*************************

Following is the full text of the speech (English only) by the Financial Secretary, Mr Donald Tsang, at the Post-Budget Joint Business Community Luncheon today (March 12):

Distinguished guests, ladies and gentlemen,

Thank you Henry for such profound and long introduction, very substantive point made. While today may be the last time I will be addressing such a distinguished audience as Financial Secretary, I hope there will be other occasions we can get together in similar surroundings, and discuss different topics, when I am no longer Financial Secretary.

Let me first thank the chambers for organising these annual post-budget luncheons. They have proved in the past to be a very valuable opportunity for me to explain in more detail the thinking behind our budget strategy. And, I trust they have been useful for you too to 'grill' me on your concerns about the government's approach to fiscal policies. This year, however, this particular function has come so soon after the budget that I'm afraid I'm still scrambling to complete the final pages. So please excuse me if I run out of things to say!

Those of you who may have been taking a passing interest in my budgets would possibly have noticed a common thread linking all six budget speeches. It can be summed up in one word - prudence. And I will be more than happy if that is the legacy I leave when I step down from the post at the end of next month. As former British Prime Minister, the late Harold Wilson, once said of himself: "I'm an optimist, but I'm an optimist who carries a raincoat". In my own case, my bow tie might have an air of flamboyance about it, but if you have seen me tie it, you would say there's a man with economical movements.

If you have read the budget speech from cover to cover - and I certainly hope you have, and you should, because it had cost you $180 - you would have seen that it carries my traditional hallmark. I have proposed to spend what I promised last year to meet the community's needs. I have also proposed modest revenue measures to uphold our principles of fiscal prudence. What I should have added, is that I firmly believe this is an honest and healthy budget. Now is not the right time for making any big moves.

The reason for my caution is the mixed signals we're picking up from our own economic data and those coming from our major trading partners. As you all know our economy last year recorded its fastest growth since 1987, jumping some 10.5 per cent in real terms. That figure is quite phenomenal for a mature economy like ours, notwithstanding it came from a pretty low base in 1999.

This year, our growth is forecast to moderate to 4 per cent, but this is conditional on a number of unknown factors. We face a very rapid slowdown in the U.S. economy, the knock-on effects this will have around the globe. We continue to face a grounded economy in Japan. We face a declining export market. We face slower growth in domestic demand in East Asia as a whole. And, we face our own people, quite a few of whom have not yet benefited from last year's robust economic recovery.

When put together, it paints quite a pessimistic picture. But I am confident about Hong Kong's overall performance in the coming financial year. We have the prospect of steady economic growth in the European Union. We have the sustained vigorous growth in the Mainland coupled with the opportunities springing from China's membership of the World Trade Organisation. We have the prospect of growing consumption and investment spending on the local scene. And we have the prospect of improved employment and wages. So pumping money into an economy now that is recovering quite solidly is not an option I considered appropriate. Unrestrained government spending is not only a dangerous road to deficits, it may well distort the recovery process and sap the energy and thrust of our economy.

But that doesn't mean we're simply marking time, waiting for the music to change to a faster beat. We are continually fine-tuning our strengths. Reforming the way we do things. Capitalising on advancements in technology to drive us further into the 21st century and to retain our competitive edge. Above all, we are a government that has not deviated from its free and open market principles. A government that lets the private sector lead the way. A government that is happy to act in support, but fight when required for our business interests.

So, in this context, I would like to elaborate a little on the strategies for development that I outlined in the budget. The first and most exciting development is what I will call the China dimension and the opportunities that will unfold with the Mainland's membership of the World Trade Organisation later this year. The WTO factor will, as I said last week, trigger a chain reaction in our economy. The stage is set for another economic take-off. But it will bring challenges.

We must remember that although Hong Kong is a Special Administrative Region of China, we do not receive any preferential trade treatment from the Mainland. Our role as an intermediary will be challenged with competition coming not only from overseas markets, but also within the Mainland itself. We cannot overlook the remarkable performance in recent years of some key mainland cities. We cannot sit back and wait for the opportunities to fall onto our lap.

That's why we have been working with the Mainland, to help wherever we can to establish contacts, to provide up to date information, to enhance infrastructure connections, particularly with our neighbouring areas, to facilitate the movement of people and goods. And we must step up our efforts to ensure we capture the full benefits flowing from a China that will be more open to the world's markets.

As you know, I shall be leading a business delegation to western China in May. At this stage some 200 people, comprising business, media and government representatives will be joining me. I hope it will pave the way for the sort of development we want to see taking place in the Mainland, hopefully with Hong Kong's active participation. We have done it in our neighbouring provinces with remarkable success. The latest figures show that at the end of 1998, Hong Kong investment amounted to some US$71 billion, mainly in Guangdong, where there are over 40,000 Hong Kong companies.

With China opening to the world, the opportunities are there for the enterprising firms and with our heritage, culture, and commercial relations going back many generations, we have an enviable advantage over the competition. And, your China investment provides double benefits. Not only are you helping to build our nation, the profits that you make on your investments are channelled back to Hong Kong where they are re-invested in our own economic activities. In other words, it will bring increase to our GNP.

Although the government is taking the initiative, on this occasion, to explore new opportunities in 'the west', we will obviously leave business decisions to business people. I will be there largely to open the doors for you. You, in the private sector, have always been in the best position to leverage on the resources of the community to further our economic development. That's why you want us to be a small government, and in this I fully agree with you.

I was heartened to hear that in his first address to the joint session of Congress a fortnight ago, President Bush in outlining his budget, also advocated small government when he said, and I quote: "Government has a role, and an important role. Yet, too much government crowds out initiative and hard work, private charity and the private economy. Our new governing vision says government should be active, but limited; engaged, but not overbearing." I think he could have been arguing the case for most governments around the world today. But, I would like to believe my final budget builds on the solid foundations laid by my predecessors, and that the U.S. is following our own footsteps.

More often than not, we in government have been portrayed as a bloated bureaucracy, a large group of 'fat cats' enjoying the fruits of the iron rice bowl. That criticism couldn't be further from the truth. And I would like to pay tribute to the hard work and dedication of civil servants who have set aside their own interests and strongly supported the many reforms that have been, and are continuing to be implemented, in the interests of the public we serve.

Let me give you some examples of what we have achieved in the reforms to upgrade our services to the public and to keep government small.

We have deleted 8,000 posts in a single year and plan to further reduce the size of the service by another 9,000 posts over the next two years. In other words, by this time in 2003, our establishment should be down to 181,000. We have delivered savings of some $3.4 billion, or 3.3 per cent of operating expenditure, since we started our enhanced productivity programme a year ago, and we are pressing ahead to meet our target of 5 per cent savings in 2003. We have implemented the voluntary retirement scheme, which should ultimately achieve net savings of almost $1 billion a year. We have reduced the entry points for new recruits as well as modernising their fringe benefits. And, we are exploring further private sector involvement in the delivery of public services.

Another development strategy that has been a recurring theme over the years is the need to continually upgrade Hong Kong's business environment. Honing our strengths as a centre for international finance and high value-added services as we transform into Asia's World City. Not only that, we want to rank among the world's best cities for business. It's not going to be easy with increased competition through globalisation, but we will always be implementing policies to keep us up there with the best of the best.

We know we can't compete effectively in those economic activities that require enormous labour resources and supply of land. The giant factories covering hundreds of hectares of land and employing assembly-line operations are simply not an option for Hong Kong. We must concentrate on the things we can do best. In manufacturing, for instance, we need to concentrate on high value operations which are not land or labour intensive. We have established a strong foothold as an international financial and services centre and we need to continue to improve our quality, efficiency and to diversify our services.

Information technology is a linchpin for the development of high value-added services. In recent years, Hong Kong has invested heavily in this sector, and while the excitement over the dotcom 'e-volution' has evaporated, we must not confuse the speculative trading of IT stocks with investment in IT infrastructure. Two are very different animals. Information technology is changing the way we live, we play and work. There is no going back. It is the way of the future and we need to stay at the cutting edge of market trends.

Just look at how IT has changed our financial infrastructure by increasing efficiency, reducing costs and risks and enhancing market transparency. We have already seen the introduction of the electronic initial public offering. The stock exchange has launched its new generation automatic trading infrastructure to fully exploit the potential for on-line trading. We have launched the US dollar clearing system incorporating the world's first payment versus payment foreign exchange transaction system. This has increased Hong Kong's attractiveness to global investors as a trading platform. And, we have introduced the Securities and Futures Bill that will consolidate our position as an international financial centre and the premier capital formation centre for the Mainland.

There are many other examples of how we are honing our strengths. Cementing our position on the global financial scene and raising our standards of corporate governance. In doing this, we cannot overlook the third strategy for development in this year's budget - upgrading our human capital to meet the demands of a knowledge-based economy.

In recent years we have devoted considerable effort and resources to train and re-train our workforce. It has not been an easy task given the change in the economic landscape as a result of the Asian financial crisis. This left some in the workforce stranded without the necessary skills to take advantage of the switch to the information age. We have been trying to correct this mismatch with a range of programmes designed to upgrade skills.

But it must be a community-wide effort - the government, employers and the rest of the community, working together. For our part, we will continue to invest in training. One new measure is our decision to establish a $300 million fund to subsidise training initiatives for small and medium-sized enterprises which form the backbone of our economy. We recognise the fact that many SMEs, by their very nature, are inhibited from investing in staff training.

For your part, we are looking to you, the leading businessmen of Hong Kong, to provide your employees with training suited to business needs. As part of this you must be prepared to employ less-experienced staff and provide them with on-the-job training. And individuals must recognise the challenges ahead and take full advantage of the training opportunities available. And we are also looking to you to help and work actively with our universities to develop the right programmes for your business.

But, it's clear our measures will not, in the short to medium term, overcome the shortage of skilled professionals we need, particularly in the IT and financial services fields. That's why we have decided to revive, in a modified form, the Admission of Mainland Professionals Scheme. And we are devising a scheme that will allow Mainland students studying here to remain in Hong Kong for employment on graduation.

But I want to make it clear, the two schemes will not deprive our local professionals or local graduates of jobs. They will not result in a lowering of salaries. They will not diminish the excellent facilities offered at our universities. Nor will it reduce in anyway the HKSAR Government's commitment to education, which continues to be the single biggest expenditure item in the budget, amounting to some 25 per cent of total government spending. Indeed, the schemes will boost Hong Kong's economic development by bridging the gap between supply and demand and will help businesses to grow thus creating more job opportunities.

Ladies and gentlemen, I have already spoken for too long and I don't want to cut further into your valuable question time. But, I hope you will allow me this final observation. Hong Kong is now more competitive than it ever was before the financial crisis. Together we have achieved a lot. It has not been easy going, but the hard work and perseverance are paying off. The economy is recovering, the civil service is leaner and more efficient, the private sector is being streamlined as it embraces the information age. We are positioning ourselves to benefit from, and assist China, once it enters the rules-based trading system of the WTO. We are indeed living in very exciting times. We look forward with hope into the future. But my optimism is invariably tempered with a little prudence.

Thank you very much.

End/Monday, March 12, 2001

NNNN