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Following is a speech by the Secretary for Commerce and Industry, Mr CHAU Tak Hay, at Team Canada 2001 plenary session today (February 16) (English only):

Mr Pettigrew, distinguished guests, ladies and gentlemen,

My audience today comprises an impressively large number of Canada's most prominent and most successful business leaders. I am sure that, as businessman, all of you will agree that managing change is one of the most difficult challenges for any business. I can tell you that this is equally true for a government. And here in Hong Kong, we have had to manage two major changes simultaneously in the past three and a half years.

Managing Two Transitions

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 1st, 1997 Hong Kong became a Special Administrative Region (SAR) of the People's Republic of China, 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 on its cover, 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. Even Fortune magazine now acknowledges this fact, and has decided to hold its annual Fortune Global Forum in Hong Kong in May this year.

The Basic Law of the Hong Kong SAR 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 full the high degree of autonomy promised in the Basic Law.

To cut a long story and as a resounding endorsement of the successful implementation of "One country, Two Systems", let me quote the words of a third party. A report published by the US Congress in August 2000 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 in which it participates, including the WTO and APEC."

The report goes on to say : "Three years after Hong Kong's reversion to Chinese sovereignty, the unprecedented "One Country, Two Systems" experiment thus far has been a success. .... The Hong Kong media remains free and continues to comment critically on the Government and the People's Republic of China. .... Perhaps the most telling indication of the success of the transition has been its lack of impact on the way of life of the vast majority of Hong Kong citizens."

Let me now turn to the Asian financial crisis, whose full impact hit Hong Kong in the last quarter of 1997, only a few months after our reunification with the mainland of China. Since then we have had to go through a very painful period of adjustment. To cut a long story short for the second time in the same speech, 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 bouncing back and for 1999 as a whole, GDP growth in real terms was 3.1 per cent. Our economic performance was even more impressive last year. GDP registered double-digit growth in the first three quarters of 2000 and we expect real GDP growth of around 10 percent for 2000 as a whole.

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. Because of time constraints, I will touch on only the first two of these four themes.

Close Ties with the Mainland

Since the start of China's economic reforms and opening-up in the late 1970's, Hong Kong has developed very strong economic ties with the Mainland; but there is still much, much more that we can do.

The private sector has already taken the lead in combining Hong Kong's strengths with those in the Mainland. The cumulative value of Hong Kong's realised direct investment in the Mainland reached US$162 billion at the end of June 2000, accounting for about 50 per cent of total external direct investment in the Mainland. Hong Kong's realised direct investment in our neighbour, Guangdong Province, accounts for 74 per cent of the total FDI it received as at end-1999. Hong Kong companies employ than 5 million people in about 70 000 wholly or partly owned ventures in Guangdong Province alone. This is 20 times the size of Hong Kong's own manufacturing workforce or almost 75 per cent of our population.

As you will appreciate from these figures, the economic relationship between Hong Kong and the Mainland is a mutually beneficial one. What we need to do is to build on the strong synergy which already exists between the two economies. In doing so, we must maximize 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.

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 Accession to the World Trade Organisation (WTO)

China's entry into the WTO will bring Hong Kong 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.

China's State Council Research Development Centre estimates that, as a result of China's WTO membership, the Mainland's GDP in real terms will achieve an additional 13 per cent increase by 2010, implying an additional annual growth of 1 percent. Major financial institutions predict that the Mainland's annual external trade will double to US$600 billion by 2005, along with a doubling of annual foreign direct investment to US$100 billion by 2005.

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.

A recent analysis by the Hong Kong Government indicates that our economy will benefit substantially from the business opportunities which China's WTO membership will create. It is estimated that by 2010, Hong Kong's exports involving the Mainland will be raised by an additional 15 per cent (averaging at an additional 1.3 percentage points per annum), and our GDP by an additional 5.5 per cent (averaging at an additional 0.5 percentage points per annum).

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 service-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.

Hong Kong's Competitiveness

Let me now 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 criticized 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, Toronto, London 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 now between 30 per cent and 50 per cent below their peak in late 1997. Consumer prices have fallen 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.

Hong Kong is already the location of choice for over 6 000 overseas companies, 3 000 of which 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.

Hong Kong / Canada Bilateral Ties

Finally, let me turn to bilateral relations between Hong Kong and Canada. Canada and Hong Kong enjoy close and longstanding ties. We share many common interests and common values. Both our governments are strong advocates of free and open trade and we work together constructively as partners in the WTO and Asia Pacific Economic Cooperation (APEC) to promote further trade liberalisation.

Hong Kong is home to the largest Canadian business community in Asia, with over 100 Canadian companies maintaining branches and subsidiaries in Hong Kong and over 450 firms represented by distributors, agents or joint venture partners. The Canadian Chamber of Commerce in Hong Kong, with some 900 members, is the largest Canadian Chamber outside Canada. Canada has been for a long time one of the prime destinations for Hong Kong emigrants. Over 150 000 Canadian citizens reside in Hong Kong, many of whom originally from Hong Kong.

I see a lot of scope for further expanding and deepening our already close economic and other ties, riding on the extraordinary opportunities which will present themselves upon China's entry into the WTO. I see Hong Kong's intermediary role broadening to cater to the needs of Canadian companies, especially small and medium-sized enterprises, which aspire to gain a foothold in what is potentially the world's largest consumer market.

As China's economic reform continues to deepen and as China's markets continue to open up, Canadian firms will continue to find that Hong Kong offers the most efficient and the most productive base from which to expand their business in China. And this is especially so for Canadian SMEs which are unused to working in an overseas market of China's size and complexity.

All in all, Hong Kong has a very good story to tell. And the story will get even better over the next decade as China's economy continues to expand and as Hong Kong's role in the Mainland's economic development is further strengthened following China's entry into the WTO. And we invite Canadian companies to come to Hong Kong and explore the opportunities that Hong Kong offers as a springboard into the Mainland.

End/Friday, February 16, 2001

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