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Following is the transcript (English portion) of the question and answer session given by the Financial Secretary, Mr Henry Tang, during his Budget press conference today (March 10):

Reporter: Mr Tang, you mentioned the proposal of Government bonds issue this year. Is it going to be in US dollars or Hong Kong dollars? And in which month are you going to sell it? And you think that will affect the rating agencies' rating of Hong Kong?

Financial Secretary: First of all, I don't think the issuance of a bond will affect our credit rating because I believe issuing bonds to fund capital works projects is a very commonly accepted practice in many many economies. So in our case, I don't think it will affect our ratings at all. Our intention is to launch this programme as soon as possible. Today, we have sent out expressions of interest to financial institutions for them to submit their proposals for a bond programme. Our launching of a bond programme actually has three main purposes. First, we want to develop the debt market in Hong Kong. We have all the infrastructures in place. We have both the hardware and the software. We have a lot of expertise. We are the financial centre that is the most capable and the most suitable for developing a bond centre, a debt centre. Second, we want to offer many small depositors an alternative investment option. I've chosen those words very carefully because I know there are many small depositors who have some money invested, not a lot, but whatever amount that they have, it is earning virtually very very minimal interest. So we're offering them an alternative investment option to gain a higher interest income. And thirdly, (issuance of bonds) is also very important to us because we want to have a greater degree of flexibility in our asset sales programme. We would not sell something until we get the right price. And by the issuance of a bond, it would give us that flexibility.

Reporter: Is it going to be global bond, or local bond?

Financial Secretary: We haven't decided.

Reporter: Excluding the.... bond issue, your combined operating capital deficit is widening. Isn't it a sign of political/financial weakness that you're not resorting to new taxes? Four years seems to be a long time before doing a sales tax. What are your options, for example, constrained by your fiscal options, constrained by the democracy debates, the patriotism debates?

Financial Secretary: Debate on electoral arrangements in 07/08 and also the debate on patriotism have not affected the formulation of my budget in any way. Secondly, the budget deficit this year shrank to $49 billion. It's mainly due to several windfall profits. First of all, it's because of the investment income from the Exchange Fund that was well beyond our original expectations. But investment income can go up and can go down. So I don't think it would be prudent for us to budget for a large income from the Exchange Fund. Secondly, because of our cash accounting practice, we have put in the $20 billion as a diminution of the budget deficit. But by the same token, actually when we published the accrual account, which we have started publishing last year, you would see that all of this would be properly accounted for in our accrual account. So that's why we have gone ahead and we would continue to publish our accrual account for the sake of transparency as well as a more realistic and accurate representation of figures that we have. I actually do think that the deficit we have budgeted for this year is a realistic one because we feel that the way we are doing it is a moderate but serious approach in controlling public expenditure. And this year's demonstration in the 04/05 budget is actually a very very serious cut because we started out at $217.4 billion, and we have cut well beyond $214.4 billion. If we are to take a gradual approach to $200 billion by 08/09, our target this year should be $214.4 billion. But we have cut to $212.2 billion, which is $2.2 billion more than our original target. So this is our way of demonstrating and establishing our credibility that we have the will and we are able to control public expenditure.

Reporter: Referring to the $20 billion from the bonds ... to diminish the budget deficit. But looking at the figures that are given in the budget on page 27 in the English section, you see that by the year 2008/2009, which is one year further that you get to balance the budget, you still show a deficit of $5.2 billion. So you would not have achieved a balanced budget even with the money that you're bringing in from these bonds. And it's difficult to see, with the fiscal reserves before and after the bond issuance, how much money you plan to take in, and where it is. Because the numbers are quite close together.

Financial Secretary: Actually, Francis, I'm glad you asked that question. Because you have confused the recurrent and non-recurrent spendings. I'm glad you've asked that question. I just want to elaborate so that nobody gets confused again. It is not a way of reducing deficit. And it would not be mixed up with our recurrent spending. We are looking to balance the recurrent spendings with recurrent income, and we are looking to raise bonds for non-recurrent spendings. Due to those are mainly infrastructural projects. And the way the numbers are presented, you only see it as a below the bottom line kind of figure. So our recurrent deficit has not been funded by a bond issue.

Reporter: I just to want to follow that up. You said a few minutes ago that, in response to another question, that the $20 billion was a diminution of the budget deficit. So I took that from you. But looking at the numbers here, again...it says consolidated surplus deficit before bond and after bond. Before bond - $7 billion in 2008/2009, $6 billion after bond. Where is the money, and how much is it?

Financial Secretary: I will ask Alan (Permanent Secretary for Financial Services and the Treasury (Treasury)) to explain to you the technical details of why I said you have confused it.

Permanent Secretary for Financial Services and the Treasury (Treasury): So basically, the targets of the Financial Secretary is to achieve a balance by 2008/09 in the operating account as well as a balance in the consolidated account. As far as the figures shown in the table, you will find that by 08/09 there is still a deficit under the operating account while there is a surplus as far as consolidated account is concerned. All the Financial Secretary is saying is that he will continue to consider measures in the coming years that will help him to achieve a balance even in the operating account as well.

(Please also refer to the Chinese portion.)

Ends/Wednesday, March 10, 2004

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( Floor / Cantonese / Putonghua / English )