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The following is the speech by the Financial Secretary, Mr Donald Tsang, at the World Economic Forum Hong Kong Networking Lunch in Singapore, today (Wednesday).

Excellencies, Distinguished Guests, Ladies and Gentlemen

I'm delighted to have this opportunity to speak to such a distinguished audience here in Singapore. And, perhaps, to relax a little after the formalities of the East Asia Economic Summit. That's not to say I'm about to take off my tie!

I always enjoy visiting the Lion City. I was here on holiday last year. But we don't seem to read a lot about Singapore in Hong Kong these days, although I understand just about everything that moves in Hong Kong appears in the Singapore press! So it's good to see at first hand the changes and developments taking place in the city that is often described by the international news media as Hong Kong's arch rival.

A lot has been said about the rivalry. Although that is often excessively portrayed, it keeps both of us on our toes. It also promotes a higher degree of cross-fertilisation of cultures that has its mutual benefits. I understand one of the newest night spots in Singapore is called Lan Kwai Fong, which is named after the well-known restaurant and bar area behind Hong Kong's CBD. Meanwhile, back in Hong Kong, one of the most popular lunch-time dishes is called Singapore Noodles, although few Singaporeans here know what we are talking about. I suppose you could say it's a union of night spots and noodles!

Seriously, it is only natural that comparisons are drawn between our two cities. After all we share the same historical backgrounds, developing from small 19th century fishing villages with excellent deepwater harbours to the dynamic economies that we are today. In spite of our similarities, we have been able to thrive and prosper as we have each developed our own special market and region at opposite ends of East Asia. And we each retained our own distinctive characteristics. In Hong Kong's case, some might say a little more free-wheeling and frantic.

I prefer to see us as partners in commerce. There is no doubt, however, that the Asian financial crisis has heightened the perceived competition between our two cities, certainly as a regional base. The foreign press loves it, and many bureaucrats in both economies are agitated by it.

Hong Kong is now home to nearly 2,500 international corporations. And, while from time to time, some corporations relocate to Singapore, we continue to gain new players who want to take advantage of our location. Wasn't it the noted hotelier, Conrad Hilton, who once remarked that the three secrets of a successful business were: "Location. Location. And location."

While we can't rest on our laurels, we do have different hinterlands. In our case, we have the mainland of China, with its population of 1.2 billion, which offers tremendous challenges and opportunities. And we are perfectly placed, as part of that great country, but operating under a separate system, to participate in its emergence as one of the top two or three world economies early in the new millennium.

In about 70 days, we will enter that new century. Hong Kong is at ease with the new millennium in that over the course of our history, we have continued to conquer frontiers, meet new challenges, and provide leadership in the Asian region. Most important, as an international financial centre, Hong Kong has a tradition of being fiercely self-critical but always looking forward, not backward.

In the next millennium, future growth and prosperity for the region will be decided by two overriding issues - the quality of life and skilled workforces. Over the past few decades, environmental protection, a subject dealt with at some length in our Chief Executive's policy address a fortnight ago, was something that many Asian countries tended to regard as of secondary importance - and I include Hong Kong here - in the drive for economic growth and to provide a better livelihood for their people. One only has to recall the thick haze that enveloped this part of Asia, a year or so ago, as a result of the forest fires blazing in Indonesia.

It is clear that action, not words, is required. Protecting the environment is essential for sustainable economic growth. The measures we are putting in place over the next few years, some in co-operation with our neighbours across the boundary in Guangdong Province, will dramatically 'clear the air' over Hong Kong, as well as enable the right conditions for sustainable development. You might think it a little strange that a Financial Secretary should be touching on such a topic, but whichever way you look at it, the environment is a financial and economic issue and it affects us all.

Even before the Chief Executive outlined the government's proposals for a better 'quality home', international chambers of commerce were lobbying for action. They advised us that our deteriorating environment might make it increasingly difficult to attract foreign investment and new overseas companies to establish in Hong Kong. The warning was heeded. We have acted decisively on a topic that was top of their agenda. We will spend HK$30 billion in the next 10 years on enhanced environmental measures. This will spur new industries and heighten global attention. Much work will need to be done between now and 2005 when positive results will be filtering through. Do not be mistaken that Hong Kong is environmentally in danger. If you look at the bottomline, by that I mean life expectancy, Hong Kong is No. 2 in the world, in terms of life expectancy. Our women live to a mature age of 84 and our men manage 79.5. It's not bad.

And, I'm pleased to say that Hong Kong continues to appeal to foreign investors and businesses. There are indications that the downward trend in the number of new international offices setting up in Hong Kong has reversed this year. This follows a downturn in the previous year, largely as a result of the impact of the Asian financial crisis, and wages and property prices going through the roof, sapping our competitiveness.

The fact that we were swept up in the Asian turmoil, a bit later than most, hastened the economic adjustment that had to take place and stimulated the radical restructuring now under way. The crisis was a wake up call - and Hong Kong smelt the coffee. At first we were at a disadvantage to other countries in the region as our linked exchange rate mechanism to the US dollar (a vital pillar of our economic policy) limited our use of interest rates to stimulate growth.

But no one should ever write off Hong Kong. We have been through too much over the past six decades to let another crisis get the better of us. And through Hong Kong people's natural survival instincts, we are decisively recovering. The discipline of our fixed exchange rate compels efficiency and structural reforms autonomously. No side-stepping. No postponement. The long-term structural and productivity gains, as regulated in speed and depth by the market, and not by the government, will be worth every blood or humiliation exacted by the adjustment process.

Property prices have dropped significantly, rents have been pegged down, the stock market has picked up, consumer confidence has risen, visitor numbers are up, and inflation has disappeared. And to top it all off, the economy grew in the second quarter - but more on that later. Here I would like to compliment Singapore on the way it has come through the crisis - in remarkably good shape. In fact, we both implemented measures that, in some cases, bore a striking similarity.

However, in Hong Kong's case, it would be wrong to assume that through these economic packages and our recent moves to stimulate interest in innovation and technology - like the Cyberport project, or tourism initiatives, such as negotiations with the Walt Disney company on a theme park - that we have somehow abandoned our free market principles. Nothing could be further from the truth. These projects are merely examples of the government reacting judiciously to manifest private sector demands. Our basic philosophy has been, is now, and will continue to be "maximum support for our private sector, minimum intervention". We certainly don't want to stifle creativity or entrepreneurial flair, so we let the business people get on with the job they do best and keep government meddling to the minimum.

What we are doing is positioning Hong Kong for the 21st Century. Diversifying into new areas with the ultimate goal of developing Hong Kong as a world city - the New York or London of Asia. Restructuring the economy away from our former reliance on property. And strengthening our systems to reinforce our position as a leading international financial services centre. 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 powers for our watchdog Securities and Futures Commission. Singapore is following the same reform route. In the public sector, we are embarking on further privatisation of public assets, including our highly successful Mass Transit Railway and even some of our social welfare services.

In telecommunications, I'm pleased to say, there has been something of a revolution. For instance, in one area alone, our decision to free-up the market has resulted in the price of phone calls tumbling as fierce competition between the existing and new players provides a bonanza for the consumer. We have completely liberalised the market for Internet services and mobile phones. And, taking our external telecommunications policy one step further. 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.

Perhaps our most substantial reform, and one closest to my heart, is the merger and demutualisation of Hong Kong's stock and futures exchanges and their associated clearing houses. We have passed the latest hurdle with flying colours. Members of the two exchanges voting overwhelmingly late last month to approve the merger and the next stage is to guide the necessary enabling legislation through our Legislative Council.

We are aiming to build the leading securities and futures exchange in Asia and one of the top five equities markets in the world. And in this regard, we're anticipating competition from many quarters including Singapore. It is through such competition that we all thrive together.

In paving the way, we are creating a single holding company which we will list on the stock exchange for trading and wider public ownership before Easter next year. The merger is central to our approach to market reforms. The other measures involve upgrading the market's infrastructure to include a single electronic 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; new regulations on Internet trading; and a streamlined licensing regime for market intermediaries. These reforms, taken together, 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.

And we are extending the reforms into our banking sector, arguably the most efficient and best regulated in the region. In particular, we are deregulating the remaining deposit interest rate rules, looking at ways to enhance depositor protection, and encouraging greater participation from foreign banks. This liberalisation will stimulate competition, promote greater efficiency and innovation, and improve the soundness of the industry. 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.

Obviously, nothing in this world remains constant. And Hong Kong is no exception. We have taken advantage of the Asian financial crisis to initiate reforms, to strengthen our systems, to explore new ways of expanding our economic base. But we jealously guard our freedoms which have remained the same since our reunification with China. The rule of law. An independent judiciary with the power of final adjudication. A free and open market. Freedom of the press. Freedom of speech. Freedom of religion. The freedom to run our own economic and fiscal policies without interference. And the list goes on. So, with the reforms and restructuring under way, coupled with our vital constants, the pieces of the vast jigsaw of Hong Kong are gradually falling into place as we enter the new millennium.

Nevertheless, in summing up, I am taking the liberty of quoting from a recent editorial in the weekly business magazine, Far Eastern Economic Review. And I quote -

"Because of the Hong Kong dollar's peg to the U.S. dollar, the city has been at a price disadvantage against the rest of the region.

"Its best way of adjusting is by reducing local-currency costs, which, contrary to the buzz of deflation, is exactly what it's doing.

"More as a testament to its commitment to the free market, it's accomplishing this without government intervention or cajoling.

"So relax, sit back and watch Hong Kong bounce back - with Adam Smith smiling down on the city."

Thank you.

End/Wednesday, October 20, 1999

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