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The following is a transcript of question-and-answer session with the Financial Secretary, Mr Antony Leung at the business breakfast in New York on February 1(New York time):

Question: Now that the World Economic Forum is going on here in New York, an anti-globalization forum is going on in the other end of the world in Brazil. My question is from your speech, we strongly believe that Hong Kong believes in this globalization of its economy. Is there in any way that this restructuring will hurt its own interests?

Financial Secretary: I think globalization is an inevitable trend. And Hong Kong has benefited in the past because the entire world is now one market. Now clearly, we all know that in the process of globalization, there may be people, particularly those who are less educated and less skilled, who'll find it difficult to compete with their counterparts from around the world. And indeed, the unemployment situation in Hong Kong, you can argue, is the result of the process.

To give you a sense of the unemployment situation in Hong Kong, in the past few years, despite deflation and despite slow growth, the number of jobs in Hong Kong was still on the rise, particularly in the sectors that we have a competitive advantage, particularly in those sectors that we call knowledge intensive, such as banking, such as in the design, especially in IT design. Those are sectors that have done well and employment opportunities are still going up. However, the so-called trickle down effect, meaning those support services that are needed to support all these knowledge intensive industries were not creating enough jobs for the continued increase in the labor force.

In Hong Kong, in the last few years, we've seen a continued increase in the labor force, particularly in the less-educated and lower-skilled areas. As you may know, we had a policy of allowing 150 immigrants from China to reside in Hong Kong and many of these are actually descendents of our people. So, based on human rights reasons, we have to allow them to come in. On the other hand, we also have been seeing a continued increase in foreign domestic helpers into Hong Kong, despite slow growth in the economy. So, that's why in a globalized world, and especially when Hong Kong is fast integrating with the mainland economy, we find it a bit difficult to create jobs for the less-skilled and less-educated people, and that is why C. H. Tung, the Chief Executive has been thinking very hard about creating jobs in that particular sector.

For Hong Kong, tourism is a very important source, not just for foreign exchange, but actually for creating jobs. That's why the Chief Executive and the entire administration is focusing on sectors such as tourism, and on other services, business services, as well as personal services, hopefully to create jobs for these less-skilled people. But to a certain extent, that is a problem that faces almost all developed countries and I suppose that later on I'll ask Betty* for her advice as to how in Hong Kong we can create more jobs for those people.

(* Betty Wu is the newly appointed Commissioner for the Department of Employment of the New York City Government.)

Question: I wonder if we could talk a bit about how the weakness of the yen is affecting the region. I know you have a stable currency board, one of two left in the world now. Chinese officials have been obviously quite concerned about the weakness of the yen and we saw some rare comments recently from the Governor of the People's Bank of China (PBOC), saying that this could result in a round of competitive devaluations in the region. So, if you could just talk a bit about that. I was interested in your speech, you mentioned the prospects of Chinese companies raising funds in international markets. In the wake of Bank of China scandal could we talk a bit about how you see prospects for that.

Financial Secretary: Firstly, the yen. Obviously we in Hong Kong are concerned about the weakness of the yen and the possibility that some economists may have predicted, they may weaken a lot further. Many other Asian currencies are somehow linked with the yen as well, so as the yen weakens, we are already seeing a number of Asian currencies weakening against the dollar.

Now, Hong Kong's currency, as you know, is linked to the US dollar, and so, on a competitive basis, it is putting us at a disadvantage. If the yen weakens further, chances are Hong Kong will have to deflate a bit further, in order to remain competitive. Now, luckily, Hong Kong does have a fairly flexible wage and property sector and we have been deflating, obviously not without difficulties. But we have been deflating and we are adjusting. However, if the yen weakens a lot in between a short period of time, there is fear that there may be, as you have suggested, competitive devaluation happening in Asia.

The most important one for us to watch is obviously the Chinese Renminbi because our economy trades so much with the mainland of China. So if the Chinese Renminbi moves, meaning devalues, then obviously it puts a lot more pressure on Hong Kong. We are watching very, very carefully. We are pleased that Governor Dai Xianglong of the PBOC has in a way sound his warning, saying that they are watching the yen and hopefully the yen would not weaken too much further. Otherwise, it will actually affect China. But, on the other hand, we are also comforted by the fact that Governor Dai, has said that most likely in this year 2002, that the Renminbi is going to remain stable and that is giving us a fair bit of comfort. So in Hong Kong, we hope that the yen will not depreciate too much and especially not too fast.

As to the question about the Chinese companies raising funds internationally, both in the equity market as well as in the debt market, we believe that they will continue to be a source of very good issuers, meaning a lot of bond issues and equity issues will come from China. Charles Lee, the chairman of the Hong Kong Exchange is here, and I'm sure he has been kind of marketing very aggressively in the Chinese market. We believe that a lot of Chinese corporations will be raising fund.

Bank of China obviously exposed a number of weak areas in the financial system. But on the other hand, one can take comfort by the fact that they are not hiding the problem; if anything, they are actually aggressively trying to restructure their own corporations, including the stable corporations, so that these corporations can compete and compete effectively in the era after China's accession into the World Trade Organisation (WTO).

Clearly, restructuring from essentially a centrally planned economy to a market economy is not without pain. But, on the other hand, as I said, the fact that they are pushing for reforms and were determined to join the WTO shows that they have the determination and they have the management skills in making sure the corporations, and the entire Chinese economy, can cope effectively with the change. And we are optimistic that Hong Kong can remain as the funding center, and the financial center, for the Chinese companies as well as for companies in Asia that would like to raise funds.

Question: What's your plan to deal with the structural deficit [inaudible] in Hong Kong?

Financial Secretary: Well, the short answer is I'll tell you in detail on March 6 when I deliver my first Budget. But as we have actually suggested on many other occasions, the problem of the structural deficit is in a way two-fold. One is deflation in Hong Kong, and traditionally, we have been counting on revenue coming from asset-based sources. One is the sale of land, the premium from the sale of land, and as the land price come down, we are obviously not receiving as much. Secondly, we've been counting on the investment return from our large fiscal reserve. And that one, obviously, the return is tied to standards of inflation, and as inflation comes down, the return will not be as high.

The second problem obviously is that we have been spending, or we have been increasing government expenditure at a rate quite a bit higher than the nominal growth in GDP. The nominal growth GDP in a way, relates to the recurring revenue that we gather from the economy. Now if we are asked to close the budget deficit within a very short period of time, then obviously, we will be challenged as the expenditure is quite rigid and definitely increasing revenue in a slow economy is not easy. However, the fact that we have a fairly large fiscal reserve means that we have time, we can buy time, and we do not have to raise funds from the debt market. So, hopefully, over the next few years, we'll be able to contain the growth in government expenditure and eventually be able to tackle the budget deficit. But obviously, a lot more detail will be given out on March 6. But thanks for the question.

End/Saturday, February 2, 2002

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