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Following is a speech by the Chief Secretary for Administration, Mr Donald Tsang, at a breakfast meeting with the Executive Club Belgium, in Brussels today (November 22, Belgium time):

Chairman Vanhove, Your Excellencies, ladies and gentlemen,

It is a great pleasure to join you all this morning for breakfast in Brussels. I hope that I can help get your day off to a good start with some food for thought during our meeting this morning.

What I want to do is, first, take you briefly through how we have been doing since the Handover in 1997. Then I want to update you on what we have been doing to ensure that we remain the best place in Asia to do business. Of course, a vitally important aspect of that is what we are doing to buttress our position as the best place for European business to access the Mainland of China following her admission to the World Trade Organisation last week.

But before I do that I want to reinforce, in your minds, the importance that we in Hong Kong place on bolstering and increasing business and other links with Europe. We have an Economic and Trade Office here in Brussels to help us achieve that goal. We have another office in Geneva that deals mainly with WTO-related issues. And we also have an office in London that looks after the UK and all non-EU countries. We want to serve Benelux business better; we believe we can do more for French, German and Italian businessmen in Hong Kong. Indeed, we provide the best option for European business activities, not only in China but throughout Asia. And we are working hard at ensuring that is the case.

We were delighted when the European Union granted visa-free access to Hong Kong SAR Passport holders in April this year. Just prior to my visit to Paris yesterday the French Government announced its intention to extend this to its overseas departments, including French Polynesia. These new arrangement will no doubt help our businessmen and women to develop closer links here in Belgium and throughout the EU. Further to that agreement, Hong Kong has just completed negotiations with the European Commission on a Readmission Agreement which will be initialed today prior to the necessary ratification procedures.

There are many other agreements between Hong Kong and Belgium, other Member States and the European Union itself that facilitate closer links in such areas as investment promotion, air services and customs co-operation. We are working closely with your government on issues concerning mutual legal assistance, surrender of fugitive offenders and the transfer of sentenced persons. We are also looking at closer co-operation between our police forces. And I was very pleased to learn that just last week, the Prince Albert Fund, through its Business in Asia programme, has chosen the Chinese University of Hong Kong as a partner university for its 2002 programme. The Fund provides grants to young executives or graduates that enable them to study in Asian business schools and to acquire business experience through internships at Belgian companies with overseas offices. These efforts demonstrate how we are doing more to nurture closer links between Belgium and Hong Kong. It also allows each of us to keep up-to-date with what is happening in our respective parts of the world.

Understandably, one of our major objectives since 1997 has been to make a success of our new position as a Special Administrative Region of China. We have the firm support of our national leaders in moving forward under the principles of "One Country, Two Systems" and "Hong Kong people running Hong Kong with a high degree of autonomy". Indeed, in the wider context, nothing is really possible in Hong Kong unless we ensure "One Country, Two Systems" works well if we are to maintain confidence, both locally and internationally, in our systems and way of life.

Our constitution, the Basic Law, guarantees and protects the rights and freedoms that our international business partners expect in a free and open society such as Hong Kong. The rule of law is upheld by an independent judiciary. We have a level playing field for business - local and international businesses compete on the same footing without special rules or concessions for this sector or that. Our civil service is recognised as one of the most efficient and clean in Asia. News and information are freely available and circulated. We have low taxes - 16% corporate profits tax and a maximum of 15% for salaries tax. We have a stable and freely-convertible currency. We are a duty-free port. There are no restrictions on the movement of goods or capital. All of this institutional software forms the basis upon which our success has been, and will be built.

One of the best barometers of how well we are doing is our attraction as an international business centre. Our 2000 - 2001 survey results released earlier this month show that more international businesses are setting up in Hong Kong. By June 2001, some 3,200 international corporations had regional HQ or offices in Hong Kong - a six per cent increase over the 3,000 last year. And that's on the back of a 20 per cent increase in 1999 - 2000. That's the most number of regional HQs or offices in Asia. Hong Kong continues to be a major financial intermediary for the entire region. Last year more than US$64 billion in external direct investment flowed into Hong Kong, which highlights the strength of, and confidence in, our financial system to handle such large fund flows. More and more Chinese enterprises are looking to Hong Kong to raise funds in the international market. Last year, our stock market raised US$4.4 billion for Mainland enterprises. There is no doubt that China's entry to the WTO is providing the catalyst for this increased interest.

Nonetheless, international and Mainland businesses are looking to Hong Kong as the principal bridge between China and the rest of the world. That is, they are seeking out and making the most of our location, our bankers and accountants, our lawyers, our insurers, our entrepreneurs, our experience and our contacts.

We are working off a fairly solid base. And one that provides a great degree of confidence in our long-term future. But as one of the world's most externally-oriented economies, our immediate prospects are very much influenced by what happens elsewhere. We weathered the downturn of the Asian financial crisis in 1997 and 1998 and recorded fairly solid growth of 10.5% last year. However, a slowdown in the US market - our most important export market - was already beginning to filter through before the terrorist attacks on September 11. Obviously, the tragic events in New York, Washington and Pennsylvania have exacerbated the slowdown in the US economy. So Hong Kong, along with the rest of Asia, with the notable exception of the Mainland of China, is again facing a rather gloomy, short-term outlook. Our Financial Secretary is forecasting GDP growth of 1% this year but the final out-turn will depend a great deal on the extent of external demand, particularly from the US.

We are facing an additional challenge, and that is a structural adjustment of our economy. We are working hard to establish our own particular niche in the global, knowledge-based economy - where innovation is the new capital and knowledge the new currency of economic development and growth. So what we are doing is to provide a business and living environment that attracts those with knowledge and experience, ideas and creativity. This encompasses a wide range of things such as ease of access for talented people; reducing and cutting red tape for business; improving air and water quality and greening our city; greater promotion of arts and culture and heritage; and determined efforts to promote the wider use of IT within the community to foster innovation and technology as economic drivers.

Second, we are investing heavily in education and infrastructure. We are reforming the way we teach our children, to nurture their own particular strengths and provide them with the intellectual assets they will need to succeed. This in turn will provide Hong Kong with a broader and deeper pool of human capital. We will continue to invest more in education as we move into more high value-added activities to survive and remain competitive. Over 20% of the entire public sector spending programme goes to education. In terms of infrastructure, we will spend some 86 billion Euros (HK$600 billion) over the next 15 years on new railways, roads, ports and other supporting infrastructure to ensure the efficient movement of people and goods between Hong Kong and our hinterland, the Pearl River Delta. There will be plenty of opportunities for Belgian business, for European business, when these projects start rolling off the planning boards.

We have a very clear picture of what we want to achieve - and that is to maintain itself as the leading commercial city in China and to become Asia's world city. A city that is progressive, free and stable. Where opportunity abounds and quality is premium. A community that is innovative, cosmopolitan, enterprising and well-connected.

Hong Kong's future is inextricably linked to that of the Mainland. According to the World Bank, China's economy will be the world's second largest by 2020. Obviously, Hong Kong stands to benefit from such strong growth over the next 20 years. But what we need to do - and will do - is to leverage our existing strengths and talents to maximise the opportunities that will come from China's accession to the WTO - a more open and transparent China market, more closely aligned with the rules-based, multilateral trading system.

Enhancing co-operation with our hinterland, the Pearl River Delta (PRD), is of particular importance. Over the past two decades, our economies have become more complementary. Together we have developed into a highly productive economic region. The PRD is an enormously attractive market, with many affluent consumers and a population of over 45 million - that's more than four times the population of Belgium, or 20 million more than the Benelux countries combined. The economy of the PRD is 40% larger than the Yangtze River Basin with Shanghai as its fuel city and continue to grow just as fast. Following China's WTO accession, co-operation between Hong Kong and the PRD will be strengthened to achieve a "win-win" situation. This is a key element in our efforts to consolidate and enhance Hong Kong's position as an international centre for finance, trade, transport and logistics, as well as a premier tourist destination.

This co-operation not only involves encouraging and facilitating closer business links between private sector partners. It also involves working closely with our government counterparts in Guangdong Province to map out strategies dealing with cross-boundary flows of people, cargo and vehicles. The task we face is to establish a framework of arrangements that facilitates seamless interaction within One Country while not in any way compromising our commitment to Two Systems. For example, while we must maintain separate immigration and customs controls, advances in technology can make the process quicker. We have secured agreement with Mainland authorities to make it easier for business people based in Hong Kong to travel to China, as well as making it more convenient for Chinese business people to come to Hong Kong. The Hong Kong and Guangdong governments are also working hand-in-hand to tackle air pollution problems. These efforts will have a positive, long-term impact on the quality of life in both Hong Kong and the Pearl River Delta.

Despite all the strengths and advantages that I have just outlined, there are those who believe Hong Kong's importance as a gateway will diminish now that China has entered the WTO. I do not - let me repeat, do not - agree with this assessment. Yes, we will face more competition from overseas companies, particularly those from Europe and America. But competition is a good thing and we are ready for it. Hong Kong has been competing in the international market for decades. More important, we've been slowly building a significant presence in the Mainland for more than two decades. Hong Kong businesses are the largest investors in every Mainland province. We're sitting on the launching pad, ready for take-off. You simply can not replicate that kind of experience and that range of contacts. This again reinforces my belief in the ability, the acumen and foresight of our entrepreneurs. China's WTO accession is simply too good an opportunity to let slip by.

This is worth bearing in mind when we talk about the rising star of Shanghai, and what that means for Hong Kong. Nearly every time I go overseas, and more often than not at home as well, I am asked what I think about competition between Hong Kong and Shanghai. Let me say this - Hong Kong and Shanghai are not competing against each other for a finite slice of business. It is too simplistic to say that because Shanghai is attracting new business, that this business is at the expense of Hong Kong. The figures I quoted earlier tell a different story. In fact, Hong Kong and Shanghai complement each other's strengths and advantages.

If you look at a map of China, you can see that Shanghai and Hong Kong serve two very different hinterlands. If you look at the economic data, you will see that Shanghai still has a solid industrial and manufacturing base, while about 85% of Hong Kong's GDP comes from the services sector. Shanghai's port serves the Eastern seaboard and the Yangtze River, while Hong Kong serves the South China coast and the Pearl River Delta. Shanghai serves as a domestic financial centre, while Hong Kong is primarily the major international financial centre for East Asia, as well as a service centre for southern China and a growing number of international Mainland enterprises. It is not a zero-sum game.

If I can borrow an analogy first used by the Mayor of Shanghai, Mr Xu Kuangdi. He compared China's economy to a huge jet liner. Hong Kong was the engine under one wing, while Shanghai was the engine under the other wing. Together, these two powerful engines will help China's economy take off and soar to new heights. And as China's economy grows and develops there is every likelihood that one or two or more engines of economic growth will emerge. China is a huge market, make no mistake about that.

The opening up of China, and the development of Shanghai and other major economic centres in the Mainland is not a threat to Hong Kong. It is an opportunity. An opportunity to provide value-added services in the areas we excel and which are not fully developed in the Mainland - for example, financial services, including insurance and fund management; professional services such as accounting and auditing; legal services such as contract law, dispute settlement and arbitration; logistics and supply chain management; marketing and advertising.

Ladies and gentlemen, Hong Kong is facing a tough time at the moment. The downturn in the global economy has started to bite at a time when we were just recovering from the effects of the Asian financial crisis. Two economic downturns in the space of four-and-a-half years is hard enough for any economy to manage. Coupled with that is an ongoing, structural adjustment of our economy. We are addressing this problem by devoting more resources to education, retraining, skills upgrading and lifelong learning so we can move higher up the value-added ladder.

Hong Kong has faced many challenges in the past, and each time we have overcome them and emerged stronger and more resilient. We have a very clear vision of what we want to achieve in the future. And we have the nerve and the talent and the determination to see it through.

Thank you.

End/Thursday, November 22, 2001

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