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Following is the speech (English only) by the Financial Secretary, Mr Donald Tsang, on "Access to Asia" at the Pensions 2000 Conference today (Monday):
Mr Schaefer, ladies and gentlemen,
I am delighted to have the opportunity to address such a distinguished gathering, particularly travelling under the banner "Access to Asia". Today, more than ever, the Asian region must present itself as an alluring proposition for investors, as we begin the slow but sure recovery from the ravages of the Asian financial turmoil.
And with such a captive audience, I can't resist the temptation to 'advertise' the opportunities available in the retirement fund market in Hong Kong. A market that is poised to take off with the impending implementation of the Mandatory Provident Fund System in Hong Kong. But a little more on that later.
First, I would like to give you a rundown on the state of the economy and how we see the prospects for the year ahead. I will then summarise our thinking on some of the measures we plan to take to expand our economic base to meet the challenges of the 21st Century. For all this, I promise not to keep you beyond 10 pm tonight!
Up to the end of last year, we had not seen any turnaround in the economic situation in Hong Kong. Most of the indicators were still showing significant declines as a result of the fallout from the Asian financial crisis. A crisis that began rather benignly with the devaluation of the Thai Baht in July 1997.
We were hit hard during all four quarters of 1998, with a particularly bad third quarter when the economy actually shrank by 7% in real terms. In fact, on a year-on-year basis, the decline in the third quarter was the largest ever recorded for the quarterly GDP series when it dated back 20 years ago. As you can imagine, it was quite a shock for an economy which has, over the past three decades or so, largely experienced continual growth. For the year as a whole, the preliminary estimate shows GDP contracted by 5.1%. And when you compare that with a 5.3% growth in 1997, our economy really went through the wringer.
However, the fact that we have been able to withstand a reversal of fortunes, so to speak, and of such magnitude in such a short time-span, indicates the resilience of Hong Kong's economy and her people. We are going through a very painful period of restructuring the likes of which have never been experienced by this working generation. In particular, unemployment reached record high levels towards the end of 1998. But throughout this period, the Hong Kong dollar remained rock solid as a result of our financial strength to maintain the currency link to the US dollar.
While we are certainly not out of the woods yet, there have been a number of positive signs in more recent months on the home front. Interest rates have declined; bank liquidity has improved; asset prices have stabilised; securities markets have surged forward; and tourism has recorded double digit growth in the first two months of this year. However, fixed asset investment remains subdued and external trade is expected to continue to decline. Consumer spending, which also declined last year and early this year, has picked up somewhat spurred by the 10% tax refund we gave to all taxpayers in my budget last month. More than one and a half million cheques, with a total value of some $8.5 billion, have been sent out.
So you can see, local sentiment has noticeably improved. The risk premium has narrowed. And the prime rate in Hong Kong is now 8.5%, which is actually 25 basis points lower than the rate at the end of June 1997, just before the onset of the Asian financial crisis. Nevertheless, overall economic activity is likely to remain slack in the early part of this year followed by a more visible pick-up in later months. On this basis, we are forecasting a very small growth in our economy of around 0.5%. However, until our first quarter results come in, we won't get a clearer picture of the situation, which still remains quite fragile. But, if growth is realised at year's end, it will represent a significant improvement from last year's drop of 5.1%.
Our ability to provide a 10% rebate in the budget to every taxpayer, reinforced in a practical way, the underlying strength of our economic position and the prudent fiscal policy we have pursued over the years. We have been able to build up considerable reserves. And it is the existence of these reserves that gives us the fiscal strength to ride out the impact of the economic downturn on our finances. At the same time, we are able to maintain government spending programmes, particularly on capital projects that are providing the infrastructure and investment necessary for our future development. All these are happening to our fiscal system which carries no debt. We've got zero public debt in Hong Kong.
Over the next five years, we're spending some HK$235 billion - that's 50% more than we spent on our new airport and associated works in the past few years - on major rail, road, land and port projects that will enhance our position as a regional transport hub and improve the quality of life for our residents. This in itself will provide new jobs as well as investment opportunities for those of you wishing to be a part of our development as a Special Administrative Region of China.
However, we are not limiting ourselves to capital works, as a way of 'energizing' Hong Kong in the aftermath of the regional financial crisis. The reforms we are undertaking to make us more competitive and to strengthen our existing systems go much deeper. In a sense, we are re-inventing ourselves. We must do this if we are to remain in the premier league of international financial centres.
The initiatives include - widening our monetary base to reduce volatility in interest rates, especially when international speculative capital switches rapidly into or out of our market. This has already been done and the new system is working well; strengthening the supervision of banks by developing a greater capability to identify and quantify the risks faced by individual banks and to assess the quality of their policies, procedures and controls in risk management; developing a deeper debt market, both locally and on a regional basis, to provide more stable and flexible financing for businesses; and reforming our securities and futures markets.
On this latter point, it has become clear that advances in information technology have made cross-border trading increasingly convenient and popular, in turn eroding the effectiveness of domestic market regulations and exchange monopolies. Traditional exchanges are facing a direct challenge from alternate trading systems, such as Internet-based brokers, who are, so far, beyond the reach of regulators anywhere.
Our answer to these global challenges is a three-pronged reform of the securities and futures market. First, we are upgrading our market infrastructure. Second, we are modernizing our regulatory regime. And, third, we are demutualising and merging the exchanges and clearing houses. Maintaining the status quo is simply not an option in today's competitive environment. Reforms have to happen swiftly.
Among the issues on the table for market infrastructure improvements, are the establishment of a single clearing arrangement for securities, stock options and futures; the introduction of a secure, scripless securities market; and enhancing technology to facilitate straight-through processing across the financial markets covering information delivery, trading, clearing, settlement and custody functions.
On the question of regulatory reform, our emphasis will be on providing optimal regulation and investor protection, including a new regulation on Internet trading. However, we will not stifle market development and innovation.
The third pillar of our reforms concerns the structure of Hong Kong's market, which presently comprises two exchanges and three clearing houses. Although this structure has served us well over the past decade it has increasingly become a constraint over the markets' competitiveness at the international level and their efficiency in responding to the challenges of technological advances.
Our plan now is to demutualise and merge the two exchanges and their associated clearing houses into one new holding company and ultimately list the shares of the company on the stock exchange for trading and wider public ownership. This move will separate ownership from trading rights and enhance competition.
And that's just the start of our reforms.
We have a track record of letting the market, through its enterprise and efficiency, come up with the most economical solution to deliver a public service. For example, the hot subjects in town these days include public housing management reform and public health reform. They promise some exciting improvements to the present systems. We are also taking that a step further with a proposal to contract out a variety of public services. As a pilot scheme, we are trying to provide welfare services through competitive bidding among service providers. And we are looking at other suitable candidates for some form of private sector participation, including the supply of water. As a logical extension of this, we are also looking at corporatising suitable government services. And in this context, the most outstanding example is our world-class Mass Transit Railway Corporation. We are now proposing to privatise a substantial minority share of the MTRC through a public offering with the government remaining the major shareholder.
This will not happen overnight. But when it does, it will be one of the largest flotations of a railway system anywhere in the world. And, I might add as an aside, while the proceeds from the sale will provide a useful boost to our finances, we are not doing it for the money. Hong Kong prides itself on its long-held free market philosophy of encouraging the private sector to maximise its participation and investment in our economy. And an offering of this nature will provide the people of Hong Kong with an unrivalled opportunity to participate in the ownership of a successful and profitable public corporation. Another spin-off will be a significant increase in activity generated on our stock market. This will strengthen the market and enhance our attractiveness to investors.
We are also undertaking a fundamental review of our strategy and policies for attracting foreign investment into Hong Kong. A review that should be completed in about two months and will pave the way for a more focused promotion of Hong Kong internationally and an improved administrative structure within the public sector for handling foreign investment. And we are actively encouraging investment in high value-added and high productivity industries, but within the framework of our legendary free and open market philosophy. A philosophy firmly based on the premise of a level playing field for all. And a creed that endures maximum support minimum intervention.
There are two specific projects falling within this category. One is the proposed cyberport development, our planned joint venture with the private sector, that will create an international multi-media and information services centre in Hong Kong. And, the second is our effort to consolidate Hong Kong's position as Asia's most popular tourist destination by starting intensive negotiations on the establishment of a Disney theme park on North Lantau, a stone's throw from the new airport.
We are also trying to mobilise private initiatives to re-position ourselves in the Chinese Mainland markets in preparation of her admission to the WTO.
These are just some of the plans and reforms we are undertaking now and for the future. As you can see, the Asian financial turmoil has given us a body blow, but it has not stopped us in our tracks. Rather, it has provided us with an opportunity to look at where we are going. To consolidate. To build on our strengths. To diversify into new directions. And to fight back and assume leadership in our chosen path.
Finally, one new direction that has spent a long time in the melting pot is our Mandatory Provident Fund System that we expect to be fully implemented by the end of next year. It's a scheme that will serve very significant social objectives in the long term, and at the same time generate new opportunities for the financial services sector in Hong Kong and, I expect, for people like yourselves.
The model we have chosen is an employment-related and privately managed provident fund system that will cover all members of the workforce. The trust schemes to be established for the MPF system will be governed by the laws of Hong Kong. However, because of our already highly-developed financial services sector and a strong regulatory and legal regime, we don't believe excessive regulations are necessary or appropriate. For these reasons, and like the US and the UK, we will have no asset allocation rules for the MPF schemes. In other words, it can invest anywhere on any instruments.
In other words, we aim to give fund managers flexibility to cope with dynamic market conditions, and to be guided by the "prudent man" rule to invest in the best interests of scheme members. We have also drawn the line at imposing a state guarantee for a minimum investment return. We believe such a guarantee is unnecessary and might lead to mediocre performance by fund managers. However, we will establish a Compensation Fund to indemnify scheme members. The MPF system is also designed to encourage free competition, so there will be no quota on licences provided the company meets the approval criteria.
And what about the opportunities? We estimate the initial annual MPF contributions will amount to about US$1.5 billion, quickly growing to US$4 billion, or about 3% of our GDP. The eventual size of MPF portfolios may reach 60-70% of our GDP. This will have a very positive impetus on the growth of the local capital markets, especially the debt market. There will also be significant business opportunities for corporate trustees, banks, investment management houses, insurers and other financial institutions.
There remains just one more thing to be said. You are all welcome to become a player in this new and exciting market. And as you can see, it is one of the building blocks of our overall strategy to consolidate our position as a world city of the 21st century. The opportunities are out there. The rest is up to all of you and all of us!
Thank you very much.
End/Monday, April 19, 1999
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