Press Release

 

 

Speech by FS at Global Leadership Forum

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Following is the full text of the speech (English only) by the Financial Secretary, Mr Donald Tsang, at Global Leadership Forum, Harvard University, Boston today (Boston time, June 13):

"Is there a Second Asian Miracle?"

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Provost Fineberg, Professor [Graham] Allison, Mr [Richard] Cavanagh, Dean Nye, Ladies and Gentlemen,

It is good to be back in the Ivy-decked halls of Harvard, where I spent many happy days of immersion learning. Unlike the noted 19th century English author Thomas Peacock, when writing satirically about one of his characters who was "sent, as usual, to a public school where a little learning was painfully beaten into him. And from thence to the university, where it was carefully taken out of him". From my experience, he wasn't talking about Harvard!

This evening, I have been asked to speak on the recent economic developments in Asia - a topic I am beginning to warm to. The recent signs of recovery in Asia have been quite spectacular, so I thought I should rightly attempt to answer the question: Is there a Second Asian Miracle?

MIT Professor Paul Krugman of course is on record on saying that the First Asian Miracle was 90% perspiration and 10% inspiration. I wholly endorse the perspective that the word 'Miracle' inaccurately attributed Asian growth success to providence rather than to hard work. And if there is to be a Second high growth era, no doubt even harder work will be necessary. But I am jumping the gun and should try to keep you in suspense.

Flashback to July 1997. When the Thai baht devalued on July the 2nd, it appeared to signal the end of more than two decades of Asian Miracle growth. Asia was accused of crony capitalism, over-borrowing and other ills. But by the 1st quarter of 2000, Asian growth was powering back with almost no inflation in sight.

Take Hong Kong, for example. We were accused of being a growth laggard, but in the 1st quarter, we recorded real growth year-on-year of 14.3%, the fastest rate in Asia, even faster than Korea (1st quarter of 12.8%).

And in US dollar terms, Hong Kong's real income in 2000 has been maintained at 3% higher than 1997, whilst almost all other Asian economies, except China and Taiwan, have lower real income in US dollar terms due to the sharp depreciation of their currencies.

With the exception of negative inflation of 4%, every sector enjoyed positive growth - private consumption (8.3%), investment (5.6%), and services exports (16.4%). More significantly, the private sector led the growth. Public sector investment contracted by 10.6%. Thanks to Hong Kong's famous entrepreneurial spirit, the economy is undergoing significant structural changes towards the New Economy - providing more competitive value-added services through e-Commerce and new technology.

Without doubt, Net-fever has swept the whole of Asia - from Japan to Indonesia and west to India. Stock markets throughout the region witnessed record peaks in March, signalling confidence in a remarkable export-led recovery. Since then, interest rate increases have somewhat dampened the enthusiasm, but not the momentum of growth. Both official IMF and ADB, as well as street, forecasts register real growth of 6.0%. And the indicators are quite clear in direction:

The Asian Wall Street Journal survey of executives in Asia indicate that 55% of their companies see increasing direct investments in Asia in the next 12 months; 52% would be investing in technology, telecommunications & internet areas; 17% in manufacturing; and only 9% in construction and property - a significant change from high investments in fixed assets in the 1990s.

Japan's equity investments in Asia are picking up again, although they still do not compensate wholly for the withdrawal of bank funds during the crisis.

Overall, Asian executives are positive about China's accession to the WTO, although we are all hoping the Senate will follow the lead of the House and approve the PNTR legislation.

There are of course, notes of caution and concern amidst the upswing. Two questions stand out:

* Has Asia slowed down the momentum for reform?

* Is Asia's capacity to compete in the New Economy only skin-deep?

I cannot claim to speak for all of Asia. It is of course extremely difficult and over-simplistic to generalize the trends. With Asia-Pacific accounting for nearly 40% of global population and 20% of world GDP, there is every chance that all the sins can be found in Asia's backyard. But let me try and answer these two questions, using Hong Kong as the litmus test of reforms and restructuring in the New Economy.

First of all, I believe that we have learned the lessons of the Asian crisis and that the momentum of Asian reforms is moving forward. In the larger economies, such as Japan, India and China, there is clear recognition that the New Economy offers both opportunities and risks.

On balance, both the private and public sectors have made major structural investments in these New Economy areas, even as the pain of restructuring Old Economy state-owned enterprises and traditional industries grows.

The Asian crisis was the region's lesson in globalization and capital flow volatility. In the three years to July 1997, US$300 billion flowed into the region and in the two years following, US$200 billion flowed out - most of it bank credit. Over-leveraged corporations and under-supervised financial systems could not stand the strain and massive IMF rescue packages had to be installed or in the case of Malaysia, exchange controls. But instead of the predicted slow U-shaped trough, there has been a V-shaped recovery.

Asia was fortunate that a combination of structural reforms, fiscal reflation, lower global interest rates and the strength of the developed economies, especially the U.S., have pulled us out of the crisis. The OECD recently estimated that overall global growth accelerated from 3.7% in 1999 to 4.0% in 2000, with U.S. growth alone of 5.4% this year. Even the Japanese economy is expected to pick up from a modest 1.4% growth this year to 2.1% next year.

But there are interest rate pressures on the horizon, as the U.S. tries to curb overheating and its highest current account deficit ever. Fortunately, the Asian recovery is also on the back of a sharp revival in intra-Asian trade.

The New Economy in Asia

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As I indicated earlier, the Old Economy in Asia was still trying to recover from the Asian crisis when it met the threat of the New Economy. The Old Economy is suffering from a combination of overleverage in private and state-owned enterprises, outmoded management and excessive investment in fixed assets and manufacturing capacity.

The export recovery and lower interest rates helped to relieve their cash flow, but by and large many Old Economy industries still need to restructure their corporate governance and improve their competitive efficiency. After all, reforming the Old Economy is about forcing it to face up to competition, humiliation or even demise. By that I mean tackling, for example, the SOEs in China, the whole corporate culture in Japan and Korea, and the problems of the uneducated workforce in a good part of Asia who are being forced to take lower wages or face unemployment.

There is no doubt in my mind that an influx of foreign direct investments in Japan, Korea and China, is helping the restructuring process. China's determination to join the WTO demonstrates a huge political will to use foreign competition to upgrade its domestic efficiency. Similarly, Japan has allowed Renault to attempt to restructure Nissan, indicating determination to use foreign expertise to revitalize competitiveness.

The New Economy has also created new opportunities through the arrival of thousands of young Net entrepreneurs who are changing the way business has traditionally been done in Asia.

The Growth Enterprise Market, Hong Kong's second board, achieved 25 new listings in less than 6 months' operation, a market capitalization of more than US$10 billion at its peak, with more than 40 applicants in the queue for listing. Similar boards are being considered in Mainland China, opening new sources of venture capital for private enterprises.

Hong Kong's New Economy has been able to take off because of its superior telecommunications infrastructure, a deregulation that allowed greater competition, not only in fixed line and mobile communications, but now nearly 200 ISPs and their free entrepreneurial spirit.

A similar web-based culture is emerging in almost all Asian economies. There is a distinct trait appearing. The economies with good English education, such as the Philippines and India, are emerging as new powers in software and call-centers. The manufacturing centers, like Taiwan, Korea, Singapore, Malaysia and even China, have become the dynamos of original equipment manufacturers in web-based products.

Few have noticed that last year, China's exports in IT products exceeded the country's exports in textiles. Hong Kong, on the other hand, is developing B2B startups that will rapidly change the way trade is done in the region.

What Hong Kong has shown is that the arrival of the New Economy can lead to new wealth creation helped by equity markets replacing banks as key channels of capital. For example, in Korea and Taiwan, the capital markets are raising more capital than the banking systems in funding the IT markets. In the larger economies of Japan, India and China, there is hope that the wealth generated from the New Economy can ease the pain of restructuring Old Economy companies, as labour will have to be shed and retrained.

It is clear that Asian economies are paying huge attention and devoting a lot of resources to developing telecommunications and fostering Internet growth. China already has 115 million fixed line phones, 43 million mobile phone users and 80 million cable subscribers. Similar investments are beginning to take place in India.

Using Global Capital to Energize the Second Asian Miracle

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By now it should be clear that the first Asian Miracle was due to Asian hard work and openness to global trade. Even though the Asian crisis was caused by exposure to global capital flows, the recovery was led by global trade and New Economy technology. And while Asia has tremendous domestic savings, much of it was misdirected through a lack of efficient, sound and deep domestic capital markets.

Such capital markets, especially venture capital, will be vital to help Asia restructure and fully embrace the New Economy to compete globally. Fortunately, Hong Kong has the financial markets, the financial infrastructure and a world-class regulatory framework for such growth markets to thrive.

Our Mandatory Provident Fund, the trading of Nasdaq shares in Hong Kong, and continued reforms such as demutualization of our exchanges, privatization of public utilities, deregulation in telecommunications and media, all combine to provide a vibrant market environment to assist the rest of Asia in the move to the New Economy.

There are those who argue Hong Kong does not have the skills or the knowledge base to compete in the software and IT manufacturing area. By definition, a city of 7 million simply cannot have the critical mass to compete against the talent pools of mega markets such as India and China.

But Hong Kong's skills have always been in marketing, management, finance and integration - our entrepreneurs leverage on our neighbors' competitive strengths. And our strategic position in the heart of Asia makes our integration role all the more important in helping to realize the coming Second Asian Miracle. And we will be looking to forge even stronger links with our good partners here in the U.S. to ensure we can both enjoy the benefits of the revival.

I have no doubt that this Miracle will be as much perspiration as the previous one. But we will be exercising our mental muscles more than our physical muscles this time round.

What is more important, Hong Kong deeply understands that the New Economy is about giving people and businesses the ability to link themselves together, and about empowering them to make market-optimal decisions. This is, in essence, Hong Kong's specialization over the past century. We cannot and will not fall behind in this evolution.

Thank you.

End/Wednesday, June 14, 2000

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