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Following is the speech (English only) by the Financial Secretary, Mr Antony Leung, at the luncheon of the CSFB Asian Investment Conference 2002 today (March 21):

Ladies and gentlemen,

Thank you for inviting me to speak at this function today. First, let me welcome to Hong Kong all those delegates who have come from many different countries this week to help make this conference a success, to enjoy the Rugby Sevens and to visit this great city.

I know the importance Credit Suisse First Boston attaches to its four-day annual Asian Investment Conference. And I would like to congratulate CSFB on being the main sponsor of the Hong Kong Sevens, which must rank as one of Hong Kong's most internationally-recognised sporting events.

I have to admit that I am not a big follower of rugby and would certainly never have qualified as a player, as I am sure you can see why. With my slender frame, even as a winger, can you honestly picture me up against someone like Jonah Lomu? However, I am a great supporter of the 'Hong Kong Sevens', because it does so much to demonstrate why Hong Kong is a world city. Every year, thousands of rugby fans come from all over the world to enjoy one of the fastest and most exciting games in Asia, if not the world. Just the beer the fans drink will help to reduce our Budget deficit!

I am also a supporter of the Hong Kong Sevens because it represents the global competitive game that Hong Kong is engaged in and so good at: fast, exciting and always changing. The winner is not only the fastest, with the wisest strategy and best execution, but also the most flexible and resilient. Let me give you a quick sketch of how we are dealing with the opportunities and challenges thrown up by this changing global environment.

First, Hong Kong is one of the most open economies in the world, with total trade in goods and services amounting to 2.8 times GDP in 2001. If the world slows down, we slow down. With the public sector accounting for 23% of GDP, and the fact that Hong Kong is a very open economy, that is, with a very high degree of leakage, there is very little room for fiscal policy to counter an externally induced slowdown.

Second, when the US recovers, Asia will recover and so will Hong Kong. The lag is normally not more than two quarters. But this time, since there is still lots of excess capacity in the world, we are witnessing recovery with very little inflation, and I believe this is the consensus of this Conference. Those who reform and react quickly to meet global demand win. Those who reform slowest will find that there may be low economic growth and growing unemployment.

I look at the issues facing Hong Kong very simply. For all our faults, we are still one of the most entrepreneurial and free market economies in the world. In the 1980s and 1990s, we were very successful, growing at an average rate of five per cent a year. But we had asset inflation from which we are still adjusting. We had a very successful business franchise as the major window for China, which is one of the world's fastest growing economies. But as China opens itself to the world, Hong Kong will have to move up the value chain.

Our success was based on private enterprise, facilitated by a business-friendly public sector that is providing the rule of law, infrastructure and a level playing field that is the envy of Asia. But as the environment changes, we must ask ourselves, irrespective of the private or public sector, how we can better respond to the needs of our customers or stakeholders in the 21st century.

The thrust of our strategy is very simple - to enable the market to play to its best. This is why I have announced a target to reduce the size of the public sector from 23% of GDP next year to 20% or below in about five year's time. I want to ensure that the public sector will improve on what is already good at - providing efficient public services at low cost, and leave the business decisions to businessmen.

For the same reason, we need to re-examine our regulatory system, because many of our existing processes, rules and regulations may no longer be quite applicable in the 21st century. Some of them may even be impeding our own efficiency as well as that of the private sector.

For example, we have the world's busiest container port. But can we afford to have long queues of container lorries at our boundary crossing to the Mainland and vice versa? Can we not change our policies and processes to facilitate straight through transit across the boundary while still preserving our separate customs territory, so that the consumer across the Pacific or in Europe can get their goods faster?

China's accession to WTO will have a decisive impact on our growth. On the one hand, China's reforms will bring great opportunities. On the other, our franchises at the lower end of the value chain can no longer be profitable when the Mainland is increasingly able to provide such services at much lower costs. Hence, we need to compete on product differentiation, and offer customer-oriented goods or services with speed, quality and creativity.

We have never had the cheapest labour in the world. We have never had a large domestic market. Yet we have enjoyed enviable success in the past 50 years, mainly because Hong Kong entrepreneurs are the best re-engineers in the world. We can take the best innovations in the West, re-engineer to the consumers' taste, get it manufactured throughout Asia, including in the Mainland, and finance, package and market it to the world at a pace faster than anyone else. We do not pretend to be anything else.

In my Budget Speech a fortnight ago, I identified four key economic sectors, among others, in which we have real competitive advantages - financial services, logistics, tourism and producer and professional services. I will elaborate on what we are doing on the financial services front, especially on enhancing our market regulatory system and increasing liquidity.

We will continue to simplify processes in the financial services area. For example, in the newly enacted Securities and Futures Ordinance, there will be a single licensing system, instead of multiple licenses. The Ordinance alone consolidates 11 separate ordinances into one piece of legislation. The license application process has been re-designed to facilitate electronic applications. The license fees will be reduced by 3% for all applicants, and another 5% for early birds. I have asked our regulatory bodies to re-look at all ways to ensure that the regulatory processes will not impose an unnecessary burden on the private sector, without sacrificing regulatory effectiveness.

Simplifying the process does not mean that we throw the baby out with the bath water. We need to have very clear rules of the game - rules that are fairly and firmly enforced. In the new Securities and Futures Ordinance, we have created a Market Misconduct Tribunal, ahead of the major markets, to ensure effective enforcement of the law.

But enhancing the regulatory system is not enough. As the private sector continues to innovate to meet the rising competition, so must the public sector respond. I have asked the Secretary for Financial Services to lead a Task Force on Financial Market Development. This has five working groups on banking, debt market, securities and futures, insurance and the fund industry. Each working group has market experts to help the regulators. They are tasked to explore ways to increase liquidity in our markets by encouraging new players and developing new products and services. The dialogue with the market has generated many new ideas. I trust that we will be able to develop many of these new ideas into action to strengthen and consolidate our position as the preferred financial centre in the Asian time zone.

For example, in the debt market area, we are already committed to reducing the issuance procedures with a view to facilitating retail distribution of fixed income instruments. The potential for debt market instruments in Hong Kong and Asia is huge, since there is a growing appetite for retirement funds. And as you know, in Hong Kong, we have a Mandatory Provident Fund which now has an inflow of 2 billion Hong Kong dollars a month and, in due course, this will be a very large pool of capital.

As a result of these intensive discussions with market experts, we are revamping the debt issuance procedures and guidelines to make them less restrictive and more user-friendly. Another example is in the derivative warrant market, where the HKEx will be reducing its fees and charges. The Securities and Futures Commission is also reducing its fees and charges proportionately.

On another front, we are also upgrading our financial infrastructure to the best international standards. The securities market clearing network is undergoing a thorough revamp. It will be linked with the real-time gross settlement system shortly to form one of the most modern in Asia. We have a plan to go scripless quickly and securely, with the most efficient and robust delivery-versus-payment infrastructure in the world. These strategies will make us even more market oriented and reduce our transactions costs.

I cannot end my remarks without saying something about the impact of Enron on our markets. It is a timely wake up call for all of us to pay serious attention to the need for good corporate governance. We have been working seriously on improving our corporate governance framework since 1998. We have a Standing Committee on Company Law Reform, chaired by Mr Justice Rogers, to review global corporate law reform and make recommendations. We are looking at market best practices to improve corporate disclosure and the protection of minority rights. Our new Securities and Futures Ordinance will go some way to address these issues, and we will also update our Companies legislation.

But corporate governance is not just about getting more regulatory teeth. It really boils down to corporate ethics and values, not just at the management level, but also the advisory, accounting and legal service providers who form important checks and balances in the system. More and more companies in Hong Kong are now getting corporate governance ratings from independent ratings agencies. They do so not just because they want better market ratings, but because they realise the value of an independent health check assessment.

Because Hong Kong has some of the best companies in Asia, I believe that with a firm but fair regulatory framework, our corporate governance will continue to improve.

Ladies and Gentlemen, regulating financial markets is exactly like refereeing the Hong Kong Sevens. There will always be someone who skirts the rules, but we must regulate firmly, fairly and with a light touch. These are the rules of the game that have made Hong Kong such an attraction for entrepreneurial talent.

The public sector must provide the infrastructure and the regulatory framework for the market to thrive. The Hong Kong Sevens cannot be played well without world class facilities, world class transport and telecommunications, and world class rules. We aim to provide all of these, so that you as investors, consumers or participants can enjoy the finest that Asia can offer.

And now for the questions on all those issues I haven't raised! Thank you.

End/Thursday, March 21, 2002

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