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CS' Speech

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Following is a speech (English only) by the Chief Secretary for Administration, Mr Donald Tsang, at a Business Luncheon in San Jose today (September 22, San Francisco time):

Good afternoon, ladies and gentlemen,

It's a great pleasure of mine to be here in sunny San Jose. I'm happy to see so many friends and supporters of Hong Kong.

The theme I'm given today to talk on is "Hong Kong and California - The Winning Combination". I would like to talk about Hong Kong's ongoing developments as Asia's world city, including the important role played by Californian companies and other international investors in that regard. I also want to brief you on a breakthrough free trade agreement that Hong Kong recently signed with the Mainland of China, and how you can take advantage of the exciting new opportunities that it presents.

With so much of the world's media focused on Californian politics these days, there is a tendency to overlook less sexy topics as the economics of a place. Hong Kong is exactly the same. Many people have been focused on our political development and activities without regard to perhaps the main state of livelihood, which is Hong Kong's economy. And there is a great deal going on.

We've had nearly six years of economic restructuring forced on us by the Asian financial crisis and then the global market downturn. The fallout from these two events has included the bursting of our property price bubble, ongoing deflation, and something with which California is familiar - a budget deficit.

Last spring, just when we thought we'd hit the bottom, Hong Kong's economy was blindsided by the SARS virus. Besides causing the tragic loss of lives, SARS delivered a knockdown blow to several key sectors - travel, hotels, restaurants and retail. One result has been something else that you folks can relate to. Our unemployment rate, which was already near its historic peak before SARS, has risen to a record 8.7 per cent.

In the second quarter, our GDP shrank by 3.7 per cent. Consumer confidence was depressingly low. The short-term outlook seemed bleak.

But, it didn't take long for sunshine to break through. The WHO announced on June 23 that it had taken Hong Kong off its list of SARS-affected areas. Six days later, Hong Kong and the Mainland signed a landmark free trade agreement. With SARS contained, the government launched a multi-million-dollar recovery program to show the world that Hong Kong was once again safe to visit.

In recent weeks, tourists have been flocking to Hong Kong. We welcomed 1.3 million visitors in July, up 78 per cent from June. Tourist arrival figures further went up to 1.68 million in August. A further 30 per cent up from July. Our hotels had reported single-digit occupancy during the SARS outbreak; now they're operating at 80 to 100 per cent. A large number of these tourists are from the Mainland, thanks to the recent easing of restriction on travelling of Mainland people to Hong Kong. And they can come from major cities in Guangdong and as well as Beijing and Shanghai. Let me tell you, the retail sector is thrilled, because these visitors are not shy about spending their hard-earned renminbi in Hong Kong.

So, the signs are very encouraging. The economic sectors that were laid low by the SARS are more or less back to normal. In the meantime, other engines of the economy have barely missed a beat. Hong Kong's exports in the first half of this year grew by 14.7 per cent over the same period last year. We recently revised this year's GDP growth projection upward from 1.5 per cent to 2 per cent.

Indeed, encouraging economic signals are emerging throughout the Asia-Pacific region. If the US recovery is sustained, all of Asia will benefit - along with the international companies that have invested there.

That leads me to Hong Kong and California's winning combination. We have a long-standing, extremely successful partnership. California is a trade-oriented state, and Hong Kong is California's eighth largest export destination. Your exports to Hong Kong in 2002 amounted to US$3.7 billion.

More than 150 Californian companies large and small have operations in Hong Kong, and continue to be an important source of investment for us. They range from long-time business partners such as Chevron Texaco and Levi Strauss to leading Silicon Valley companies like Cisco Systems, Intel and Sun Microsystems. During the first half of this year, 10 firms from the Golden State made new and expanded investment in Hong Kong. Three of them even did so during the SARS outbreak, demonstrating their confidence and foresight.

These companies joined an ever-growing list of international investors which have helped to make Hong Kong such a cosmopolitan city. More multinationals have regional headquarters and offices in Hong Kong than in any other city in the Asia-Pacific Region. Many corporations use Hong Kong not only as their China headquarters, but as their regional headquarters as well, since we're conveniently situated within four hours' flying time of most major cities in Asia.

In addition to location, they come to Hong Kong for many and varied reasons. Hong Kong is one of the world's leading financial centres. There are no restrictions on the flow of capital. Four-fifths of the world's top 100 banks operate in Hong Kong. We are Asia's biggest venture-capital centre, managing 30 per cent of the region's total capital pool.

Hong Kong is Asia's transport and logistics hub. The world's busiest container port and the world's busiest airport, air cargo hub are in Hong Kong.

Now there are even more reasons to come to Hong Kong, as several exciting initiatives signal the beginning of a vibrant new economic era.

One of the most significant developments is China's accession to the World Trade Organisation. This watershed event is going to have a massive impact on global flows of trade and capital. The World Bank has forecast that China will be the world's second-largest trading entity within two decades. As China's economy continues to boom, and as it opens its markets under the WTO obligations, the opportunities for overseas companies will be bountiful.

Some companies will be racing through these windows of opportunity much earlier than others. As I mentioned, Hong Kong and the Mainland recently signed a landmark free trade agreement. It is called the Closer Economic Partnership Agreement, or CEPA for short. Effective January 1, next year 2004, it will give preferential treatment to a broad range of goods and services from Hong Kong. Tariffs on exports in 270 product codes will be reduced to zero and it covers nearly 90 per cent of Hong Kong's trade portfolio at the moment. The CEPA not only gives Hong Kong companies a head start on the Mainland's WTO commitments, in some cases it exceeds those commitments.

When I say "Hong Kong companies", I'm not referring to ownership. Whether a company is foreign-owned or local, it can take advantage of CEPA, provided it's incorporated in Hong Kong and does substantive business there.

In most of the services categories, a company must have been operating in Hong Kong for three to five years. This means foreign investors are looking at partnerships, mergers or acquisitions. But in the manufacturing sector, you can fly in, set up your operations and begin exporting tariff-free right away if your products are covered by CEPA and meet the rule-of-origin requirements. These products might be goods with high-value-added or intellectual property content, allowing you to take advantage of Hong Kong's transparent legal system and rigorous IP protection regime. And, as a bastion of free trade, Hong Kong is one of the easiest places in the world to set up a company. Staff at our Economic and Trade Office in San Francisco will be happy to help.

CEPA is just one example of how Hong Kong and the Mainland are working hard to bolster economic inter-dependence. We are speeding up the cross-border flow of people, goods and services. There are massive new infrastructure projects in the market, including a rail line that will cut travel time between Hong Kong and Guangzhou to one hour, an 18-mile bridge connecting Hong Kong with Zhuhai and Macau. And Beijing is considering permitting Hong Kong banks to start dealing in renminbi. This is among many other initiatives.

But while we are stepping up economic co-operation at a brisk pace, both sides are committed to upholding the principle of "One Country, Two Systems". The reason we were able to reach a free trade agreement within our own nation is because Hong Kong is not "just another Chinese city". It's anything but just another Chinese city. Among our numerous distinctions, Hong Kong remains a separate customs territory, with separate membership in the World Trade Organisation, and autonomy in our external commercial relations.

Our infrastructure program is not restricted to transportation links. Hong Kong's reputation as the trade fair centre of Asia will be enhanced when a new 1 million-square-foot International Exhibition Centre is built beside our award-winning international airport. The new Exhibition Centre will be just 10 minutes from Hong Kong Disneyland. Disney's third international theme park is scheduled to open in two years, providing another huge boost to our tourism industry.

Hong Kong has been known as the "gateway" to China. But it is far more than that. Let's face it - if you're a Fortune 500 company, you no longer need a "gateway" to that burgeoning market of 1.3 billion people. A big company with a lot of resources can go directly into Shanghai or Beijing without the benefit of a facilitator. But if you are a small or medium-sized business, without a large corporate infrastructure dedicated to China, it is not easy. If you are a financially orientated company, you'll find the environment there very alien, too. For you, Hong Kong can help in myriad ways - with information, contacts, resources, language, longstanding business and cultural relationships, laws, partners, funding, and the benefit of decades of experience doing business in China. After all, Hong Kong is the largest investor in the whole of China. And Hong Kong is the largest investor in each and every province and autonomous region in China. Hong Kong is the largest investor in Shanghai. Hong Kong is the largest investor in Beijing. Hence the experience we have gathered.

But even if you are a corporate giant, Hong Kong offers a unique skills set. Foremost is one of the most crucial foundations for foreign investment - the rule of law, backed up by a sound legal system and upheld by an independent judiciary.

We are the world's freest economy, according to annual surveys of the Heritage Foundation and the Fraser Institute. We provide a level playing field for all businesses, whether local or foreign, and minimal government intervention. We offer a low and simple tax regime, no foreign exchange controls or trade barriers, a clean public service, and a free flow of information and ideas through vibrant and independent media.

Hong Kong is where Mainland companies seek foreign funds, partners and trading contacts. In the other direction, Hong Kong provides valuable experience and partnership to foreign companies exploiting the Mainland market.

And for the American executive and his family, Hong Kong offers an extremely safe, modern and cosmopolitan lifestyle. We have world-class medical services, countless restaurants serving American and other international cuisines, a sophisticated nightlife, pristine country parks and American schools.

Hong Kong is also a regional communications and broadcasting hub. We were the first major city in the world with a fully digitised telephone network. And we have one of the world's highest penetration levels for mobile phones, at 92 per cent. Broadband coverage is available to every business and I mean every business in Hong Kong and over 99 per cent of households. We don't even have a "last mile" problem. We have now done it with fibre optics.

Hong Kong is embracing technology as a new economic driver in our bid to move up the value chain. We are also putting some new technology infrastructure into place. Our Science Park opened last year to help technology-based enterprises carry out applied R&D. Phases I and II of Cyberport were finished earlier this year. It's designed to attract companies involved in IT applications, information services and multi-media content creation. Already some California companies have settled in - Pericom, RAE Systems, RedRock Semiconductor have set up in the Science Park, while Rainbow Technologies has moved into Cyberport.

We are not out to rival Silicon Valley. What we have attempted to do is to build a critical mass of high-tech companies in the Science Park and Cyberport, and to better position ourselves for partnership with pioneering companies like the ones represented here today. We see Hong Kong's future as a base for small businesses focused on value-added, high-tech, innovative services.

I know that many Bay Area companies are leaders in the process of globalisation. And I know that many of you are concerned about the migration of jobs to low-cost manufacturing centres. We in Hong Kong have gone through it. Our manufacturing sector began moving en masse into the Pearl River Delta in the 1980s. The Delta has become known as "the factory of the world" as companies from Japan, Taiwan, Korea, Europe and the United States take advantage of the inexpensive and efficient operations there. Hong Kong-linked companies now employ 11 million people in Guangdong Province alone. That's 4 million more than the entire population of Hong Kong or the San Francisco Bay Area.

China is becoming a manufacturing powerhouse. In the medium term, at least, this is an irreversible trend. We cannot compete on cost. We have no choice but to embrace and take advantage of the opportunities produced by China's remarkable metamorphosis. When Hong Kong's manufacturing jobs moved to China, we were forced to transform ourselves into a services economy. Today, fully 87 per cent of our GDP is generated by our services sector.

So Hong Kong has become a premier financial, business and services centre of Asia. We offer well-developed clusters of bankers, lawyers, engineers, designers, accountants and consultants. Foreign companies use Hong Kong's banks for trade and financing. We've set up sales and marketing offices there. We provide modern and efficient transport, supply-chain management, insurance and many other services in the mainland.

In an increasingly globalised world, Hong Kong is an increasingly globalised city. We pride ourselves on our international dimension - our sophisticated financial markets, our expertise in trade and logistics, our high level of spoken and written English, our cosmopolitan style of life. All our plans and efforts are focused on staying in the forefront of the ranks of the top world cities.

Ladies and gentlemen, Hong Kong people have been through a traumatic time, with the fall of the property market, deflation, unemployment and SARS. But through it all, Hong Kong's economic fundamentals have remained strong and resilient. There is a new sense of optimism among our energetic and hardworking populace. The feel-good factor is palpable in Hong Kong's streets today. As Hong Kong moves upmarket, as we look for new ways to add value to Asia's world city, we are poised for great things. We invite you to come and share the fruits of this exciting new era.

Thank you very much.

End/Tuesday, September 23, 2003

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