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Following is a speech (English only) entitled "Where is Hong Kong?" delivered by the Permanent Secretary for Financial Services and the Treasury (Financial Services), Mr Tony Miller, at the lunch meeting of the Annual Conference of the Asia Pacific Loan Market Association today (September 20):

Mr. Calla, ladies and gentlemen,

I am both surprised and delighted to have been invited to join you for lunch today: surprised that you should expect me to have the answer to the question which the conference has posed; delighted because the organisers ultimately did not insist that I even attempt to address it! Instead, they kindly agreed that I should pose a question of my own. Either they have a bigger appetite for risk than you thought, or past experience has convinced them that too much technical relevance is bad for the digestion of a good lunch.

Whatever the case, allow me to start by paying a heartfelt tribute to the Association for the work it has done as an interlocutor with regulators, in establishing common standards and documentation and in promoting market transparency. I know from earlier experience in GATT / WTO negotiations on financial services just what a thankless task this sort of nitty-gritty detail can be. But I also know how immensely valuable it is as a means to helping the wheels of commerce turn just that much faster.

So where is Hong Kong?

A few years back, I had the pleasure of being able to take time off to re-tool at the Kennedy School of Government in Harvard. It was great fun, and of course not all of the lessons were learned in the classroom. One which was left almost to last came when I was queuing at the Brattle Street Post Office with a Singaporean colleague on the same programme - we were sending back parcels of books. The Postal Clerk looked at my friend's neatly stenciled address, which ended Singapore, Republic of Singapore, crossed out "Republic of Singapore" and wrote in "China". My friend, a senior official in the Singaporean Civil Service, protested, reasoned, expostulated and eventually went incandescent, but the clerk stood his ground with both tact and fortitude.

Now I tell this story not to poke fun at the US Postal Service, but to make the point that however "globalized" we become "village" perceptions still prevail in all sorts of places. Such perceptions may be false, but they are nonetheless real. We have to recognize that they reflect how people see us.

Trade statistics provide another example. Over the last quarter century or so, economists and others have found it convenient to generalize about the phenomenon of rapid growth in a number of countries around the world. Post-war Japan was the first. Then in the seventies and eighties, the four "Asian Tigers" attracted attention. Over the years a number of slightly more formal descriptions gained currency: the Developing Countries, the Newly Industrialised Economies; the Newly Emerging Markets, the Dynamic New Market Economies, and a variety of acronyms came and went. Nothing wrong with such convenient shorthand, of course, that is unless it leads to sloppy accounting, which at one stage it did.

Imagine our consternation when one very important trading partner actually introduced separate aggregate trade statistics for the four Asian NICs, noting that "In 1985, their combined manufactured exports exceeded the value of exports of all countries except Japan, the Federal Republic of Germany and the U.S." Un-believable and utterly meaningless; the same could be said in the same year of the combined manufactured exports of Belgium, Luxembourg and Denmark, or of Austria, Finland, Sweden and Switzerland.

We had great fun countering this sort of nonsense. I remember one speech, which reminded a North American audience that Singapore and Seoul were as far apart as Quito and Quebec. However, it would be a mistake to imagine that such problems of perception ever disappear for good. Like languages, geography has to be learned by every new generation, and I have no doubt that everyone in this room has seen references by young investment gurus to institutions being "over-exposed in Asian equities" or similar incisive generalisations.

Coming closer to home, I have always felt rather flattered that the Singaporeans feel the need to compete with Hong Kong. And more recently, I suppose inevitably, we have comparisons of Hong Kong with that great re-born metropolis, Shanghai. Do not get me wrong, in a globalized economy there is bound to be some competition, especially in the financial services sector, but I regard competition as healthy and not threatening. Too often, I fear, commentators focus on threat like cats frozen in the headlights. They forget about opportunity and geographic fundamentals.

Take container traffic, for example. We are told, sometimes in glaring headlines, that growth in Shanghai's container through-put outstrips Hong Kong's. Anxious comments are offered on the impact of improving cross-strait's relations and whether container traffic to and from Taiwan will ultimately be diverted away from Hong Kong.

I gather that you guys know something about percentages, so you will excuse me if I make the obvious point that a small percentage of a large number of beans is generally speaking better than a large percentage of a small number of beans, assuming always that you like beans. Of course, trade through newly opened Shanghai is growing faster than Hong Kong, but the absolute numbers are still relatively small.

Thus the last ten years has seen Shanghai grow from half a million TEUs to 6.3 million a year, while Hong Kong, which ten years ago already moved 6 million TEUs a year now moves treble that number, nearly 18 million TEUs a year. Add in the rest of the Pearl River Delta and that figure grows to over 24 million TEUs.

More important in the longer term, however, is a simple matter of geography and logistics. The economics of container transportation on land is that anywhere within a 400 mile radius a tractor-trailer is cheaper and more flexible than a railway, and, for those of you confused by the convenience of air travel, Hong Kong and Shanghai are roughly 800 miles apart. By definition we serve very different hinterlands: Hong Kong the Pearl River Delta; Shanghai the Yangtze River Delta.

More important than either of the above points is the speed with which the whole pie is expanding. Whichever way you look at it, and whether you look at it from Shanghai, Hong Kong or the Pearl River Delta, significant investment will be needed in new port capacity simply to keep pace with this phenomenal growth in trade flows.

At this point I would like to digress a little and say a few words about natural and unnatural states. High on the list of Hong Kong's natural assets are, of course, its superb natural deep-water harbour and its location at the mouth of the Pearl River Delta. This delta has been the focal point of southern China's trade with the world for close on 2000 years and nothing, barring a new ice age, seems likely to change that geographic fact.

For a quarter of a century, China closed itself off from the world and Hong Kong lost its natural role. The story of our transformation from entrepot to light manufacturing centre is the stuff of legends. We grew our financial services on the back of this industrial revolution and the trading connections which underpinned it.

With China's re-opening, the natural roles and relationships are re-emerging. That requires adjustments, which can be painful for some sectors, but overall it is healthy and mutually beneficial. It also demands investment.

The first time I visited China, I took a train to Lo Wu, where I disembarked and carried my suitcase on foot across a narrow bridge to a lonely Chinese Customs Post at the rail-head on the other side, where I boarded a Chinese train for the trip to Guangzhou. There was no other way. In those days, our young people could do little more than stare wistfully across the border at Lok Ma Chau. These days we are spoilt for choice: travel by air, sea or land; plane, high-speed ferry, train, coach or car. And our businessmen, and our young people roam country wide, building up both contacts and understanding.

The connecting infrastructure, almost non-existent 15 years ago, has all gone in and is being steadily improved. Just as the building of the canals in eighteenth century Britain facilitated its industrial revolution, so the building of new highways kick-started the development of the delta. This is nowhere more evident than in the swathe of industrial buildings sandwiched between Sir Gordon Wu's highway to Guangzhou and the Hong Kong- Guangzhou railway. While on the western side of the Pearl River, massive investment in roads and bridges has succeeded in connecting every part of the most highly reticulated part of the real river delta.

If you want to be a "hub" you have to have "spokes" and that is what we have been busy building. And there is more to come. Complaints about peak hour jams, both of vehicles and pedestrians, at our northern border crossings tell you all you need to know about the growth in demand even during this prolonged recession. Supply has lagged, but is not far behind

Work is already in hand on new railway lines in Hong Kong, which will greatly facilitate access to the border crossing points. The intention is to have back-to-back straight through processing for both Hong Kong and Mainland customs and immigration processing. At the end of last year plans were unveiled for a spur line connecting Sheung Shui to Lok Ma Chau, as well as for a completely new Regional Express Line from Hong Kong through Shenzhen to Guangzhou. In addition planning is in hand for a port rail line, which will link Lo Wu to a new port rail terminal at Kwai Chung.

Half-way between Hong Kong and Guangzhou, a graceful suspension bridge already crosses the Pearl River at Fumun, halving journey times to places such as Nansha and Zhongshan. Work on the Shenzhen Western Corridor should start in mid-2003 and will cut times still further. Completion is scheduled for 2005. Integration of transport and communications facilities is well under way.

Which brings me back to problems of perception and geographic parallels. A variety of commentators query the need for some of this investment. They worry about duplication of effort and a surfeit of facilities on both sides of the border.

My answer is simple: think about New York. How many airports serve it: Kennedy, La Guardia and New Jersey. Think about the top four busiest airports in the world: London, Paris, Frankfurt and Amsterdam. How far apart are they? They all fall within a 150 mile radius.

Hong Kong is already the fifth busiest airport in the world in terms of passengers, and the biggest in terms of air freight. Last year it handled 2.3 million tones of cargo, including exports valued at around US$47 billion. That was only 1.5% of exports by volume, but nearly 25% by value.

Substitute stock exchanges for airports and similar locational comparisons are equally valid: for Hong Kong and Shanghai, think New York and Chicago. Get out your atlases and check the distances and densities. You will find that we are not so different. And that is before you look at the demographics.

Roughly 270 million people live within an hour's flying time of Hong Kong, equivalent to the entire population of the US. Guangdong Province by itself is slightly larger than the United Kingdom and has a population of around 86 million. More than half of that population, 48 million people, live in the Pearl River Delta. Add to that Hong Kong's 6.8 million. Then factor in the economic data.

China is the eighth largest economy in the world and the fastest growing. It measures around US$1.2 trillion today and has been growing at an average of 7.8% p.a. for the last five years, 7.3% last year. Like every other economy it has legacy problems, but it also has: rapidly rising domestic demand, huge development opportunities including in the West, and the increasing openness, which comes with its accession to the WTO. It is a land of enormous opportunity. The Pearl River Delta is its wealthiest and fastest growing region. Hong Kong in turn is the Delta's commercial and financial services hub.

Markets and logistic centres depend on the same features: location, communication, information. Hong Kong has the best of all three together with several other highly distinctive characteristics: the rule of law, open economic policies, a level-playing field for all businesses, low and predictable fiscal policies, an efficient and un-corrupt civil service and a well-educated, efficient and adaptable work-force.

Services now account for around 86% of our GDP; financial services, logistics, tourism and professional and producer services account for half. All are externally oriented and are the focus of our drive to add value by improving speed, quality and creativity, as we adjust to the new opportunities north of the border. Financial services provide a particularly good example of our strategy.

Once China re-opened to the world, Hong Kong became the obvious place to raise funds for Mainland enterprises. You are all familiar with the growth of this business and the crowning success in July this year, when the Bank of China listed in Hong Kong, raising US$2.5 billion in the process. This type of fund-raising is a win-win. On the one hand, Hong Kong's market is deep and mature. On the other, the need to comply with an effective and respected regulatory and corporate governance regime, and follow international legal and accounting standards provides a quality stamp, which can boost investor confidence. "One Country, Two Systems" not only works, it generates win-win situations for both.

Not that we can afford to be complacent. As many of you will know our Legislative Council passed a new Securities and Futures Ordinance earlier this year and the whole raft of subsidiary legislation should be through by the turn of the year. Our aim is to enhance the quality of the market while reducing compliance costs. Measures flowing from this major overhaul include: a new streamlined single licensing regime for intermediaries; new proportionate disciplinary sanctions to combat market misconduct; new measures to protect the interests of investors by criminalizing market misconduct and providing a civil route for action; and a tighter regime for disclosure in listed companies to enhance corporate governance.

Improvements on the hardware side, include the introduction of US dollar and Euro Real Time Gross Settlement Systems, and the progressive implementation of scrip-less securities trading systems and automatic straight through processing. In parallel we want to increase the depth and breadth of the market, and facilitate the development of new products and services in banking, the debt market, equities, insurance and the fund industry. Is there anything we can do to improve? We look to you to tell us. Are we getting in the way of business? Tell us.

Efficient customs and immigration services ensure that we turn around ships and planes and their cargoes faster than any place on earth. There's no reason why we should not achieve the same in our financial markets. By positioning ourselves as the highest quality market in the region with the highest potential growth, we know we will attract liquidity.

In conclusion, ladies and gentlemen, I invite you to lift your sights above the gloomy short-term view of the global economy. Look at Hong Kong in its proper context. Where in the world can you find a place with the growth potential that the Pearl River Delta offers? Take a look at what has already been achieved. Take a look at the flows of goods, services and investment. Take an even harder look at what is under planning. If you want a slice of the action, Hong Kong is the place to be, the region's pre-eminent international financial center, combining global reach with local savvy.

End/Friday, September 20, 2002

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