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Following is a speech by the Secretary for Commerce and Industry, Mr CHAU Tak Hay, at the World Economic Forum Asia Pacific Economic Summit Hong Kong Networking Lunch today (September 12).

Distinguished guests, ladies and gentlemen,

As my audience today will readily appreciate, managing change is one of the most difficult challenges for any business or for any government. In Hong Kong, we have had to manage two major changes in the past three years.

The first change was brought about by the resumption of sovereignty over Hong Kong by China. The second, by the Asian financial crisis. I am proud to say that we have managed both with much success.

On July 1, 1997, Hong Kong became a Special Administrative Region (SAR) of the People's Republic of China (PRC), under the concept of "One Country, Two Systems". A concept that had never been tried before anywhere in the world. A concept that was bound to fail, according to some purveyors of doom, including especially Fortune magazine, which had infamously announced, well before 1997, "the death of Hong Kong".

And we have proven all of them wrong. "One Country, Two Systems" is alive and well. Hong Kong is alive and well and getting better all the time.

The Basic Law guarantees a high degree of autonomy for Hong Kong, which in practice means that we have autonomy in everything except foreign relations and national defence. The Central Government in Beijing has faithfully abided by both the letter and the spirit of the Basic Law. And the Hong Kong SAR Government has been able to exercise, to the fullest extent, the autonomy promised in the Basic Law.

In a report on Hong Kong presented to the British Parliament in February, the British Government stated: "We continue to believe that the Governments of China and the Hong Kong SAR remain committed to safeguarding Hong Kong's fundamental systems and way of life. Overall, the experience of Hong Kong since 1997 augurs well for the future governance of the SAR."

On the other side of the Atlantic, the US Congress published a report, also in February, which was equally positive. This report finds that Hong Kong "remains a vibrant economy that the Heritage Foundation and the Cato Institute recently ranked as the freest in the world"; and that "Hong Kong continued to operate independently in economic decision-making and to voice its own views in international fora, including the WTO and APEC."

The Report also states: "The people of Hong Kong continued to enjoy a tradition of free speech and free press ... A wide and diverse range of opinions, including those critical of the Hong Kong and PRC Governments, are routinely aired in the mass media and public fora."

The Asian financial crisis started on July 2, 1997 in Thailand, just a day after Hong Kong's Reunification celebrations. It hit Hong Kong a few months later. Since then we have had to go through a very painful period of adjustment. To cut a long story short, in 1998 our GDP shrunk by 5.1 per cent - our first recession in decades, but by the second quarter of 1999 the economy was already bounding back and for 1999 as a whole, GDP growth in real terms was 3.1 per cent. In the first quarter of 2000, GDP growth was 14.3 per cent - the fastest growth recorded since 1987. In the second quarter of 2000, the economy grew by 10.8 per cent. And for 2000 as a whole, GDP is forecast to grow by 8.5 per cent.

The financial crisis highlighted Hong Kong's strong fundamentals - our strong legal system, a level playing field, a corruption-free and efficient government, open but well-regulated financial markets, a high standard of corporate governance.

But the crisis also exposed structural weaknesses, including an over-reliance on the property sector and the lack of any long-term strategic plans for the future. To address these deficiencies, our Chief Executive, Mr Tung Chee Hwa, set up a Commission on Strategic Development to provide us with pointers to guide us in our quest to become the leading international city in Asia.

The Commission has identified four strategic themes: strengthening links with the Mainland of China, in particular the Pearl River Delta; enhancing competitiveness; improving the quality of life; and reinforcing our identity and image.

Hong Kong already has very strong links with the Mainland but there is still much, much more that we can do. In doing so, we must maximise the benefits that Hong Kong enjoys under "One Country, Two Systems" and this means reinforcing those things which make us different - our legal institutions, our cosmopolitan character and international outlook, our open capital markets, our fully convertible currency, our free-market principles and a fast, unfettered flow of news and information.

The private sector has already taken the lead in combining Hong Kong's strengths with those in the Mainland. Hong Kong companies employ around 5 million people - more than 70 per cent of Hong Kong's population - in more than 60 000 wholly or partly owned ventures in Guangdong Province alone. So what we need to do now is build on this synergy.

At the government level, we will work more closely with our neighbours to foster better regional planning in areas such as cross-boundary infrastructure, environmental protection as well as immigration and customs procedures. We will make greater use of the enormous pool of technological talent in the Mainland to support our drive to become a centre for innovation and technology in East Asia.

Southern China, in particular the Pearl River Delta, is one of the richest regions in the Mainland. Guangzhou, Shenzhen and Zhuhai are each, in their own right, dynamic and vibrant economies. Collectively, they are a major driving force for China's economic development. Add Hong Kong to the equation and there is enormous potential, not only as a market, but as a major economic hub for global trade and investment.

China's entry into the WTO will bring even more opportunities. As a member of the WTO, China's trade and investment relations with the world will be governed as well as protected by multilateral rules and discipline. Further liberalisation in China's trade and investment regimes will stimulate faster growth in foreign trade and direct investment, bringing enormous efficiency gains to the Chinese economy over the long term.

Hong Kong stands to benefit from these developments. Its strengths in relation to the Mainland lie in its advanced business infrastructure, professional expertise, wide commercial connections, and ability to package complex and sophisticated deals. The Mainland's increasing integration with the world economy will increase the demand for such services. By helping to stimulate growth in China's trade and investment activities, Hong Kong will be able to expand and enhance its traditional gateway role.

As a major investor in the Mainland's manufacturing sector, Hong Kong will gain from less restrictive trading and distribution rights. Costs of production will also fall, in tandem with customs tariffs.

China's WTO accession will open up significant opportunities for foreign participation in the Mainland's service industries - in particular, telecommunications, financial services, and distribution. As the pre-eminent services centre in the region and the most services-oriented economy in the world, Hong Kong is in a strong position to maximise those opportunities. Involvement in the Mainland's services market could well usher in the next wave of Hong Kong investment into the Mainland.

Let me turn to competitiveness. Hong Kong has regularly been rated as one of the world's more competitive economies. On the other hand, we have often been criticised for being too expensive. Robert Bosch, the German industrialist once said : "I don't pay high wages because I'm rich; I'm rich because I pay high wages." That same philosophy applies to Hong Kong, as much as it does to, say, London, New York or Tokyo. Good locations come at a premium, because they deliver a premium. But we are mindful that we have to contain costs.

We have become more competitive over the past two years. Office and housing rents are between 30 per cent to 50 per cent below their peak in late 1997. Consumer prices have fallen by about 5 per cent over the past year and wages have generally remained static. This is the silver lining, if you like, of the dark clouds of the Asian financial crisis.

But competitiveness is about more than just costs. Geographical location, low taxation, clean government, a sound legal system, an independent judiciary, currency stability, an advanced communication and telecommunication infrastructure are all factors. We have identified several areas that we must continually improve to maintain and enhance competitiveness.

We will ensure that we have the highest-calibre human resources. We have embarked upon an urgent overhaul of our education system to better prepare our young people for the knowledge-based economy of the future. We are investing considerable resources to improve information technology skills as well as standards of written and spoken English and Chinese.

Hong Kong must also be more than just a great place to do business. It must also be a great place to live. We are well aware of the concerns of the international community about Hong Kong's air pollution. We are taking action to ensure the problem does not get any worse and will improve noticeably over the next three to five years. We are also paying more attention to promoting arts and culture; bringing together the best of the East and West to enrich the social fabric of our community.

We will do more to promote Hong Kong's role in the region and our identity as Asia's most cosmopolitan and vibrant city- a community with a global outlook and proud of its Chinese heritage.

We are already the location of choice for 5 500 overseas companies - and 2 500 of these use Hong Kong as the base for their regional headquarters or regional offices. We will do more to attract multinational corporations to set up regional headquarters or regional offices in Hong Kong. We will further promote our close links with the Mainland, and at the same time target major Mainland companies to establish their international headquarters in Hong Kong.

All in all, we have a very good story to tell. And the story will get even better over the next few years as our economic recovery gains further momentum; as China's economy continues to expand and become more and more efficient and as Hong Kong's role in the Mainland of China's economic development is strengthened following China's entry into the WTO.

Thank you.

End/Tuesday, September 12, 2000

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