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The following is the transcript of the Chief Secretary for Administration, Mr Donald Tsang, at the FORTUNE Global Forum Plenary Session: Setting the Framework today (May 9):

Moderator: I know you have got more on the region's economies and I want you to hold on to that. Having set us a framework for the US and Japan, let me shift over to Donald just for a second.

Looking across Asia, not just at Hong Kong but at the region, do you feel like - we have been given Hank's scenario - are the economies are they prepared to deal with sluggish US growth over the next year or so, not ..... in talk some time in 2002? If not, what do they need to do to cope with that kind of scenario?

Mr Tsang: I am less optimistic than many forecasters of the US economy at the moment. Many of them have said there could be a rapid v-shape of recovery in the Fall of this year, leading to a rapid growth rate in the year 2002. Having gone through, in Asia, the sort of devastation since 1998, if this sort of thing tends to go a bit longer. If you look at the whole thing historically, when the last slowdown in the US economy took place, when the US economy performed the low trend, it tends to last for about 6 or 7 quarters. If that is any guide at all, I would believe that the recovery from the present slow down or weakness in the US economy might take the shape of a u-shape, going right into the early part of 2002. This is my personal perception.

But from an Asian perspective, I would want the recovery to take place a lot faster, particularly with a rather slow growing or rather flat, as Hank said which I agree, in Japan, that must be read, also, in a context of a whole land mass stretching from Japan right down to Singapore, which has been devastated by the crisis, a slowdown, which we have not seen for a half a century. That, compounded by the correction in the securities market and equities market in the year 2000, which wiped off, on average, about 40% of the GDP of the whole area.

The real issue, as you quite rightly said, is a matter of confidence and perception. Even in the better endowed territories' economies like Hong Kong and Singapore, where people have savings, they are rather hesitant in spending their savings. So this is the sort of things we have to watch out, what is going to happen here, not only in terms of reduction of personal wealth, but also in terms of the wider economic and political impact on the region as a whole.

Economically, I could see that people will be seeing a period of generally slower growth in the whole of Asia. There is a reconfiguration of the perception of what Asia is, anyway. The sort of thing we talked about in the mid-90s of the 'tigers' in Asia has now been devastated. We have not heard the term "four tigers" for many many months now. The main reason is it has now changed; there is a much wider differentiation among the economies in Asia. Differentiating a much more powerful one, stronger one, that would have capacity for reform. With Hong Kong and Singapore on the one hand, and a larger, more complex economy, which would find it very difficult to reform on the other.

Then there is the question of social impact on people. What are we? What are our positions in life from this point onwards? And you can see, for instance, people in my previous incarnation, financial ministers. When I was in a gathering with financial ministers not too long ago, and I have not attending this meeting for a long while, I was asked to attend and so I went over there, and found I'd lost all my friends. They were either sacked or in jail.

Then, not only that, look across the economies, there have been changes of governments - some peacefully, some less peacefully. So there has been a sea change in the whole of the eastern seaboard of the Pacific, and the change continues. Now the game is getting more complex. While China is growing steadily, because it has a very large internal economic sector comprising 80% of GDP, there are other economies. For instance, Taiwan did remarkably well through the Asian financial crisis but the situation has now changed, things are a lot more volatile there. While there are ..... in the whole of East Asia, the Asian financial crisis did an excellent purification in terms of fiscal systems, balance of payments, bank regulations and so on. It is much stronger in financial terms.

But in social, political terms, we are going to see only the beginning of a much bigger change. There will be migration of people, there may be discontent in certain economies, so things are a bit more volatile. What is important now is, those economies with more efficient, more flexible, more able to cope with change, and particularly have the courage to undertake major reforms, large or small, they are likely to emerge much stronger after this crisis than in the past. But your political system is now somewhat different, compared with, say, 1997.

Moderator: Donald, you were mentioning the tests for the economies out here - they will be separated by who is ready to take the tough steps that need to be taken to stay competitive in an environment way that global growth is slowing a bit. I wanted to come back to Hank's assessment of Japan and ask you if Japan is one of those countries, in your opinion? Last night, at dinner, I heard an interesting divergence of opinions. A lot of enthusiasm, as Hank suggested, for the new Prime Minister who for most of us came out of the blue, and, as you suggested, created the sense that there is some political will, at least on the part of the new leader that was not even on prospect before. At the same time, some of the Japanese businessmen that I was speaking to said they would give him 100 days because the people are not ready to move with him on some of the tough steps that need to be taken. That is one question.

The second one is, if he is successful and takes those tough steps, isn't it going to slow Japan down further and weaken the Yen and add to the problems in Asia, if we finally get what we want, which is Japan addressing its bad debt overhang? So I would like to hear all of you deal with that question, I guess it is an all important one.

Mr Tsang: To me it is a very large question. We have been waiting for the recovery or the revival of Japan for the last 10 years, since the "jusen" problem first erupted. Whether we like it or not, we have to adopt a wait and see attitude as far as the new leadership in the Japanese Government. And for many, it has perhaps come to the stage of saying - there is a good Chinese saying that - this is perhaps a situation where you have to wait for the death of the animal and wait for the reincarnation so that the whole thing can come out better then. I think that is the sort of feeling which I have about Japan. So there is a lot of hope and we must not ignore the fact that the way in which Japan is moving or not moving is exerting deflationary pressure on the whole of East Asia.

What we need now is the new leaders in Japan, the new leaders in other states, and exert some economic leadership which Mickey just said and which is so important. They need the whole of Asia, and the whole of the world for that matter, is looking for the light at the end of the tunnel. Where are we going? And we need some impetus.

The WTO question of China becomes pivotal in this, so it is important for President Bush and for Europe, for all, and for President Jiang, working together to ensure an early accession of China to the World Trade Organisation. That gives at least some hope and some encouragement that we are going somewhere, taking us to a new plateau of world trade.

And secondly, when we talk about Asia, and we talk about mostly in negative terms, we must remember this is an area which has been purified by massive, as I said, economic adjustment. If you look around the world now, looking beyond the mature economies like the United States and Continental Europe, where do you bring your money at the end of the day? Latin America? Scandinavia? South Africa? Middle East? Russia? No. The answer is, here, right here in East Asia. These are countries which are now at least purified, behave themselves. The major, enormous opportunities that exist on the Mainland of China, and the bubbling little cities like Hong Kong and Singapore, helping and chivvying them along. Before, I think the market situation we talked about, that Hank talked about, in China. It is not strange, it displays all the elements of an emerging market in that the country as a whole is becoming more prosperous, they have got more savings, but unfortunately, the investment instruments are few and far between, therefore all the money been chasing all these stocks and shares. This will change as the economy expands and getting more sophisticated. So what we are going to see is mergers and a much, much bigger economy in the Mainland of China, and I believe it will have a moderating political influence in the whole world as a whole.

But what we need now, in the short term, is leadership - economic leadership, taking us and the world to a new plateau.

Other speakers

Mr Tsang: I have so want to elaborate a few aspects of Hank's answer, and also it just echoes what Mick just said. When we look at the growth prospects in Asia, inevitably in the short run, say five or 10 years, we have to look at the Mainland of China, you must come back to the point which, Mickey and I just emphasised about the WTO, we are looking at, not only in the Mainland of China alone, we are also looking at Taiwan. Both of them are likely to become member of World Trade Organisation this year. What does it mean for people at large? It has an enormous impact because of the size of the market on its own and its ..... stage of development. We are talking about a massive reduction of tariffs. We are talking about removal, wholesale removal of non-tariff areas. If you are going to benefit the whole spectrum of trade, whether you are doing commodity trade, going to insurance and banking products, so you are looking at the possibilities of a real re-configuration of trading pattern, how trade and capital would like to flow. I would suggest that it is not looking at whether it is heavy industry or light industry. It is in fact more of everything in the years to come. And for those who are servicing this major economy like Hong Kong, it is really exciting, in that from our point of view, in the case of Hong Kong, or in Singapore for that matter, where we have a totally convertible currency, we are likely to serve this country, this particular growth, both in commodity trade and service trade. We are going to benefit us and through us into other regional economies as well. But we have to look at it as a new ball game, in that a huge economy is just opening up, giving us and the rest of the world a chance to trade, in different sort of speed, in different sort of products. And set against that, you have a country which has a very highly educated workforce. Shanghai alone has about 53 universities. Xian has 49 universities. People ignore that there are huge human resource there. That human resource can create, that energy that could be unleashed by economic activities because of the opening up of the WTO, will be enormous, to the benefit not only to the Mainland of China alone, but for sophisticated markets like in other states, in California, in Massachusetts, in Hong Kong, or in Europe. This is the sort of thing we are talking about - a Asia which has pent up energy and is going into the new world. And all we need to do is open up, and help it, and exploit it as best as we can. And I say it is going to bring a much better world at the end of the day.

Moderator: You own 10% of the Hong Kong Stock Exchange now as a result of ...

Mr Tsang: I used to. No longer.

Other speaker: That has got to be one of the best trades ever done.

Mr Tsang: I think the gentleman raised a very important question, in particular looking at the global perspective - the position of Europe. We tended, say two years ago, held on to a conventional theory is that Europe always to be held out as a counter balance whenever there is a slowdown in the US economy. We have suddenly discovered we are now all living in the same boat; when one big giant moves, everyone shakes, and this is exactly what is happening now. A weakening of the US economy means a diminishing economic prospect even in the bigger giant, like Europe. And underlying that there is a further global perspective - we have to watch out - in that the point you made earlier about the balance of payment deficit of over $400 billion is a lot of money which has not been highlighted.

Well, Mr Greenspan, quite effectively is now decreasing interest rate. That is, up to the point that people are beginning to realise what is the rate of return on my investment in the US in relation to elsewhere, particularly in Europe? If that happens, more and more people ask that question, particularly we are talking about sovereign treasure. People, like in Hong Kong, in Japan, in Korea and Taiwan and Singapore, were holding major reserve positions, most of them US Treasury. And once they begin to think that perhaps we should spread all the apples around in different baskets, then we are going to see a major uncertainty among the G-3 currencies. It means that there is some re-configuration again taking place, and that, to me, is more worrying. It is the second wave of a, the consequential wave of the US economy weakening. And that could lead to, perhaps, to a temporary relief in Europe, a sign of sucking in of investment money. But then it creates another set of uncertainty in the rest of the world in that the US Dollar weakens. This is a prospect of it.

Question (International Data Group): I have a question for Donald. I agree with you that the acceptance of China into WTO will open a lot of opportunities for international investors but my question is, that it will also make Mainland China to be more competitive against Hong Kong - maybe it becomes a competitor. Of course we are talking about two systems, one country, and then these two systems, I think, will be more competitive in many ways in different areas. So my question for you is, how is the Hong Kong strategy for Hong Kong to be more competitive and how does the competitive edge; how Hong Kong will work with Mainland China after China is accepted into WTO?

Mr Tsang: Well, there is a lot of life after WTO for Hong Kong. In fact we see it as an enhancement of Hong Kong's position, in the national scale in terms of China, and also in terms of the global trading pattern. We see, for instance, our assessment is that the GDP of Hong Kong is likely to be boosted by half to one full percentage point in the twin pattern, once China becomes a member of the World Trade Organisation; from the present 4.0% to 5.0%, to about 4.5% to 5.5%.

The point is this, China - I personally will never subscribe and I am sure Mickey does not subscribe to that but there is a zero sum gain in terms of trade, in the sense that one country or one particular sector is going to do well in a certain part of the world, it can only do well at the expense of everybody in the rest of the world. That is not the case. In fact it is a monosynergism that has built up. In the case of Hong Kong, if there is more trade flowing into China, it means goods of all kinds are going to flow into China and flow all over China, you need somebody to service them, somebody who will write the Letters of Credit, someone to offer them insurance policy, somebody to provide shipping for it. And who is going to do that? Well, yours truly, here is likely to help, and in a big way.

And it is not going to be just that, in that Hong Kong does not stay alone, we have got a mission in our National Charter, in that Hong Kong has been slated to be the international financial centre under our Basic Law, our Constitution.

It means that we have to develop products, we have to be able to do things for the Mainland of China will not be able to deliver in the short term. The sort of thing that we are able to do, unlike a totally convertible currency, backed up by the rule of law, particularly trading on a level playing field and of playing the same level, you target anybody can rival. What does that mean? It means zero tariff. We haven't reached that, even in the major economies like Europe, Japan and the United States. We are already there and we are not going to sit still, we want to make sure that this niche economy will develop. We are going to produce more sophisticated products - products and financial products, and also in the technology fund as well.

So I would suggest that China becoming a member of WTO will be likely to push Hong Kong further along the technology ladder, and push it further along in a financial ladder servicing the nation as a whole in a much better way. I do not see it as a challenge, I see that as an enormous opportunity.

End/Wednesday, May 9, 2001

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