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The following is the transcript (English only) of the question and answer session given by the Chief Executive, Mr Tung Chee Hwa, at Credit Lyonnais Securities Asia's Investors Forum this (Monday) morning:

Question: ..... your strategy with the time-table for dealing with the shares that you picked up last August/September?

Mr Tung: As you know, we have formed a new corporation to deal with this issue. They have recently appointed three financial advisers, all world class advisers who are now advising the company how to progress forward, and I think we should wait patiently for the advice to come through.

Obviously, we are very mindful of the need for the disposal, but also the need to dispose it in an orderly manner because it's never our long-term objective - aside from having defined that we may be keeping some behind - it has never been our long-term objective to hold these shares. So, we would like these to be disposed of in an orderly manner, pending the advice of the three advisers. I can't give you an exact timetable at this moment because we are taking advice.

Question: Could I ask about the financing of Hong Kong going forward? Historically, the Government has relied on property sales in order to finance capital projects. If you're concerned about cost-competitiveness, going forward then presumably a stable property market is what you are after.

Mr Tung: Well, let me say this, in the five-year period which I was describing to you, perpetually we would have incurred a budget deficit of about $6.5 billion. Of course, you may say this is based on certain assumptions, that we will end up with a budget deficit over a five-year period of $6.5 billion, and in fact over a five-year period from the fourth year and fifth year onward we would have a balanced budget.

Now, these budget forecasts have taken into consideration very realistic property prices, where they might be. And we are quite confident and comfortable that these targets can be met.

What I would like to emphasise is that although we have created a budget deficit for 1998 and 1999, the two years, it was done deliberately, for a purpose. But we will not depart from our very successful past policy of prudent financial management and that will continue. And we are confident that based on our own internal forecasts, we can manage this well.

Question: Hong Kong has amongst the highest real interest rates in the world, as you alluded in your talk earlier. How much of a problem do you think that is?

Mr Tung: Of course real high interest rate at this moment is retarding the progress of our recovery, and that is very obvious. And because of the linked exchange rate our interest rates have to move in regard to the US interest rates, so it is a problem at this moment, especially our economic cycle is in fact very different from the United States which is either still ploughing ahead or towards the end of a bull cycle, depends on where you sit. Whereas for Hong Kong, we are actually in recession. But this is a reality. It will affect us for the rest of this year because of very high real interest rates.

But on the other hand, I believe there still may be some room for interest rates to move somewhat downward but not a whole lot more. But on the other hand, I would say this, that at this stage of our economic adjustment, in order to make our adjustment really successful it is not totally a bad thing - if you know what I mean. But in the longer term this issue needs to be addressed, I accept that.

Question: You are proposing to allow a significant relaxation of the standards for immigration from China into the Administrative Region. Can you talk about what kind of additional burden that will put on your finances and on the infrastructure in Hong Kong, and what you intend to do about it to meet that burden?

Mr Tung: You are asking a question, part of it could be quite controversial but I will talk about it nevertheless. Actually, if I may, I will answer it in two parts.

The first part is that there is a need, as we move forward, to get good quality people from all around the world to come and live and work in Hong Kong, because they can make major contributions in all the areas of activities we have, whichever part of the world they come from, we all welcome (them).

Specifically, with regard to China, obviously they have some real good talents in areas of science and technology, and indeed in some other areas where they have really some good quality people. And I think for us, in Hong Kong, we would very much like to attract these talents to come. I don't think they will be a burden to our community, as there will not be a burden for all the other talents from other places, because they can contribute right away to our economy. And especially as we move forward in areas of innovation and technology, we will need many of these top quality talents.

But then there is another problem, which relates to immigration generally. As you know, over the last three or four years, we have had population increases which was close to about three per cent of the total population, about 180,000 to 190,000 people every year, of which 54,000 are from the mainland of China, and there is a portion which is Hong Kong natural births minus deaths, and there are about a hundred-odd thousand coming from overseas. They may be returning residents or they may be others coming here to work. So the population increase is quite hefty at this moment and it is a major challenge for us. But the people who are coming, the hundred-odd thousand out of the total 180,000, they generally can contribute to our economy. But nevertheless, as you can see, these numbers will not help the unemployment numbers, especially as we are in a recession.

But what has happened now is this, that as a result of the Court of Final Appeal decision, according to government figures, there will be, on top of this, 1.67 million additional people coming. And this is now posing a major challenge to this Government because on the one hand the need for respecting the rule of law, the independence of the judiciary, on the one hand to understand the humanitarian aspect of what is happening, but on the other hand to look at affordability, whether we can afford it. And then all the figures have shown we can't afford it.

So very soon, really very, very soon, we will be making some very tough decisions as we go ahead. And when I take these decisions, having considered all these issues, they will be in the best long-term interests of Hong Kong. And I can stand here all day talking about it because it is a very complicated issue but I don't think you want me to bore you with it.

Question: My question concerns China's growth momentum. I mean the last 10 to 15 years Hong Kong has benefited a lot from China's growth. And given the slow-down in China's growth in the last couple of years, and especially in the external sector, do you have any plans to diversify yourselves away from, or at least lift away from China's volatilities?

Mr Tung: First of all, let me say this, that we are very international, we look at the world as a whole, we look at Asia as a whole, and that is why even today, many of us pay particular attention to when Japan will start moving out of a recession and going forward again.

But having said that, there is no doubt that China is very important to us, and we all know that. Growing at seven and eight per cent steadily every year, over the next few years, would be very, very important to us and I can't imagine China's economy will not grow at this sort of rate.

I would like to tell you a story, some of you may know about it. Alan Greenspan was in Hong Kong and we talked about how important it is for any community that there needs to be good economic managers at the top to really run the economy. And I was complimenting how well Mr Rubin and Mr Greenspan and Mr Summers have done the job in the United States. And he was saying to me, "Do you know where are the best economic managers in the world today, managers with vision, with determination, political will and everything else?" He says, "Really, in Beijing, it's the best there, you find them there, you talk to them, you know exactly what they are trying to do." And I was very encouraged by that. So I am very optimistic about China's economic development. Of course the challenge is enormous, we all recognize this, but I am quite optimistic about China's economic development.

As far as Hong Kong, we are in for a major challenge too, because before 1978, Hong Kong was used by the West as a sort of a window into China, as a conduit doing business in China; and Hong Kong was used by China as a window to the rest of the world. After 1978, China began to open up. Hong Kong's role has changed. We moved our manufacturing across into China and employ millions of workers, expanded our manufacturing base. We have invested in China's infrastructure and China has begun to invest in Hong Kong.

But as the new millennium begins there will be another China - part of WTO, confident in its own self, a very open economy. What is Hong Kong's role in all this? We are mindful of this challenge and the Financial Secretary has a team looking at all these issues. But our initial conclusion is that we will benefit enormously from this - we will benefit enormously from this. Of course we need to know how do we go forward. And I am very confident that Hong Kong will benefit enormously from China's further opening up as a member of WTO.

End/Monday, May 17, 1999

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