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The following is the transcript (English only) of the Question and Answer session given by the Financial Secretary, Mr Antony Leung, following his speech at the Hong Kong Venture Capital Conference today (September 16):

Question: I wonder whether I could ask your views, Mr Leung, on the proposed reinterpretation - let me put it that way - of certain tax legislation relating to the investment management industry, which probably would affect the private equity and venture capital industry as well. Is it likely that the way in the past -- that revenues from investment activities outside Hong Kong would be taxed in Hong Kong? Is that something which you are aware of or you are concerned with because I think we as an industry are concerned with this particular point?

Mr Leung: Thank you for this question. I am keenly aware of the problem and indeed numerous, should I say 'advice' and numerous enquiries have been made to my office. Our tax base or our revenue source right now is kind of territorial in nature and there is no intention for the government to change that. As a matter of fact I have instructed the Commissioner of Inland Revenue to study this issue to ensure that Hong Kong would remain a very attractive place for fund managers, including private equity investors and venture capitalists, to locate their business in Hong Kong.

Chairman: The Chamber wrote to you a few months ago on the same issue expressing the same concerns, so I am glad that you took note.

Question (Edwin Lee - HK Business Investment): I'm just wondering, in a certain way Government supports the new enterprises, right? - some start-up companies - in that sense in a certain way it is also in competition with the private VCs as well. Then can you explain the benefits of governmental support versus the private support then?

Mr Leung: The Government would like to provide a very attractive environment for the private sector to flourish. We believe, also, in the principle of the level playing field. Now, for the small and medium size enterprises, right now, because of the economic restructuring they are facing a lot of difficulties and as you know, the SME is a very important sector for Hong Kong. Most of the companies in Hong Kong belong to SME.

The Government has provided some funding to assist them in a number of areas. For example, in the area of training, in the area of helping them to acquire additional equipment, but then on a risk-sharing basis with the banks. To that extent we make all of these available to the SMEs without differentiating the industry or the source of the funds or the nationality of the companies. So we believe that these measures will not, indeed, compete with the venture capital firms. In a way it actually complements what you do because the Government does not really take equity interest in any of these SMEs. You take the equity interest; we provide the funding to assist them to grow. And I think, to a certain extent, hopefully all of you can see that it's not just that the Government is not competing with you, but is, in a way, assisting your industry to grow.

Question (Chairman): As you know, the report came out last week about this penny stock issue and there was some recommendation and some concern about the role of the SFC versus the SE and some communication problems or structural problems, etc. I guess my question is, setting aside all the politicization of the issue, if you are just purely looking at the structural and the communication issues, do you think that is something that would affect investor confidence or how do you think the Government can deal with that?

Mr Leung: I hope that the commentators will look at the Report very carefully. The Report makes a number of recommendations and the Government has committed to follow up those recommendations. And most of those recommendations, if not all, indeed all, are actually very reasonable. So I hope that after people have read the Report they will find out that the system itself, as the Report pointed out, does not really contain major flaws in the overall structure. But like almost anything, with the passage of time when the environment changes it requires a review to make sure that the system works even better. So investors should take note of the fact that our system is a resilient one and it should also take note of the Government's commitment to improve upon this so that we make Hong Kong an even better and more attractive place to locate business and to invest in.

End/Monday, September 16, 2002

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