Following is the speech by the Chief Executive, Mr Tung Chee Hwa, at the Joint Business Community Luncheon at the Hong Kong Convention and Exhibition Centre today (January 12):
Anthony, Philip, Andrew, Mr Hung, Alan and ladies and gentlemen,
Thank you for this opportunity to address you. It is always a pleasure to address the business community and share my thoughts with you on government policies, and to get feedback on what you feel we ought to be doing. This dialogue between government and business is, I believe, essential to building Hong Kong's prosperity and ensuring that we have a business environment that is second to none.
A few days ago, I delivered the second policy address of my current term as Chief Executive. It is not my intention to repeat what I said there, but I would like to use this opportunity to share with you some of the broader economic considerations that shaped my thinking and that of my colleagues as we considered the various policy options.
As I looked at Hong Kong's economic performance over the last few years, and the forecasts for the period ahead, I was struck by two things, the unprecedented scale of the economic storms we have had just weathered, and the enormous opportunities that lie ahead to rebuild our fortunes. We have gone through great pain, but we have now laid the foundation for unprecedented gain.
Over the past six years, Hong Kong's economy has been undergoing a difficult process of restructuring. Restructuring has been painful and protracted for several important reasons. First, we inherited a serious bubble economy and a mismatch of human resources that is required for a knowledge economy. Second, the sudden onset of the financial crises in 1997 pierced the bubble economy, leading to a sharp drop in property prices, the evaporation of personal wealth and for many people, the problem of negative equity. The serious adverse impact of these had contributed to continued deflation. Third, this is the age of globalisation and globalisation means the migration of jobs from high-cost economies, like Hong Kong, to lower-cost economies elsewhere, leading to job losses and reduced income here in Hong Kong. Fourth, the adverse economic situation has affected public finances, causing serious budget deficits. If not dealt with properly, this will undermine our linked exchange rate and the stability of our financial markets. However, dealing with it too hastily and severely will seriously affect people's livelihoods and at the same time, the momentum of economic recovery.
To many citizens of Hong Kong, falling property prices and household income, as well as painful budgetary measures have understandably created grievances and anger while at the same time high levels of unemployment and the uncertainty of future job prospects have created anxiety and frustration. Businesses too had to face enormous challenges as deflation deepened, consumer spending shrank and business activities declined. In the middle of all that, Hong Kong was hit by SARS. It has indeed been a difficult time for all of us.
To understand the seriousness of the situation we faced, our GDP deflator has fallen 21% in the last five years. To find comparable figures, we will have to go back to the time of the Great Depression in the United States of America when the GDP deflator had fallen 26.7% in the four-year period between 1929 and 1933. In Hong Kong, we had indeed faced enormous difficulties. But our people persevered in face of these difficulties and our financial market and banking system stood the test of stress and strain imposed by the economic downturn. Indeed, what has happened in Hong Kong speaks of the tremendous resilience and strength of our society and its institutions that we have withstood such a storm without leading to political, social and economic breakdown.
Throughout this period of time, in addition to the dealing of the constant challenges facing us every day, we also frequently and carefully evaluated the challenges and opportunities posed by the changes on the Mainland and indeed around the world. Should we delink our currency? The answer has constantly been a resounding No! What are our own competitive strengths and weaknesses and what are those of our competitors? How can we emerge from the restructuring and be more successful than at any time in our history? One thing is clear - we have benefited greatly from the rapid and orderly development of the Chinese economy, an economy which in the year 2003 continued to be the largest recipient of foreign direct investment in the world, the fourth largest trading nation in the world as well as potentially one of the largest consumer markets in the world. China has also become the largest and most efficient manufacturing base in the world.
It was clear that Hong Kong's future depends on ensuring access to the Mainland market for our businesses and our professionals, and on building on our capacities to service the trade and investment needs of the Mainland. An FTA-type agreement between Hong Kong and the Mainland, subsequently named CEPA ("Closer Economic Partnership Arrangement"), would be a tremendous benefit to us. It was also clear that while ensuring greater access to the Mainland market, we also needed to work with our colleagues in the Guangdong Provincial Government to ensure that we would be a major player in the growth of the Pearl River Delta. It was important for Hong Kong's future to arrive at a broad understanding on co-operation between the respective governments to ensure that our economic strategies did not work at cross purposes. Similarly, we realised for Hong Kong to sustain its position as Asia's leading financial centre, we must, in the long run, be an offshore RMB centre. Allowing our banks to do RMB business would be a good start.
Therefore, throughout the last few years, we were exploring with the Central Government as to how Hong Kong's competitive advantages can best be leveraged and how Central Government can help us to eventually emerge from our economic restructuring. These discussions accelerated in 2002 and came into fruition during 2003 with the signing of CEPA on June 29, 2003 here in Hong Kong.
In addition to these factors, we focused on other macro perspectives. We invested heavily in education and encouraged life-long learning not only with a view to raise the quality of our people to participate in the knowledge economy but also to allow each of our citizens equal opportunity to move ahead and to excel in life. We strove to improve the living environment not only because we owe it to ourselves but also to ensure we can attract talent from overseas and the Mainland. We embarked on a road to encourage innovation and technology, creativity and design so that services we render and products we produce can move up the value chain and compete in a global economy. All at the same time, we worked hard to ensure Hong Kong would continue to possess a superior environment for business - a safe and orderly society, judicial independence, a level playing field, well-developed infrastructure, simple and low taxes, harmonious labour relations, a clean government and highly efficient public services. We will continue to protect intellectual property rights. Over the years, our regulatory regime in some areas has become excessively tight and detailed, leading to frustration among business people. We will step up efforts to improve the business environment, simplify procedures and improve regulations. These are all fundamental critical success factors that are so important for Hong Kong's future.
We have indeed gone through a prolonged period of difficulties. But, in every cloud there is of course a silver lining. The economic difficulties that Hong Kong faced were severe, but they did lead to the bursting of an unsustainable bubble. High costs and inefficiencies had crept into our economy during the long boom that we enjoyed. In the decade of the 1990's, we were perhaps no longer the lean, efficient economy that we were in the decades before. I believe that, over these last few years, a lot of excess fat has been burned, and we are today once again on our way to becoming an extremely competitive and dynamic economy. Deflation has been painful, but it has brought down the cost of doing business here. Our currency peg with the US dollar has proven to be a hard economic taskmaster. But with the US dollar weakening, we are reaping the benefits.
At the same time, agreement with the Central Government on CEPA, agreements with the Guangdong Provincial Government and the Shanghai City Government on closer collaboration created enormous confidence in Hong Kong and enormous interests both on the Mainland and overseas. A scheme to allow individuals from the Mainland to travel to Hong Kong has instantly injected new life into our economy. Global economic recovery is also working in our favour. Property prices have stabilised and are edging up. Deflation is also easing. Indeed since SARS, we are in V-shape recovery. Prospects of this year and next year are encouraging indeed.
Although the prospects are better, we must generally look for dangers both internally and externally that may hit us again. Deflation and the fiscal deficits are internal issues that need to be resolved. Externally, globalisation may bring sudden and unpredictable fluctuations in areas such as shocks to financial markets, new diseases and epidemics, and international terrorism. Geopolitics and international conflicts could also affect us directly. These are of course challenges to overcome when they happen. In many cases, we are not in control of the situation. But, nevertheless, we must be on guard at all times.
In general, I am optimistic of our medium to long-term future. We have overcome economic difficulties of unprecedented scale and although economic restructuring may continue for some time, we have laid down the foundation to rebuild our fortune. Indeed, by 2020, the size of the Chinese economy will be quadruple and reach US$4 trillion. Obviously, given Hong Kong's special position, Hong Kong will benefit greatly from the continued expansion of the Chinese economy. Our long-term prospect is bright so long as we work hard to capitalise on the opportunities that lie before us.
What are the major tasks of the Government over the next 12 to 18 months? First, of course, to ensure the smooth implementation of CEPA, so that the full benefit of CEPA can be felt by our businesses and professionals. Second is to consolidate our core activities in areas of financial services, logistics, tourism and trade and trade-related support services. Third is to encourage new areas of economic activity. On this front, it is for our business sector to lead the way and as a government, I can assure you, we would do the best to support you with necessary policies. We will also continue to support medium and small enterprises and the work of our professionals.
We will obviously need to tackle deflation and the budget deficits. On the deflation front, I am happy to note that the picking up of economic activity is helping deflation to ease. And there are reasons to believe that the prolonged period of deflation will end in the next 12 to 18 months. Budget deficits need to be dealt with too. The Financial Secretary has rightly announced the delay to the fiscal year of 2008 - 2009 to balance the budget. I have every confidence we will be able to do so. Given the pick up of the economy, we will also have the opportunity to find the right balance between the need to reduce budget deficit on the one hand and to safeguard people's livelihoods and the momentum of the economic recovery on the other.
One of our major tasks is to stay in close touch with our community and to improve our government's governance. We will work towards enhancing the accountability system, improving our policy-making capability and better grasp the public sentiment. We will strengthen advisory and statutory bodies so that they can truly participate in the process of policy making and in monitoring policy implementation. A legislature which monitors the work of the government is a cornerstone of effective governance. We will continue to work closely with the legislature. We will also enhance the work in the 18 districts to ensure that we can promptly and properly respond to the many needs of the local community.
We understand the concern of the community over our future constitutional development and the importance of the constitutional review. The Government of Hong Kong has always attached great importance to the matter, and has consistently taken the position that we will be taking the matter forward in full accordance with the Basic Law. I have also been asked by the Central Government that before the beginning of the constitutional review, the Central Government needs to be consulted. There are issues of principle as well as legal issues that need to be clarified. I have decided to establish a Task Force, headed by the Chief Secretary for Administration with members including the Secretary for Justice and the Secretary for Constitutional Affairs to seriously examine these issues, particularly those concerning the understanding of the relevant provisions of the Basic Law, and to consult relevant authorities of the Central Government. The Government will also encourage all sectors of the community in Hong Kong to continue considering these issues and expressing their views. We hope relevant arrangements may be made as soon as possible.
I want to sum up my talk today by sharing with you the conversation I had with Aman Mehta, the former CEO of HSBC Hong Kong who retired recently and is planning to go back to Delhi. He told me that he travelled extensively all around the world and almost weekly within Asia. He told me that every time he came back to Hong Kong, he felt good. Why? In Hong Kong everything works. Public service is effective; the Government is corruption-free. The city is safe, law and order is upheld and after SARS, Hong Kong has become much cleaner. He thought Hong Kong can become a centre of attraction for people from the Mainland. He also saw there are some 60-70 million overseas Chinese and for some Hong Kong can become an alternative home base. They will find it comfortable to visit and live in Hong Kong because of the environment, the food, the low taxes, etc. It is chats like this that give us the encouragement and it is chats like this help us in setting our directions.
For the last few years, we have been building on the theme of Hong Kong being the world city of Asia. The role that New York plays in North and South America and London plays for Europe. What is a world city? The world city is a city that has developed tremendous strengths in internationally oriented service industries and other high-level corporate service functions, which generate significant levels of added value as well as good employment opportunities. The most important of these include financial and business services, corporate and regional headquarters, news and information services, tourism and creative and cultural activities. The world city is a city that is typically characterised by an outstanding enabling infrastructure, in terms of both "hard' infrastructure, for example, transportation and telecommunications, and "soft" infrastructure, such as education, trading, research and development and urban planning. The world city is also a city which is underpinned by the rule of law, freedom of expression and association and free flow of information. By definition, a world city is cosmopolitan and outward looking. Another feature of world city is its relationship with the hinterland. The world city typically enjoys strong links with its hinterland and is supported by a free flow of goods and services and people. The world city is where people from all over the world would want to visit for fun, for work, for their children to join schools and universities, and for medical treatment. The world city such as New York and London has per capita income which is higher than others within their country.
If you look around, of all the cities in Asia, Hong Kong does have the best opportunities to continue to be the world city of Asia. Indeed, I would say it is for Hong Kong to lose it and that I know it would not happen because we would all be working very hard for it. Business sector is the best catalyst for us to continue to stay ahead.
Indeed for our society as a whole to move forward, the business sector always has a very important role to play. The Government values your views, your input and your efforts. And we look forward to working with you in the months and years ahead on all fronts.
Thank you very much.
Ends/Monday, January 12, 2004