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Budget Speech by the Financial Secretary (6)
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Developing Our Economy

92. I shall now give an account of the economic development of Hong Kong.

Capitalising on Our Competitive Edge

93. We must take advantage of our existing competitive edge to promote economic development.  The National 12th Five-Year Plan has unprecedentedly included a dedicated chapter on Hong Kong and Macao.  This spells out the functions and positioning of the Hong Kong and Macao Special Administrative Regions in the development strategy of our country.

94. Last August, Mr Li Keqiang, Vice-Premier of the State Council, announced the Central Government's package of more than 30 specific policy measures to support our economic, trade and financial co-operation with the Mainland.  We shall actively take forward these measures.

95. The continued liberalisation of the Mainland economy has presented Hong Kong with an opportunity to further develop its economy.  Take the capital market as an example.  Mainland enterprises flock to list in Hong Kong, attracting large international capital inflows.  This has made Hong Kong the premier location for capital formation for Mainland enterprises seeking to raise funds overseas.  After more than two decades of development, the Mainland has gradually moved from seeking to attract capital inflows to encouraging its enterprises and funds to go global, a process that is accelerating.  Hong Kong should brace itself for another restructuring of its capital market.  Among other things, we should improve our market infrastructure, seek to enhance the market connectivity of the Mainland and Hong Kong and increase our market capacity.

96. On the promotion of Hong Kong-Taiwan co-operation, the Hong Kong-Taiwan Economic and Cultural Cooperation and Promotion Council and the Taiwan-Hong Kong Economic and Cultural Co-operation Council are actively following up on the agreed priority co-operation areas, including medical and health co-operation, arrangements for avoidance of double taxation on shipping income, and further strengthening bilateral economic exchanges between the two places.  In late December last year, both sides signed an air services arrangement, which increased the flight frequency, number of destinations, and passenger and cargo capacities between Hong Kong and Taiwan.  Not only will the arrangement benefit the development of the aviation, freight and tourism industries of the two places, it will also strengthen Hong Kong's position as an international and regional aviation hub.  Furthermore, the Hong Kong Economic, Trade and Cultural Office in Taiwan commenced operation last December.  This marks a significant step in fostering the co-operation between Hong Kong and Taiwan on economic, cultural and other fronts in the long run.

97. Linkage to the world is one of the competitive edges of Hong Kong.  Since this Government took office, we have been strengthening trade ties with emerging markets.  I led various business delegations to the BRICS countries, South East Asia, South America, etc., and signed with a number of trading partners a series of tax arrangements, investment promotion and protection agreements and free trade agreements (FTAs).  Hong Kong has started negotiations with Chile on a bilateral FTA recently, which will enable us to tap business opportunities and development potential in this emerging market, and open a gateway to the South American region.

98. We need to pursue participation in multilateral and regional economic co-operation to reinforce Hong Kong's position as Asia's world city.  To this end, we have conveyed to ASEAN our wish to join the China-ASEAN Free Trade Area.  We shall also continue to be an active member of the World Trade Organization and the Asia-Pacific Economic Cooperation to further promote trade and investment liberalisation.  With these efforts, more business opportunities will be opened up, facilitating greater trade and investment flows for Hong Kong.

99. To enhance the competitiveness of Hong Kong as an international financial, investment and commercial hub, we shall continue our efforts to expand our network of avoidance of double taxation agreements.  Significant progress has been made in recent years, and our endeavour has been widely recognised by both local and foreign chambers of commerce.  In just two years after the relevant legislative amendments took effect to align Hong Kong's exchange of tax information arrangements with international standards, we have already signed 17 new agreements, including those with some major economic partners such as the UK, Japan and France.  We have also concluded agreements with partners like India, Malaysia and Mexico, and are in discussion with other partners, including Canada and South Korea.

100. At present, there are 7 000 parent companies from overseas and the Mainland operating in Hong Kong, an increase of six per cent over 2010.  They are attracted by a combination of factors, including our strategic location, sound legal system, simple and low tax regime and diverse pool of talent.  We must strive to maintain these competitive edges.

101. I believe that we should take full advantage of our relationship with the Mainland while enhancing our international outlook.  This should continue to be our way forward.  It will further reinforce Hong Kong's position as a global economic, financial and commercial centre.  Hong Kong is prepared and ready for future challenges.

Promoting Development of Industries

102. To maintain Hong Kong's competitiveness, we have been pursuing economic development in recent years by actively promoting the four traditional pillar industries and the six industries where Hong Kong enjoys clear advantages.

The Pillar Industries

103. The four pillar industries, namely trading and logistics, financial services, business and professional services, and tourism, have been the engines powering Hong Kong's economic development for years.  In 2010, the four industries brought about a total value added of almost $1,000 billion and made a contribution of 58 per cent to GDP, which represented an increase of nearly 15 per cent over the previous year.  They employed nearly 1.7 million people in the year.

Trading and Logistics

104. First, trading and logistics.  With Hong Kong's strategic location and the competitive edge of the trading and logistics industry in handling high-value goods and providing high value-added services, Hong Kong is well-positioned to develop into a high-value goods inventory management and regional distribution centre.  To facilitate development in line with this trend, the Government put a second logistics site at Tsing Yi on the market last December for the construction of modern logistics facilities.  We shall continue to identify land suitable for logistics and port backup uses to meet the industry's development needs.

105. The planning of airport development and construction take time.  Therefore, we should formulate long-term strategies in a timely manner to ensure that the handling capacity of the Hong Kong International Airport will fully meet the ever-increasing air traffic demand.  Last year, the Airport Authority Hong Kong (AA) commenced Phase 1 works of its midfield expansion project to provide additional aircraft stands and apron facilities and a new passenger concourse.  Upon completion of the project, the handling capacity of the airport will be increased to 70 million passengers and six million tonnes of cargo a year.  Such capacity will be sufficient to cope with the air traffic demand up to 2020.

106. The AA launched a public consultation in 2011 on the findings of the Hong Kong International Airport Master Plan 2030.  In their report submitted to the Government, the AA has recommended adopting the three-runway system as the blueprint for the airport's future development and further planning.  The future development of the airport, the construction or not of the third runway in particular, and the overall economic development of Hong Kong are inextricably intertwined.  The project will have profound financial implications for our society.  The Government is considering the AA's recommendations carefully in a bid to make an early decision for the commencement of the next stage of work, which includes conducting an environmental impact assessment and preparing the associated detailed design and financing proposals.

107. Turning to the port, we have commissioned a preliminary feasibility study on the development of Container Terminal 10 at Southwest Tsing Yi to assess the project's impact on the environment and on road and marine traffic.  We have also commenced the Study on the Strategic Development Plan for Hong Kong Port 2030 to update port cargo forecasts and explore how to make better use of the existing port facilities in support of future development.  Both studies are scheduled for completion by the end of this year.  We shall take into account the study results, economic situation, the views of stakeholders, etc. when deciding on the need to develop Container Terminal 10 and the timetable.

108. While developing its services, the shipping industry is also very concerned about environmental protection.  Last year, it launched the Fair Winds Charter.  By signing the Charter, the industry voluntarily switches to low sulphur fuel for ocean-going vessels berthing in Hong Kong waters in a bid to reduce emissions.  To encourage more carriers to switch to cleaner fuels when berthing in Hong Kong waters, I propose to reduce by half the port facilities and light dues charged on ocean-going vessels using low sulphur fuel while at berth in Hong Kong.  The proposed scheme will span three years and cost the Government $260 million.

109. In response to the positioning of Hong Kong as an international maritime centre as set out in the National 12th Five-Year Plan, we shall continue to reinforce the local maritime service cluster, strengthen manpower training, and join hands with the industry to promote both locally and abroad our maritime services in areas such as ship management, maritime arbitration and ship finance.

Financial Services

110. The second pillar industry is financial services.  The World Economic Forum ranked Hong Kong first in its Financial Development Index announced in late 2011.  Overtaking the US and the UK, Hong Kong becomes the first Asian financial centre to top the rankings.  We shall keep up our efforts in maintaining Hong Kong's edge in financial services.

111. Last year, Hong Kong further consolidated its position as an offshore renminbi (RMB) business centre.  Since last August, cross-border trade settlement in RMB has been expanded to cover the entire nation.  RMB trade settlement conducted through Hong Kong amounted to RMB 1,900 billion in 2011, which was five times the value of the whole year of 2010.

112. Hong Kong became the first place outside the Mainland to develop an RMB bond market.  As at the end of last year, there were 116 RMB bond issuances with a total value approaching RMB 180 billion.  As at the end of 2011, RMB deposits in Hong Kong amounted to nearly RMB 590 billion, representing an increase of nearly 90 per cent compared with the RMB 310 billion as at the end of 2010.

113. Last year, the Central Government announced a package of measures to support financial development in Hong Kong, of which eight are beneficial to the development of RMB business, such as allowing the use of RMB for direct investments in the Mainland and permitting investments in Mainland's equity and bond markets through the RMB Qualified Foreign Institutional Investors (RQFII) Scheme.  These measures have been implemented.  Regarding the RQFII, the first batch of products was approved by the Securities and Futures Commission in December last year for public subscription.

114. As regards strengthening our role as a fund-raising platform, Hong Kong was ranked first worldwide for the third consecutive year in terms of the total amount of funds raised through initial public offering, which amounted to US$33 billion in 2011.  Enterprises from the US, Switzerland, Kazakhstan and Italy came last year to list here for the first time.

115. On asset management, Hong Kong's combined fund management business set another record high of over HK$10 trillion by the end of 2010, representing a year-on-year growth of almost 19 per cent.  Two-thirds of the assets of the fund management business in Hong Kong were sourced from non-Hong Kong investors, indicating that Hong Kong was a preferred location for overseas fund managers to conduct asset management business.

116. We shall continue to consolidate our position as a global platform to raise capital.  In collaboration with the Hong Kong Exchanges and Clearing Limited (HKEx), we shall strive to attract more overseas companies, especially those from emerging markets, to list in Hong Kong.  While maintaining a high standard of regulation, the HKEx is also studying ways to further facilitate listing or secondary listing of overseas companies in Hong Kong, and accept companies incorporated in other jurisdictions to apply to list here.

117. On the development of Islamic finance, we are close to finalising the draft amendments to the relevant legislation with a view to levelling the playing field for common types of Islamic bonds (i.e. sukuk) vis-j-vis their conventional counterparts as far as profits tax, property tax and stamp duty are concerned.  We plan to conduct market consultation in the first quarter of this year to gauge market views on our legislative proposals, and introduce the amendment bill into this Council in the next legislative session.

118. With regard to the bond market, the iBond we launched last year was well received.  It has helped enhance retail investors' understanding of and interest in bond investment, thereby fostering the development of the retail bond market in Hong Kong.  It has also provided investors with another option for coping with inflation.  As the interest rates in the market continue to stay at low levels, the attractiveness of conventional fixed-rate retail bonds to investors has been limited.  To further promote the sustainable development of the retail bond market, another issuance of the iBond is a preferable option in the short term.  I have to point out that this is a special measure taken at this time having regard to the current market situation.  In the long run, we need to leave room for developing other kinds of bonds, including conventional fixed-rate bonds, for the development of a more mature bond market in Hong Kong.

119. We shall launch a further issuance of iBond worth not more than HK$10 billion under the Government Bond Programme.  The iBond, with a maturity of three years, will target Hong Kong residents.  Interest will be paid to bond holders once every six months at a rate linked to the inflation of the last half-year period.  The HKMA will announce relevant details as soon as possible.

(To be continued)

Ends/Wednesday, February 1, 2012
Issued at HKT 12:19

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