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Following is the speech by the Financial Secretary, Mr John C Tsang, at the Macquarie China Conference - China 2009: Paths back to Growth and Profits today (May 18):
Basil (McIlhagga), distinguished guests, ladies and gentlemen,
Good morning.
It is my pleasure to join you today. Allow me to congratulate Maquarie on organising this China conference.
The theme of the conference, "Paths back to Growth and Profits" is a subject on all our minds, especially after the release of Hong Kong's latest economic data last week.
Our first quarter figures are a reminder - if any were, indeed, needed - of just how deep the global economic crisis is, and how long and how difficult our return to prosperity will be.
I am delighted to have this opportunity to speak with you about our prospects for an early recovery. I will also say a few words about our tactics for combating the financial crisis, and what we will be doing in the coming months to return to the path of growth and profits.
First though, a recap of those first quarter figures I have just mentioned.
In the first quarter of this year, our economy contracted 7.8% year-on-year and unemployment rose to 5.2%. All the indications point to more job losses in the near term.
In the first quarter of this year, exports fell 22.7%. That is the biggest fall in 55 years. Back in 1954, a UN trade embargo, imposed a year earlier during the Korean War, dried up our trade with the Mainland of China. We often like to use historical references to highlight current situations. No one is suggesting we turn the clock back, but sometimes it is reassuring to know that we have been through economic turmoil before, and survived.
The point is that, during difficult economic times, Hong Kong's survival skills are at their sharpest, and opportunities are never far away.
Last month, the International Monetary Fund lowered its global GDP forecast for 2009 to minus 1.3%. That would be the first worldwide contraction since World War II.
In view of the latest forecasts and economic statistics for Hong Kong and our trading partners in all corners of the world, 2009 is likely to be bleaker than we had earlier expected.
Last week, I revised downwards our full-year GDP forecast for 2009 from between minus 2% and 3% to between minus 5.5% and minus 6.5%. The last time we experienced a contraction within that range was at the height of the Asian financial crisis more than a decade ago.
Today, we are experiencing a global, rather than regional, slowdown. In the first three months of this year, the US economy shrank a more-than-expected 6.1%. The European Commission has cut its full-year GDP forecast for the "euro area" to minus 4%.
All this will impact on our externally oriented economy. Not only does our recovery depend largely on the performance of regional markets, but also on that of our trading partners in the US, in Europe and around the world. So forget about the "decoupling" theory.
Even though the Mainland's economy expanded 6.1% in the first quarter, this was our nation's slowest growth rate in a decade.
There are some signs that the Mainland's economy is feeling some positive effects from the 4 trillion renminbi stimulus package announced by the Central Government last November.
Supported by the stimulus measures, domestic demand in the Mainland has remained resilient. In the first quarter of this year, total retail sales rose by almost 16% over a year earlier. Fixed asset investment continued to surge, rising by almost 30% year-on-year. Industrial value-added also rose by 8.3% in March, much higher than the 3.8% rise in the first two months of 2009.
It is a mixed picture, but it carries a clear message - economies are fragile; the challenges are severe, and we must dig in for a long, hard fight.
In Hong Kong, we have taken, and we will continue to take, a flexible approach to dealing with the crisis. This is the best way for an economy such as ours to adapt to the fluctuating market conditions around the world.
Last month, I promised to consider introducing more targeted measures, outside the budgetary cycle, where necessary, in order to help relieve hardship, stimulate economic activities and assist those in need. And last week, I made clear that this promise would be kept. We will be pushing out a new package of measures within a month's time.
In view of the weak first quarter economic performances in Hong Kong and around the world, we are working on a new round of stimulus measures tailored to the current situation. We will announce details as soon as the preparation work is completed.
This will be the sixth time since my Budget in February last year that the Government has introduced targeted initiatives and stimulus measures to counter the downturn.
Through my first two Budgets and the Chief Executive's stimulus package announced last July, we have provided some HK$70 billion to stimulate the economy, create jobs and soften the impact of the downturn on our community. This is equivalent to about 4.2% of our GDP.
It also excludes the HK$100 billion loan guarantees to businesses to ease the credit squeeze and additional spending on capital works projects this year.
Since the onset of the financial crisis we have focused on four specific areas.
First, because this is primarily a financial crisis, we have made every effort to maintain stability and confidence in the financial sector. Among other things, we have guaranteed bank deposits 100% at local banks, and provided more liquidity for our banks should they require it. Our banking system remains sound.
The second part has been to stimulate the economy. In the past 15 months, we have lowered taxes further to attract more overseas investment. We have launched initiatives to promote research and development activities and boost various key sectors, such as tourism, construction and green industries. We have also initiated the Loan Guarantee Scheme to provide much needed liquidity to our SMEs. So far, we have made some 9,000 loans to the tune of $18 billion.
Thirdly, we have focused resources on creating jobs and training opportunities for people of all ages. These initiatives will help upgrade the workforce, and better prepare us for the economic rebound when it does come. Preserving and creating jobs will remain a top priority for the Government.
The fourth and final part of our strategy is a targeted approach to help the most vulnerable members of our community through this difficult period. This includes easing the burden on low-income families, homeowners and the elderly.
Any new stimulus packages and recovery initiatives will continue to reflect this four-pronged strategy.
Now, as this is a China Conference, I will highlight some of the benefits of our close integration with the Mainland.
Earlier this month, I signed a new supplement to the Closer Economic Partnership Arrangement, or CEPA. CEPA is our unique free trade pact with the Mainland that was introduced in 2003 to open up markets on the Mainland to Hong Kong firms. Another historical reference is required here, because CEPA was launched to help us recover from the economic fallout following the SARS outbreak.
Each year CEPA has been expanded, so this is an ongoing commitment to break down barriers to trade between Hong Kong and the Mainland.
In a change from previous years, this time the new liberalisation measures will take effect from October 1st. That is three months earlier than the usual timeframe, to provide additional early impetus to the recovery process.
Under CEPA rules that are nationality neutral, overseas companies incorporated in Hong Kong can enjoy the same full benefits of CEPA as local firms. New initiatives this year will make it easier for banks to expand their services on the Mainland and enable local securities companies to participate in the development of the securities market across the boundary. These are in addition to measures that are already included under CEPA and cover banking, insurance, accountancy and securities as well as a range of other services areas.
Also included in the latest CEPA supplement is a proposal to establish an "open-end index-tracking exchange-traded fund" in the Mainland. This would be backed by portfolios of Hong Kong listed stock and would open up an avenue for Mainland investors to buy shares in Hong Kong companies.
The new measures will strengthen Hong Kong's position as an international financial centre and as our nation's most important city for global finance.
Hong Kong is already an active and attractive asset management centre. We are a free port with no restriction on selling assets. We have a stable currency and no foreign exchange controls. Our tax system is simple and our taxes are low. We have also no inheritance tax, no capital gains tax and no GST, and offshore funds are exempted from profits tax.
Earlier this year, the US-based Heritage Foundation ranked us as the freest economy in the world for the 15th year in a row. We have a clean and efficient civil service and a free flow of capital, information and ideas. Our liberal immigration policies have attracted a deep pool of international financial talent.
Even though our stock market has taken a few hits lately, it remains the 3rd largest bourse in Asia and 7th largest in the world by market capitalisation.
This brings me to my final point today - Hong Kong's effectiveness as a conduit for financial services between the Mainland of China and the rest of the world.
One of the many things to emerge from the G20 Summits in Washington last year, and in London last month, is the Mainland's growing importance for global finance. Hong Kong was pleased to take part in the G20 as a member of the China delegation.
As a well-established international financial centre, Hong Kong has a key part to play in opening up the Mainland's financial markets, as well as in the emerging prominence of the Mainland currency on the international stage.
Since renminbi banking was introduced in Hong Kong in 2004 services have expanded to include deposits, remittances, cheques, and currency exchange. At end-March this year, deposits totaled some 54 billion renminbi.
Our renminbi bond market - the only one outside the Mainland - has increased from three issues in 2007 to seven issues today, raising a total of 22 billion renminbi.
We expect this to increase further under a new set of measures announced last month by the Central Government to help Hong Kong through the financial storm. These measures include expanding the number of companies allowed to issue renminbi bonds and increasing the amount of funds to be raised.
In addition, a pilot programme to settle cross-boundary trade using the renminbi has been given the all clear. This scheme will give companies an opportunity to counter the risks of exchange rate fluctuations in settling trade.
Currently, most of this trade is settled in Hong Kong dollars or US dollars. Last year, the value of exports to the Mainland from Hong Kong amounted to US$175 billion and imports from the Mainland exceeded US$180 billion. It is still unclear how many of our traders will opt for the new renminbi settlement arrangements, but there is no denying the enormous financial services potential of such transactions.
The pilot programme is the first major step towards promoting the renminbi as an international currency. Under the programme, our banks will be able to expand their range of services to include enterprises as well as individuals. Further developing this business in Hong Kong is another step towards becoming a renminbi clearing centre, and maximising our potential as an international financial centre in the Asian time zone.
Ladies and gentlemen, the current economic crisis has no respect for international boundaries or for the budgetary cycles of Governments.
Hong Kong will continue to work with other economies around the world to restore stability to markets and return to the path of economic growth and profits.
On the home front, we will make the best use of our resources with timely and targeted measures that address the most pressing needs of our economy and our community.
I am grateful for this opportunity to share my views with you, and I wish you all a successful conference. Thank you.
Ends/Monday, May 18, 2009
Issued at HKT 15:31
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