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CE's speech at the HKTDC annual dinner in London (English only) (with photo)
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     Following is the speech by the Chief Executive, Mr Donald Tsang, at the HKTDC annual dinner in London on November 18 (London time):

The Baroness Scotland, distinguished guests and friends, ladies and gentlemen,

     Thank you for that warm welcome on this chilly autumn night. And thank you also for your continued support of Hong Kong.

     I can see that the TDC Dinner has lost none of its appeal. This is not just a testament to all the hard work that the TDC does to promote Hong Kong in the UK; it also represents the strength of the ties between Hong Kong and Britain - ties that I believe have become even stronger and broader since the historic Handover 11 years ago.

     Indeed, this was borne out in the very cordial meetings I had today with Prime Minister Brown, and with the Leader of the Opposition, Mr Cameron, and of course with our old friends in the Hong Kong Association.

     In all of these meetings, I was struck by two things: First, the genuine interest in Hong Kong, not just as an Asia business hub, but as a city with a deep commitment to the rule of law, as a maturing civil society, as a responsible global citizen, and as a city with a unique role to play in China's development. And second, the extent to which the world is getting smaller - and cities such as London and Hong Kong and New York are becoming even more closely intertwined by the forces of globalisation, for better or worse, richer or poorer, in sickness and in health.

     Much has been said at these dinners, over many years, about the future of Hong Kong. This year, more than any I can think of in recent history, there is a confluence of issues and events that will have a profound effect not just on Hong Kong's future - but on the future of the rest of the world.

     So tonight I am going to resist the strong temptation to talk about all the various actions we have taken, and the measures we have introduced, to ensure that Hong Kong emerges from this crisis stronger and more competitive. I believe Hong Kong has proved its mettle more than once in the past decade, and I am confident we will do so again this time. And of course British businesses, with their long history in Hong Kong, know this better than any. This is not hubris or unfounded optimism; it is just an acknowledgement of the resilience, flexibility and determination of Hong Kong and its people and its international business community to meet challenges such as this head on - and to look for ways to transform crisis into opportunity.

     Rather, I would like to talk about what I see are the five temptations that governments around the world will need to resist if we are going to avert the threat of a prolonged and painful global recession.

     Some of these temptations were among key issues discussed at the G20 meeting over the weekend, and also in my meetings today; and these are issues I'll be discussing again later this week at the annual APEC Economic Leaders meeting in Lima, Peru.    

     The first temptation is to go it alone and act in isolation. This is a global crisis on a massive scale, but it affects different economies in different ways. There is no one-size-fits-all solution. Every economy has needed to act quickly and decisively to address their own particular problems such as a loss of capital, shortage of liquidity, insolvent banks, mortgage defaults, businesses going bust, high interest rates and rising unemployment. Some economies have injected funds into the banking system, some have nationalised banks, many have guaranteed bank deposits to provide stability and certainty in the banking system, some have helped with loan schemes for business and industry.   

     At the same time, what we do in our economies can immediately affect other economies. If this crisis has proved one thing, it is that the world is linked together like never before - and those links defy political boundaries. They are only going to become deeper, more entrenched and more intertwined. So, governments need to ensure that whatever they plan, it is a co-ordinated plan that won't create uncertainty in other markets and reverberate backwards. For example, many governments have introduced time-limited guarantees to protect bank deposits and loans. When these guarantees are withdrawn, it should be co-ordinated to avoid destabilising fund flows between economies. We must keep the lines of communication open. The G20 meeting convened just last weekend should go a long way to addressing this point.

     The second temptation is to neglect the need for an exit strategy. This relates to the various measures that have been taken to stabilise national financial systems and global financial institutions. In simple terms, this means the use of taxpayers' money and extraordinary public policies which are not sustainable to keep financial institutions, corporations afloat.

     I speak from personal experience when I say that as soon as a government intervenes in a market this way you create the potential for moral hazard.  When that happens you need to be thinking about how you get out of the market later.

     As we discovered during the Asian financial crisis in 1998, desperate times call for desperate measures. In Hong Kong's case that involved buying the full range of Hang Seng Index constituent stocks to ward off a concerted and systematic attack on our currency peg and stock market. At that time our actions were greeted with a mixture of understanding as well as disbelief; acceptance as well as outrage; and trust as well as deep cynicism.  

     I think it's fair to say that many pundits, initially, were sceptical about our reasoning and our motives. What we said we would do - and what we did do - was to devise a way to detach ourselves from those investments in a gradual and orderly way that did not disrupt the normal function of the market.

     I believe the same approach is needed again - except this time on a global scale. When governments start to divest themselves of these extraordinary investments they need to do so in a totally open and transparent way. And - in keeping with my first point - we need co-ordination and enhanced disclosure among governments, central banks and market regulators when these investments are brought back to the market. Hong Kong certainly has a lot of useful experience to share in this regard.

     The third temptation is for governments to cut back on public spending in response to the global economic slowdown. Last week, our sovereign, China, announced a huge US$586 billion economic stimulus package over the next two years. The money will be spent on range of initiatives, ranging from tax breaks to national infrastructure projects including roads, railways and airports and the reconstruction of areas devastated by the Sichuan earthquake. The International Monetary Fund has said that this package will not only influence the Chinese economy, it will influence the world economy by supporting demand. Undoubtedly Hong Kong and other economies will benefit from this package through the export of goods, services and raw materials. Other governments have also announced economic stimulus measures, including Hong Kong.

     The message we need to reinforce is that economies - big and small - can help ease the global crisis with their domestic spending programmes. Now is not the time for Governments to cut back on spending - it may even be an opportune time to accelerate spending to help keep the wheels of domestic economies turning at a time when private investment and construction is under severe strain - and is likely to remain stressed for some time.

     Government spending programmes funnel money back into the community where it is needed most - into jobs, and into demand for goods and services. Creating jobs also helps lessen the welfare burden. And the projects undertaken will undoubtedly have positive, long-term benefits for society as a whole.   

     In Hong Kong, for example, we are pressing ahead with major infrastructure projects that will create a large number of jobs at exactly the time when we expect unemployment to rise as a result of the fallout from the financial crisis. These projects will enhance our connectivity - nationally and locally - as well as boost our long-term competitiveness.

     This brings me to the fourth temptation - that is, the temptation to close our doors because of protectionist sentiment. As economic recession sets in, following corporate closures and fall in consumptions, unemployment will promptly rise. In these circumstances, protectionist sentiments will inevitably grow and may poison domestic politics. I hope that this crisis will not provide a convenient excuse to step back from international commitments to further liberalise trade and provide enhanced market access to each other. Governments will inevitably face calls to protect local industries and labour markets. I would urge them to strongly resist these quick-fix responses.

     The world has benefited greatly from more open and free trade and investment regimes. Asia in particular has gained enormous benefits from trade liberalisation. Hong Kong, of course, is one shining example. So too, are China, Taiwan, Japan, Korea and Singapore, along with Malaysia, Thailand and, more recently, Vietnam.  

     At a time of such uncertainty, governments around the world have a rare chance to create certainty by showing a renewed resolve to deepen - rather than step back from - our economic engagement.

     I hope that major economies can work together at this time to bring the WTO's Doha Round to a successful conclusion. It's been dragging on for too long - as we know only too well after hosting the 2005 Ministerial Meeting.

     We should certainly build on the progress made during the WTO Ministerial Meeting in July - a meeting in which Hong Kong played an active role. We will certainly be working hard to hammer out an ambitious and balanced outcome. This will have a significant and far-reaching effect on the multi-lateral trading system and benefit us all in the long term. A successful conclusion to Doha Round, for example, will reduce by half the amount paid today in import tariffs - a saving of some US$150 billion. And the World Bank has estimated that between US$290 billion and US$460 billion could be gained from global trade liberalisation annually by 2015, lifting more than 100 million people out of poverty. So there are very real and tangible benefits for developed and developing economies to share.   

     The fifth and final temptation is to over-regulate in response to the financial crisis. While the G20 meeting rightly stressed the need for enhancing sound regulation, it did not lose sight of the danger of over-regulation that would stifle innovation or hamper economic growth.  The challenge ahead is to make our regulatory regimes more effective over the economic cycles.  History has shown us that markets nearly always over-correct. We should avoid the same thing with regulation.  We should keep our regulatory regimes ahead of the curve, but not behind.

     The globalisation of financial services has highlighted the dark downside of closer economic integration - that is, the risk of contagion spreading rapidly and widely when things go wrong. What we need to work on now is a better system, with better risk management, better early warning systems, and better response mechanisms. And it needs to be a concerted, co-ordinated and global effort.  

     In cities such as London, Hong Kong and New York the financial services sector is bound to innovate and to expose itself to risk. That is, after all, how we got into this mess in the first place. What we need to do, of course, is close the loopholes that allowed this to happen. We also need regulatory regimes that not only provide adequate protection for investors, but which can also respond to shockwaves from other markets. But we don't need regulation that stifles or strangles the development of financial markets, or hinders the ability of business to access capital and credit.

     The co-operation that exists between Hong Kong and the UK is a good example of what is possible, and what is needed on a global scale. The Hong Kong Monetary Authority, the Securities and Futures Commission and the Commissioner of Insurance have all signed Memorandum of Understanding with the Financial Services Authority that cover sharing of supervisory and regulatory information as well as rendering mutual assistance.

     I will be meeting with the FSA's chairman Lord Turner tomorrow, as well as the Lord Mayor and other leading City figures. I will take the opportunity to reinforce Hong Kong's commitment to even closer links between our markets, and also discuss ways in which we can work together to help rebuild a strong, efficient and stable global financial system.

     Ladies and gentlemen, the past two months have been a turbulent time for the global financial system. Advanced economies are facing the very real prospect of recession next year - the first time this has happened since World War II. The world has been hit by a financial tsunami and we are still not sure about the true extent of the damage that's been caused. What that means, also, is that we don't know how much reconstruction will be needed, or the extent to which the foundations of our global financial structure have been damaged, or the depth of the economic pain to follow.

     What we do know, though, is that the world must work together to rebuild and modernise the system. As key links in the global financial system, London and Hong Kong undoubtedly have a role to play, and experience to share. We need to co-ordinate and communicate our actions; we need to be thinking of exit strategies for financial assets that have been nationalised; we need to press ahead with government spending programmes, and think seriously about making them even more ambitious, especially on the infrastructure side; we need to press ahead with global trade talks that will deepen and broaden our economic engagement; and we need to ensure that we have enhanced regulatory regimes that will boost the global efficiency, transparency and safety mechanisms of the market, without unduly increasing the complexity of capital raising or stifling market innovation.

     I hope that the work we are seeing now maintains its momentum. That national governments continue to stimulate their economies, which helps to keep capital flowing through the global system; that national governments continue to act collectively through such fora as the G20, the WTO and APEC to look for global solutions; and that national governments finally understand that the Asian financial crisis 10 years ago was a wake up call to reform our global financial system, but in the end it was an opportunity lost. This time, for the sake of globalisation and closer engagement between the people of the world, we must get it right.

     Thank you very much.

Ends/Wednesday, November 19, 2008
Issued at HKT 08:12

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