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Speech by Financial Secretary at HK Networking Dinner

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The following is a speech by the Financial Secretary, Mr Antony Leung, at the Hong Kong Networking Dinner tonight (February 1, New York time):

Distinguished guests, ladies and gentlemen,

I am delighted to have the opportunity to speak to such a distinguished gathering tonight - and it's all the more pleasing because you are all friends of Hong Kong. This networking dinner has always been our "unofficial" element of the World Economic Forum program. And it is my distinct honour to be hosting it for the first time as Hong Kong's Financial Secretary.

I've been in the job now for exactly nine months so you may be wondering what this rather skinny guy has to say about Hong Kong. Let me start by sharing with you what I see as the more imminent priorities for me.

As you know, recent themes of the WEF annual meetings have related to globalization. Indeed, Hong Kong with its highly externally oriented economy is probably the epitome of globalization : or, as former President Bill Clinton said, 'exhibit A in the case for global interdependence and its benefits'. Yet globalization is not without costs. Hong Kong is undergoing fundamental economic restructuring as a result of the advent of the knowledge-based economy and rapid economic integration with the mainland of China. Associated with this restructuring are deflation, depreciation of asset values, reduction in income, and higher unemployment.

Deflation is a painful process. And very few governments in the world can successfully deal with such an environment. Some people have suggested that our linked exchange rate under a currency board system should be abolished to solve the problem. Some have even cited the example of Argentina to support their argument. This is not an option for Hong Kong. As the Chief Executive and I have said many times before, the Hong Kong SAR Government has no plan, nor do we intend, to change the linked exchange rate. The basic point here is that our financial and economic systems would not be able to withstand the tremendous shock created by the possible massive outflow of capital if the linked exchange rate were to go. Hong Kong is also markedly different from Argentina. We do not have any external debt. We have a sizable foreign exchange reserve of over 100 billion US dollars. The one lesson to learn is not to perpetuate the problem of fiscal deficits.

Hong Kong has been facing the problem of ongoing fiscal deficits for a few years. This year we are anticipating an unprecedented deficit, mainly because of a reduction in revenue from several sources, as well as expenditure increasing at a rate over the rate of economic growth in the last few years. It is true that our reserves could help to tide us over. But, as the Financial Secretary, I must endeavour to bring the budget back to a balance within a reasonable timeframe.

This is an issue I am currently grappling with in preparing the budget for the coming financial year. My task is to send a clear and strong signal to both the domestic and international communities that the government is determined to address the problem and that we can provide a basket of measures that are workable both financially and politically. At this stage, I am focusing on controlling government expenditure. In the process, we should allow the private sector to take up a bigger role in the economy.

I firmly believe that the resources of the community are best used when they are subject to market forces. Reducing the size of government will not only help address the fiscal problem, but also introduce more flexibility and efficiency in our economy so that we can address any future adjustments more quickly. I have also received much sound advice on the revenue side and I am reflecting on this, although I have to admit that raising revenue is never a popular initiative.

While we tackle the immediate challenges facing us, we must also look at the broader picture to ensure that we have sustainable development in the medium to long term. In this, we are on the right track.

Our policies are designed to help Hong Kong move further up the value-added chain. Our determination to revamp and upgrade our education system and to embrace innovation and technology are just two examples. I also believe we have struck the right balance between facilitating development in an increasingly complex environment, and preserving - indeed enhancing - Hong Kong's reputation as a free market economy.

Others also seem to think we're on the right track. Authoritative groups from the International Monetary Fund to the Heritage Foundation continue to commend Hong Kong for its policies and performance. Visitors I meet speak optimistically about our future prospects. Companies from around the globe, in many different lines of business, are establishing regional headquarters and offices in Hong Kong in record numbers. The United Nations Conference on Trade and Development cited Hong Kong as the 'predominant funding hub for business in Asia'. All of these indicate that the international community does have a considerable amount of confidence in Hong Kong's future. Surveys by the American Chamber of Commerce in Hong Kong and other international chambers also bear this out.

Not surprisingly, the local community is more concerned with prevailing economic conditions than the prospects for the next five to ten years. This is understandable when there is rising unemployment and the possibility of wage cuts. As an open economy highly-geared to trade and services, any global downturn will inevitably affect Hong Kong. Nevertheless, compared with other economies in the region, we are not faring too badly. While our GDP for the 3rd Quarter of 2001 dipped into negative territory, the results were not as bad as many had forecast. What we are trying to do as a government is to position ourselves in a way that will enable us to recover more quickly when the world situation improves. This includes making the most of the opportunities arising from China's accession to the World Trade Organization.

How will we do this? First of all, we must maintain our institutional strengths: the rule of law upheld by an independent judiciary; the free flow of information; a level playing field for business; low taxes and a simple tax regime; and a clean administration. These are also unique advantages we enjoy under the 'One Country, Two Systems' formula.

On top of this, we are planning to add more value to what we do in a number of key areas, including financial services, logistics, business services, design and tourism. This will help us realize our vision of becoming Asia's world city.

But Hong Kong's economic position as the region's premier financial, business and logistic hub can only be strengthened if we interact seamlessly with our hinterland. We are determined to facilitate the flows of people, cargo, capital, information and services between Hong Kong and the Mainland. I know the international business community also wants this to happen. In doing so, we will be careful to protect our 'One Country, Two Systems' advantages and strengths.

In conjunction with the Mainland authorities, we are taking the initiative to facilitate travel for businessmen and tourists between the Mainland and Hong Kong. We are pushing ahead with plans to enhance the flow of talented people into Hong Kong, including those with the right qualifications from the Mainland. This will help us to maintain a top-quality workforce.

In response to suggestions from the international business community, the Mainland has started issuing multiple-entry visas valid for up to three years to expatriates who are Hong Kong Permanent Residents. This is a big plus for business people running operations in the Mainland and using Hong Kong as their base. There are many other initiatives for making it easier to travel across the boundary for business, holidays, leisure or other exchanges - all of them important for maintaining Hong Kong's role as a business hub for China and the region.

China's WTO membership will boost the need for efficient and advanced transport and logistics services for cargo to and from Hong Kong and the Mainland. We already excel in this area, but more needs to be done to link the Mainland with the world by making even better use of our transportation facilities and the high productivity of the Pearl River Delta. Indeed, we are working closely with the private sector on our Logistics Hong Kong initiative that will include upgrading our physical facilities, electronic transactions capacity, manpower development and marketing.

There will also be huge investment potential in the services sector as the Mainland market becomes increasingly mature and sophisticated. Hong Kong is well positioned to capture the opportunities in areas such as legal, accounting and auditing, finance, marketing and advertising, education, medical, architecture, construction and management.

Another trend following China's entry into the WTO will be the greater flow of funds into and out of the Mainland mainly from overseas investors or from Mainland enterprises looking to raise funds in the international market. Hong Kong's advanced banking and securities markets are set to play a major role in this. Our freely convertible currency, without any restrictions on capital movement, low taxes and high standards of corporate governance, should strengthen our position as the premier fund-raising centre, in both equity and debt capital markets, as well as in providing all kinds of financial services for the Mainland. As part of this, we are discussing with the Mainland possible collaboration on some financial services.

For free markets to work, there must be a free flow of information. Hong Kong is not only the regional base for important international media groups; our local media is extremely active and vocal. And we would have it no other way. Hong Kong is also continually upgrading its IT, telecommunications and broadcasting capabilities to ensure accessing information is easy, and reaches as many people as possible. The liberalization of our telecommunications market since 1995 has led to substantial private sector investment, a significant upgrading of our external communications and the rapid development of advanced telecommunications infrastructure with strong price and service competition.

This is just a snapshot of what is happening in Hong Kong. We are laying down a solid foundation to become Asia's world city. In capitalizing still further on our advantages and China's WTO membership, we are now exploring with the agreement of the Central Government, the establishment of a Closer Economic Partnership Arrangement between Hong Kong and the Mainland. This would be similar in many respects to a free trade arrangement consistent with WTO rules and the 'One Country, Two Systems' principle. While we are naturally very excited about this development, I will add a note of caution. China has just joined the WTO and neither the Mainland nor Hong Kong has so far entered into any form of Free Trade Agreement with other trading partners. So, we need to bear in mind that this is a very complex subject and one that will take some time to bear fruit.

As you would expect, I remain very optimistic about Hong Kong's future. We are determined to ensure that Hong Kong benefits substantially from the continued opening up of the Mainland market. We have a special role to play in the development of China. Some of the initiatives I have outlined will help us to fulfil that role and provide a winning combination for Hong Kong, the Pearl River Delta and our nation as a whole.

Having said that, I hope I have not given you the impression we are putting all our eggs into the Mainland basket. So, let me assure you that Hong Kong has always been outward looking, and will continue to be 'exhibit A for global interdependence'. Our past successes have come from our free and open markets and as a hub for the region, not just for the Mainland. We may not have been blessed with a host of natural resources, but our location and our people have been the driving force in our success. A location where international corporations naturally look for the expertise, infrastructure, facilities and policies required for the efficient transaction of global trade and investment.

I hope I haven't spoken for too long, but if you have any questions, I am more than happy to answer them.

End/Saturday, February 2, 2002

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