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Following is the speech (English only) by the Chief Secretary for Administration, Mr Donald Tsang, at the Melbourne business luncheon today (August 19):

Thank you David for those kind words of introduction. Ladies and gentlemen, it is an understatement to say that I am delighted to be back in Australia after a break of two years and to be representing Hong Kong for the first time 'down under' in my capacity as Chief Secretary for Administration.

I have many fond memories of my previous visits to Australia, in particular the friendliness and down-to-earth nature of the people of this great country.

And if the success of your proud sportsmen and women at the Commonwealth Games in the past few weeks is any indication, the next games to be held here in Melbourne in 2006 might have to be renamed the 'Australia versus the Rest of the Commonwealth Games'! My heartiest congratulations to everyone involved.

The phrase 'the lucky country' immediately springs to mind. But it does not do justice to the sweat and toil of all Australians who have done so much in building up the country to where it is today.

Although you have been lucky by coming through the Asian financial crisis and the current global economic downturn in rude good health. Others have not been so fortunate.

Luck is also a word we do not use in the context of building Hong Kong into Asia's world city. It is an ambitious goal that is being achieved through the determination and hard work of our people. We are building a Hong Kong that is the equivalent of what London is to Europe or New York is to the Americas. A vibrant, progressive and cosmopolitan city providing opportunities for all and where quality is the key.

We may have our problems now, but they are no more - and in many cases less - than some of our neighbours in the region. Yes, we are facing a tough economic situation. Two downturns in the space of five years, which have come on top of a major restructuring of our economy, have tested the legendary resilience of Hong Kong.

Unemployment at well over 7% is far too high; economic growth is rather flat, although the medium to longer term is brighter; and consumer sentiment remains depressed.

Clearly this is not our best time. But it is far from our worst. Indeed, the picture is much brighter than currently meets the eye.

Let me repeat a little saying that has passed into common usage - no one has made money betting against Hong Kong. We are vigorously addressing the unemployment problem through a mix of job creation, re-training, skills matching and education.

Indeed, the reforms to the education system will result in a sea change in the way our young people are taught and in the emphasis on life-long learning. Our restructuring to a knowledge-based economy will be complemented by this transformation.

In the market-place, we have never ceased to improve corporate governance, to try to prevent crises like those of Enron and WorldCom in the U.S.

And we are building on our reputation as one of the world's 'hot' tourist spots with projects like Hong Kong Disneyland, which is well on the way to completion in late 2005; and a new scenic cable car system that will take visitors from Hong Kong International Airport up to the hills of Lantau Island where they'll meet face to face with one of the world's largest outdoor statues of Buddha. And that's just the beginning!

Also offsetting the economic problems is a political stability that has probably confounded the critics. We had a seamless transition to Chinese sovereignty in July 1997. 'One Country, Two Systems' has been successfully implemented and the leadership in Beijing has been scrupulous in honouring its commitment to observing a 'hands off' policy towards Hong Kong.

As masters of our own destiny, we proudly celebrated the 5th anniversary of the Hong Kong Special Administrative Region last month.

With this success, we have taken a further step to enhance the effective governance of Hong Kong. From the 1st of July this year, the Chief Executive introduced the new accountability system of government - often referred to as a Hong Kong-style ministerial system.

In essence, Mr Tung has formed what amounts to a Cabinet of politically-appointed Principal Officials to serve as his 'Ministers' and to provide 'an open, enlightened and progressive government'.

The new second-term administration is imbued with a mission to feel the pulse of the community and to pay more attention to public opinion in the formulation of policies and in their implementation.

In other words, the 14 policy secretaries, and that includes me, are now more accountable not just to the Chief Executive, but to the legislature and the public.

We are only six weeks into the operation of the system, but since day one the new 'cabinet' members have been showing a more open and direct approach in handling their portfolios.

The system has also freed up our highly respected permanent, politically neutral and professional civil service to do what its members do best, provide objective and well researched advice to their 'political masters' to make the appropriate decisions.

Significantly, the accountability system will pave the way for a healthy and enlivened discussion and deliberation on the constitutional arrangements we need to put in place after 2007. This will be crucial to our orderly progress towards the implementation of a more representative style of government as envisaged in our Basic Law.

So, on the political front, while we have made some fundamental changes to our style of governance, our way of life and the freedoms that we have enjoyed over the years remain unchanged.

The rule of law buttressed by an independent judiciary, a level playing field, a clean administration and the free and unfettered flow of news and information continue to be nurtured. They're what I have traditionally called Hong Kong's four pillars of success.

And here I should add our low and simple tax regime which still stands at a maximum 16% profits tax and 15% salaries tax. No capital gains tax. No sales tax.

These are the elements that give us the edge. They provide that level of comfort for the international business community when looking for a base from which to expand into the Mainland and the region generally.

The pace of this movement has accelerated in recent years as multinational companies, both small and large, have established their headquarters or regional offices in Hong Kong.

We now have some 3,200 regional operations - a third more than we had in 1998. They are moving into Hong Kong to be close to the action. To take advantage of the opportunities that will flow from China's membership of the World Trade Organisation and a market that will open up more to competition through a rules-based system.

And I am pleased to note that Australian companies have been showing the way. You may not be aware of this, but the Australian Chamber of Commerce in Hong Kong is the largest one outside Australia.

Its 850 members, of which 480 are Australian companies, employ some 200,000 people in Hong Kong, or about 6% of our workforce.

And just to let the figures continue telling the story, there are an estimated 50,000 Australians living in Hong Kong backed up by 10 support groups, including the newly formed Australian Institution of Engineers with some 500 members and, I understand, still growing.

Indeed, Australians are an integral part of our community. They have been in Hong Kong for over a century involving themselves not just in business, but in law, culture, the arts and education - blending into Hong Kong society and in many instances becoming the 'quiet achievers'.

Others see Hong Kong as the stepping off point for the Mainland. Let me give you a typical example.

An Australian company sets up in Hong Kong, establishes a toe-hold, looks for a suitable partner, builds up a good local business base, and moves into the Mainland market with the right combination - a Hong Kong partner with knowledge, skills and links, and the Australian with ideas and innovation.

It sounds too easy. But there are many success stories. For instance, a little over a week ago, an Australian consortium won a 25 billion Australian dollar contract to supply liquefied natural gas to our neighbouring Guangdong Province.

Helping Australia to secure that deal was the Hong Kong office of an Australian legal firm, which had been the principal legal adviser for the consortium throughout the 18-month bidding process. Lawyers on the team included specialists in Chinese law and the tender processes in China.

On another occasion, a pharmaceutical company with a good idea that couldn't get off the ground in Australia, came to Hong Kong was able to secure venture capital and is now making drugs in China.

A couple of young entrepreneurs came up with an idea for travel security devices for backpackers. They're now making the device in China.

An Australian company that specialises in clever building technology has just helped a major Hong Kong hotel to shave 20% off its energy bill.

There's the story of another Australian company that won a contract to renovate the older carriages of the Mass Transit Railway system. The company has done such a good job that commuters think they are travelling in brand new carriages.

And the list goes on and on, including the Octopus Card, an Australian smart-card invention that is used by just about everyone in Hong Kong and which has now gone global.

Why? Because Hong Kong is an entrepreneurial city. An excellent testing ground for new ideas. A city that's open seven days a week, and if not round-the-clock it's the next best thing.

We provide an entire range of services that enable you to get things done quickly and cost-effectively. Eighty-six percent of our GDP is derived from services, so you can see the vital role they play in our economy.

And although our manufacturing base has shrunk, as Hong Kong entrepreneurs have moved their operations across the boundary to take advantage of the huge land supply and lower labour costs, those that have remained in Hong Kong are concentrating on the high value-added end of the market.

This is the new focus of development for Hong Kong - moving up the value added chain, not just in manufacturing, but in the services where we have already established such a strong foothold in the region and internationally.

Building on our strengths in financial and business services, logistics, tourism and professional services. We need to concentrate on the essentials not only to make these sectors thrive, but add value to the economy. By achieving this we will offset our relatively high cost structure.

And I would like to point out that we have become more competitive. Our costs are coming down and nowhere is this more evident than in property prices and rents for office space and residential accommodation.

In the process of developing our services industry, the natural progression has been to work more closely with our neighbours in Guangdong Province, particularly the Pearl River Delta. This is the fastest growing and most affluent region in China - a global production powerhouse. Hong Kong companies that have moved into the area have spurred the growth of the entire Delta.

When you take Hong Kong and the Pearl River Delta together we have a combined population of almost 50 million - that's two and a half times the population of Australia.

Including Hong Kong and Macau, the PRD, as we call it, has a total GDP of US$258 billion, placing it amongst the world's top 20 economies.

Within China, the Delta has the highest per capita GDP; it is the largest consumer market in the country, accounting for 12% of retail sales from less than 4% of the population; and it has the country's highest export capability.

The region was the first in China to liberalise its services market; and it attracts the most Foreign Direct Investment. In other words, it's where the action is.

The PRD has specific advantages and significant potential as a consumer market, a trading hub, a manufacturing base, a services market and as a destination for investment.

And, Hong Kong lies at its heart. It has been the principal driver of the PRD's growth for more than two decades. Hong Kong owned enterprises employ some five million workers in the region alone, responsible for the record-breaking volume of exports I mentioned earlier.

So, my message is a simple but vital one: you cannot overlook the PRD in your investment plans; and Hong Kong is the best place from which to make a start.

To help smooth the way, we have given priority to improving the flow of people, goods and capital across the boundary. Making it easier for business people from either side to move easily between Hong Kong and Shenzhen or further north; building new transport links including road and rail services; improving the two-way flow of capital, in particular capital coming into Hong Kong from the Mainland.

The Mainland authorities have already relaxed some travel restrictions on its residents. We are working together with them to upgrade our travel documents to ensure speedier processing; we are studying the possibility of co-locating checkpoints at the boundaries; and we are looking at possible options for further co-operation of the financial markets.

And we are discussing a Closer Economic Partnership Arrangement (or CEPA) with the Ministry of Foreign Trade and Economic Co-operation. Such an arrangement, while still some way off, would cover trade in goods, services and trade facilitation.

But, in enhancing the value of our interdependence with the Mainland, we are very conscious of the need to protect the high degree of autonomy guaranteed Hong Kong under the Basic Law. After all, that is what 'One Country, Two Systems' is all about.

So, our strategy of closer economic co-operation with the Mainland is not being put in place at the expense of our separate identity within the Chinese nation nor at the expense of our many international friends and partners.

We believe that only through further strengthening our ties with our friends, in particular our close trading and business partners, can we emerge stronger from the many challenges now facing Hong Kong.

And that's one of the reasons why I'm here. Undoubtedly Australia and Australians are amongst our closest friends or, to put it another way, the best of mates.

Thank you.

End/Monday, August 19, 2002

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