*****************************

The Financial Secretary, Mr Donald Tsang, delivered a keynote speech at a luncheon in San Francisco today (Tuesday, US time). The luncheon was co-organised by the Hong Kong Economic and Trade Office, Asia Foundation, Asia Society, Hong Kong Association of Northern California, Hong Kong Trade Development Council and San Francisco Chamber of Commerce. Following is the full text of his speech (English only):

Distinguished Guests, Ladies and Gentlemen,

Thank you for those kind remarks. Needless to say I am delighted to be back in your delightful city and speaking to such a distinguished and knowledgeable audience.

I'm certainly conscious of the fact that I've been asked to follow our headliner Hong Kong act - my "boss", Tung Chee Hwa, who only last July was able to combine business with a much-needed break in his favourite American city - San Francisco.

In fact, I have undertaken the difficult task of personally reporting back to him an early analysis of the likely prospects of his beloved 49ers, even though I won't have an opportunity to see any games at first hand.

On a more serious note. I believe the steady stream of visitors from Hong Kong to these Pacific shores demonstrates the importance we place on our continued good relations with the United States and, in particular, the West Coast. There is no more important link for Hong Kong outside of the mainland of China than our ties with the U.S.

Our partnership extends beyond trade and investment to commerce, culture and communion that goes back to the middle of the last century.

We must, on both sides of this partnership, do all we can to ensure these traditional bonds are strengthened as Hong Kong evolves socially, politically and economically under the unique "one country, two systems" principle enshrined in its constitution, the Basic Law.

That's one of the many good reasons why the warmth of your welcome today gives us great comfort and reassurance, knowing we have friends like you here in the U.S.

I am also sure most of you have kept a finger on Hong Kong's pulse over the past couple of years and are aware of the "hot issues" that have kept us on our toes, principally as a result of the Asian financial crisis; and how we are tackling them. So, I don't want to take up your valuable time in recapping how we have fared as a Special Administrative Region of China since the handover.

Instead, what I will do today is explain in greater detail the way we are going about reforming our markets. Opening them up even further. Fine tuning what is already the world's freest economy.

In the financial services sector, our reforms fall roughly into three areas - the merger of the stock and futures exchanges; further reforms of the banking system; and enhanced but not heavy-handed regulations to give further clout and credibility to the watchdog Securities and Futures Commission.

In the public sector, we are embarking on further privatisation of public assets, including our profit-making and highly successful mass-transit railway and even some of our social welfare services, initially with home care help and special services to our elderly and people with disabilities.

In telecommunications, we have successfully negotiated the early surrender of the former Hongkong Telecom's exclusive licence for international telecommunications. This has been a major breakthrough in opening up the market since January this year.

Healthy competition, wider choice of services, and - best of all - cheaper prices for consumers are the result. These benefits came a lot earlier as the licence was not due to expire until October 2006.

And, taking our external telecommunications policy one step further - the sky's the limit, literally. From next January we will have an 'open sky' policy to encourage innovative uses of satellite and other wireless-based systems to provide broadcasting and multimedia services including Internet-from-the-sky services.

We have completely liberalised the market for Internet services and mobile phones. We now have roughly every eighth person in Hong Kong surfing the net, or every other person using a cell phone. And we are continuing to free up the market, primarily in satellite services and new submarine or overland cables.

Hong Kong people have always been switched on, but I think it is also safe to say Hong Kong is a truly wired-up society.

Having said all that, I would like to go into more detail about how we're re-shaping Hong Kong's markets for the new millennium. In one sense we are introducing radical reforms. Not extremist measures. But fundamental changes to the way in which Hong Kong's markets will operate in an increasingly competitive world.

Survival of the fittest is the name of the game.

But are we going too far? Perhaps entering the realm of reform that may have prompted the late French statesman, Rene Coty, to once remark: "It's a pity to shoot the pianist when the piano is out of tune".

The short answer is no. We certainly don't intend meddling with our deeply-rooted free and open market philosophy. What we are doing is building on those strengths to meet the challenges being thrown up by globalisation.

Our most substantial reform, which is taking place as I speak, is to successfully guide the merger and demutualisation of Hong Kong's stock and futures exchanges and their associated clearing houses.

The first phase of the complicated process was completed at the end of July. The proposals will be put to their shareholders for approval next Monday (September 27th).

Our ultimate aim is to build the leading securities and futures exchange in Asia and one of the top five equities markets in the world.

To pave the way, we are creating a single holding company eventually to be listed on the stock exchange for trading and wider public ownership. There is no doubt, the success of the merger is a vital step in achieving our goal. The market trend for a single stock and clearing entity has been established here in the United States, in Europe, and is taking hold in Australia.

That's why we have been fully behind the efforts of the stock and futures exchanges and the establishment of the new company - Hong Kong Exchanges and Clearing Limited - that will replace the separate bodies once agreement is reached.

The merger is central to our approach to market reforms. The other interlocking pieces completing the picture involve upgrading the market's infrastructure to include a single clearing arrangement for securities, stock options and futures transactions; straight-through processing; and a scripless securities market. This will be backed up by a modern regulatory regime that will include:

- strengthened supervisory and investigative powers for the Securities and Futures Commission;

- the creation of an independent Market Misconduct Tribunal headed by a High Court Judge;

- new regulations on Internet trading; and,

- a streamlined licensing regime for market intermediaries.

Taken together these reforms will reinforce Hong Kong's position as a global financial centre and will put us at the forefront of markets in Asia. As I mentioned earlier, these are enhanced, not heavy-handed regulations.

They will provide optimum regulation for the market, give sufficient protection for investors, and leave enough room for market development in a fair, orderly and transparent way.

In other words, encouraging, not stifling, healthy competition and market innovation. Let there be no doubt, as we enter the 21st century, Hong Kong will play an increasingly important role as the number one services centre and capital fund-raising focal point for China in particular and East Asia in general.

And we are not content to stop our reformist zeal here. We have extended it to our banking sector - arguably the most efficient and best regulated in the region.

In particular, we are deregulating the remaining deposit interest rate rules by scrapping the long-standing practice of the so-called banking cartel to set rates on current and savings accounts. We are enhancing depositor protection. And we are encouraging greater participation from foreign banks.

This liberalisation of the banking sector will stimulate competition; promote greater efficiency and innovation; improve the safety and soundness of the industry; and help maintain Hong Kong's position as a leading international financial centre. Eventually, we may see the merger of some of Hong Kong's smaller banks as a way of strengthening their position in the new highly-competitive global environment.

So, while the Asian financial crisis had a devastating impact on our economy and the economies of countries in the region, it has spurred much-needed restructuring. Restructuring that is helping us recover from the recession and re-positioning ourselves when full recovery is under way.

And we are beginning to see the first glimmer of that recovery. The revised second quarter figures out yesterday showed our economy grew by around 0.7% in real terms - a robust recovery from the previous quarter's decline of over 3%, and the first positive GDP figures since the final quarter of 1997. Tourism is up, trade figures have improved and private sector consumption expenditure is improving.

While it's too soon to predict with certainty that we are finally out of the woods, the indications are that our forecast growth of 0.5% for 1999 as a whole is achievable.

What I can say with certainty, however, is that Hong Kong will be entering the new millennium - whether you believe the magic date is January the 1st next year, or January the 1st two-thousand-and-one [2001] - in much better shape than a year ago.

And we will be further capitalising on our very special position in China. As part of the same nation, but operating under a separate capitalist system, we are uniquely placed to contribute towards the modernisation of the Mainland and, at the same time, to benefit from its emergence as a world economic power.

The mainland of China's economy is forecast to grow by around 7% this year, following on from last year's nearly 8% rate. This growth, together with the continued opening up of the economy and the reform of the state sector, is expected to contribute to a further expansion of our two-way links. And, the Mainland's accession to the World Trade Organisation will open up even more opportunities.

The natural synergy that binds Hong Kong and the Mainland will remain a potent economic force in the next 50 years and beyond.

Finally, I know some of you are still interested in our decision to intervene in the stock market in August last year. Without going into great detail, the decision was taken as a last resort to protect our currency link with the U.S. dollar and, indeed, to save the economy from collapse.

The action we took, hard as it was at the time, is inevitably mentioned as evidence of a perceived departure from non-interventionist capitalism. We knew this would be the case and we vehemently disagree with those who put forward this argument.

But, faced with the prospect of a market set to implode through manipulative activities, I decided it was better to have a market in which to invest than to have no market at all. I'm sure all of you here in the U.S., more than anywhere, would appreciate that.

Following our incursion, we swiftly set about distancing the government from the multi-billion dollar equity portfolio by establishing a company - Exchange Fund Investment Limited - to find the best way in which to carefully dispose of the shares.

Last June, the company, operating independently of the government, announced that it planned to launch the disposal programme in the form of a unit trust product designed to track the stock exchange's Hang Seng Index. Work is underway to prepare for the launch of that product.

As a government we are anxious to dispose of our large share holdings, reducing it - in the long-term - to an amount equal to about 5% of the assets of our Exchange Fund. The unit trust is the first step to achieving that goal.

For the past two years, Hong Kong people have found the going rather tough. However, with the economy showing signs of recovery; with the recent improvement and stability in the stock market; a playing field that remains perfectly level; and a Mandatory Provident Fund coming on stream, there is - at last - some good news coming from our region.

And, as I said recently, if you look closely through the haze generated by a healthy plural society, you will find a confident city, dedicated people, and a free community passionately committed to the rule of law. A city that is leaner, more competitive, and positioning itself for the post-recession lift-off.

Thank you

End/Wednesday, September 22, 1999

NNNNN