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Following is a speech delivered by the Chief Secretary for Administration, Mr Donald Tsang, at the Hong Kong-Japan Partnership 2002 lunch in Fukuoka, Japan, today (November 27):

Distinguished guests, ladies and gentlemen:

Good afternoon. It is wonderful to be here in this beautiful city of Fukuoka, a city renowned for its great food. As you know, Hong Kong people love Japanese food. We have 650 Japanese restaurants in Hong Kong. And we especially love Hakata ramen, a Fukuoka specialty.

Another thing our two cities have in common - we're both trading ports. Of course, Fukuoka's history of international trade dates back many centuries. Hong Kong, on the other hand, was a humble fishing village until only 160 years ago, before it emerged as a world-class international financial centre.

Today, five years after Hong Kong's return to China, we proudly maintain our unique characteristics. Our national leaders have scrupulously honoured their commitment to the 'One Country, Two Systems' principle. Hong Kong people have been running Hong Kong with the high degree of autonomy that was promised to us under our Basic Law.

To prove that the principle works, Hong Kong remains the 'World's Freest Economy'. That status has been confirmed for the past nine consecutive years by the Heritage Foundation and Wall Street Journal, and for the past 17 straight years by the Cato Institute and Fraser Institute. According to a survey conducted by Asian Intelligence in 2001 among 12 Asian economies, Hong Kong has the region's most open environment for foreign investment. In addition, this year the Milken Institute of the US placed Hong Kong at Number One in its annual ranking of the world's most open and efficient capital markets.

In 2001, Hong Kong was the world's 10th largest trading entity, although it ranked only 94th in terms of population. Hong Kong's port remained the busiest in the world in terms of container throughput. Hong Kong's airport was also the busiest in the world in terms of international cargo throughput, and the 5th busiest in terms of passengers handled. We are one of the world's leading financial centres - 11th largest in terms of external banking transactions; 7th largest in terms of foreign exchange transactions; and 9th largest in terms of stock market capitalisation. There are 121 foreign banks in Hong Kong with 75 of the world's top 100 banks having presence in the territory. The number of overseas companies establishing a place of business in Hong Kong stands at 6,625. About half of them have their regional headquarters or regional offices there.

The values that underpin our society remain the same - the rule of law, a level playing field for businesses, a clean government and the free flow of information and ideas.

In short, our way of life has remained unchanged.

But, on the other hand, the world around us is changing so fast. In such circumstances, it's reassuring to turn to an old, trusted relationship. Decades ago, when Japanese companies began venturing overseas, their first foothold was often in Hong Kong. Japanese construction companies, department stores and banks are good examples. So, the Japanese business community has built up a close partnership with Hong Kong's business community over the years. And it's still strengthening. Japan's corporate presence in Hong Kong has expanded by 40 per cent in the past three years. There are about 2,000 Japanese companies in Hong Kong, from multinationals to small operations. The purpose of my visit is to try to enhance this partnership even further. I would like to tell you how Japanese companies can leverage Hong Kong's role as the business hub for the Pearl River Delta and tap into the huge and rapidly growing market of China.

The rapid development of China provides vast opportunities for all of us. It will give fresh impetus and meaning to the Japan-Hong Kong partnership. One year ago, China joined the World Trade Organisation. Its participation in the world trading community will have a profound effect. The Mainland economy has been growing steadily at 7 to 8 per cent a year since the Asian financial crisis. And it shows no signs of letting up. China's total trade could reach 600 billion US dollars this year. The World Bank forecasts that China will become the world's second-largest trading entity within two decades.

And the fastest-growing and most affluent part of China, in turn, is the Pearl River Delta. Just as Fukuoka serves as the business hub for Kyushu and Yamaguchi, Hong Kong is the business hub for the Pearl River Delta. The Economist magazine recently wrote that the Pearl River Delta, or PRD, is becoming 'an industrial region so huge as to transform global trading patterns and investment flows'. To give you an idea of the potential, the PRD area, including Hong Kong and Macau, is the same size as Kyushu in area, but with three times the population.

With a GDP of 271 billion US dollars - about one-fifteenth of Japan's roughly two-thirds of Kyushu's or one-third of South Korea's - the PRD is a major production and sourcing platform, a huge market for consumer goods, and a red-hot destination for investment.

It is China's largest export base. The PRD area had a total export capability of 283 billion US dollars last year, nearly four times greater than that of the Yangtze River Delta, which has Shanghai as its hub.

The PRD is an increasingly sophisticated consumer market - and China's wealthiest. Per capita GDP in the PRD is 5,388 US Dollars. That's nearly two-and-a-half times higher than the per capita GDP of the Yangtze River Delta.

And the PRD is China's most popular destination for foreign direct investment. The PRD region attracted 37 billion US dollars in FDI last year, nearly three times the FDI into the Yangtze River Delta.

At the centre of the Pearl River Delta, and the driving force behind its success, is Hong Kong. Eighty per cent of the PRD's exports go through our city. In 2001, there were on average 638 cargo vessels plying between Hong Kong and the Mainland every day. Twenty-five thousand goods vehicles crossed the border daily.

Hong Kong is the premier financial, business and services centre of the PRD. We offer well-developed clusters of bankers, lawyers, accountants and consultants. Our businessmen have rich experience in managing Mainland operations. Foreign companies with factories in the Pearl River Delta use Hong Kong's banks for trade financing. They've set up sales and marketing offices in Hong Kong. We provide modern and efficient sea and air transport, supply-chain management, insurance and many other services.

Add into the mix what Japanese companies have to offer, and it's a great combination of our respective capabilities - Japan's technology and innovation, China's low-cost, quality manufacturing, and Hong Kong's expertise in finance, logistics and professional services. That's why Japanese companies are moving to the PRD.

I see in the sports pages that 'Godzilla' Matsui might go to play for the New York Yankees. For a baseball fan, it has to be frustrating to watch yet another star player move across the Pacific. On the other hand, the Japanese fans of Nomo and Ichiro, and now Godzilla, can still cheer for them from afar. They can still take pride in the exploits of their heroes in North America. Of course, the players themselves are reaping the financial rewards and career benefits of making the move.

In much the same way, many Japanese companies are migrating to China for economic reasons. In the past two years, Japanese FDI into China has doubled. It has been predicted that by 2007, some 50 per cent of Japanese manufacturing will have moved to China. It's no wonder. Kyocera Corporation says labour costs at its parts plants in China are about one-thirtieth of those in Japan.

This relocation of Japan's manufacturing sector is something that Hong Kong experienced 20 years ago. This puts us in a unique position to offer our expertise and know-how, based on two decades of moving our manufacturing operations across the border to a region with much lower costs.

Japanese companies are setting up regional operations in Hong Kong and placing their manufacturing operations in the Mainland. Last year, for example, Origin Electric Company set up a Hong Kong office as a platform for accessing the Mainland market. The company wanted to create a closer relationship with its major customers, who are increasingly manufacturing in the Chinese mainland. And Origin itself planned to establish a manufacturing base there.

Dongguan has attracted many multinational corporations, including over 30 Fortune 500 companies. Besides its clusters of textile, toy and shoe factories, Dongguan is the world's leading production base of computer magnetic heads, computer cases, scanners and motherboards. Multinationals in Dongguan include GE, Cargill and Wal-Mart from the US, Nestle from Switzerland, ICI from the UK, Philips from Holland, Samsung from Korea, President Group from Taiwan, and Nokia from Finland. From Japan, the list is a long one: Sumitomo, Sanyo, Nippon Steel, Mitsui, Marubeni, NEC, TDK, Minolta, Kawasaki Steel, Kyocera, Pioneer, Hitachi, Itochu, Clarion Orient, Nichimen, Ricoh, Nikon.

The PRD has the highest penetration of private cars in the Mainland, and car assembly is one of Guangzhou's pillar industries. Honda plans to double the capacity of its existing car assembly plant in Guangzhou by 2003, to target the growing domestic market.

Sanyo plans to relocate production of LCD projectors and plasma TVs from Japan to the PRD next year, and to make all of its air-conditioners in China by 2004. NEC plans to shift 70 per cent of its cell-phone production to China by March. Jeol outsources its electronic microscopes and scanners to Hong Kong manufacturers that have production facilities in the PRD.

The big companies are well known, but the Pearl River Delta also attracts small and medium-sized enterprises. How many Japanese SMEs are in the PRD? It's hard to determine, but certainly they number in the hundreds. Some experts figure that there are 5,000 Japanese companies altogether in Hong Kong and Guangdong. We estimate that three-quarters of them are SMEs.

Some of them are very small operations, sourcing or assembling parts and components. The PRD is an attractive place for SMEs to carry out assembly. Distances are short, which means a company can place a relatively small order and have it delivered quickly. In Japan, the minimum order might be one ton, but in the PRD it could be only 200 or 300 kilograms. And the price is more competitive. It's not just labour that's cheap in the PRD, but components, too.

As I have said, many companies are setting up manufacturing or sourcing operations in the Pearl River Delta. So, you may ask, why not set up your headquarters there, rather than in Hong Kong?

The answer to that question has two aspects. First, big corporations like Honda and Sony can move directly into China. But it's not so easy for SMEs. They often lack the financial, legal and human resources, the experience and the cultural knowledge to enter on their own. Hong Kong provides a business-friendly environment with a level playing field for all companies, whether they're local or foreign. We have a long history of adhering to the rule of law, which provides certainty. We have a low and predictable tax system. We have a clean and efficient civil service. We offer protection of intellectual property. As a free-market economy, Hong Kong promotes the free flow of goods, services, capital, people and commercial information. We have abundant experience in doing business in the mainland of China, and vast expertise in marketing.

These advantages make Hong Kong the natural headquarters location for companies operating in the Pearl River Delta. Hong Kong can be the risk manager for Japanese SMEs in China. We do not compete with Shanghai for this business. You can't be based in faraway Shanghai and operate in the PRD, any more than you would operate in California from a base in Chicago. Many well-known companies have invested in the PRD, while operating regional headquarters or offices in Hong Kong. A few of the names are GE, Philips, Samsung, NEC, Casio, Olympus, Epson, Sanyo, Fuji Xerox, Ricoh, Canon and Omron.

The second aspect of why Hong Kong can help involves how people want to live. For the Japanese executive and his family, Hong Kong offers an extremely safe, modern and cosmopolitan lifestyle. We have world-class medical services, international air services, hundreds of Japanese restaurants, a sophisticated nightlife, cable TV and Japanese schools.

In addition to providing services for the Pearl River Delta, Hong Kong is busy building hard infrastructure. We're planning to create an express railway line linking Hong Kong with Shenzhen and Guangzhou. That will cut the travelling time between Hong Kong and the city centre of Guangzhou to just one hour. We are also going ahead with the Shenzhen-Hong Kong Western Corridor. When the Corridor is completed in 2005, it will further strengthen transport links with the eastern part of the Pearl River Delta. We're connecting the Hong Kong International Airport by ferry with 20 ports in the Delta. We're taking action to speed up the flow of people and goods across the boundary with the Mainland. On top of all that, feasibility studies are under way to build a land transport link to the western part of the Delta. As you can see, we are not sitting on our hands.

Yet, as Hong Kong integrates logistically with the Mainland, we jealously maintain our unique characteristics. As I mentioned at the beginning, we value the free flow of information. The media watchdog group Reporters Without Borders recently published its first Worldwide Index of Press Freedom. Hong Kong ranked just behind the United States, and the highest in Asia. Japanese newspapers are among the many that circulate in Hong Kong. But with widespread broadband Internet access, many foreign residents simply log on to the Web to get news from home.

We're politically stable and business-friendly. Our regulations are transparent. We won't tie you up in bureaucratic red tape. The old saying about Hong Kong's efficiency is as true as ever - you can arrive in Hong Kong in the morning, register your company by lunchtime and meet your first customer in the afternoon. In addition, Hong Kong is a leading international arbitration centre. If you get into a dispute in the Mainland, Hong Kong arbitration awards are enforceable there.

Hong Kong people are hardworking and resilient. They welcome the challenges and employment opportunities presented by the PRD, and by Japanese enterprises setting up in Hong Kong. The people and the government together are keen to uphold Hong Kong's status as 'Asia's world city'.

I invite you to come and see for yourselves the exciting investment opportunities that await you in Hong Kong and the Pearl River Delta. Together, we can extend the successful Japan-Hong Kong partnership further into the world's fastest-growing manufacturing basin and consumer market.

Thank you.

End/Wednesday, November 27, 2002

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