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Following is a speech delivered by the Chief Executive, Mr Tung Chee Hwa, at the luncheon organised by the Hong Kong General Chamber of Commerce this (June 17) afternoon:

Chris, members of the consular corps, friends, ladies and gentlemen,

I'm very honoured and delighted to be invited to talk to you this afternoon. I thought about what to talk about. And in fact, there is really only one subject which everybody is talking about and this is really about the World Cup. I could stand here for hours exchanging views about how valiant China was in defeat against Brazil; how easily England was able to win the other day three-nil against Denmark; and what a game yesterday, the way Senegal and Denmark played, probably one of the best games I have seen in the World Cup. And mind you I started watching World Cup games in 1958 so it goes back a long way. Eden Woon was saying to me you must be very busy, there's so much going on. That's right - I have been watching the soccer games all the time.

Chris was talking about what I was going to tell you. I think you would be disappointed if you were expecting me to tell you in this audience what I am going to do in the next five years from July First and what are my priorities. Because, as important as you are I am sure you would agree, that talk should be left to July First when I officially become the second-term Chief Executive.

It is in fact very difficult for me to choose a subject because today is only two weeks away from July 1. I thought it best for me to talk about the second-most interesting subject which is about the state of our economy. What are we doing? How we are facing the many challenges we have? And among the many efforts the government and the community as a whole are making, I want to talk specifically about how we must move up the value chain if we are to succeed in the economic restructuring. For those who might be disappointed at the narrowness of this topic, I'll be happy to answer any questions you might have subsequent to my talk.

Let me talk about the state of the economy. Until last week's fall in the US Dollar and the US stock market, there were signs that recovery was in the offing of Hong Kong. Tourism is up. Cargo throughput at both the container terminals and the airport has been up. Real estate transactions, even though prices have not gone up, there were more transactions. And there was certainly a strong pick up in the number of companies that are going to be listed in Hong Kong in the second half of this year. Indeed as the economy starts to pick up in the rest of the world, particularly in our major markets, I think we should be able to expect a second-half recovery, modest as that might be and indeed a cyclical recovery, in my view, has begun. Of course, there are whole lots of uncertainties out there, especially around the world, that we have to be worried about. But barring any unforeseen circumstances, a slow modest recovery is possible.

But in the meantime, Hong Kong's economy is still undergoing difficult restructuring. I have to emphasise that this will go on for some time to come. And we are surely not talking about months, we are talking about years. During this time, as we adjust ourselves, our economic growth will be affected, deflation will continue and therefore, budget deficits and all the other negative consequences will follow with it. Unfortunately, unemployment will remain high for some time. And the government and the community as a whole will face further new challenges as my term begins.

Let us go back to talk, maybe once more, as to why there is a need for restructuring here in Hong Kong. We have all talked about this many, many times but I thought I would take this opportunity just to summarise why there is this need.

Globalisation and the advent of IT, the rapid development of IT, has made economic structuring here in Hong Kong very necessary. The extremely successful and rapid development of the mainland Chinese economy has given us many new opportunities, but certainly many new challenges. Today, products and services can now be produced at a fraction of the cost of Hong Kong's just across the border from here, and thereby creating new competition and in fact, that is one of the reasons of deflation here.

The bursting of the property bubble as a result of the Asian financial turmoil and excess of property prices in the '90s has greatly affected the corporate balance sheet as well as personal wealth here in Hong Kong, thereby affecting investments generally and as well as consumers' spending. And this effect is still being felt, is still here today. It's been reported to me almost 50 per cent of the deflation up to today can be accounted for because of the decline in property prices. And this is why as a government we are so keen to hold property prices stable.

The other thing which is worthwhile noting is that foreign direct investment of Hong Kong, by Hong Kong people today, is very, very high. It accounts for, the last count, 177 per cent of our GDP, which is very high indeed. And if you assume that the return has declined only 3 per cent say, then the impact of that income decline on Hong Kong's GDP is equal to 4.3 per cent in the year 2000 and 5.3 per cent in the year of 2001. And these are in fact all the reasons why we need restructuring, all the reasons why there is deflation here in Hong Kong, which actually over the past four years has accounted for almost 12 per cent. Deflation of course affects government's tax revenue, affects consumer spending, and affects the desire of businesses to invest. All the above also affects the speed which we can successfully come through our economic restructuring.

Ladies and gentlemen, we are indeed faced with many, many challenges. What can the government do? What can we do together? Am I really pessimistic? Or do we see a light at the end of the tunnel that things are going to be moving ahead?

Well, let's go back and ask ourselves what the government can do. I ask myself constantly what the government should be doing. I talk to my senior colleagues constantly about what we need to be doing as a government.

First of all, we need to constantly and carefully but thoroughly review the changing external environment we are confronted with. Carefully review our competitive advantages, our strengths, our weaknesses, especially compared with cities who are competing with us, and compared with other regions who aspire to compete with us. Given the change that is going on around us, how do we reposition ourselves? In what direction should we be heading to ensure that we are successful in our economic restructuring and in the shortest possible time?

Now let us look at some of our competitive advantages. And if you look at these competitive advantages I think you will come away as I have, somewhat much more confident. You know we are a very successful international financial centre and I cannot see on the horizon anyone remotely possibly taking over from us. We are centre for trade, transport and logistics. Our tourism business is moving up very, very well and with what is happening with Disneyland, and the support the Central Government has given us, our tourism business will be achieving new heights every year in the next few years. We are the centre for multi-national companies doing business in Asia and also for the mainland of China.

And the other thing we should remember constantly is that there are traditional industries here, whether they be in garments, the making of watches and clocks, toys, etc. These are very successful businesses by international standards and the question is how we help them to move up the value chain and to take a bigger portion of the world market.

And all this, ladies and gentlemen, is supported by the institutional framework of the rule of law, of a level playing field, of free flow of capital and information, and of course, a very low tax structure. We have, additionally, an unrivaled geographical location and a clustering of really some of the best specialists in the world, whether they be financial analyst experts, accountants and lawyers etc.

So we have all these advantages with us and what we need to be doing is to leverage on these advantages. How are we positioning ourselves? And I have said this many, many times already, but I just want to repeat again how, do we position ourselves not only as one of the major cities of China, but as a world city of Asia. What London is for Europe, New York is for North and South America, so should Hong Kong be for the rest for Asia.

We will continue to leverage on our competitive advantages, particularly on the rapidly expanding economy of the mainland of China. And in particular in relationship to developing an even closer relationship with the Pearl River Delta. We will continue to move up the value chain by constantly striving to provide high value-added content to the services and products we provide for ourselves in Hong Kong and for the rest of Asia.

So, I think this is the way we need to move forward into the future. What can government do in trying to take this thing forward?

I think as a government we need to improve and promote a business-friendly environment. What do I mean by that? Improve efficiency of the government, promote the use of IT, ensure the maintenance of a low and simple tax regime, and create an environment to allow individuals and corporations in Hong Kong to rebuild their balance sheets or their own wealth.

And secondly, we need to continue to invest in infrastructure whether it be hard or soft infrastructure. Soft infrastructure, by that I mean in education. We really need to invest a lot in education to make sure that for the generations to come, we will be able to compete successfully in world terms as a value-added city.

We need to make sure that we continue to strongly uphold the rule of law, the freedoms and the level-playing field we all enjoy today. We need to improve Hong Kong's competitiveness by removing obstacles to doing business here, and we need to ensure that the quality of life in Hong Kong is the best you can find anywhere in the world. Hence, all our efforts in environmental matters as well as in enriching a Hong Kong culture which is really quite unique. We need to be constantly aware of how we help medium and small enterprises. A lot is being done, perhaps not enough, and we will be listening to the views of the industries as we move forward.

And finally, as we move forward, economic restructuring is going to be very difficult on a sector of our population not as well as equipped compared with others. And to these who are disadvantaged, we need to be compassionate, we need to be helpful to make sure that they can move along, given the equal opportunity really to come out of all these difficulties.

I said earlier on I want to talk somewhat about what we need do to get Hong Kong moving in the value-added direction. One of the areas where government can do something, has been doing something, and will continue to do something, is how to help Hong Kong to move up the value chain.

Apart from education, the government has been emphasising the role of innovation, and the role science and technology can play in helping Hong Kong to move up the value chain and thereby help Hong Kong's economic restructuring.

Our objective is to use science and technology to enhance the innovative capability of Hong Kong, to strengthen the competitiveness of industry and to create knowledge-based, high value added industries and, through acquisition of knowledge in science and technology, to help individuals move up the value chain also. Over the past five years, we have been doing a great deal in this regard.

Over the past five years we have seen a continuing process in which we have built up a respectable science base in Hong Kong. Working together with the universities, we have seen internationally competitive research work, both basic and applied, from the construction of one of the smallest nanotubes in the world to the breakthrough discovery and use of maternal plasma DNA in the biomedical field as markers for the diagnosis of foetal deformities being done here in Hong Kong. I would not try to bore you with all the technical details. But the fact is we are seeing more and more corporate participation in applied research and development. In 1997 corporate contributions to public sector research and development sponsored by the Innovation and Technology Fund, which is a Government fund, was $9 million compared with $222 million committed by the Fund. So, $9 million from the private sector and $222 million by the Fund. This has now increased to $59 million compared to $318 million contributed from the Fund.

The successful development of science and technology in Hong Kong is about developing local talents, finding local talents, nurturing them and developing them. It is also about attracting world-class scientists and scholars from all over the world to come and live and work here in Hong Kong. We have been increasingly successful in these efforts. Only last month the prestigious membership of the Chinese Academy of Sciences was conferred upon six outstanding scientists from Hong Kong. One of them, in her late 30s, is the youngest academic in the Academy.

Good quality universities and the government's commitment to science and technology are attracting some of the best around the world to join us in Hong Kong. Indeed, we can take the recent recruitment of outstanding people as indicators. People such as Paul Chu at the Hong Kong University of Science and Technology. Paul, as you know, is a world renowned researcher in superconductivity; Tsui Lap Chee at the University of Hong Kong - Dr Tsui is the former head of the Genetics and Genomic Biology Programme in Toronto and has many important breakthroughs in human genetic research; C D Tam at the Hong Kong Science and Technology Parks Corporation - C D was the former President of Motorola Asia responsible for Motorola's activities here in Asia; and Simon Wong at the Applied Science and Technology Research Institute - Mr Wong is formerly the Professor of Electrical Engineering at Stanford University. From these you will see the credibility of Hong Kong is now being taken seriously around the world. Furthermore, world-class scientists and engineers attract others to join. We are seeing that our institutions and universities, but recently and notably the Applied Science and Technology Research Institute, are able to recruit young and talented research scientists and engineers from overseas. We are determined to maintain this momentum.

Our new infrastructure to support innovation and technology is progressing well. Phase I of the Cyberport's occupancy rate will reach 80% with a new signing to be announced this week. The Science Park will be opened by end of this month. The occupancy situation there is very satisfactory, with 16 tenants from Hong Kong and overseas, notably Silicon Valley, already signed up and more in the pipeline. What is more satisfying is that we are beginning to see the clustering of electronics and integrated circuit design companies in the Science Park. We have good basic research capability in some of our universities. But in order to provide more applied research to support innovation and technology, the Applied Science and Technology Research Institute was formed. The Institute is already embarking on its own programmes. Initially it will focus on photonics, integrated circuit design, e-learning software development and wireless telecommunications. It is also looking into areas such as biotechnology, including the development of Chinese medicine. As I said earlier, these programmes, and the increasingly conducive environment of Hong Kong, are attracting research scientists and engineers, particularly those from North America.

The promotion of entrepreneurialship is a cornerstone of our innovation and technology programmes. Good technological developments are only worthwhile if they are commercialised and applied to industry. The Hong Kong Science and Technology Parks Corporation is set to increase the uptake of its incubation programme to 100 annually. Similarly it is also, in collaboration with local universities, to induce more campus based entrepreneurial activities. On the other hand, we have supported more than 80 projects under the Small Entrepreneur Research Assistance Programme, mainly in information technology, telecommunications and consumer electronics-related developments. We hope that this process will help spawn new industries and new innovation driven and technology-based companies. Our efforts to build up technology entrepreneurship are beginning to bear fruit with the public listing of at least three companies in the past 12 months and the impending listing of at least another one in the next three months.

For us to be moving up the value chain, we need to improve the quality, the design, and creativity of the products or services we provide to the local market, to the market of the Mainland as well as around the world. In this respect, branding is important, design is important. Good design is essential for successful branding. We are seeing encouraging signs that our industries are engaging in original design manufacturing (ODM) by providing their own engineering and design solutions to customers, instead of the traditional original equipment manufacturing (OEM) mode. There are quite a few local manufacturers already marketing their products with their own or acquired brand names and I am confident that more and more will follow suit in their competition in the global market.

Hong Kong has been leader in the field of design in this part of the world. We will continue to support any effort to improve Hong Kong's design capability. In September we will see the opening of the Hong Kong Design Centre whereby all design professionals in Hong Kong will put their acts together to promote design in Hong Kong and raise Hong Kong's international profile.

The garment and apparel sector is also working hard to establish its own fashion centre, in which fashion design will be a major element. Our desire to enhance Hong Kong's design capability will also be seen in the plans of the Hong Kong Science and Technology Parks Corporation and the Applied Science and Technology Research Institute to set up a joint integrated circuit design support centre by the end of the year. But we should, in any case, not be complacent. We will examine critically whether design courses offered by tertiary institutions here need to be further supported and improved in order to face the new demand and new challenges.

Building up brand names, improving our capability and design, promoting entrepreneurship and the culture of science and technology are all long-term efforts. But I believe we have made a good start. During my second term, this particular effort will continue to be one of my main focuses and the focus of many of my colleagues. The new Secretary for Commerce, Industry and Technology will have overall responsibility. And having information technology and other developments in science and technology grouped together will help make our push that much more focused and that much more efficient.

So much for what we are doing about science and technology and about innovation. And as I said earlier on, I believe we have made a good start. There is a lot that needs to be done and I just want to assure you in the second term, this will be one of our top priorities as we move forward.

Ladies and gentlemen, we are faced with an enormous task of restructuring our economy. It is not going to be easy. But let me remind you, we have done this twice before. The first time was in the '60s. A huge influx of immigration from the Mainland created a major challenge to Hong Kong. The resourceful Hong Kong entrepreneurs were quick to seize the opportunity of the large supply of cheap labour and transformed Hong Kong into one of the world's largest and very successful manufacturing centres. 'Made in Hong Kong' conquered many markets in the West.

And then we had to restructure again prompted by rising costs. But fortunately, because of the timely opening up of China's economy in 1978, Hong Kong went through the second phase of economic transformation in the '80s. The low cost manufacturing industries migrated across to the Pearl River Delta to take advantage of the lower cost of labour and land. And Hong Kong was transformed into a service economy creating yet more wealth and improving yet further the lives of the people of Hong Kong.

We are now faced with a third economic restructuring, probably the most difficult one so far. But I have no doubt, while not underestimating the difficulties we face, that we will be successful in the end in coming through this restructuring. What can we all do, every one of us, to make the restructuring successful?

The government needs to give strong leadership in these difficult times. Government needs to be more responsive to the needs of the people and the needs of the business community. Government needs to clearly articulate our repositioning, the roadmap as to how to get there, and to persuade the community as a whole that this is the way forward and to demonstrate the necessary political will of getting there.

I sincerely believe when the accountability system is in full swing that we will push this as dynamically forward as possible and achieve the results we would like to see. Corporate Hong Kong needs to think a lot more outside the box. Apart from improving efficiency and reducing costs through reengineering, it is about how to use science and technology and creativity to improve product design, to improve the quality of products and to ensure the product reaches the market in the shortest possible time and be acceptable to consumers. The market, of course, is not just about Hong Kong. It's about mainland China, a rapidly expanding market, and indeed the rest of the world.

Individuals need to have the faith and the determination to continue to improve one's ability, creativity, constantly seeking new knowledge, thereby equipping each one of us much better as we face the new challenges.

I know when I talk about this, you understand that there are no easy solutions. To those who are unemployed, to those with negative equity, to those small and medium businesses whose companies may go bankrupt, to those who are about to lose their jobs, all I have said seems to be so irrelevant.

But let me say this to you. Yes, we are going through a difficult time and this will continue for some time to come. But we must have faith. We must believe that we have the competitive advantages, that we have the support of the Central Government, and that Hong Kong people have gone through this twice before and each time we have come out stronger and better.

In my second term, I pledge to you that I myself, my colleagues, will work at this the best we can to ensure a successful restructuring can be completed in the shortest possible time. And I know I will have your support.

Thank you very much.

Ends/Monday, June 17, 2002

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