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Following is a speech by the Secretary for Commerce, Industry and Technology, Mr John Tsang, at the Harvard Project for Asian and International Relations Revitalizing Hong Kong: 2004 Mid-year event today (April 3)(English only):

Mr Yamins, Fellow Students, Alumni and Friends of Harvard, Distinguished Guests, Ladies and Gentlemen,

Good afternoon. It is my great pleasure to have this opportunity to meet with you, and to share with you some of the latest developments that are having an impact on Hong Kong's economy.

Like many of you present today, I am a graduate of Harvard University. In fact, I attended both of those schools on Mass Ave some time ago, and I probably spent some of my happiest days along the banks of the Charles in Cambridge. I have since held great affinity for projects relating to these fine institutions. Perhaps they remind me of youthful exuberance and things that I did myself years ago. And today, I am hugely delighted to see this hall packed with young faces - faces that are so full of life, enthusiasm, and dynamism. Even your choice of focus, on positive solutions and not on problems, is eminently well suited for a group of optimistic and forward-looking future leaders. Like you all, Hong Kong is also full of life, resilience and positive energy.

You will remember that our economy was badly hit by the SARS outbreak just about a year ago. There was enormous slowdown of economic activities in every sector, bringing with it record high unemployment. But consistent with the Hong Kong people's spirit of perseverance and resilence, and building on the basis of our strong social institutions and solid economic fundamentals, Hong Kong quickly rebounded in a typically Hong Kong v-shaped fashion.

GDP grew by 3.3% last year and is forecast to grow by 6% this year. And, after five years of continuous deflation, we are cautiously optimistic that the downward trend may well reverse itself in the coming year. Our unemployment rate, while still on the high side, has dropped to 7.2% in February from its peak of 8.7% last July. The value of Hong Kong's export of goods has continued to grow at a robust pace, even through the difficult SARS period, yielding a healthy growth rate of 11.7% in 2003. We also hit in February a ten year high month on month growth rate in our exports.

The outlook for Hong Kong's economy beyond the short term remains positive and encouraging. This is underpinned not only by our traditional strengths, but also enhanced by the vast opportunities opened to us through economic reform and market liberalization in the Mainland. Hong Kong is strategically positioned to benefit from such developments through closer cooperation with our hinterland.

The Closer Economic Partnership Arrangement or, CEPA for short, has been implemented since 1st January this year. This is the first ever bilateral free trade arrangement concluded by either the Mainland or Hong Kong. Under CEPA, a total of 374 products of Hong Kong origin will enjoy zero tariff when exported to the Mainland. These products include all our major export items, from electrical and electronic products and textile and clothing to clocks and watches and jewellery. Together with the concessions committed by the Mainland on accession to the WTO, some 90% of the value of our domestic exports to the Mainland now fall in the zero tariff category.

I should also add that CEPA is a continuing process. In fact, we have just begun, and it is progressing on a building block approach. The coverage of the zero tariff treatment will be expanded even further upon application by local manufacturers and upon CEPA rules of origin being agreed and met to include even products that are not presently manufactured in Hong Kong.

Another facet of CEPA is services. The Mainland has agreed to open up 18 service sectors to Hong Kong suppliers, including distribution, logistics, real estate and construction, transportation, and a number of professional services. They will enjoy earlier and easier access to the Mainland market, with preferential treatment that is ahead of China's WTO timetable and in some sectors, beyond China's WTO commitments. We have also been working closely with the relevant Mainland authorities on issues such as recognition of professional qualifications, and we have been making substantial progress in certain sectors.

Under CEPA, the Mainland and Hong Kong have also agreed to promote cooperation in seven areas including trade and investment promotion, customs clearance facilitation, and transparency in laws and regulations. Enhanced cooperation in these areas will further facilitate trade and investment between the two places, and is a clear commitment of the two governments in fostering an improved environment for business.

Quite naturally, CEPA has been of late the favourite topic of discussion in town. Some call it a panacea for all our woes, while others warn that it is just a gimmick. It is neither, but for sure, it is an opportunity that needs to be pursued actively because CEPA will not realize itself. The relevant sectors must seize the time and make good use of it. We have been asked from time to time since CEPA was mooted what possible benefits will it bring to Hong Kong? Barely three months into implementation, it is actually too early for any serious forecast to be made. We need at least a year's data before we are able to have some initial ideas on a broad order of estimate. But using last year's export figures on the goods side, and without counting the possible effects of trade creation, tariff elimination alone is simplistically estimated to bring some HK$750 million worth of savings for Hong Kong this year.

On the services side, the total benefit is even more difficult to quantify, but let us just look at a couple of sectors. Take the movie industry. Under CEPA, Hong Kong films will be allowed to enter the Mainland market quota free, but foreign films will be capped at 20. So the opportunity is there, but the industry needs to make use of it.

Another example is tourism. With the Individual Visit Scheme implemented in 14 Guangdong cities as well as in Beijing and Shanghai, we already saw an increase of 36% in Mainland arrivals in December 2003 and an even higher increase of 49% in January 2004. The Scheme will be expanded to cover the entire Guangdong Province in May this year, and we expect tourism figures to rise even further. The direct economic impact due to the increase in Mainland tourists may not be substantial, but we have seen as a result of the increase of tourists coming into Hong Kong significant improvements in overall market sentiments, boosting growth in related sectors, stimulating local consumption and contributing to the creation of employment opportunities.

CEPA will open up new business opportunities as well. On the goods side, for example, we see great potential for manufacturers to produce in Hong Kong brand name products and high-value added goods. We are aware that many businessmen are already pursuing plans in this direction. With the Mainland rapidly emerging as one of the largest consumer markets in the world, producing economies are moving to compete for a share of that Chinese pie. The WTO plus market liberalization measures under CEPA provides Hong Kong with a valuable "first-mover" advantage and an excellent platform to exercise this opportunity.

We also see widened opportunities for our professionals and service providers. Increasing economic prosperity on the Mainland has nurtured great demand for high quality services, and Hong Kong is well placed to tap this potential.

CEPA and the opportunities it brings will also serve as a great attraction for foreign companies wishing to tap the vast potential of the Mainland market. Hong Kong is the ideal platform for overseas companies on which to base their operations to take advantage of our efficient infrastructure, our world class clustering of professionals, as well as our unparalleled wealth of experience in the Mainland market. Hong Kong is also the natural springboard for access to the Mainland, and CEPA provides an additional stimulus to strengthen Hong Kong's pivotal role in the region.

CEPA has ushered in a new era in the already very close economic relationship between the Mainland and Hong Kong. It provides new impetus for deepening and broadening Hong Kong's trade and economic partnership with the Mainland, and that is particularly relevant to our immediate neighbours in the Pearl River Delta.

With an abundance of land and labour, the Pearl River Delta, also known as "the factory of the world", is one of the fastest growing regions in the world. Together with Hong Kong, it is fast emerging as a major economic force and attraction for investment and business.

Let me share with you some interesting statistics. The Greater PRD has a total land area of over 42 000 square kilometres and a population of about 50 million. Combined GDP has reached some US$290 billion in 2002. The size of this regional economy is bigger than that of Switzerland (US$268.4 billion). On a per capita basis, the income in the Greater Pearl River Delta without Hong Kong is higher than that of the Yangtze River Delta that includes Shanghai. In 2002, exports reached US$315 billion, representing 5% of the world's total exports. As an economic entity, that should make the Greater PRD the 6th largest exporter in the world if you count all the countries in the EU as a single entity. It has also attracted foreign direct investment inflow of US$25 billion in 2002, more than that of Japan, Korea, Singapore, or Taiwan.

As an integral part of the Greater Pearl River Delta, Hong Kong stands to gain from the accelerated pace of development and rapid economic advancement in the region. Indeed, Hong Kong and Guangdong have been enjoying a healthy symbiotic relationship since the late 70's. Guangdong provides Hong Kong with a vast hinterland for expanding our manufacturing base. Cumulative value of Hong Kong's realised foreign direct investment in Guangdong reached US$86 billion at the end of 2002, or some 70% of Guangdong's total. It has been estimated by Harvard University's Professor Michael Enright in a recent study for the Federation of Hong Kong Industries that there are now over 60 000 Hong Kong owned concerns operating in Guangdong employing over 11 million workers, a figure that is much larger than our entire population. In turn, Hong Kong provides Guangdong with our excellent infrastructural facilities including port and airport, and our world-class services, including design, sourcing and marketing, transportation, finance and other business services. As at the end of December 2003, over 160 Mainland enterprises are listed in Hong Kong, raising a total capital of HK$786 billion.

Together, we are what the Financial Secretary calls the "dream team" that provides an inexpensive but efficient production base backed up by first class support services and infrastructure. An unrivalled combination, indeed.

We have also been working to foster even closer ties with our neighbours in the PRD. On the infrastructure side, we are striving to enhance the connectivity with a view to improving the cross-boundary flow of people and cargo. Construction of the Hong Kong - Shenzhen Western Corridor is now moving full steam ahead and is targetted for completion in end 2005. This will serve to relieve the congestion at the three existing land boundary crossings and facilitate the further expansion of trade between Hong Kong and Southern China.

The Hong Kong - Zhuhai - Macao Bridge will expand Hong Kong's hinterland to the western part of Guangdong and promote the socio-economic development of the west bank of the Pearl River. We aim to complete the feasibility study by the end of this year, and we look optimistically to a possible completion date of 2008.

We are also working on the Guangzhou - Shenzhen - Hong Kong Express Rail Link which will help shorten the travelling time between Guangzhou and Hong Kong from 100 minutes at present to within an hour, and provide speedy connections to other PRD cities.

These road and rail links will strengthen the concept of a three-hour travel zone that will enable the business community to use Hong Kong as a home base, and commute to PRD for business dealings and return within the same day.

With these projects to facilitate the movement of people and goods and the impetus provided under CEPA to facilitate the movement of capital and services, the combined strengths of Hong Kong and the Pearl River Delta will be further consolidated. The Hong Kong - Pearl River Delta business model is a unique and attractive one for investors and businessmen, local and foreign alike, to exploit fully the comparative advantages of the two components in the overall strategy by centralising activities such as financing, management, marketing, logistics and design in Hong Kong, while locating manufacturing production in the PRD.

On the institutional side, the Hong Kong Guangdong Cooperation Joint Conference, led by the Chief Executive of Hong Kong and the Provincial Governor of Guangdong have been set up at the government to government level to undertake and oversee implementation of various joint endeavours. We have also recently set up the Greater PRD Council at the business to business level chaired by Dr Victor Fung, another Harvard alumni and former professor at the Business School, to provide an interactive platform for enterprises, trade and business associations of the two places to exchange views, and a channel to take forward comments and suggestions from the business sector regarding economic cooperation within the Greater PRD.

Ladies and gentlemen, I have just outlined for you the enticing prospects of one of the fastest growing regions in the history of the world. Hong Kong and the PRD have reached a new stage of development following China's accession to the WTO and the implementation of CEPA, presenting many new opportunities and opening up new horizons. As government, we will strengthen our cooperation and build on the complementarity of our respective comparative advantages. We will join forces with members of the Greater PRD community and tap each other's relative advantages to the full in creating the best possible business environment for our investors.

Consistent with our maxim of "maximum support, minimum intervention", we will continue with our facilitating role in enhancing the existing support infrastructure while leaving the ultimate commercial decisions on how to exploit the opportunities to the private sector. We believe that this is our winning formula, and through such partnerships between government and business, and between Hong Kong and the PRD, we will set new standards that will take us to a new level of excellence, driving economic growth that will improve the quality of life of our people.

Thank you.

Ends/Saturday, April 3, 2004

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