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

Following is the speech (English only) by the Financial Secretary, Mr Antony Leung, at the 2002 Annual Dinner of the Federation of Hong Kong Industries today (March 25):

Victor, distinguished guests, ladies and gentlemen,

Thank you very much for your invitation tonight, and for the chance to meet with such a wide cross-section of Hong Kong's captains of industry and business. It is always a pleasure to be among friends and to chat about matters that interest and concern all of us, even more so over an enjoyable dinner and a glass or two of wine.

Tonight I'd like to talk about two things. First, I want to speak about how I see Hong Kong's economy developing, in a broad sense, over the next few years and beyond. And then I want to talk about one of the key areas that will drive Hong Kong's economic growth in the future, and that is the area of producer and professional services. This, together with financial services, logistics and tourism, are the four high-value-added sectors that I mentioned in my Budget earlier this month. But before I go on, I'd like to step back in time for a brief moment.

For more than 40 years, your Federation has helped shape Hong Kong's prosperity through a wide variety of services and activities. The Federation's role and function has grown and changed in tandem with Hong Kong's growth and development. It is interesting to look back at a few figures to see just how far we've come and what we've achieved.

In 1960 when your Federation was established, I was a young lad of eight, and Hong Kong was a city of 3.1 million residents with a per capita GDP of around 2,000 HK dollars. Today, Hong Kong's 6.8 million residents enjoy one of the world's highest per capita GDPs of 185,000 HK dollars. Our affluence and prosperity has grown as Hong Kong transformed itself from an economy largely reliant on domestic manufacturing to one reliant on services.

China's WTO accession will have a decisive impact on our future growth. On the one hand, reforms and opening up in China will present considerable opportunities. But on the other hand our "franchise" as an intermediary at the lower end of the value chain will diminish as more and more Mainland companies become able to provide such services at lower costs.

For a long time, Hong Kong has not had the cheapest labour in the world. Nor have we ever had a large domestic market. Yet we have enjoyed enviable success. This is mainly because our entrepreneurs and businessmen are masters of quick change. They are the best re-engineers in the world. Innovative products from the West are reworked and adapted to fit consumer tastes. They are manufactured cheaply and efficiently throughout Asia, including in the Mainland. And then they are packaged, marketed and shipped to the four corners of the globe. It is now very much a case of "Made BY Hong Kong" rather than "Made IN Hong Kong". We do not pretend to be anything else.

The two major factors in the success or otherwise of any business are price and product. Because our costs are relatively high we have to compete more on the strength and differentiation of our product. This calls for market-driven, customer-oriented services and products delivered or made with quality, speed and creativity. Such attributes are essential for both high- and low-technology industries. Let me cite a few examples.

Hong Kong's restaurants are renowned around the world for the quality of creativity of their food. Our Canto-pop stars, TV programmes and movies are popular throughout Asia. Our garment industry has distinguished itself by the speed and quality of products in design sourcing, manufacturing and delivery. These are real examples of us breeding success through quality, speed and creativity.

As I mentioned earlier, I would like to elaborate on producer and professional services tonight. Broadly speaking, producer and professional services are those rendered for local businesses, rather than households and individuals. We have estimated that in the year 2000, such services accounted for about 50 per cent - or some $500 billion - of the value-added services rendered in Hong Kong.

Over the years, our adept industrialists have shifted our manufacturing base across the boundary into the Pearl River Delta to take advantage of cheaper land and labour. These Hong Kong-linked companies are now employing some 5 million people. And that is why, in recent years, we have witnessed rapid expansion in producer services such as import and export, transportation and warehousing, trade financing, insurance, accreditation and testing, research and development, product design and market research. We cannot only provide these producer services to our own manufacturers, but also to others in the region.

As the Mainland becomes more closely aligned to the multi-lateral trading system, the demand for producer services is bound to increase rapidly. Hong Kong professionals will have an excellent opportunity to fill this void. On the one hand they already have decades of international exposure and understand the needs and practices of the global market. On the other hand they will also be able to draw on the close geographical, cultural and language links with the Mainland, as well as decades of practical business experience in the Mainland market. That's why Hong Kong is also a growing provider of professional services in the legal, accounting, engineering, advertising, consultancy, public relations and design fields.

I do not believe that Hong Kong will ever move out of the manufacturing sector. Indeed many of you here tonight are involved in the manufacture of a wide and varied range of products. But what I believe we will see more of, is a greater focus in Hong Kong, on areas that add the highest value. It doesn't cost much to actually manufacture a pair of tennis shoes. But a large percentage of the final cost - that is, the high value, or the premium the brand commands - goes into research, design, marketing, advertising and distribution. These are all the things we're good at in Hong Kong.

To advance further up the value chain, Hong Kong enterprises need to devote more resources to research and development. They need to become even more innovative and make wider use of technology, especially information technology, to add value to their services.

One way is by accelerating the evolution of the production mode from Original Equipment Manufacturing to Original Design Manufacturing and thence to Original Brand Manufacturing through design and product innovation and the use of new materials. Such activities can generate many other high-value-added industries and businesses.

Hong Kong does have an edge in developing products that contain more consumer-friendly features, that follow pop cultures, and that are more reliable and resilient. Pagers with Chinese characters, wireless home phones, remote monitoring devices, fashion goods and accessories - all are relatively unexceptional products manufactured with exceptional sense and flair. This again demonstrates our quality, speed and creativity.

The Government does have a role to play in promoting producer and professional services. We should have a clear vision of the direction of the economic development and be a proactive market enabler. We will let the market lead. But at the same time we must try to provide an environment in which your companies can expand and flourish.

On a macro-level, the Chief Executive and I have repeatedly stressed the need to enhance our education system. We need to move away from the old learning by rote system to one that better nurtures young minds, encourages innovative and creative thinking, and instills in our young people a desire for lifelong learning.

In terms of specifics, we have just launched a $100 million Professional Services Development Assistance Scheme. This aims to provide financial support for projects that can increase the competitiveness of Hong Kong's professional services sector in external markets. The Trade Development Council is also redoubling its efforts to promote Hong Kong services industries overseas, with a focus on the Mainland. We also recently launched four funds of a total of $1.9 billion to support our Small and Medium Enterprises.

We will also look hard at and re-engineer our regulatory regime because many of our existing processes, rules and regulations may no longer apply in the knowledge-based era. Some may even impede the efficient operations of business and we must not let that happen.

And here I would like to say that, a lot of people recently have somehow mixed up the efficiency of the government with the effectiveness and indeed the performance of our civil servants. I would like to really point out a fact, and the fact that I've observed in the last 10 months of working in the government full time. Our civil servants that I work with, and I've observed, the great majority of them are extremely diligent and most of them, if not all, are very dedicated to their work. But sometimes the performance of the government may not be as good as what you've expected, but these are not really our civil servants' problem. A lot of these are really the problem of the system, the processes and the regulations that we have accumulated over all these years. So we are determined to reorganize, to re-engineer the government, so that we can provide much better services to all of you and to our citizen, but that as I said should not be related to the performance of the civil servants themselves.

Ladies and gentlemen, to end this note, I would like to pay tribute to the role of the Federation, as well as other business organisations and chambers of commerce, for all of your efforts in helping to upgrade Hong Kong's global competitiveness.

As I mentioned in the Budget, one of the Government's roles in the economy as a proactive market enabler is to secure more favourable market access for local enterprises through multilateral and bilateral economic and trade negotiations, and participation in relevant economic and trade organisations. The Government, in conjunction with appropriate organisations, should also assist local enterprises to promote their products outside Hong Kong.

In many cases, it is more appropriate for a body to represent Hong Kong businesses to liaise with their overseas counterparts, conduct promotional activities and try to resolve trade or business-related disputes. You can see from the examples of powerful business chambers of the US, the UK and other European countries. They work very hard to promote the interests of their members and, as a result, the economic interest of their countries.

There is a need to present a more united and outward-looking image of Hong Kong businesses as an entity in the face of increasing global competition. There have been calls to better utilise and co-ordinate our overseas resources, such as our Economic and Trade Offices, the Trade Development Council, and various chambers and business organisations, to promote one or more of Hong Kong's economic sectors overseas. And I look forward to the advice and suggestions from the business sectors in such regards.

I must also take this opportunity to thank the Federation for their recent submission on the proposed Mainland/Hong Kong Closer Economic Partnership Arrangement. It has been most helpful in collating the comments and requests of the local enterprises. I welcome further collaboration between business organisations and the Government in this regard.

Once again, thank you for your invitation tonight. I would like to wish the Federation and its members every success in the years to come. Thank you.

End/Monday, March 25, 2002

NNNN