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The following is the transcript (English only) of the question-and-answer session given by the Financial Secretary, Mr Henry Tang, at the Credit Lyonnaise Securities Asia (CLSA) Investors' Forum 2003 yesterday (September 22):

Question: In the long term, do you think that Hong Kong needs to change the structure of its tax base?

Financial Secretary: Currently, we have about 3.2 million Hong Kong people who are gainfully employed, but only 1.2 million who pay any income tax at all. Of the 1.2 million who pay income tax, the top 100,000 taxpayers pay about 62 per cent of the total income tax that we collect. That is a pretty small tax base and a pretty skewed collection in terms of the amount of taxes that's collected. I know if I were to say yes, I want to broaden the tax base because for the prudent management of our taxation income, if I say yes, I am studying the feasibility of introducing a sales tax of some sort to broaden our tax base some more, if I were to say yes, I am prepared to think of ways where we can even out the tax burden, then of course, our media friends in the back are going to report fervently the next day that I want to get all the poor guys into the tax net. So I am not going to say it. I would just say that we have a current tax system where we need to continuously review it and to see whether we should look for ways to collect in a more efficient manner, we can increase the percentage where we have a more regular and more dependable flow of income taxes. But otherwise I have not made up my mind how I would change it. But I guarantee you no capital gains tax, for now.

Question: Mr Tang, you mentioned a bit about capital flow, QFII and Hong Kong playing a facilitator role in this. One of the major changes in my mind is the liberalisation on labour flow in this .. that until the middle of this year it was easier for someone like me from southeast Asia or for people to come from Europe and the US to work in Hong Kong, and very difficult for Mainlanders to work in Hong Kong. And that, of course, changed in July this year. I was wondering whether you have any figures on how many people have come in on work visas from the Mainland and what your own views are about how many people might come in with the skills from the Mainland over the coming years?

Financial Secretary: I don't have the latest figures on how many have taken advantage of our importation of talents scheme to come from the Mainland. But I do know the number is not very high. The last time I looked, it was less than 1,000 people. The last time I looked was a couple of months ago. I don't have the latest figure. But I do know it's not a surge of people. However, you are right it is relatively simple for people from anywhere outside the Mainland to come and work for Hong Kong. Our criteria are fairly general in the sense that we only ask for economic contribution to Hong Kong. And those who are able to contribute economically are welcome to come to work here. I think that is the same attitude we should take for our compatriots from the Mainland because since we are looking to them as one of our potentially big markets, there is no reason why companies should not be able to recruit expertise from across the border to Hong Kong and then perhaps send them back to get new business. So that's why when we revised the scheme, we hope through the revision of such scheme, we will be able to attract more Mainland talents to Hong Kong.

Question : Mr Tang, in your speech you talked on well regulated markets in Hong Kong, which indeed we do have. But we also have a funny situation whereby the regulation of our stock market has been somewhat in dispute between the Stock Exchange of Hong Kong and the Securities and Futures Commission in Hong Kong. How do you think that dispute, if I can call it that, should be resolved, and how much of an input or direct input do you think your office should have in that matter?

Financial Secretary: You are testing my knowledge on the three-tier system. The original concept of the three-tier system is that government will formulate policy, the stock exchange is the market and also the frontline regulator. They are the ones responsible to ensure the quality of the entrants, and SFC is the regulatory agency which regulate the behaviour of companies that are listed on the stock exchange. That was the original intention of the three-tier system. Actually, I do see a lot of merits to keeping many of the good qualities of the three-tier system with a view to making revisions or updating it as times and environment change. And that's why one of the first things I've done after taking office is to ensure that investors in Hong Kong and those who are the companies and investors and the stakeholders feel that they can see the stability and they can also see that whatever the arguments that have been aired in public, or behind closed doors, should be in the interest of our investors and should be in the interest of our stakeholders. That's why I talked about quality market to ensure that Hong Kong is seen as a quality market so that companies that are listed in Hong Kong is subject to a certain stringent standard for market entry, and also after they have been listed or whatever capital instruments that they are taking, there is certain quality assurance to it. So this way, foreign investors would feel comfortable and feel safe that Hong Kong is a reliable market that they can invest in. And so the Mainland companies who come to list in Hong Kong would feel that Hong Kong is the kind of market where they wish to be seen to be associated with. That is my intention. And so I will be announcing the outcome of the chairman of the SFC very soon. We have reached an agreement and I will be announcing it very soon.

Question: Mr Tang, can you comment on Hong Kong as the clearing centre for Renminbi?

Financial Secretary: Yes. We have formally requested the Mainland authorities to allow us, as a first step, to engage in four Renminbi services, which are: exchange, deposit, remittance and credit card business. I feel this is a very important first step in Renminbi services outside of the Mainland. It may not be a huge step in terms of services, but it is a significant first step. Because it would be the first time China allows that kind of Renminbi service outside of its own boundaries. Hong Kong being part of "one country two systems", it's like a half-way house. When the head of the PBOC Zhou Xiaochuan was here last Friday, I did discuss with him on progress. He was cautiously optimistic that they will be positive on it. So I am cautiously optimistic about it. After we have got the go-ahead on these four services, I believe the next logical step should be on clearing. And then after clearing, you must ask what's next. What's next would be other financial instruments, whether it's bonds or whether it's other kinds of derivatives. And that will be a huge step once we get to that. I am aware that the Chinese authorities are very cautious about allowing Renminbi services outside of its own boundaries. So I would like to just get the four services first, and then take it one step at a time.

Question: I was wondering, what's more important ? Balancing the budget or stimulating the economy?

Financial Secretary: Both. I actually don't think that I should try to stimulate the economy too much. Because if I were to say that I planned on stimulating it by one, two or three percent of the GDP, it would smack of a planned economy. We do not have a planning agency in Hong Kong, and I do not wish to be seen as we are now engaging in very heavy dose of interventionism, or very heavy dose of a planned economy. I would say that if I can facilitate the market to grow, if I can facilitate more businesses to set up and invest in Hong Kong, if I can facilitate a more business friendly environment, and therefore the incentive to invest more money here, if I can do all of that and improve the economy in the process, I believe balancing the budge would be an easier task than it is now. So I would like to think of the government as a facilitator, our role is to gain market access, such as CEPA, to better regulate to allow a more open, efficient and quality market. And we're also in the job of trying to get more investors to come to Hong Kong, whether it's investors to come to Hong Kong or whether it's talents who want to come to work and live here. So all of that, and of course tourism, through all of these measures, I hope we would be able to continue to turn that corner. Our markets are showing some signs of recovery, whether it's in the equities market, or the housing market. If we can facilitate some of those to continue, then I am optimistic after all.

Question: Would further measures in the property market fall into the camp of measures which facilitate business activities in Hong Kong?

Financial Secretary: We are still in the process of discussing whether any measure is still necessary. Because in the last few weeks actually the market has shown significant activity compared to the same period of last year and also has shown some movement. I very much believe in the market. If there are ways that I do not need to intervene, then of course I prefer not to intervene. Because I do believe non-intervention, as well as policy consistency are probably some of these key issues and key attractions where you come to invest in Hong Kong.

Question: What sectors do you think that can drive Hong Kong economy forward? A few years back, the Hong Kong Government tried to promote high-tech, like building the Cyberport, making high-tech industry the centre-piece of the economic activity. But, of course, that one seems not to be working too well. And now, we are looking at the economic activity of, let's say, the retail industry because of the tourists from China. They are coming into Hong Kong and then drive the economy forward. My question is what kind of transformation are we seeing in Hong Kong? Are we going into a high-value-added industry, like high-tech industry? Or are we coming down to retail tourism, a type of low-tech industry?

Financial Secretary: I don't think we are a single element kind of society. I believe we have been, and we will continue to be a multi-faceted, cosmopolitan, international city. Therefore, I do see that there are several pillars of our economy which we will continue to promote and facilitate. And we will continue to build them into stronger and stronger pillars of our economy. One of them is obviously financial services. For all the things I have said when I was doing my very brief talk and all the things which you have heard by now, a hundred times, which I don't need to repeat, I believe we have a very strong potential, not just to bring foreign direct investment either from Hong Kong or through Hong Kong to the Mainland. If you remember in the last Party Congress in September of last year, the then Party Secretary, Jiang Zemin, said very clearly our policy is now to build strong multi-national domestic companies, and build them into robust multi-national companies, to not only attract foreign investment into the Mainland, but also invest overseas. We have been very successful in attracting foreign direct investment to the Mainland through Hong Kong. And I think we are going to be even more successful by helping the Chinese invest overseas. Culturally, linguistically, I cannot think of a better partnership than Hong Kong for the Mainland when they wish to invest overseas. I mean this is cash register ringing all over the place. This is obviously one of our strongest pillars and that's why I keep emphasising the quality of our market. Because, unless we can maintain that quality, the companies would not come through Hong Kong and investors would not buy the products here.

The second one is our trading services. We have always been extremely strong in our trading services. Whether it's trading goods or whether it's trading services. And I believe we will continue to do so. It still makes up a very large and healthy percentage of our GDP. The third one is logistic services. With the Western Corridor crossing and the Hong Kong - Zhuhai - Macao Bridge, the logistic services would make the entire Pearl River Delta an even more vibrant place than it is today. So I believe the logistic services would be another very strong pillar of our society.

Now, tourism, a lot of people have enjoyed the short-term benefits of tourism today. I think, in the past, we have not placed enough emphasis on the importance of tourism to Hong Kong. It is not a low-end business per se. Because why do people go to New York? They don't go to New York to see tourist sights because there are not that many. And why do people go to Shanghai? They do not go to Shanghai for tourist sights because there are virtually none. So, people go to New York because they like the cultural events, they like the restaurants, they like the cosmopolitan life-style that New York offers. And I believe that is why people want to come to Hong Kong. Hong Kong offers that cosmopolitan life-style which China does not have. An international community that is vibrant, outgoing, and has better Chinese food than the Mainland can offer. I once made a suggestion to tourist agency operators: have you ever thought of a "good food and wine tour". Because a lot of Chinese tourists, when they come to Hong Kong, they want to buy many of the seafood products, whether it is shark fins, birds' nests or abalone. But how many people really understand these kind of products? How many people know what to choose? How many grades of birds' nests are there? How many of you know? What do they know about wine? What do they know about all these things which cosmopolitan cities like Hong Kong knows? So, these are kind of tourists that we will get. Never forget, and I always emphasise this point, is when the tourists come to Hong Kong, they walk into a jewellery store, they buy a Rolex watch, we must be able to assure them that if they walk into a reputable store, the product they buy will not be a fake, will not be a knockoff; they walk into a Chanel store in Central, that will not be a knockoff; they walk into a Louis Vuittion store to buy a bag, it will not be a knockoff. So therefore that IPR Regime is again something we are proud of and we will continue to enforce it with vigour. These are some of things which I think would be very important pillars of our economy.

As to technology, I save that one for last because I used to be the Secretary for Commerce, Industry and Technology, I think one must not under-estimate the entrepreneurial spirit of Hong Kong and also for example, in places like Cyberport. Phase I of Cyberport is now fully let; phase II of 2A of Cyberport is now 70%, 80% let. And last year, in 2002, when we hosted the "ITU Asian 2002", we offered the participants to the ITU, which is International Telecom Union, we offered the participants a tour to Cyberport. We ran it for a few times, every single one was very well subscribed. They have heard of Cyberport, they wanted to see it and they joined our free tour to Cyberport and they were impressed by it. Now we are getting enquiries that they wish to go into Cyberport. And the rent is not cheap. We have been accused that we have been attracting tenants based on cheap rent, the rent is not cheap now. We don't have to lower the rent anymore because people are now actually coming of their own initiatives to come and see Cyberport. And they like what they saw. So I think these kind of projects, whether it's Cyberport or Science Park, will eventually pay dividends. But it is not a short-term kind of thing. It's not something which you could play the market on a day trade system and win. It is the kind of thing that is in the longer term basis will pay dividend to us.

Question: Mr Tang, you mentioned that the Hong Kong property market is showing some nascent signs of recovery. Are you not concerned that higher residential prices and higher office rentals will make Hong Kong lose the competitive edge that she has recently regained?

Financial Secretary: Way back in 1997 or 1996, I went on a radio programme. And someone asked me the question. At that time property was sky-high. Most people can't afford it. And they asked me whether I felt that property prices were way too high and that government should take measures to lower the price of residential housing. And my reply at that time was, whoever asked that question, I said the fact that you may not have bought the property therefore you wish the government to impose its polices to drive the prices down. But don't forget nearly half, forty-some percent of households at that time owned property. Don't forget a lot of people have bought property based on government policies. Now the prices have come way down, what do we want people to do? That is why earlier on I emphasised the importance of having a consistent policy that government must not be seen and certainly must not waver on our policies from day in and day out or from month in and month out. We must have clarity of policy, communicate clearly and be consistent in our policies. We will adjust according to changing of times. You know no policy is forever the same, the Gospel. It must be communicated properly and that people do see a consistency in it. I don't think it would erode our competitiveness because we are not the cheapest and we would not be the cheapest. So we would never be able to compete on prices alone. We have always competed on the quality and the standards, and also on some of our strengths. And I think we should continue to compete on our strengths and not just for dollars. Certainly it is a considering factor, but I don't think it is the factor that ends all factor.

Question: One area that you haven't discussed very much about is unemployment, which of course right now is much much higher than five years, 10 years ago. Do you think Hong Kong has a structural unemployment problem, and the rate is not going to come down to what it used to be? Or is there anything that the Government can do to address this issue?

Financial Secretary: Last year, when I was appointed to be the Secretary for Commerce Industry and Technology, at that time I said, I would probably not see 2.2 percent unemployment in my lifetime. Of course, I had been severely criticised for being cold-blooded, and not caring about average people. Although it was a sincere concern, I did not package that statement properly. Actually, I have been saying that since way back in 1996, before the return of Hong Kong to the Mainland. And I said I am not worried about the 'One Country, Two Systems', I am not worried about China living up to its promises under the Basic Law and the Joint Declaration of allowing people all their freedoms and autonomy that's guaranteed under our Basic Law. I was worried about unemployment because in my previous life in the private sector, I have been investing in the Mainland since 1978. I started my first factory there in 1978, and then the second one in 1981 in Urumqi in the north western part of China, and in 1982 in Shanghai. My bankers were actually kind of worried about me at that time, because it was very aggressive expansion in a very short period of time. I proved them wrong. But, I could see that this economic cooperation, the closer and closer economic cooperation would pose a whole different kind of challenges for Hong Kong, which we have never seen before. We would be moving rapidly up the value-added ladder into a knowledge based economy, and much faster than our population are able to adjust. Currently, 46 percent of our population are secondary three or lower in education. A secondary three or lower education will find it a huge challenge to adjust to a knowledge based economy. That's why I talked about not just three pillars of our economy, but four pillars. Because to train someone to cater for the tourists, it does not require university education for the average job. And tourism will create jobs for those who are not equipped for the knowledge economy. And that's why I said this is going to be one of the important economic pillars in Hong Kong. I actually do not believe the Government should be the one who's creating jobs. I believe the private sector can create longer lasting, better value-added jobs than the Government can. We have been doing that in the past simply because we know that SARS has taken a heavy toll on Hong Kong. And therefore we have to put together an 11.8 billion package to create some short term jobs to tide people over. But eventually, I do think that it is not up to government to create jobs, but for government to facilitate and to create an environment for investors and for the private sectors to create those jobs. The latest figures do show that there's a very strong rise in the number of vacancies that are offered in the Labour Department, the vacancies looking for bodies. I have been told that some of those jobs are not very good quality jobs. But I do believe that you have to start somewhere. If people keep criticising that you are not doing this right, you are not doing that right. Or these jobs are too low paying, or that job is not good enough for me. I think actually most Hong Kong people are not like that. Most Hong Kong people are very hard-working, very diligent, and many of you who have experiences with workers in Hong Kong will find that actually Hong Kong people are very hard-working, very ambitious in terms of what they are looking for. I am confident about the Hong Kong people. I think there's only a very small minority who are whiners, and most of them just very quietly go about doing their work in their usual way.

End/Tuesday, September 23, 2003

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