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Following is a speech by the Financial Secretary, Mr Antony Leung, at the HKETO/HKTDC Business Luncheon in Amsterdam, The Netherlands, today (November 22, Amsterdam Time):

Good afternoon, ladies and gentlemen,

It's a great pleasure to be in Amsterdam, and to be here among so many people who are so knowledgeable about 'Asia's world city'.

2. Hong Kong and the Netherlands have a long history of economic ties. In fact, Holland is our second-largest source of foreign direct investment when excluding tax-haven economies. You invest more in Hong Kong than the US does, more than the UK, more than every country in the world except the Mainland of China. About 260 Dutch companies are active in Hong Kong, including Shell, Philips, KLM, Heineken and Polygram, to name just a few. The Dutch Business Association is among the most influential chambers of commerce in Hong Kong.

3. And here's another one of Holland's contributions to Hong Kong - our new $10 note. These notes contain a number of advanced security features and were designed and printed in the Netherlands. They were issued to fill a popular demand in Hong Kong - we slip them into red packets and give them to friends and children at Chinese New Year or other special occasions. So, in a couple of months' time there will be thousands and thousands of happy children in Hong Kong clutching these shiny new $10 bills.

4. The purpose of my visit is to try to reinforce our already strong ties. And I want to tell you how, together, we might take advantage of some exciting developments in our part of the world - particularly the emergence of the Pearl River Delta.

5. In addition to the opportunities we want to present to you, we also have a lot to learn from you. You can teach us because you're a trading nation with hundreds of years of experience, at the mouth of two large rivers that run through some of the most productive areas in Europe. You have very impressive logistics facilities. Indeed, to foreigners, sometimes your whole country seems to be one big, efficient logistics facility.

6. We, too, have a trading tradition. We, too, lie at the mouth of a great river, which runs through one of the most rapidly developing manufacturing centres in the world. We already have the world's busiest container port and the world's busiest international air cargo terminal. But if we are to realise our full potential, we must integrate our transport and logistics links more efficiently. I'm sure we can pick up a lot from the Dutch, and in so doing create commercial opportunities for your companies.

7. There are other ways we can learn from you. Education is enormously important to Hong Kong's development as a knowledge-based economy. So I was delighted to learn that a Netherlands Education Desk was set up last month at the Dutch Consulate General in Hong Kong, with a view to letting more of our students participate in your Higher Education, which is offering some 650 programmes taught in English.

8. Besides learning, we're also restructuring our economy in the face of globalisation. And we're trying to cope with the same economic challenges that many others in the world are also facing - slow growth, persistent deflation, high unemployment, and a nagging budget deficit. Understandably, this situation has affected the confidence of Hong Kong consumers. But, in contrast, I find that overseas business people like you are quite upbeat about our future.

9. I'm confident that your optimism will be rewarded. Four straight years of deflation have at least helped make our costs more competitive. As for the budget deficit, I aim to shrink public expenditure from the current 23% of GDP to 20% or less by the 2006-07 fiscal year, and to balance the budget by then, too. Reducing government's involvement in the economy will free up capacity that can be more efficiently exploited by the private sector.

10. But the foremost reason for optimism is, in a word, China. Its economy has been growing consistently over 7% a year since 1991. In fact, this robust performance coincides with falling consumer prices, which suggests that productivity growth is outstripping strong domestic demand. With China now a member of the WTO, the country's total trade could reach 600 billion Euros this year. The World Bank predicts that China will become the world's second-largest trading entity within two decades.

11. Within this burgeoning Chinese economy is a region that's driving the boom - Hong Kong and its immediate hinterland, the Pearl River Delta. It covers the same area as the size of the Netherlands, but with three times your population. The Pearl River Delta, or PRD, is a production powerhouse, an investment magnet, and a consumer marketer's dream comes true.

12. To illustrate how quickly the PRD has been transformed, here's a quote from a reference guide published less than 10 years ago. "In addition to being a fishing region, the delta is an important production base for sugar cane and a major silkworm base. Other delta products include rice, wheat, potatoes, and ornamental plants and flowers."

13. Nowadays that description seems quaint and hopelessly out of date. The PRD is no longer a quiet agricultural region. Today it is a robust industrial zone. Rice and sugarcane fields have been replaced by hectares and hectares of factories, producing everything from furniture to watches to telephone sets. The silkworms of Shunde have given way to the Sanyos and Sony of the corporate world. The exports of the PRD, excluding Hong Kong, amounted to over 90 billion Euros in 2001 - that's more than one-third of all the Mainland's exports. If added to Hong Kong, it reaches 283 billion Euros, or nearly four times the exports of Shanghai and the Yangtze River Delta. Foreign Direct Investment received by the PRD, excluding Hong Kong, in 2001 was 14 billion Euros, or almost 30% of the Mainland's total. In the centre of all this is Hong Kong. We ship four-fifths of the PRD's products through our busy port and airport. Our banks provide the trade financing. Our accountants, lawyers and logistics professionals smooth the flows of money and goods.

14. The prospering PRD figures in our economic restructuring. One of our priorities is to enhance the 'five flows' - of people, cargo, capital, information and services - across the boundary between Hong Kong and the Mainland. Another aspect of our restructuring is upgrading our performance in economic sectors in which we already excel.

15. The first is logistics. Hong Kong has the busiest container port and the busiest air cargo terminal in the world. Much of this activity involves the export of manufactured products from the PRD. But, as I said a moment ago, we still have much we can learn from the Netherlands. At the moment, I believe a delegation from the Port of Rotterdam is visiting Hong Kong. And who better than Holland to educate us on the export of flowers from China?

16. The second sector is financial services. We are already a leading financial-services hub, as ABN Amro and ING can attest. The Stock Exchange of Hong Kong provides an international platform for Mainland companies to raise money, and many have done so. An Initial Public Offering by the Bank of China, which raised around 2.5 billion Euros, is a recent high-profile example. We encourage secondary listings like Standard Chartered Bank's, which has a primary listing in London but wanted to raise its profile in Hong Kong and expand its shareholder base in Asia. We are working with other Asian officials to develop bond markets, and we are reviewing and updating our own market's regulatory regime.

17. The third sector focus is tourism. We expect to receive 15 million visitors to Hong Kong this year, more than twice our own population. We are building new attractions. The most prominent is Hong Kong Disneyland, which is scheduled to open in 2005. In the longer term, we are planning with our counterparts in the Mainland to reposition Hong Kong and the Pearl River Delta as an integrated tourism destination.

18. The fourth value-added sector is producer and professional services. Hong Kong is unique in its clusters of accountants, lawyers, consultants, marketing experts and other professionals. We are the service centre for the PRD's manufacturing base. In fact, much of the PRD's manufacturing capacity is owned by Hong Kong companies, which moved their factories across the border in search of cheap land and labour. Hong Kong manufacturers employ more than six million workers in Guangdong province. Nowadays, services account for 86 per cent of our GDP.

19. Hong Kong wholeheartedly embraces the concept of a knowledge-based economy, and we realise that we have the capacity to be one of the best technology services hub in Asia. Our researchers and technology entrepreneurs are actively pursuing various research and technology commercialisation projects in niche areas such as Integrated Circuit design, wireless communications, electronic supply chain management and biomedicine. To facilitate financing of Hong Kong as well as Mainland technology projects, we have established a second bourse - the Growth Enterprise Market - to focus on new and growing firms. Some 150 companies are listed with a total market capitalisation of 8 billion Euros. Our venture capital industry, which is the biggest in Asia, adds to our strength.

20. But while we are co-operating more and more closely with the Mainland in our economic development, we have been meticulous about maintaining our uniqueness under 'One Country, Two Systems'. That's the principle under which China resumed sovereignty over Hong Kong five years ago. It's a principle that's working as it was designed. We do not want to become just another Mainland city. We have kept our own common-law legal system, for example. Indeed, Hong Kong is a centre for arbitrating business disputes, and arbitration awards handed down in Hong Kong are enforceable in the Mainland. And we have very strong intellectual property protection to protect your products.

21. We remain a separate customs territory. The Hong Kong dollar is freely convertible. Our system is staunchly capitalist and market-driven, and our government is pro-business.

22. Hong Kong enjoys advantages that other Chinese cities do not have - our strategic location in the Pearl River Delta, our affluence, and our institutional strengths. We are the world's freest economy - a status, I am proud to say, that was reaffirmed just last week for the ninth consecutive year by the Heritage Foundation of the United States. We have the rule of law; sophisticated financial markets; a level playing field for all companies, whether local or foreign; a low and predictable tax system; clean and efficient government; and free flows of trade, capital and information.

23. Hong Kong also enjoys advantages that other Asian cities do not have - our location on the doorstep of China, our linguistic and cultural links, plus the networks and expertise that we've built up over years of doing business in the Mainland.

24. Hong Kong is therefore well positioned for Dutch companies that want to explore the China market. More than 3,100 foreign companies have established regional headquarters or regional offices there. We welcome companies of all sizes. As a matter of fact, 98 per cent of Hong Kong's companies are small and medium enterprises. So we know how important they are, and we know that they can use some help when it comes to setting up shop in a new locale.

25. One of the brightest lights in Hong Kong's spectacular skyline is the Philips sign that shines out over Victoria Harbour. Earlier this year, Philips chose Hong Kong as its Asia-Pacific regional headquarters. Previously the function had been split between the company's offices in Hong Kong and Singapore. Philips wanted to get closer to China, and to take advantage of Hong Kong's sophisticated communications and transport infrastructure. Philips also uses Hong Kong as a purchasing hub. Its buyers live in Hong Kong and make the short commute to the Pearl River Delta. That way they can take advantage of the high quality of life in Hong Kong, with access to high-quality schools and medical care.

26. The PRD is more than just a place to manufacture and source products or components. Increasingly, it's becoming an important consumer market in its own right. You might be surprised to learn that the top three Mainland Chinese cities in per capita GDP are Shenzhen, Guangzhou and Dongguan. All three are in the Pearl River Delta. All three are wealthier than Shanghai and Beijing.

27. Then again, you probably won't be surprised about that fact if you've been to the PRD lately. If you haven't, we urge you to come and see for yourself. We invite Dutch companies to consider taking advantage of a unique combination - the Pearl River Delta's manufacturing muscle and Hong Kong's expert services platform.

28. As a final note, with our goal to be 'Asia's world city', we do not only position ourselves as a part of the Greater PRD. Hong Kong has been, and will remain, an international financial and business hub, servicing all of Asia. This certainly puts us at the forefront at the trade and investment links between Europe and Asia.

29. Most of all, we look forward to further enhancing our excellent relationship with the Netherlands, its companies and its people.

30. Thank you very much.

End/Friday, November 22, 2002

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