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Following is the speech by the Financial Secretary, Mr John C Tsang, at a session of the "Town Hall Forum Series: Meet the Ministers" on the global economic outlook organised by the Hong Kong General Chamber of Commerce today (September 25):
C K (Chow), distinguished guests, ladies and gentlemen,
Good afternoon.
Thank you for inviting me to join you today. It is always a pleasure to meet with captains of our industries.
This is a timely opportunity to review the outlook for the global economy as well as the likely impact on Hong Kong and what we are doing to maintain growth and stability.
I have been keeping in close touch with key policymakers around the world. Earlier this month, I attended the G20 (Group of Twenty) Summit in St Petersburg as a member of the China delegation. Next month, I shall be attending the World Bank/IMF Meeting in Washington, DC, and the Chief Executive will be joining the APEC (Asia-Pacific Economic Cooperation) Economic Leaders' Week in Indonesia, following my attendance at the Bali Finance Ministers' Meeting last week. I shall be visiting London and Paris later on in the year.
A common theme of these events is international connectivity, sharing information on recent developments and updating each other on policy intentions, as well as how we can work together more effectively to achieve a more sustainable economic recovery.
Five years after the onset of the financial meltdown in the US and Europe, the global recovery is still sluggish and uneven. Acute tailwinds from the Euro-zone have eased somewhat and recent data from advanced economies is more positive. Nevertheless, conditions for a full-fledged recovery remain elusive. The IMF has forecast global economic growth of 3.1 per cent this year, which is the same as the actual growth rate of last year.
Among the advanced economies, the US has fared relatively better recently, largely on the back of a more stable housing market. The Federal Reserve describes the pace of recovery as "modest to moderate" at best. Ongoing tax increases and spending cuts continue to affect growth. Among other things, there is still no durable solution with regard to the debt ceiling, and the US has to work out a credible medium-term plan to balance its budget. These are politically impossible tasks for any administration, and I do not expect them to be resolved anytime soon.
Across the pond in Europe, the green shoots of recovery are finally sprouting, with economic growth turning positive in the second quarter of this year, ending an 18-month-long recession. But the recovery is still fragile, with high unemployment rates, structural reforms and austerity measures continuing to restrict forward momentum. The most heavily debt-laden Euro-zone states are not yet out of the woods as they embark on critical structural reforms. With (Angela) Merkel's success, it seems that austerity may be the main favour for the near term.
Japan's reflationary policies based on the "three-arrows" strategy, which is a new approach in dealing with a stagnant economy, have translated into some visible improvements in the short term. The longer-term prospects remain uncertain. No doubt, Japan's successful bid to host the 2020 Olympics will provide a welcome confidence boost for the country.
However, Japan still has to fix its ailing public finances. The country's public debt-to-GDP ratio is approaching 250 per cent, a level even higher than that of Greece. Japan's government is considering increasing the sales tax to improve income together with other fiscal measures, but there is concern that this could possibly put a damper on growth and further limit the pace of recovery.
Here in Hong Kong, lacklustre demand from our traditional trading partners in the West has dragged down our export performance. Fortunately, domestic demand has remained resilient and held up well. Employment opportunities continued to rise, with the jobless rate staying low. In the first half of the year, the economy grew by 3.1 per cent from a year earlier. We should have little difficulty in achieving my forecast GDP growth for the whole year of between 2.5 and 3.5 per cent, which is a better performance than last year but still below our long-term trend performance.
In light of the subdued growth environment, I have included a package of measures in this year's Budget to boost the economy. The stimulus effect is expected to be around 1.3 percentage points.
SMEs are particularly vulnerable in this unpredictable environment. Our SMEs in Hong Kong employ about half of our workforce and are an integral part of our business engine. To render support to SMEs, I have extended the SME Financing Guarantee Scheme in this year's Budget to help them obtain the necessary loans. Since the scheme was launched in May last year, over 7,500 applications have been approved with total loan guarantees of more than $32 billion.
The Hong Kong Export Credit Insurance Corporation has also introduced a new scheme to help small exporters secure insurance cover, and SMEs have found that quite helpful.
With advanced economies still operating in low gear, Mainland China remains our most important opportunity. Despite a moderate slowdown, the Mainland economy continued to outperform other major economies and grew 7.5 per cent in the second quarter compared to the same period last year. This is largely due to strong domestic demand and the Central Government's commitment to keep growth above 7 per cent. Correspondingly, our inbound tourism and our exports to the Mainland market also outperformed other external sectors.
The shift of the world's economic focus towards Asia, with China at the centre, will be an irreversible trend and a defining feature of the 21st century. The "China factor" will remain Hong Kong's biggest competitive edge in developing our own economy. Given the support of the Central Government and our enduring institutional strengths, we are fostering closer, stronger and broader ties with our nation. We are making good use of all G2G (government to government) platforms to push open more doors for our enterprises to access the Mainland China markets.
One such door is CEPA (Mainland and Hong Kong Closer Economic Partnership Arrangement), which is strongly supported by this Chamber. Since its launch in 2003, CEPA has been expanded through annual Supplements. It continues to be the most liberal free trade pact signed by the Mainland of China. CEPA is important because it gives preferential treatment for Hong Kong goods and services entering the Mainland market.
Over the past decade, over $53 billion worth of Hong Kong products have been exported to the Mainland tariff-free, with tariff savings of more than RMB3.6 billion. We have issued over 2,700 Hong Kong Service Supplier certificates that enable companies to enjoy CEPA advantages.
Last month, I signed Supplement X to CEPA, which included an additional 73 services liberalisation and trade and investment facilitation measures. The new measures will become effective on January 1 next year. So I encourage our enterprises to make the best use of CEPA in tapping the opportunities across the boundary. And please do let us know specifically how you think CEPA implementation can be improved.
We recognise that the full potential of CEPA has yet to be unlocked. Most of the Hong Kong Service Supplier certificates issued so far are related to traditional transport and logistics services sectors. The situation is less pronounced for the professional service sectors such as accounting, insurance, legal and medical services, where our economy has a strong competitive edge.
We have heard the business community's feedback reflecting difficulties or problems encountered in registering or opening businesses across the boundary. There is still ample room to improve CEPA's implementation.
A Joint Working Group under CEPA involving the SAR Government and the Ministry of Commerce has been set up to address these issues. At its first meeting in June, the Joint Working Group discussed at length the implementation issues related to Guangdong. We shall listen to our business community and use the G2G platforms to iron out CEPA implementation issues.
Apart from Mainland China, the economies of other BRICS nations - Russia, India, Brazil and South Africa - have slowed significantly this year. Nevertheless, emerging markets, especially those in Asia, have far higher growth potential as our export destinations than most developed economies. The Government will continue to build ties with the emerging economies, through which we can diversify our export base.
We also look forward to negotiating a free trade agreement (FTA) with ASEAN (Association of Southeast Asian Nations). A Hong Kong-ASEAN FTA will help to strengthen Hong Kong's economic involvement in the region and create opportunities for local investors and entrepreneurs. Recent high-level exchanges between Hong Kong and ASEAN members have been encouraging.
To maintain our competitiveness, we must reinforce our strengths in the four pillar industries of finance, trade and logistics, tourism and professional services. These industries employ nearly half of our workforce and contribute almost 60 per cent of our GDP.
To accommodate our growing tourist numbers and strengthen our role as a modern logistics centre, we shall continue to invest heavily in transport infrastructure. Construction works for the Hong Kong-Zhuhai-Macao Main Bridge and the Hong Kong section of the Express Rail Link connecting to Guangzhou are well under way. On completion of these projects, travel time to neighbouring cities in the Pearl River Delta will be significantly reduced.
The Kai Tak Cruise Terminal began operating this year with the opening of the first of its two berths. We expect that this new facility will bring more high-end visitors to Hong Kong. Meanwhile, Ocean Park has secured a loan from the Finance Committee to begin its New Water World Project at Tai Shue Wan.
On financial services, we have received strong support from the Central Government to develop offshore Renminbi business. Renminbi bond issuance, trade settlement and banking have all made good progress in recent years. Earlier this year, the China Securities Regulatory Commission, the CSRC, relaxed rules for the RMB Qualified Foreign Institutional Investors scheme, the so called RQFII scheme.
In addition, our Securities and Futures Commission is working with the CSRC to study the mutual recognition of funds between Hong Kong and the Mainland. These developments will help create more innovative and diversified Renminbi investment products in our market. At the same time, our market regulators will further strengthen the market infrastructure to facilitate Renminbi business.
Hong Kong is the premier asset management hub in Asia. To seize new opportunities, we plan to extend the profits tax exemption for offshore funds. We recently amended our tax laws to improve the Islamic finance platform in Hong Kong. We also amended Hong Kong's trust law to make the most of the opportunities for trust services and wealth management business in our region.
Our regulators are also encouraging participants to set up a Private Wealth Management Association by the end of this year, to enhance the competency framework and promote training for local practitioners.
I also take this opportunity to encourage you all to share your ideas with the Economic Development Commission and the Financial Services Development Council on how to further strengthen Hong Kong's position as a leading international business and financial centre.
Last, but by no means least, I would like to say a few words on the hot topic of US Federal Reserve's exit strategy from its bond-buying programme and how this may impact Hong Kong.
Allow me to recap some of the recent developments. The Fed began its third round of quantitative easing, or QE3, just a year ago. In June this year, Fed Chairman Ben Bernanke indicated that the asset purchase programmes might be scaled back, with the timing dependent on the country's economic performance.
Uncertainty of the timing, scale and economic impact of the unwinding strategy threw global financial markets into a spin. Emerging markets in particular came under pressure due to a reversal of capital flows.
Last week, the Fed decided to delay tapering, citing that the economic data have not provided adequate support to warrant such a move. While timing of the taper is still unknown, global financial markets have seen notable gyration since May, with emerging markets under particular pressure seeing reversal of capital flows.
We may not be able to accurately predict the impact of the Fed's strategy on Hong Kong. However, several notable trends are clear.
First, interest rates are already very low, and the only realistic way that they can go in future is up. Businesses as well as individuals should take account of this fact before making long-term investment decisions.
Second, the volatility of financial markets is likely to persist after the Fed tapers asset purchases. The course for normalising the Fed's policy is likely to be long and complex.
The third trend is increasing downward pressure on currencies of countries which have large deficits in their government budgets as well as their current accounts. This underscores the importance of fiscal prudence in safeguarding monetary and exchange rate stability.
Asian and emerging economies, including Hong Kong, will be susceptible to shifts in direction of US monetary policy. Expectations of reduced asset purchases by the Fed have led to a reversal of capital flows in some emerging markets. We have also seen increased interest rate risks faced by investors and significant asset market fluctuations around the world.
All indications are that Hong Kong's financial sector is in good shape with adequate liquidity, a high level of confidence and a robust regulatory environment.
Our financial system is capable of handling the massive capital flows, both in and out. Our regulators have implemented various prudential measures to mitigate systemic risks and keep the financial system strong. They have also been administering stress tests under severe scenarios, and requiring necessary adjustments.
Both supply-side and demand-side measures have been successfully implemented to contain the housing market bubble risks and to ensure the sector's healthy and stable development.
Ladies and gentlemen, the external economic environment is brighter than it was this time last year. However, considerable uncertainty remains in the financial markets. The protracted weakness of advanced economies continues to be a major concern. The shift in US monetary policy presents fresh challenges. Against this backdrop, it is particularly important for Hong Kong to make the most of its strengths as the world's freest economy on the doorstep of Mainland China with strong global connectivity.
From the Government's perspective, it is too early to let down our guard. We shall stay vigilant and roll out additional measures to safeguard Hong Kong's macroeconomic and financial stability, if and when required.
We look to you, captains of our industries, our business leaders, for ideas and support in the months ahead.
Thank you very much.
Ends/Wednesday, September 25, 2013
Issued at HKT 20:05
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