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FS' Speech


Following is the speech (English only) given by the Financial Secretary, Mr Antony Leung, at the 2002 Asian Venture Forum this morning (November 14):

Distinguished guests, ladies and gentlemen,

What a wonderful sight for a Financial Secretary to see so many venture capitalists gathered in Hong Kong at the same time. I only hope that as a result of this Asian Venture Forum, even more of you will invest in, or through, our dynamic city.

First of all, I would like to welcome those who have flown to Hong Kong for this Forum. I am sure the Forum, with its focus on 'buyouts, China and real returns', will provide you with plenty of 'food for thought' over the next two days. And in the end, I think you will agree we are the world's most business-friendly city: an entrepreneurial city made for venture capitalists.

But don't take my word for it. You are the experts when it comes to evaluating the viability of a business. So, I thought it appropriate we go through a simplified 'due diligence' check on Hong Kong as a business, so to speak, to see how we are positioned as an 'investment target'.

As a former banker, I know that financiers and analysts sometimes look at a business from a 'top-down' approach, covering the overall operating environment, the core business competences, the products offered, financial health, growth prospects and competitors. I will roughly follow this framework in our check on Hong Kong. After this analysis, I'm sure you will be interested in establishing your base in Hong Kong. And if you have already done so, I hope you'll be even more convinced you have made the right move.

Operating environment

The global economic downturn continues to cast its shadow over the operating environment of much of the world. Risk factors are compounded by the terrorist attacks in such diverse locations as Bali and Moscow, and the possibility of a war on Iraq. These uncertainties undoubtedly have a major impact on investment decisions, and create volatility in global markets. Although the lowering of the US Fed Fund rate has provided monetary ease, it has also demonstrated the fragility of the recovery. At this juncture, it is simply too difficult to predict when real recovery will begin.

Unfortunately for Hong Kong, while it is a safe place as far as security is concerned, the global economic malaise has resulted in our second downturn within the space of five years. And, it comes on top of a major restructuring of our economy from an enclave to a metropolis. Unemployment at 7.4 per cent is still far too high; deflation continues; consumer confidence remains low; and companies are holding back on their investment plans.

That's the downside. But, Hong Kong and its people are resilient. And there are some positive signs in the otherwise bleak statistics. Our economy grew 0.5% in the second quarter, after receding for the previous three quarters. Exports of services were up nearly 9% in the same period. Air cargo throughput was up more than 26% in September; and we're heading for a record 15 million visitor arrivals this year - an increase of almost 12%. And most important, we have a hinterland - the mainland of China - that is the brightest star on the global horizon, with its economy growing at 7 to 8% a year.

Our core competences

Since the mid-1980s, Hong Kong has witnessed an amazing economic revolution - the movement of thriving manufacturing industries from Hong Kong to the neighbouring Pearl River Delta. Through the process, Hong Kong has transformed itself into a services economy - providing support and expertise not only for the manufacturers who moved across the border, but to the East Asian region and beyond. Services now account for 86% of our GDP, and we are now focusing on our core competences and competing in sectors where we have the edge such as financial services, logistics, tourism, producer and professional services.

The products offered

The "products" we offer reflect precisely our positioning as Asia's world city - a progressive, stable and free society where opportunities abound. There are few places in Asia, if any, which have the sound institutional strengths to match Hong Kong - the rule of law buttressed by an independent judiciary, a level-playing field for business, the free and unfettered flow of news and information so vital in running a business, and a clean administration. We offer a low and simple tax regime, with profits tax currently at 16 per cent and salaries tax topping at 15 per cent, which rank amongst the lowest in the world. There is no capital gains tax, no withholding tax on interest or dividend, and no sales tax or VAT. We offer world-class infrastructure in telecommunications, banking, land transport, aviation, shipping and education. And we also offer the myriad of professionals such as lawyers, accountants and consultants, as well as a wide and deep pool of other talent and expertise to help make things happen, not only in China but the rest of the region. All the major investment banks have their regional headquarters in Hong Kong. These are the pillars of Hong Kong as a premier international financial centre.

Let me take the VC industry as an example. Hong Kong is already the largest venture capital centre in Asia, managing 30% of the total capital pool in the region. We have over 660 venture capital professionals - the second highest in Asia after Japan. Instead of taking Hong Kong as an actual investment target, venture capitalists and private equity investors are using Hong Kong as a base to manage their investments in China and the region. This is the most successful business model of Hong Kong. Here in Hong Kong you are in the midst of an entrepreneurial culture and an economy that has spawned over 300,000 small and medium-sized enterprises. We have efficient, robust and liquid financial markets of international standards. Corporate governance is amongst the best in Asia. And you can find viable exit routes for your investments. Profits can be realised by the sale of share equity, either as a trade sale or through initial public offering.

In this context, our stock market, with a market capitalisation of some 460 billion US dollars, provides a well-established exit route of high liquidity for venture capitalists. Particularly, our second board, the Growth Enterprise Market, provides an alternative fund-raising channel for emerging growth companies under a well-established market and regulatory infrastructure. At the end of October, 156 companies were listed on our GEM, as we call it, with a total market capitalisation of 6.6 billion US dollars.

Financial Health

Let us look at the financial health of Hong Kong. Despite the downturn, Hong Kong is still a very wealthy place. Our per capita GDP is just over 24,000 US dollars. At the end of 2001, we had a net international investment position of 270 billion US dollars, which is 1.7 times our GDP.

Nevertheless, our public expenditure as a percentage of GDP is too high. This year it is expected to rise to 23 per cent, which is well above the 16 and 17 per cent in the '80s and '90s. We've had a budget deficit for three of the past four years and we're heading for another one this year. To tackle the situation, we will implement a three-pronged approach: fostering economic growth; cutting expenditure and raising revenue. We have set the target to balance the Budget and reduce public expenditure to 20 per cent of GDP, or less by fiscal year 2006-07, and we are confident that we can meet the target.

Growth prospects

Now, we have come to the most interesting part of the due diligence process - growth prospects. And as the topic of this Forum suggests, you are coming to Hong Kong, hoping to get some 'real returns' from China and the region. With such a strategic position, Hong Kong is set to capitalise on the Mainland's growing economy. Over 20 years' experience of trading, investing and doing business across the boundary, Hong Kong entrepreneurs have established a working business model for China trade. It is a bi-directional flow with Hong Kong assisting overseas companies to explore and gain a foot-hold in the China market; and helping Mainland companies to expand into the rest of the world.

As the major capital-raising centre for Mainland enterprises, many leading Chinese companies have been successfully floated in Hong Kong. The most recent example is the listing of the Bank of China, which raised around 2.5 billion US dollars.

Leveraging our unique position as the facilitator, integrator and manager of trade, investment and business activities with China, Hong Kong also has an important role to play in the high-value-added arena of innovation and technology. Strong research capabilities in Hong Kong and Mainland universities and research institutes, such as the areas of information technology, biotechnology and traditional Chinese medicine, should offer plenty of potential targets for venture capitalists. And then there is the lure of a consumer market of 1.3 billion people, which in itself provides immense opportunities in branded consumer goods such as food and beverages and fashion, to name just a few.


Clearly, we recognise that as China continues to open up, competition - the last of our due diligence checks - will become far more intense. But, Hong Kong has always thrived on competition. It brings out the best in our entrepreneurs and their business operations. Asia is certainly large enough to support two financial centres - Hong Kong and Shanghai. But it will be a while before Mainland cities can match Hong Kong in key areas such as a fully convertible currency, the free flow of capital, the free flow of information so important to proper due diligence, a legal system based on the common law and a predictable tax regime.

Finally, I would like to clear up any worries the investment community may have over the need for Hong Kong to enact legislation to safeguard national security under Article 23 of our Basic Law.

Every nation has laws to protect their sovereignty, territorial integrity, unity and national security. It is universally accepted that a national owes allegiance to his or her state, in return for the protection afforded by the state and for the provision of a stable, peaceful and orderly society within which to carry out his or her pursuits. National security laws are always enacted by central or federal governments. But under the 'One Country Two Systems' principles and in line with the high degree of autonomy for the Hong Kong Special Administrative Region, the Central Government has authorised Hong Kong to formulate legislative proposals on its own, instead of extending the Mainland laws to Hong Kong.

In drawing up the proposals, the Hong Kong Government has decided to make use of provisions in existing laws as far as possible. The intention is to improve and clarify the provisions of existing laws, but not to make them more stringent. In certain cases, the offences are more clearly and tightly defined to avoid uncertainty. All proposals are consistent with constitutional protections in the Basic Law, the common law principles as well as international conventions on human rights protection, including the International Covenant on Civil and Political Rights (ICCPR) and the International Covenant on Economic, Social and Cultural Rights (ICESCR). The existing rights, freedoms and lifestyle of Hong Kong people will not be affected by the implementation of the proposals.

We cannot see the proposals having any adverse effect on the financial markets, nor on the free and unfettered flow of information. The implementation of the "One country, two systems" principle has worked well over the past five years, and will continue to be so. Indeed, enactment of the proposals, which we believe are reasonable and in line with our international human rights obligations, will serve to remove any lingering doubts on the effect of national security legislation.

We have not asked for any additional financial investigative powers for the police in dealing with offences under the proposed law. They will rely on existing powers, which have been in place since 1983. These have not hindered in any way the development and reputation of Hong Kong as a major financial centre. Nevertheless, my colleagues in the Security Bureau are conducting a public consultation exercise, and we welcome the views of the community on the proposal.

Ladies and gentlemen, as a government official, I obviously cannot offer any direct 'investment advice', but I trust I have provided enough information for you to make your own positive evaluation. I hope you come to the same conclusion - Hong Kong is the springboard for investing into China and the rest of Asia, a move that fits neatly into the theme of the Forum.

By basing your operations in our city, you are making your best Hong Kong investment: an investment supported by a deep pool of across-the-board professional expertise that is ready to be tapped for advice in any venture capital endeavour, whether 'start-ups', 'expansion', or 'mezzanine'. And you will be joining more than 3,100 other international companies that have already established regional operations in Hong Kong.

From here you can explore the 'upside' of China and the Asian region. And, if an analysis of industry representatives proves correct, there is cautious optimism of a pick up in M & A and VC activities over the next 12 months, with an 'outright bullish' feeling by a third of respondents for the medium term. On this basis alone, the future is looking brighter.

Thank you.

End/Thursday, November 14, 2002


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  • Transcript of FS's Question and Answer Session at Forum (14.11.2002)

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