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Following is the transcript (English only) of a question-and-answer session by the Financial Secretary, Mr Antony Leung, at the Luncheon of Hong Kong Investment Funds Association today (May 22):

Question : I'm very pleased to hear what you said about off-shore funds particularly the revenue at the moment are being extremely aggressive in this area. I'd also like to ask you a slightly related question because you are talking about looking for attracting funds into Hong Kong. The obvious question is that are you also going to consider the removal of estate duty so that Hong Kong can become a much more effective trust administration and centre as well, and then people buying assets into Hong Kong are not going to be faced with estate duty charges.

Financial Secretary : Well, this issue has been raised quite a number of times throughout these years. As a former banker, what you said obviously has certain appeals. However, I think it will be very useful if your association and obviously from your angle, you can kind of think through one issue that can help us to consider whether it should or should not be changed and that is whether you can genuinely promote the development of Hong Kong as a financial centre because if you take away the estate duty, someone argues that the only tangible benefit is actually it will benefit the accountants and some lawyers. With the actual asset allocation remaining unchanged, meaning that it will not actually draw more funds into Hong Kong. It's really just a matter of booking centre. Now if it's just a booking centre with a few jobs created in those industries that I have just mentioned, it may not be a strong enough argument for the Government to basically give away anyway between one to 1.5 billion dollars of revenue a year and the Government right now needs money. So if your industry and also the accountants and the legal profession can really submit further arguments, it will be highly appreciated.

Question : Could you comment on the Mainland in terms of development of their investment and management industry. At the moment we have to go into the Mainland for joint ventures etc. Is that any way we can sort of encourage them to use Hong Kong more directly ?

Financial Secretary : Under the "one country, two systems" principle, I better avoid commenting on the development of the industry in the Mainland. But clearly as a former banker, the Mainland market is one that we, the private sector and the Government, are interested in. Rather than kind of giving you a picture that is anything different from what has been agreed in the WTO in the speed of their opening up. As you are aware, according to some newspaper reports, there have been discussions of the Mainland authorities on instruments such as QDII, CDR and the like, so that it'll increase the flow of capital between the two places particularly from the Mainland into Hong Kong. With these instruments, I think depending on what can be covered under these schemes, it can or, cannot really help your industry and obviously I am hoping that it can help your industry a great deal.

Question: We frequently heard how Singapore is regarded as a competitor in fund management industry to HK and how the Singapore Government uses its own assets to encourage fund managers to go to Singapore. This doesn't happen in Hong Kong. Is there any intent on you part to try to use Government asset to encourage fund managers to come here and use government asset to encourage fund managers that are here?

Financial Secretary: Hong Kong prides itself to be a free market and level playing field is a very important pillar of such claims. To apply protective measures may or may not be in the interest of HK. Obviously we do have quite a bit of funds under the Government's management or actually under Government's control but a lot of them are farmed out to the private sector, including to a lot of firms in this room, for management. Obviously when we evaluate who to give the funds to we'll take into account quite a number of factors including your contribution to HK. But I don't think we'll be as explicit as Singapore, and personally I'm against any protectionist measures because it really would ruin Hong Kong's reputation as a free market. Don't take it as an open invitation so that you can move to Singapore, manage their asset and then trying to get our funds. We do want to maintain our status as a free market but on the other hand we do look at the firms' contribution to Hong Kong as one of our criteria.

Question: (inaudible)... to sell investment funds around the region?

Financial Secretary: I would rather leave it to the Task Force to work with you for the details. I must declare that I am not an expert in this area and I'd rather have the Task Force work out a lot more details before we talk about it further. But the intention is that fund managers can use Hong Kong as a base and that you can really market the funds throughout the region.

Question: I read the newspaper yesterday ...I can't remember which, now that you have stated that if the Government is unable to reduce its cost, you may well be forced to look at other forms of taxation or money raising measures. Precisely what do you have in mind?

Financial Secretary: I am sure that you'd like me to add to, to just answer, kind of, a quick and simple consumption tax. But I'll have to disappoint you. As the Financial Secretary, I have the responsibility to ensure that we maintain a balanced budget, at least achieve it in some reasonable period of time. Two reasons. One is for the financial health in Hong Kong. We all recognise that an uncontrolled sustained period of budget deficit will lead to monetary instability. We have a vivid example in Argentina. We just had a crisis (there) not too long ago.

Secondly, it is required under the Basic Law that in Hong Kong we have a more or less balanced budget. So I'll have to fulfill my duty to maintain Hong Kong's prosperity as well as making sure that we abide by the Basic Law.

Right now, we have a budget deficit that is at record level. Last year, our budget deficit exceeded five per cent of Gross Domestic Product (GDP). And being people in the industry and the financial sector, you know that the budget deficit which is five per cent of GDP is very large. And we'll have to close it at some point of time. I've set the target that we'll achieve a balance by 2006/07.

My preference obviously is to reduce Government expenditure. After all, we'll also achieve the purpose of reducing the size of the public sector and giving more room to the private sector. I think that's actually good for the economy.

However, if we are not successful in reducing expenditure, then to close the budget deficit, there is absolutely no other way but to increase revenue. And we have obviously a lot of plans as to how it can be done. Whether we would impose consumption tax, I would hope not, and this is not in the foreseeable future because both the Chief Executive and I believe that to impose a regressive tax like the consumption tax during a period of economic restructuring, and our unemployment rate is still high, is not right. However, if we are not successful in reducing Government expenditure, then we may have no choice but to resort to such revenue measures. But at this point of time, I would like to repeat again the Government does not want to do such things and our focus really is to control the growth in Government expenditure.

End/Wednesday, May 22, 2002

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