

Hong Kong's economy has gone through a very difficult period in 1998. Our economy has shrank by more than 5 per cent, or is expected to shrink by more than 5 per cent. Unemployment has increased rapidly to 5.8 per cent and is likely to grow, to increase further. So it is a very difficult time for us in Hong Kong.

Secondly, I'd like to point out that we have taken very active, short-term measures. One with a view to alleviate the pain; second to spur economic growth; and thirdly, really paving the way for long-term recovery. What we have is in the way of introducing an increase in expenditure and tax cuts which amounted to 4 per cent of our GDP in the Budget for the year 1998. This is obviously a huge stimulus package. The increase in expenditure is mainly in areas of infrastructure. We are spending a whole lot more in building roads, railways, schools. And the purpose of that is not just that it creates a stimulus for the economy but it is really paving the way for our long-term future. You will be interested to know that in fact over a five-year period the total spending on roads, railways, schools and so on, on infrastructure projects, amounts to over US$30 billion. So that is a huge commitment for us in Hong Kong, a commitment for out future.

You may wonder whether we have the fiscal means of doing it. Other communities and economies in Asia needs to cut back on their spending - how do we do it? The fact is that over the years of very prudent fiscal management we have built up a foreign exchange surplus of US$90 billion and a fiscal surplus of over US$50 billion. This has given us a lot of cushion to move ahead forward, despite difficulties, building a solid future for ourselves. So we have taken these short-term measures which we thought was very important.

Another short-term measure which we took, which was controversial at that time, was the fact that we entered into the stock market in August. When we took the decision to do it, it was a very difficult decision. It was controversial, by any standards, particularly by Hong Kong standards. But I am glad that many months afterwards there is an increasing recognition in the world that the action we took was the right one to protect ourselves in Hong Kong. What we saw in the months immediately leading to August was speculative pressure on the Hong Kong Dollar but given the fact that our dollar is linked with the US Dollar and that it operates under a currency board system and any pressure on the Hong Kong Dollar results in tremendous pressure on interest rates and that in itself then causes a decline in the stock market as well as the futures market. So the interaction was predictable that there were international short-term capital flows that were taking advantage of this, building up huge positions in the market in Hong Kong. And it came to a point that our market was no longer free anymore, it was being manipulated. And the purpose of doing what we did was to make sure of the integrity and total freedom of our market place. And we did what we did, as I said it was controversial, but I think and I believe it was the right thing to do at that time.

Although we have been very busy focusing on the short-term, for us what is much more important is long-term. After all this turmoil, where is Hong Kong? And for us that is far more important. And in order to position ourselves for the future we have to ask ourselves what the world is going to be like in the 21st Century. We see a world where trading will be more and more integrated; we see a world where recovery in Asia, some countries may come faster, some countries may come a little bit later but whether it's going to be two years, three years, five years, Asia will resume its growth path which has been going on for 40 or 50 years but has been very badly interrupted by the financial turmoil. I very firmly believe that Asia will resume its growth path. It may take some time, it will happen and Hong Kong is in the heart of Asia, Hong Kong is in the middle of Asia.

And thirdly, I see China moving forward from strength to strength. Its economy is moving well and in 20 to 25 years time it will be one of the major economies in the world. So we look at this scenario, we say to ourselves where do we want to position ourselves. And the answer is that we want to become the international, the premier international city of Asia. We would do this by firstly, trying to enhance areas where we have always been very good and that is in areas like financial services, tourism, headquarters for multi-national companies who want to do business in Asia, areas of manufacturing services, areas of transportation - a hub for air and sea. In all these areas, apart from Japan, we are the leaders and I want to be sure we enhance our position in these areas. Secondly I believe our economy, the efficiency of our economy as well as the base or our economy can be further expanded by greater promotion in innovation and in technology. That is one area which we are very determined to move forward to and we are confident that in not too long a time we will be deriving another benefit from this effort.

And thirdly of course, the Mainland Chinese economy is moving well. By the end of 1998 it is already the sixth-largest in the world and no doubt in 25 years time it will become one of the largest. And as Hong Kong we have the unique opportunity, under 'One Country, Two Systems' as part of China, to take full advantage of this very exciting growth. So these are some of the areas where we think Hong Kong will excel as a premier international city.

But we also look at our strengths and look at our weaknesses. Where are our weaknesses? Well, one of our weaknesses is that we know that the 21st century economy will really be a knowledge-based economy. We have to get our level of education one level higher and that is very important for our future. Obviously improvement in language skills, English and Chinese, all this will be very important. And we as a government will spare no effort in driving up the level of our education, the standard of our education. Already education is the single-largest expenditure item we have in out budget.

Secondly, we have another weakness that we are very conscious of and that is Hong Kong is very expensive, we all know it. One of the end products of the financial turmoil around is that the fact that there has been a very steep correction of property prices in Hong Kong. Apartment values have fallen off nearly 50 per cent, offices have fallen off probably 60 per cent. These are huge adjustments. Adjustments in the area of salaries and compensation generally is continuing. I believe that at the end of the day, when the process is completed, our cost structure will be that much more reasonable and make us that much more competitive.

And finally as an international centre we need to be aware that we need to attract the best talents from all around the world. And furthermore, even for the 6.5 million citizens of Hong Kong that the quality of life is the best anywhere. So we will be sparing no efforts in areas such as arts and culture. But more pressingly in areas of environmental protection. It is a tremendous commitment by this government and we will not waver from this.

And these are some of the weaknesses we see for ourselves. I mention the weaknesses only because I want you to know we are very aware of them, and very resolute in tackling these issues.

We have many strengths also. We have strengths that other Asian communities and cities do not have. For instance we are very deeply rooted in the rule of law. It is something we will work very hard to preserve. We treasure very much our way of life, including all the freedoms we enjoy today. And in this we will continue to make sure it is enhanced and protected. And over the years we have built up a track record in areas of fiscal prudence, in areas of our believing in a free-market economy. And in the level playing field for all in a very open market. And these are some of the philosophies we want to stick to to make sure of our future success. So ladies and gentlemen, I think we have a very clear vision of what we want to be in the 21st century - the premier international city in Asia. And I am very confident we will be able to achieve this.

Q: (Cliff Bale, RTHK): I would like to ask for your reaction to the Court of Final Appeal decision in Hong Kong on the question of right of abode and the implications on Hong Kong. Whether you think it reflects badly on your legal advice?

Mr Tung: Well Cliff you are asking a very local question and we have an enormous international press audience here. But can I just say that we respect the ruling of the Court of Final Appeal. A decision has been made and we respect that. My colleagues in Hong Kong are working through the consequence of that particular decision.

Q: (Xinhua): Mr Chief Executive, just now you said that you are going to use the full advantage of Hong Kong's relationship with the Mainland of China to enhance Hong Kong's economic development. Can you explain it in detail?

Mr Tung: I think, firstly is that the Chinese economy is developing very well and taking the longer-term view, as I said earlier on, the economy will become one of the largest in the world. Secondly, is that we in Hong Kong, we are part of China and under 'One Country, Two Systems' we do have some very unique advantages and on top of that given the cultural and language relationship, I think we will be able to, more than anyone else, fully participate in the economy. Thirdly, is that Hong Kong is a very active international financial centre and, as a financial centre and as China's need for international capital increases, Hong Kong is in a unique position to participate in that and therefore derive benefit for ourselves at the same time.

Two weeks ago, US$1 billion of China sovereign debt was listed in the Hong Kong market, the first one ever that has been done, which is significant not just in terms of size but moreso in terms of the fact that it is the first listing in Hong Kong of a bond from China. So we will be able to participate very fully in economic development and we are very much looking forward to taking full advantage of that.

Q: (Sheel Kohli, SCMP): Mr Tung, I wanted to ask you how you respond to some criticism that has been levelled at the government over the creeping democratisation, the creeping amount of politics that there seems to be going on in Hong Kong and how that is detrimental to business in Hong Kong. Clearly, one very well-known tycoon announced very publicly that he decided not to spend $10 billion because he decided, he thought, Hong Kong was no longer a conducive place to do business at the present time.

Mr Tung: Well let me put it this way, that there are some businesses who are concerned with the investment climate in Hong Kong as such and I think the concern is understandable. On the other hand let me put it this way that Hong Kong is a very pluralistic society. The newspapers in Hong Kong feel a sense of mission that they are there to make sure the government is honest, the government is fully accountable and, so more often than not, the government is being accused of left and right, and this and that. Another day goes by for those who do not live in Hong Kong, another day goes by without there not being a demonstration in Hong Kong, very often in front of my office. I just want everybody to know, particularly those overseas, these are not signs that Hong Kong is falling apart, or Hong Kong can not be governed. The fact is that in Hong Kong we all can speak our voice but what I want you to know is that there is a sense of which way we need to go forward, there is a strong sense of that and that we will pull together, we are pulling together in going forward. And the voices you hear are really a demonstration of a strength, rather than weaknesses. And furthermore I think it is interesting to note because of what we are in Hong Kong, very free to say what you want, to be very creative in doing what you want to, we have created some of the most successful entrepreneurs in Asia so I don't want you, especially friends from overseas, to be misled by what's going on in Hong Kong at all.

Q: (Dow Jones news wire): You identified your role as an international financial centre and your special relationship with China as strength. Sometimes it can of course be a weakness as well. I am particularly thinking of some of the problems that some financial institutions in China are having at the moment repaying their debts. I am wondering how serious a problem that is for Hong Kong's financial system, if you have any rough idea at this stage how much it will cost the banks that are based in Hong Kong and whether you think that on top of the losses they have sustained from the fall in real estate prices it may cause difficulties for some of your financial institutions.

Mr Tung: Well let me answer this way. First of all from the action that the Central Government has taken against GITIC, I presume you are referring to this particular company, it demonstrates the Central Government's determination to send a message out there in the world that proper financial management is very important. And I think most people should take heart of the fact that China is very determined to tackle these problems head-on, rather than to delay solutions to these problems for another three, four, five or 10 years as some other countries have done. As Deryck Maughan, the vice-chairman of Citigroup just now upstairs was saying, that today China's sovereign bond issue commands an excellent credit rating and one of the reasons is that you see a determined effort to tackle the problems at the root. Obviously some banks, some creditors will get hurt, but there you are.

As far as Hong Kong is concerned, our bad debt provisions made by the banks are adequate. They are being very closely supervised by the Hong Kong Monetary Authority. The bad debt provisions that are made against possible difficulties with real estate and so on has been more than adequate and at about 4 per cent they are still very low by many standards. The problem of GITIC and some of the other trust companies will not in any way cause major difficulties with Hong Kong's authorised banking system, not at all. We are watching this situation very closely but we are confident it will not cause any major difficulties.

Q: (Sunday Times, London): I wonder if I can ask you whether you see the current present currency board arrangement as a permanent one or whether you see that evolving over time. As you mentioned the Chinese economy is going to develop into a major economy. Could that ever become a currency board arrangement with the yuan instead of the dollar? And would Hong Kong even adopt the yuan instead of the dollar?

Mr Tung: Well let me say very straightforwardly the linked exchange rate system we have with the US Dollar will not change. The currency board will stay as it is. There is no reason to change it. It has served us very well for 14 years now and we will continue to move in that direction.

Q: (Australian Financial Review): Just a follow-on from that question. There was speculation just two weeks ago or last week what the Chinese government was planning to do with the currency, whether a devaluation was on the way. Given the freedom of Hong Kong to speak, as you were talking about, I was wondering what your views were on that. And if it does do that do you suspect, do you predict, it would create tensions in the region?

Mr Tung: Well let me say this. China has a trade surplus of over US$40 billion and China enjoyed foreign direct investment, an inward flow, of over US$40 billion in 1998. Given this set of numbers I can't imagine, from a macro-economic point of view, it makes sense to do any devaluation at all. From time to time, the rumour does start, I don't know from where, but I just can't see it. But let me just add what one of our manufacturers in Hong Kong told me. He's a toy manufacturer and you may or may not know it that Hong Kong's toy manufacturers have toy manufacturers all over the world, including of course in China, and they account for 80 per cent of the toy production in the world. And he told me that his production costs in southern China are every bit today as competitive, if you want to compare with Indonesia or Thailand and so on. So let me say this, I just can't see there will be renminbi devaluation.

Q: (Kyodo News): In terms of recovery from the Asian crisis. How do you value the assistance so far from the Japanese government. Are you satisfied or are you expecting in a different way in terms of Asian crisis, what is your general view?

Mr Tung: I hope I get the question right. In so far as Hong Kong is concerned, of course the Japanese banks have been major participants in corporate financing in Hong Kong. And of late of course Japanese banks have been slowly but surely not doing the low financing any more and that obviously has an impact on Hong Kong's economy. I understand the reasons why this is being done, not so much directed to Hong Kong but really directed to the Japanese banking system. From Hong Kong's narrow point of view it is important that the Japanese economy starts to recover and the banking system starts to resume health again. From a trading point of view also, Hong Kong and Japan enjoy a tremendously important trading relationship. The earlier recovery of the Japanese economy is obviously very important to us. I think that really goes for the rest of Asia and that's why we are all hoping very much that the Japanese economy will start to recover. I think on another front, the US$30 billion loan that was announced by the Japanese government for those countries badly affected by the financial turmoil, Hong Kong is not included in that, is really very, very helpful. The two tranches of $15 billion each are really very helpful. And I think what basically we need to see is really the economy in Japan really recovering strongly and it will not only help Japan but help the rest of us.

End/Saturday, January 30, 1999

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