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Following is the speech given by the Chief Executive, Mr Tung Chee Hwa, at the sixth Credit Lyonnais Securities Asia's Investors Forum this (Monday) morning:
Good morning, Gary, ladies and gentlemen,
Introduction
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First of all let me say : Welcome to Hong Kong. It is a pleasure for me today to have this opportunity to address the sixth CLSA Investors Forum and to present our view of Hong Kong's economy and our vision of the future.
I would also like to commend you on your timing. It seems to me that this is a good time for really serious international investors to be testing waters in Asia. I would hope that at the end of this forum you will find the waters in Hong Kong is worthy of a dip.
Hong Kong Economy
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The Hong Kong economy has gone through a very difficult period. Our economy has shrunk by 5.1 per cent in 1998. Unemployment was last at 6.2 per cent and is going to be growing.
The fact is during much of the 1990s, years of close to double digit inflation and high property prices have eroded our competitiveness. Adjustment would have been necessary to regain our competitive edge. The Asian financial turmoil accelerated the process of adjustment. This adjustment process is painful, but is absolutely necessary.
In the past 18 months, values of residential units have fallen by 50 per cent; values of commercial premises have fallen off by about 60 per cent. These are huge adjustments. Adjustments in salaries and wages are continuing. I believe that at the end of the day, when the process is totally completed, our cost structure will be that much more reasonable and make us that much more competitive.
To adapt to the economic downturn, our Government have taken some very determined and effective measures; first, try to alleviate the pain; secondly, to spur economic growth; and thirdly, to pave the way for long-term recovery. In the 1998 and 1999 budgets, we introduced selective increases in expenditures as well as tax cuts with a view to stimulating the economy and building for our long term future.
Most of the increases in expenditure are investments in new roads, railways, schools and computers. These projects will make us more efficient and effective in the long term. There would be deficits of about 2 per cent and 3 per cent of our GDP in 1998 and 1999 budgets respectively. There will continue to be a small deficit in the year 2000 but we expect the budget to return to surplus by the year 2001. Over a five-year period, the total budget deficit would amount to about US$6.5 billion. Against an accumulated surplus of about US$50 billion and a government without debt, this deficit is quite bearable and affordable.
Another controversial measure we took was our decision to go into the stock market last August. It was taken to prevent the threat of delinking of the Hong Kong Dollar with the US Dollar and the possible meltdown of our economy in the face of enormous speculative pressure on our currency market, stocks and futures markets.
The decision was controversial, by any standards, particularly by our standards as Hong Kong believes in free market philosophy. But it had to be done and I am glad that many months afterwards there is an increasing recognition in the world that the action we took then was the right one.
Our Current Position
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Where are we today?
As things stand, consumer spending remains quite flat; real interest rates remain high; loan growth on year to year basis is still negative; indeed the economic adjustment which we see today will continue through much of 1999.
But 22 months after the financial turmoil began, stability has returned to our financial markets; property prices have been corrected. Confidence, I believe is slowly but surely recovering.
While we tackle the effects of the financial turmoil on Hong Kong, we never lost sight of the importance of our long term objectives. The world is changing. Asia is changing. China is changing. As the new millennium unfolds, where would we position ourselves? Hong Kong's future lies in its strategic position - in the heart of Asia. As Asia recovers from the financial turmoil, as surely she will, Hong Kong must be positioned to take full advantage of Asia's economy. Furthermore, Hong Kong's future also lies in even greater participation in the growing Chinese economy.
Building on our Strengths
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To enable Hong Kong to seize all these opportunities, we need to continually build on our strengths. We are already a leading financial centre in Asia, but we need to reform further in order to make us more competitive and to strengthen our existing systems.
We are pressing ahead with a major reform of our securities and futures markets. This will include the demutualisation and merger of the stock and futures exchanges and a new regulatory framework to take into account such things as e-commerce, Internet trading and around-the-clock global securities market networks.
We are also 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; and developing a deeper debt market, both locally and on a regional basis, to provide more stable and flexible financing for businesses.
We have already widened our monetary base to reduce volatility in interest rates and to make our monetary system more stable if there are sudden and large inflows or outflows of capital.
Our own market reforms are just the starting point. 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. Sectors we are looking at include public housing and health reform, welfare services and water supply. We are also looking at corporatising government or public services - our plan to privatise a substantial minority share of our world-class Mass Transit Railway Corporation is but one example.
Finally, we expect our Mandatory Provident Fund system to be fully implemented by the end of next year. It is a scheme that will serve very significant social objectives in the long term, while at the same time generate new opportunities for the financial services sector in Hong Kong.
We estimate that initial annual MPF contributions will amount to about US$1.5 billion and grow to US$4 billion, or about 3 per cent of our GDP annually. The eventual size of MPF portfolio may reach 60-70 per cent 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.
Other than financial services, we are already a major tourism centre but we are planning to create more tourism facilities with theme parks, cruise terminal and other developments. We will continue to enhance our leading position as a manufacturing service centre, and a logistic and transportation centre for air and sea cargo in Asia. Hong Kong is also the centre for multinational companies operating in Asia. There are over 800 multinational companies who use Hong Kong as regional headquarters and offices. The activities of the multinational companies in Hong Kong is very important to Hong Kong's economy. In the years to come, we will ensure our dominant position in all these areas be well protected.
Vision of our Future
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In addition to building on our existing and traditional strengths, we need to help our economy respond to change and seek out new engines for growth.
Innovation and technology are important drives of economic growth. In a knowledge-based global economy, they are essential in adding value, increasing productivity and enhancing our overall competitiveness.
In this respect, in the years to come, Hong Kong will additionally focus in areas where we have substantial competitive advantage as compared with our neighbouring communities such as information technology, hub for telecommunication, and centre for Chinese medicine, etc.
In area of information technology, progress has been particularly noticeable. We are developing a Cyberport together with the private sector, intended to house a strategic cluster of major international and local information services companies. These companies will specialise in the development of services and multimedia content to support enterprises and industries right across the business spectrum. Since the announcement of the project in early March, 10 leading international IT companies have signed up as anchor tenants. Nearly 40 companies have registered interest in becoming tenants. We will be pushing forward very hard on this front and all the other fronts.
China's economy today is already the sixth largest in the world, and can become the second or third largest in the next 20 to 25 years. Chances are good that China will be joining the WTO soon. Hong Kong can take full advantage as China's economy opens up further. We are indeed uniquely positioned in every respect to fully participate in that growing economy.
As the 21st century unfolds, I see Hong Kong as New York of North and South America and London of Europe. Indeed, Hong Kong is well positioned to be the premier international city in Asia as well as one of the major cities in China.
In the process of positioning Hong Kong in the 21st century, we need to anchor on certain fundamentals.
We know that the 21st century economy will be a knowledge-based economy. We have to get our standard of education to a higher level than today. Already education is the single-largest expenditure item we have in our budget. Obviously improvement in language skills, both English and Chinese, will be important.
As an international financial centre and a centre for information and technology, we have to attract the best talents from all around the world. Furthermore, to our 6.5 million citizens the quality of life must be the best anywhere. So we will be sparing no effort in areas such as arts and culture. But even more pressing, greater effort is needed in the area of environmental protection. The government realises much more needs to be done. Environmental protection is on the top of my priorities for 1999 and even the next few years.
We are deeply rooted in the rule of law and independence of judiciary. We treasure very much our way of life, including all the freedoms we enjoy today. Under the "One Country, Two Systems" concept, these will all be preserved and enhanced.
Hong Kong has always had a corruption free, dedicated and efficient civil service. However, as the new millennium unfolds and in order to meet the many new challenges which Hong Kong now faces, we are also making a determined effort in civil service reform. Our objective is to make our civil service even more efficient, accountable and responsive to changing needs.
Conclusion
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Ladies and gentlemen, we may have been buffeted and bruised by the financial storms which have hit the region. But the deeply-rooted fundamentals of our free market economy have proved to be rock-solid.
We have weathered the storm in better shape than most. We have also seized the opportunity to look closer at the future. To see where our strengths lie. To re-energize. To consolidate. To diversify. And to re-assume leadership in our chosen path as one of the world's most open, competitive and cosmopolitan economies.
That is the view of Hong Kong I hope you will take away with you. I wish you all success in your work and an enjoyable, fruitful forum. Thank you very much.
Photo:The Chief Executive, Mr Tung Chee Hwa, attended the CLSA Investors' Forum at the Grand Hyatt Hotel. Photo shows Mr Tung giving a keynote address at the Forum.
End/Monday, May 17, 1999
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