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Following is the full text of the luncheon speech (English only) delivered by the Financial Secretary, Mr Donald Tsang, at "Hong Kong 2000: The Challenges & Opportunities Ahead" today (Wednesday):
Chairman (Mr David O'Rear), Mr (Henry) Luk, (Mr) George (Yuen), distinguished guests, ladies and gentlemen,
On this day a year ago, the topic of my speech to a Hong Kong business summit was based on the hit movie Saving Private Ryan, which was showing at the time. Today, in keeping with the trend, I had planned to call my speech Fight Club, a thought-provoking film, starring Brad Pitt and Edward Norton, that has received critical acclaim in Hong Kong.
The title, and I mean the title not necessarily the substance, had a certain ring to it, with the situation in which we now find ourselves - East Asian economies fighting off the remnants of the financial crisis.
That was the case, until I discovered at the climax - and please block your ears if you haven't seen the film - that the financial institutions end up being destroyed, despite the best efforts of the leading actor, Edward Norton! So this year, no film title.
In one sense, however, we have been successful in 'Saving Private Ryan'. The 'feel good' factor seems to be returning to Hong Kong, perhaps more swiftly than some of us had imagined a year ago.
In another sense, the rising expectations that come with the community 'feeling good' are unlikely to be translated into a sustained period of smooth sailing for our fiscal discipline in the immediate future.
But, I don't want to be a killjoy just yet. I readily acknowledge there has been a steady trickle of good news emanating from the region over the past weeks and months, in particular yesterday.
For the first time since the final quarter of 1997, GDP in all the East Asian economies has recorded growth. Investment is starting to flow back into the region as confidence levels edge upward. And, Hong Kong has been no exception.
As you know, our provisional third quarter GDP results, which showed a real growth of 4.5%, were significantly higher than most had forecast earlier. The stronger performance has allowed us to revise upward our GDP estimate for 1999 as a whole to a growth rate of 1.8%, instead of the earlier 0.5%. So, technically, we are out of recession.
And when we tie these results to the reforms that are transforming and strengthening our markets and financial services sector. The natural or autonomous adjustments to the economy that are restoring our competitive edge. And the initiatives that have been announced in recent times by the private sector - Hong Kong is on a roll, albeit a rather tentative one.
The reform programme is part of a series of strategic initiatives. It will help us meet the challenges, and competition, of globalisation and reap the benefits of high-tech developments.
We are diversifying our economy away from our long-standing dependence on property. We are targeting the hardware and software we need to become an IT hub.
The Cyberport will help us develop a critical mass of professional IT talent in the shortest possible time and enhance our position as Asia's new 'Silicon Valley'.
The Science Park project, launched last week, will become a focal point for collaboration between local and overseas enterprises. And will act as an important catalyst in stimulating innovation and promoting the growth of technology-based industries in Hong Kong.
Joint venture proposals between Cable & Wireless HKT and Star TV; between Hutchison Whampoa and Global Crossing; and the successful debut of I-Cable Communications on both the Hong Kong and Nasdaq exchanges are examples of private sector initiatives flowing from the government's liberalisation of the IT market.
Reforms in the financial services sector, including the merging and demutualising of our stock and futures exchanges and their clearing houses; the launch of the Growth Enterprise Market, for start-up companies; the upgrading of our financial infrastructure technology; and further liberalisation of our banking sector - are preparing us for the new millennium.
And, China's imminent entry to the WTO; the highly successful launch of the Hong Kong Tracker Fund; the agreement we reached with The Walt Disney Company to build Hong Kong Disneyland; an upturn in consumer spending; and the nearly 12% growth in visitor arrivals this year. These are being seen by the community as encouraging signs of confidence in Hong Kong's future and the recovery process.
The world, particularly the Asian region, is still not immune from the continuing volatility in the Yen/US$ exchange rates. A strong Yen may entice the Japanese to once again invest overseas, as they did with such success in the early 90s, and make our exports even more competitive.
But a strong Yen would probably set back Japan's own economic recovery. A most important factor now is to have a strong Japan to ensure that the roots of the Asian recovery are bedded in solid ground.
So, while our economic growth figures are encouraging, we are still vulnerable to external factors. Most notably Japan, and in the United States where the interest rate trend could still impact on the stock market.
Another issue that needs to be addressed is Hong Kong's long term competitiveness. This will become even more pronounced with the further opening up of the Mainland after its accession to the WTO. A situation that will lead to increased international competition in the nation's lower cost internal markets.
We may have the best services in Hong Kong, the best facilities, and the best expertise in brokering deals for companies wanting to open up in China. But, if our costs are high we will be in danger of losing out to Shanghai or some other regional cities in transactions where currency convertibility is not essential.
Certainly our costs have reduced appreciably since the peak of the bubble in 1997. Property prices, rents, labour costs have all dropped. But, in some cases, they may have to be pegged back even more if we are to provide real competition for our East Asian neighbours and, more important, within the Mainland itself.
Having said that, however, I realise there is a premium for being in Hong Kong. Our compact size; the scarcity of land; and the high cost of developing new land, mean that it will be marginally more expensive to carry on business here. Much the same as in New York or London.
As with those two great cities, I believe the premium here is justified by our advantages. Our location. Our world-class banking, financial services and infrastructure. Our free market philosophy. Our strong legal system based on the common law. Our highly-developed services culture and economy which ranges across the whole services spectrum. The higher productivity of our work force. Our adherence to and respect for the rule of law. Our respect for human rights and freedoms. And the list goes on.
Hong Kong entrepreneurs have always been quick at sizing up a business situation and seizing the opportunity to turn it into a profitable proposition. And then quickly adapting to keep up with new trends.
After all, this is the hallmark of Hong Kong. But we need to do more to leverage the recovery process and develop as a knowledge-based economy. We have to build on the strengths of our adaptable work force. This can only be achieved by providing quality education geared to the technological world of the 21st century for our bright young talent to flourish.
We will need to couple this with our continuing efforts to attract the right talent from the Mainland, and from overseas - whether they are Hong Kong people wanting to return home or expatriates with the appropriate qualifications and expertise.
One of the reasons for our current 6%-plus unemployment rate is the growing number of workers displaced by our economic restructuring. While we are doing much to help them, our re-training efforts may have to be raised so these workers can realise their full potential and find meaningful work in tomorrow's world. But there are no easy solutions.
I have attempted to address some of the remaining difficulties we face as we begin the recovery process. But there is one other significant factor I promised to return to at the start of my speech, and it deals with our fiscal policies.
With the 'feel good' factor taking hold, some of us may have lost sight of the fact that this year we are still facing a sizeable deficit, though it is likely to be smaller than what we forecast in March. And a projected deficit next year of some $5.6 billion, that's assuming the partial privatisation of the MTRC will proceed.
If you recall, this year's rather large deficit stems from the fact that the last two budgets - together with the package of economic relief measures in June last year - contained a series of revenue concessions which cost the government some $50 billion.
The reason we were able to do this, to tide ourselves over the Asian financial crisis and to cover for another rainy day, is our long-standing policy of fiscal prudence. By keeping our expenditure to within the trend rate of growth in the economy over time, we have built up sizeable fiscal reserves.
But, alas, we don't have a bottomless gold mine. We do have to take into account the financial discipline stipulated in the Basic Law. And, we do have a shrinking revenue base, partly as a result of the tax concessions we have made over the years and partly as a result of the financial crisis.
Obviously, in keeping with the spirit of the Basic Law, it is my duty as a responsible Financial Secretary, and the duty of our legislature which has the ultimate say on our public revenue and expenditure, to bring our financial position back into the black over the medium term. This is also essential if we are to maintain our international credit rating, which underpins investors' confidence in Hong Kong and the borrowing capability of local businesses.
That said, however, I also need to respond sensibly to the legitimate expectations of the community in the prevailing economic climate. In other words, the first full budget of the new millennium will be an intricate balancing act. But one, I fear, that will not be sprinkled with 'gold dust'.
People who advocate the easy way out should bear in mind a famous phrase coined by a former Australian prime minister [Malcolm Fraser]: 'life was not meant to be easy'. He may have regretted saying it, but it does sound a salutary warning to those wanting more concessions, more handouts.
Our tax base is simply shrinking. For example, this financial year, around 70% of the yield from salaries tax is being shouldered by 15% of salaries tax payers. The situation is similar for profits tax, with some 80% of the revenue coming from only 5% of all the taxable business entities.
And we are expecting structural changes in our revenue base. We may no longer rely so much on land-related revenue as our land supply and demand stabilise.
There are those who will argue that I'm simply crying wolf ahead of the March budget. But we're not dealing with 'virtual reality'. The situation is serious. We have to look at broadening our tax base to find other stable sources of revenue. I will be doing everything I can to lessen the load. But nothing in life is certain.
What I do want to leave you with today is this. We are on the road to recovery. Our competitiveness is being restored. We have just been rated the world's freest economy for the 6th year running. The economic reforms being put in place are buttressing our systems. We are embracing new technology. We fully recognise there are difficulties we need to overcome to meet the challenges and capitalise on the opportunities of the 21st century. And that requires not only entrepreneurial flair and modern managerial skills, but also steadfastness and a clear vision of Hong Kong's position in our Nation and this global economy.
Thank you.
End/Wednesday, December 1, 1999
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