Following is a speech (English only) by the Financial Secretary, Mr Antony Leung, at the Hong Kong Trade Development Council's Annual Dinner in London today (November 26, UK time):

Distinguished guests, ladies and gentlemen,

I am delighted to be here to talk to you today and also meet so many old friends. Peter has given me a daunting task to explain what the Government is doing and will do - and indeed, I will.

But first of all, let me thank Peter and the TDC for inviting me to this dinner tonight. I take this opportunity to explain to friends about what is going on in Hong Kong, but this is a trip that I take to brief members of the public, of the government that I meet, about what is going on in Hong Kong.

In this trip, so far, I have not received a lot of questions on politics, partly because of my position as Financial Secretary. It is indeed probably not so useful to ask the Financial Secretary what is happening on the political scene in Hong Kong, but I believe also largely because the "One Country, Two Systems" principle is working. Yes, I do get a question or two about Article 23 of the Basic Law, about what we are doing, and if I may offer a comment on that one. We are listening to the comments of the public on how to enact local laws to protect national security, and I can assure you that existing rights and freedoms of our people will not change. Also the local law that we are going to enact will be in accordance with the Basic Law and also the rights as provided in the International Covenant on Civil and Political Rights.

However, on this trip I am getting lots of questions on the economy, and rightly so, because after all, we have had two recessions in five years, and unemployment is at a high level of 7.2 per cent, high for Hong Kong even though it is off the peak of 7.8 per cent. We have been deflating for four years. The consumer price index has come down by more than 15 per cent in the last four years, and also the budget deficit has been running at a very high level. Last year, we reported a budget deficit equivalent to 5.6 per cent of GDP, and there are reports this year that the deficit will be just as high. In short, people are asking, has Hong Kong lost its shine?

Before answering that question, let me venture to look at the reasons why we are in the current economic position. I suggest that there has to be a congruence of cyclical downturns as well as structural adjustments in our economy. There are two cyclical downturns that we are facing. First, downturns in our external markets. Most of the external markets of Hong Kong are in economic slowdown. Also, in Hong Kong, we are seeing the aftermath of the bursting of the bubble economy before 1997.

Before 1997, I remember vividly that the property prices were at such a high level that a single car park in Central cost HK$3 million. Clearly the situation was not sustainable, and right now we have seen the property prices dropping 65 per cent since its peak.

We in Hong Kong are also facing structural adjustments. Adjustments, first, because the entire world is moving further into the knowledge economy, and second, because of the impact of a further opening up of the mainland economy. Hong Kong is no longer the only gateway to China, and to a certain extent, we are losing economic activities to the mainland, and jobs are moving as well.

What is the Government doing about it, as Peter has asked? First, we have to recognise that the Hong Kong Government does not have a lot of tools. First because of the pegged exchange rate we do not have monetary policy. We cannot adjust the exchange rate or the interest rate to manage our economy. Let me state here categorically that the Hong Kong Government does not have plans to change the peg. We will continue not to have monetary policy as our tool.

Secondly, fiscal measures. Yes, they would have some impact on the economy, but because of the very open nature of our economy, the impact on national income or on the economy is going to be limited. I asked my economist to run what we call the 'multiply effect' of fiscal dollars in Hong Kong, and he came back with a number much less than 0.5, and that is for every dollar that the Government spends, less than 50 per cent would be the result of growth in the national income in Hong Kong.

No monetary policy, very limited effect of fiscal policy, the only thing we can work on is to wield the economy, the so-called supply side.

Let me give you the guiding principle that guides our action in the Government. We believe in the free market. I believe that the free market is a much better allocator of resources, much better creator of jobs, and a much better engine for growth. However, there is a role for the Government. The Government's role is limited, but it has to be a proactive one.

What is the key strategy that we are pursuing? Remember that I talked about the knowledge economy. In Hong Kong, having 86 per cent of our GDP coming from services is indeed pushing further ahead into the knowledge economy. The key strategy that we are pushing is that we are in the battle for talent, and on the side we must improve the competitiveness of our economy.

The battle for talent will have to start with educational reform. In the last five years, the Government has spent 50 per cent more than in 1997 on education. We have also embarked on curriculum reform, and upgrading of our teachers, so that in the end we hope that our students will enjoy learning, can communicate better in English as well as in Chinese, can think independently, critically and creatively and also develop a better sense of commitment to one's society.

We have also set a target to increase the higher education intake by 100 per cent from currently 30 per cent of the age cohort to 60 per cent in ten years' time. But education reform takes too long, so in the meantime we will change our immigration policy. We are going to announce changes in our policy so that we can open our door wider to talent from all around the world. As you know, Hong Kong has an open door for talent from every nationality, except from the mainland, and there we have to work on that particular area so that we can attract a lot more talent coming into Hong Kong. We are also going to introduce policies to attract more investment immigrants into Hong Kong, investment immigrants, not so much for the money because Hong Kong has a lot of money, but really is for the entrepreneurial spirit.

Talent will only come to a place only for two things: one, the opportunities, and secondly the lifestyle. Peter just talked about the opportunities of Hong Kong combining with the Pearl River Delta, and I am not going to repeat the attractiveness of these combined factors with the Pearl River Delta. Hong Kong is committed to being Asia's world city, a city that is civilised, affluent, free, that treasures diversity and rewards meritocracy. Economically, we are well positioned to be Asia's international, financial and business hub, and clearly maximising the opportunity of a fast-growing and opening of mainland China.

With this positioning, we believe that it is attractive for talent, but again the Government has a role to make it even better. I talked about the first task that the Government should do, and that is to attract talent.

The second thing that the Government must do is to maintain our institutional strengths in Hong Kong. We recognise fully that our advantage lies in our difference with the mainland cities, not our similarity, so we must maintain the rule of law, the level playing field, an environment that treasures free flow of information, a clean and efficient government, low tax in the civil tax regime. All of these are critical to Hong Kong's survival and success.

The third thing that the Government is doing is to reduce the burden of the Government on the economy. The first thing that we have to do is to reduce the size of public sector expenditure as a percentage of GDP from the current 23 per cent to 20 per cent in four years' time. In so doing, we will re-prioritise what we do, reorganise the Government and re-engineer the processes. We will also make fuller use of the market. We will privatise, corporatise and outsource a lot of our activities. In so doing, I hope that we can cut expenditure and coupled with some revenue-raising measures, close the budget gap by 2006/2007.

Another measure that we have taken to reduce the burden of the Government is in the property sector. About a month ago, we announced nine measures. The newspapers commonly see it as measures to stabilise the property prices, but it is indeed more than that. We have actually through those measures redefined the role of the Government in the property market, a market that is critical for Hong Kong. The Government will no longer be involved in the property development business. In the past, we built apartments and sold them to the people competing with the private sector, and unfortunately at a price lower than the private sector, so we have indeed created a two-tier market. We are no longer going to do that.

The Government will keep its role, one, in being the supplier of land, hopefully with a mechanism that is much more market-responsive. Secondly, we will build shelter for those people who need it.

Besides reducing the burden of the Government on the economy, the Government also has to do a number of things. Because of the opportunities in the mainland - and the mainland being our hinterland - we must facilitate the increase of two-way flows in a number of areas. We have to increase the flow of people, cargo, capital, information and services. All of these are very important if we are to maximise the opportunities on the other side.

In the last 18 months and the last few years or so, we have been making improvements in the boundary checkpoints. Right now, we are seeing a lot more people moving across the boundary between the mainland and Hong Kong. We are also seeing cargo moving more quickly and smoothly between the two places.

On the capital side, we hear reports about projects like QDII (quality domestic institution investment schemes) that allow the main investors to invest in the Hong Kong market, and you are seeing reports that hopefully at some time the Hong Kong banks can handle banking in renminbi. On the services side, and on the trading side, you are seeing reports that we are discussing with the central government on the closer economic partnership arrangements, currently known as the Free Trade Agreement. All of these are important.

Another task that the Government must do is to improve on our infrastructure. We have good infrastructure in Hong Kong, but we must make it better, particularly in the following three areas. The first one is in improving the transportation links between Hong Kong and the Pearl River Delta. You are seeing reports that we are studying whether to build a bridge that connects Hong Kong into the western part of the Pearl River Delta. We are also studying a fast link rail which connects Hong Kong and Guangzhou, hopefully shortening the travelling time to within one hour, and we are building a bridge that connects Hong Kong into the western part of Shenzhen.

We also have the invested infrastructure that cleans up our environment, the air and water. Lastly, in infrastructure, we have to invest in facilities, in cultural and sports activities. After all, Asia's world city is more than making money; it is also the lifestyle that is important.

After doing all this, what the Government must do is in another two areas. The first area is in promoting development of higher value-added activities in Hong Kong. After all, Hong Kong is a relatively higher cost place when compared to the neighbouring region, and in order to survive, we must develop activities than can more than pay for the cost, and these are the higher value-added activities that we talk about. They include financial services, logistics, professional and producer services, niche areas in technology, creative industries, and all of these we are pursuing.

But all these activities may not create enough jobs for many of our people. Because of historic reasons, many of our people may not be as well educated. 46 per cent of the population has only Form 3 or Grade 9 or below education. In order to provide employment for them, we are developing activities that can provide jobs to this group of people, particularly in two sectors. The first is tourism, the other is what we call local community economy. In short, personal services and community services.

I have mentioned a number of areas that Hong Kong hopefully will make itself more attractive and we can win the battle of talent. It may seem a pipe dream; indeed it is not. Thanks to the growth in the mainland and also the efforts that the Government have taken, we are seeing a lot of progress. The external account in particular in Hong Kong is doing extremely well. Exports of goods in the third quarter of this year increased by 11 per cent from last year. Worth-noting is on the air cargo side, and I see the Chairman of Cathay Pacific and also the Chairman of British Airways sitting here. Air cargo in the third quarter increased by 31 per cent over the same period last year. Besides the increases in the export of goods, we also see increases in export services.

Compared to last year again, the third quarter increased by 10 per cent. Particularly interesting is the increase in the number of tourists arriving in Hong Kong, which increased from 22 per cent from last year. You may say that this seems to be a counter trend, because after the 9/11 tragedy, world tourism seems to be on a declining trend, and yet in Hong Kong we are seeing an increase of 22 per cent. That increase is largely due to the increase of tourists coming from the mainland. Year on year we are seeing a more than 50 per cent increase in tourists coming from the mainland.

You may ask whether they are spending money? I am happy to tell you that their per capita spending is actually more than the tourists coming from the United States or Japan!

The problem is in the domestic sector. Because of deflation, people are not spending money. People are not spending money because they believe that if prices are going to be cheaper tomorrow, why spend today? Also, as reported earlier, property prices have dropped 65 per cent, so the negative wealth effect is affecting people's consumption. Domestic consumption year on year dropped by 3 per cent. As a result, we are seeing that while the external sector is growing, the domestic sector is slowing down, but nevertheless, we expect that the GDP after adjusting for price will increase by about 3 per cent in the second half of the year, and that is quite a good result considering the external environment.

With the efforts of the Government, with the efforts of the community, we hope that one day we can truly become Asia's world city, indeed, an Asia's world city surrounded by a hinterland that is growing at 7-8 per cent. With the hinterland growing at 7-8 per cent, there is no reason to be gloomy about our future. Indeed, one of these days, we want to be like London, the world city in Europe.

Thank you very much.

End/Wednesday, November 27, 2002

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