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Following is a speech (English only) by the Financial Secretary, Mr Donald Tsang, at a seminar organised by Austrade and sponsored by the Hong Kong Trade Development Council at Adelaide Festival Centre, Adelaide, today (August 3):

Jim (Wright), distinguished guests, ladies and gentlemen,

It is a great pleasure to be here in Adelaide on our first official visit to this lovely city. I am sorry it has taken us so long to get here. We have received a very warm reception from the South Australian Government and Austrade, and for that I would like to express my heartfelt thanks. I am looking forward to seeing more of this great southern capital, and to meet your political and business leaders.

Knowing that Adelaide is home to the most famous 'Sir Donald' in Australian history - many would say the most famous 'Sir Donald' in the world - I hope that I am able to emulate the legendary style, grace and skill of my namesake with a few words about Hong Kong today. I won't try to deliver any googlies. But I will try to hit a few misconceptions about Hong Kong to the boundary, with apologies to 'The Don' for my cricketing puns.

Before I begin I must let you know that I am very much looking forward to visiting some of your wineries tomorrow. I will of course take the opportunity to sample some of these lovely Australian reds you manage to produce down here.

But my interest extends far beyond a glass or two of Shiraz or Cabernet. What I want to do is to help forge a new partnership between Hong Kong and the Australian wine industry.

I see great opportunities for Australian wine producers in Asia, the world's fastest growing wine market. We are expecting annual growth of between 10 to 20 per cent. The value of wine consumed in the region will rise from $A1.5 billion at present to $A3.8 billion by 2006. And China's accession to the WTO will provide even more opportunities because tariffs on wine imports into China will drop from the current level of 65% to 20% by 2004.

Hong Kong has a role to play in this. There is at present no major wine distribution centre in Asia. We are very keen to develop this role. A wine delegation from the Hunter Valley was in Hong Kong earlier this week, and received a very warm reception. A South Australian delegation is welcome any time.

I believe it makes sense for wine producers in Australia, as well as those from the US, South America and Europe to look for a major distribution hub in Asia. With our excellent transport infrastructure, the world's most business-friendly environment, low taxes and an enormous depth of experience in importing and exporting - and of course a great location - Hong Kong is well placed to serve as the world's wine industry partner in Asia. I hope this has given you some food for thought.

Now to China's accession to the World Trade Organisation. I appreciate that you have had a full morning of discussions on this subject. What I would like to do is two things: first, I want to give you a rundown of how Hong Kong has been doing recently. It is important for us to update our friends and partners in Australia on how Hong Kong has fared as a region with a vibrant, free and open economy protected by the rule of law. Second, I want to let you know why I believe Australian enterprises should continue to look to Hong Kong as their business partner in Asia. And of course this includes making the best possible use of Hong Kong's advantages to leverage new opportunities in China's post-WTO market.

Let me start by putting the Hong Kong story into perspective. Our systems are different from those in the Mainland. We are part of the same nation but our national leaders in Beijing recognise the over-riding importance of this difference and fiercely guard it. It is in our national interests that Hong Kong continues to prosper as a capitalistic region. Our community expects us to be forthright in ensuring that the distinction between One Country and Two Systems is not blurred. While we all remain patriotic to one nation, Hong Kong today is still the same free, open, tolerant and pluralistic society it was before the Handover.

It is also important that the international community knows that their investments, their business dealings, their commercial contracts and their human rights and freedoms are protected by a trusted legal system and an independent judiciary based on English common law.

We fully understand that our legal system is the bedrock of our success and if we lose that, we lose everything. That is why rule of law issues come under such close scrutiny in Hong Kong. These are the foundations upon which Hong Kong will move ahead. And this is why Hong Kong will continue to be an important conduit for trade an investment into China, and the greater Asian region.

For many people - myself included - the biggest surprise about Hong Kong's post-Handover development was the economic, rather than political, problems that occupied most of our time. For most of the past three years, Hong Kong has had to deal with the profound and unforeseen challenges of the Asian financial crisis which precipitated our worst recession in living memory.

During the crisis we pushed through much-needed reforms in the financial sector to make us more competitive and to enhance our regulatory framework. We have continued to liberalize our telecommunications and broadcasting sectors. We have announced some exciting initiatives to boost the tourism industry. We continue to invest heavily in transport infrastructure. We are pushing ahead with reforms of the education system to equip our young people with the skills needed for the knowledge-based economy of the 21st Century. All of these efforts have been made with one goal in mind : to consolidate and enhance Hong Kong's position as the best place in Asia for business.

Hong Kong is now rebounding strongly - GDP grew by 14.3% in the first quarter; exports are up about 20%, imports up about 23%, in the first five months; tourists are arriving in record numbers - more than a million a month; our container port is seeing double-digit growth; air cargo traffic is growing strongly. Our currency has remained rock solid - the only freely convertible Asian currency to have held its value during the financial crisis - all others fell. More important, property rentals and prices have dropped by about 50% off their peak, which has made us more competitive. This is all pretty good news for foreign investors.

So, too, is China's impending accession into the WTO, which has inspired all this enthusiasm. There are some who believe that Hong Kong's role as China's major gateway to the world, and vice versa, will diminish once the Mainland enters the WTO. This is a simplistic and wrong observation.

Experienced businessmen in Asia see great opportunities for Hong Kong arising from China's entry to the WTO. China's accession is the next phase of what has been one of the world's most remarkable economic transformations, set in train with the Mainland's open door policy in the late-1970s. State-owned enterprises will face a radical overhaul. There will be profound changes in the way that Chinese companies do business not only with the world, but with each other. More Chinese companies will look for listings on the Hong Kong bourse, or elsewhere such as New York or London. All of this will present Hong Kong with its biggest opportunity in history. We conservatively estimate our GDP will increase by at least 0.5 of a percentage point annually after China's accession. That's from a trend growth rate of 4 to 5 per cent, going up to 4.5 to 5.5 per cent. We are not frightened or worried about China's accession, we are excited by it.

There is no doubt we will face greater competition from other global players. But Hong Kong enterprises have been pioneering greater access, and preparing for a more open market, in China since the open door policy was launched in 1978. That kind of advantage, that kind of groundwork, is something we will not surrender lightly. Indeed, we will use our existing presence and know-how, our contacts, our language and cultural ties to leverage the opportunities - and challenges - presented by a Chinese market more closely aligned to the world's rules-based, multi-lateral trading system.

Let's examine a few key points as to why Hong Kong should remain your best bet in Asia, now and in the future.

First, the question of access into the Mainland market. Many multi-national corporations may opt to move directly into the Mainland market once China enters the WTO. MNCs are already established in China and will want to expand their operations there. These companies have the financial resources, the staff and the international experience to attempt such an approach.

But for every single MNC there are hundreds of smaller, medium-sized enterprises without those resources. They are also lining up to enter what is potentially the world's single largest consumer market. Many opportunities in the Mainland's domestic market will come not only from the prosperous coastal regions and big cities like Beijing and Shanghai, but from the developing inner and western provinces where Hong Kong's small and medium enterprises already have an established foothold. These so-called 'second tier' markets accounted for 60 per cent - A$172 billion - of the Mainland's imports last year.

Hong Kong companies are the largest external investors in the Mainland, with cumulative investments of more than A$260 billion. But it is not commonly known that Hong Kong enterprises are actually the largest external investors in every single Mainland province, autonomous region and municipality. Everywhere you go, the No 1 investor is Hong Kong. In neighboring Guangdong Province there are about 18,000 wholly or partly-owned Hong Kong enterprises employing some five million people - the equivalent of Hong Kong's entire working population plus two million. More than 150,000 Hong Kong people work in the Mainland, mostly managers or professionals.

Hong Kong enterprises have been slowly but surely reaching into the Mainland heartland to pave the way for the opportunities now on the horizon. They have been transforming themselves from intermediaries to proprietors and joint-venture partners. These existing links are an enormous resource for overseas companies wishing to do business in China. By joining forces with established Hong Kong businesses, overseas companies will be able to bring their products and services in the Mainland market, while at the same time draw on the decades of experience of our entrepreneurs. It is, in my view, a natural synergy that will only grow over time.

Second, let's look at services. Hong Kong is almost entirely a services economy. Many years ago Hong Kong companies took advantage of cheaper land and labor in the Mainland to relocate their manufacturing facilities across the boundary. But in general, these companies all maintain the high value-added, high-end elements of their operations in Hong Kong. Areas such as management, design and marketing, legal services, transport and logistics, finance and accounting services are all based in Hong Kong.

Why? Because we have a deep pool of professional talent of the calibre required for international operations. We have a robust and respected legal system, a level playing field for business, and a free flow of information. Most of all, Hong Kong works. We offer a far greater degree of certainty and a legal 'comfort zone'. This is what 'two systems' means and how it must thrive as part of one country, China. And this is why international investors, big and small, continue to use Hong Kong as a services hub, not only for operations in China but throughout Asia.

About 85% of Hong Kong's GDP comes from service industries, compared to less than 40% on the Mainland. There will obviously be a large shortfall of skilled professionals and services staff in China. Some international companies will bring in their own staff. But many will look to Hong Kong - with its flexible, well-educated and bilingual workforce - to make up the shortfall. The dearth of appropriately qualified or experienced professionals in the Mainland will in turn present new opportunities for Hong Kong and international companies. I would also expect that educational institutions will be looking to expand the 'export' of their specialised learning programmes into China. This is an area where Australia is particularly strong.

Third, there are the financial markets. Foreign Direct Investment into China is estimated to increase from its current level of about US$40 billion to as much as US$100 billion annually by 2005. This huge increase will undoubtedly create opportunities for funds to be raised in Hong Kong which is already an established and sophisticated international financial centre.

Hong Kong's stock market is the second-largest in Asia after Japan and is considerably more liquid, and more familiar to investors, than most others in Asia. Our banking sector - the 9th largest in the world - and among the best-regulated in the world. They are known for their high levels of corporate governance, risk management and high capital adequacy ratios.

Our currency is freely convertible. There are absolutely no restrictions on capital movements into or out of Hong Kong. Foreigners can freely repatriate their capital or funds out of Hong Kong. What is more important, they can also freely borrow Hong Kong dollars in the Hong Kong market. Nor are there any restrictions on the trading or ownership of securities or property, or in setting up or owning companies. Our corporate tax system is simple - only profits made in Hong Kong are taxable at a flat rate of 16 per cent. Our residents pay a maximum of 15 per cent salaries tax - in fact 60 per cent of the working population pay no tax at all. We have no capital gains tax. No withholding tax. And no GST. These are the advantages of doing business in Hong Kong.

Ladies and gentlemen, as I have said, my main objective today is to give you a broad overview of why I believe Hong Kong is still your best bet in Asia. I do not believe there is anywhere else in Asia that has an economy as open and as fair as ours. I am sure the 50,000 Australians and 350 Australian companies in Hong Kong can attest to that.

But what gives me greatest hope for the future is the enormous potential of the market on our doorstep. It is a market Hong Kong knows and understands. It is a market we have spent the past 22 years learning and cultivating. And it is a market that Hong Kong companies will be aggressively entering. I earnestly believe that the best is yet to come for Hong Kong. I would encourage more Australian companies to look to Hong Kong, and to draw on our experience and contacts, when taking on the Mainland market.

Thank you.

End/Thursday, August 3, 2000

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