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Following is the full text of the speech (English only) entitled "Hong Kong's Financial Markets : Setting the Pace in Asia" to be delivered by the Financial Secretary, Mr Donald Tsang, at a luncheon in New York organized by the Hong Kong Trade Development Council today (June 13, New York Time):

John [Wall], Ambassador Platt, Fred [Lam] Ladies and Gentlemen,

There is something special about coming back to New York - somehow you know you're in the financial capital of the world, with all due respects to London. The buzz, the buildings, the boldness of New York sets the place apart from the rest and gets the adrenalin flowing.

But there's a reverse side to this story as told by a New Yorker arriving in Hong Kong for the first time - and I quote - "You know you have flown halfway around the world. You know you were on a plane for 20 hours - your back tells you that. You know, empirically, you are smack in the heart of Asia. How is it, then, that you seem to have landed in the place you started from?" I could add, that summer here is just as hot as it is back home, but I'm not sure that is a positive sign!

I imagine this morning's seminar has been very informative and has covered much of the ground on what is happening in Hong Kong in relation to our financial markets and financial services generally. So please excuse me if I happen to repeat some of the points you have already heard.

But first let me presage my remarks by bringing you up to date with how the economies of our region have been faring as we emerge from the shadow of the Asian financial crisis. While the recovery is still in its early days, forecasts indicate that this year the nine economies of East Asia, excluding Japan, will grow by an average of 6.3 per cent; and there are predictions of a 6 per cent growth in 2001. This compares with the average projected growth in the G-7 countries, which of course include Japan, of 3.3 per cent; and 2.7 per cent next year.

As far as the year 2000 is concerned, those forecasts, based on IMF data, reflect what is happening in Hong Kong today. As you may be aware, in the past fortnight we have reported a quite staggering first quarter GDP growth of 14.3 per cent - the fastest growth recorded since late 1987. This was much stronger than even the most optimistic forecasts, and came on top of a 9.2 per cent growth in the final quarter of 1999.

Admittedly, the figures have been made more impressive because of last year's relatively low base of comparison when we were still in the grip of the recession. We realize the double digit rate won't continue in the coming months. But it is most encouraging that the pick up in economic growth has been so broadly based.

Exports of goods have jumped nearly 21 per cent and that of services by a robust 16 per cent. Consumer spending is up. Investment has returned to positive growth after falling for six consecutive quarters. Unemployment is trending downwards from its peak of just over 6 per cent. And our economic outlook for the medium term remains favorable, underpinned by sustained growth and further economic reform and liberalization in China after its accession to the World Trade Organization. This has enabled us to forecast a trend rate of growth of 4 per cent annually for the period between 2000 and 2003.

On the whole, then, the picture is looking a lot healthier, although there is a downside. And the one with the most risks attached is a possible economic slow-down here in the United States, particularly in view of the recent interest rate hikes and the consolidation in the stock markets. Hong Kong is particularly vulnerable to rising interest rates because of our linked exchange rate with the U.S. dollar, which keeps our rates more or less in parity with yours.

However, this is a price we are prepared to pay as time and again the link, under our currency board system, has proved to be the best option for an economy as open and as externally-oriented as ours. It has been, and will continue to be, an anchor of stability in the Asian region.

Given this background, you might think the speech title I have chosen, "Hong Kong's Financial Markets : Setting the Pace for Asia" is a little presumptuous. After all, as I mentioned earlier, the region is still climbing out of the worst financial crisis in its modern history, admittedly though in a fairly robust manner.

That's true, but it overlooks the fact that what we have been doing in Hong Kong has been a direct consequence of the turmoil and we didn't start yesterday.

I would be the first to admit we were caught off guard by the severity of the financial crisis and we may have been a little slow out of the blocks to react. But once we were able to focus clearly after the initial shock, we started putting in place fundamental reforms to lead us into the 21st century - reforms that we could not have undertaken or contemplated, had we not had this historic financial crisis.

And we are implementing those initiatives with an almost missionary fervor, driven by our determination to remain a leading global financial center. While we have felt deeply the pains and humiliation of an economic recession, we know as well that the crisis has presented to Hong Kong a rare opportunity to reach greater heights. In today's global market, if you don't act swiftly you run the risk of going under, or at the very least, surfacing in someone else's identity. Neither of those alternatives appeals to us.

So, how are we setting the pace?

In a city that cut its teeth on free and open markets, and has consistently been ranked as the world's freest economy, the only way to meet the challenge of globalization is to open the doors still further. To encourage market liberalization, to enhance competitiveness, innovation and efficiency while still maintaining the safety and integrity of the system.

When I was here last September, we were already well under way with a reform package targeting seven areas of Hong Kong's economic fabric.

* Revitalizing the banking sector by opening it up to more foreign competition and getting rid of outdated interest rate regulations.

* We were merging and demutualizing the securities and futures markets, a process which was successfully completed three months ago. Modernizing the regulatory regime; and forging new strategic alliances with markets in other time zones.

* Revamping the public sector including privatization of a substantial minority stake in our very successful subway system, the Mass Transit Railway Corporation.

* Liberalizing the telecommunications sector to the extent where it is now one of the most open and competitive anywhere in the world.

* Transforming the tourism and recreation industry, including a start on only the third Disneyland theme park to be built outside the U.S.

* Cleaning up the environment, particularly the quality of our air and water.

* And, hitching a ride on the information super highway.

They don't all relate to our financial services, but they all have a distinct impact on Hong Kong as a leading services center in the region; and are a good pointer to Hong Kong as a market with increasingly attractive investment potential.

For the moment, our reform package has managed to keep us ahead of the pack. But that's cold comfort in today's world where competition is fierce. We have to keep the momentum going. So, we are now venturing into our next phase of development; and the new economy is providing the opportunities.

One of our most important initiatives in exploiting information technology is to further integrate the full range of financial services - securities, futures, clearing - through an open and secure electronic network. This will allow all securities and derivatives transactions to be processed in a straight-through manner. There will also be better risk management functions through real time settlement.

The Internet is also opening up a world of 'virtual' financing. Only last month the Monetary Authority issued guidelines on the licensing of 'virtual banks' - a phenomenon that is becoming more popular as Internet applications continue to spread into every corner of our daily lives. But the guidelines will ensure that a company applying to set up a virtual bank in Hong Kong must have substance and not simply a concept.

Trading in futures on the Internet is also set to grow now that the futures exchange, which forms part of the integrated HKEx, last week (June 5) switched to its electronic trading system. The change has brought to an end the colorful and often boisterous floor-based open outcry system. However, with the new electronic system comes the prospect of increased trading volumes and enhanced market transparency and efficiency.

In making Hong Kong the leading investment window in Asia, we are developing a multi-currency capital market and clearing system. As a first step, we're building a capital market that will offer local and global investors access to a full range of U.S. dollar-denominated products.

The system is being introduced in phases this year and will enable real-time transactions to be made in U.S. dollars. This will also have the effect of reinforcing our monetary stability by reducing pressure on the Hong Kong dollar as it will no longer be needed for conducting non-domestic financial business.

The Hong Kong market has also become the first in Asia to offer 'live' trading in the Asian time-zone of selected U.S. stocks. This is just one of the spin-offs from the alliance established last year between HKEx and NASDAQ. Investors are now able to trade seven of the big-name NASDAQ-listed companies. The stocks which are changing hands in Hong Kong dollars include those from companies such as Microsoft, Intel, Dell Computer and Cisco Systems.

The development marks another important step in the eventual introduction of around-the-clock trading on a global scale. And, of course, our new second board the Growth Enterprise Market, GEM has been performing well.

Expanding our global network and forming strategic links with other markets are pivotal to the competitiveness of our debt market. Establishing mature debt markets in Hong Kong and the region as a whole is an important development for Asia. It is essential if we are to minimize the risk of future liquidity crunches brought about by an over-reliance on short-term bank lending and capital from the securities market.

To increase the breadth and depth of the debt market, we need to continue to attract companies outside Hong Kong, especially mainland Chinese enterprises, to issue debt papers in our market, either in Hong Kong dollars or in foreign currencies. In this way we will sharpen Asia's competitive edge by providing an alternative to, and filling the gap between, the mature debt markets in North America and Europe.

I have spoken at length on some of the Hong Kong initiatives that are setting the pace for financial markets in Asia. But we have not overlooked the fact that opportunities also come with risks. Therefore, coupled with our reform program, we are strengthening the risk defense mechanisms of our financial system.

A new composite Securities and Futures Bill was published in April which foreshadows legislative proposals that will keep pace with the most up-to-date market developments; close existing regulatory loopholes to promote market transparency and confidence; and reduce market misconduct and systemic risks. Banking supervision is also being strengthened.

However, as our economies become more interlinked, domestic measures alone will not be sufficient to reduce the risks posed by the global movement of massive, and at times volatile, capital flows.

That's why we have taken, and will continue to take, an active role in the reform of the international financial architecture. And why it is so vital for Asian governments to have the determination to carry through with the reforms needed to address the structural weaknesses in their economies - weaknesses that were exposed during the Asian financial crisis.

Finally, there are just two other points I wish to make. We have had a tough battle during the past couple of years to maintain Hong Kong's reputation as the world's freest economy. In the past 12 months or so, it has been argued that we have strayed from our free market principles. However, I give you this assurance today, we are totally committed to the principle of a market-led economy; we are sticking to our basic philosophy of maximum support, minimum intervention. We believe investors and entrepreneurs understand markets far better than officials and private initiatives are a surer way to build Hong Kong's prosperity than any bureaucrat's blueprint.

The second point relates to China's entry to the WTO. We have long been a vocal supporter of accession. We also fully realize that Hong Kong will face increased competition as the Mainland's markets open up further to the world. But we believe the gains will far outweigh the losses.

Our services sector, in particular, stands to benefit now and in the longer term. And because Hong Kong probably understands the Chinese market better than most, we will still remain the best place for international companies to access the Mainland. We're also a pragmatic people. More foreign business may go directly to China, but as the market expands, our smaller piece of the pie is still bigger in the long run.

. More important, China's entry to the WTO is also about strengthening economic stability generally in the region. It is about ensuring the differences on trade are resolved sensibly. It is about developing the global economy on responsible, rules-based principles. It is also about making friends at enterprise, factory and shop levels, and between peoples across international boundaries

John [Wall], I have already outstayed my welcome, so I would like to finish on this note. Research by the Harvard Institute for International Development indicates that the economies which have benefited the most from globalization in the past 15 years share some common features. They adopt an open trade policy, have a clean and accountable government, uphold the rule of law, place a high premium on education, charge low tax rates, and have a flexible labor market. Time and again Hong Kong is cited as a prime example - we are building on those advantages.

Thank you.

End/Wednesday, June 14, 2000

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