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Speech by FS at Lion Rock Institute: Economic Freedom of the World Annual Dinner (English Only) (with photos/video)

     Following is the speech delivered by the Financial Secretary, Mr John C Tsang, at the Lion Rock Institute: Economic Freedom of the World Annual Dinner this evening (October 17):

Bill (William Stacey), distinguished guests, ladies and gentlemen,

     Good evening.

     I am indeed pleased to join you all this evening at the Lion Rock Institute Economic Freedom of the World Annual Dinner. It is also an honour for me to welcome Fred McMahon from the Fraser Institute back to Hong Kong. The release of the annual Economic Freedom of the World Report is keenly anticipated by our government, by our business sector and by observers around the world.

     It was in 1990 that Nobel Prize-winning economist Milton Friedman wrote that Hong Kong was perhaps the best example of a free market economy. Almost a quarter of a century later, Hong Kong is still the best place to witness the power of the free market at work, and the free market principles continue to be the centrepiece of Hong Kong's remarkable development.

     As Hong Kong and the world around us evolve, we are continuing to refine our own brand of economic model.

     The trend of globalisation and the recent global financial crisis have had a profound impact on the way the economic world now operates. Despite all these trends and unprecedented circumstances, remaining true to our economic principles has not only helped us overcome the many challenges that have arisen, but also enabled us to grasp the opportunities that come our way.

     Economic freedom has long been the cornerstone of Hong Kong's stability, our growth as well as our prosperity. Market-led reforms have steered the city's transformation from a sleepy fishing village into a manufacturing centre, and in recent years, into an international financial centre as well as service hub. The same forces of supply and demand are now driving Hong Kong towards a knowledge-based economy that focuses on creativity, innovation and technology, while making sure that the quality of our labour force keeps up with our pace of development.

     For free markets to operate efficiently, it is important to staunchly uphold the rule of law, maintain a low and simple tax system, and encourage fair competition. These three elements are crucial for the effective functioning of our market economy. Let me take a few minutes to explain how these three elements contribute to the efficient operation of the market in Hong Kong.

     First, the rule of law. We have a long and proud tradition of the rule of law in Hong Kong, and we are continuing to uphold the rule of law based on tried and trusted common law principles. Our community is law-abiding. Our business community respects contracts and honours promises. Since reunification in 1997, we have added a constitutional layer to our legal framework. Today, our economic freedom is not just an unwritten tradition; instead, our rights and freedoms are explicitly protected and guaranteed in our constitutional document, the Basic Law.

     Well-protected private property rights, together with an independent judiciary, encourage enterprise, provide predictability and facilitate long-term planning. The unrestricted flow of capital allows funds to be channeled for maximum return, and fosters greater efficiency in the allocation of resources. Free flows of information, of ideas and talent provide an environment that nurtures innovation.

     Second, the Hong Kong model of low and simple taxes has produced a business environment that promotes commerce, innovation, growth and development. Individuals and companies can focus on enhancing productivity, secure in the knowledge that they will be able to enjoy the maximum fruits of their own labour.

     A successful low-tax model is only possible with prudent fiscal management. Over the years, we have kept public spending at a historical average of around one-fifth of our GDP. This means that 80 per cent of our community's wealth is in the hands of individuals and companies and they are often more efficient and more capable of creating better value. This four-to-one private-to-public allocation ratio has enabled Hong Kong to make the best use of our limited resources. In so doing, we maximise productivity and maintain a functional and responsive public administration.

     Third, competition is indeed the fundamental basis of a market economy, without which the supply and demand curves would not even cross. Competition is also a crucial element of Hong Kong's DNA. In Cantonese we have a saying "No competition, no improvement". To Hong Kong people, competition is the driving force to excel. It also supports a process of "natural selection" that makes us stronger and more adaptive to the changing external environment.

     We compete not only through our own companies, but also by providing a level playing field for all businesses. Local and overseas companies compete side-by-side in Hong Kong. For example, foreign companies incorporated in Hong Kong and their local counterparts are treated equally under our cross-boundary free trade agreement CEPA (Mainland and Hong Kong Closer Economic Partnership Agreement). They have equal opportunities under CEPA to access markets in the world's fastest growing large economy. Also, banks registered in Hong Kong, regardless of nationality, have equal access to our efficient Real Time Gross Settlement system, which allows them to compete for offshore Renminbi business on a level footing.

     Hong Kong's rule of law, our simple and low tax regime and fair competition environment have made Hong Kong a preferred destination for foreign investment. In 2012, Hong Kong was the third largest recipient of foreign direct investment in the world after only the United States and Mainland China.

     As an international financial centre, we rank third behind London and New York in the Global Financial Centres Index. The World Bank ranks Hong Kong as the world's second easiest place to do business. Our merchandise trade in 2012 was more than four times our GDP. Our per capita GDP has reached US$ 37,000 per annum, ranking seventh in the world according to IMF measure based on purchasing power parity.

     All this reflects the power of the free market in a small city with few natural resources.

     Free market principles have served Hong Kong well in the past and will continue to do so in future. We are keenly aware of concerns, even criticisms, that some decisions made by the Hong Kong Government in recent years appear to deviate from our much-cherished free market principles.

     Allow me to give you an account of some of these decisions. And let's all be clear upfront that Hong Kong is a pragmatic practitioner of free market economics, and not a purist of the orthodox school which believes in the absolute omnipotence of the market. But markets do fail from time to time, and when they do, it is the Government's responsibility to step in. Some people believe that simply by having a government, there is already too much intervention in the market.? I don't believe there is a functioning economy anywhere that can operate without some degree of government involvement.

     Market forces alone often don't channel investments into public goods and services that do not maximise returns. Market forces alone will not favour investments, such as physical infrastructure projects which require huge upfront capital with uncertain payback. Yet, these are often essential investments that require the Government to step in.

     After years of active fiscal intervention to improve the capacity of Hong Kong and to enhance the livelihood of our people, total government expenditure in 2013-14 is some 80 per cent higher than the actual expenditure in 2007-08 when I first became Financial Secretary. That is equivalent to an average increment of 11 per cent or nearly 35 billion per annum. There are criticisms from pro-market commentators, some of whom are here today, that we have departed from fiscal prudence; that we are over expanding the Government's footprint in economic activities.

     This is not really the case. We have not been overspending. We have been fortunate enough to generate adequate additional revenue in recent years to meet the increasing needs of the community while maintaining expenditure at around 20 per cent of our GDP.

     We have been living well within our means and allocating resources to where they are needed most, and in the most effective manner.

     For example, we are helping businesses to help themselves through difficult times. SMEs are the backbone of Hong Kong's economy. They have been especially hard hit by the recent global recession. In May last year, we introduced the SME Financing Guarantee Scheme. So far, 7 600 applications have been approved with a total amount of loans over $32 billion.

     In my Budget in February, I extended the application period for the Scheme for another year. This measure was among a basket of Budget initiatives that carry a stimulus effect of about 1.3 percentage points. This stimulus has helped us maintain a low unemployment rate, currently at 3.3 per cent, amid the gloomy external environment.

     We have re-doubled our commitment in the last few years to investing in infrastructural development to facilitate our city's future growth and future prosperity. The estimated expenditure on capital works will exceed $70 billion during the current fiscal year, which is more than triple the amount for 2007-08.

     Major projects include the 29 kilometres Hong Kong-Zhuhai-Macao Bridge, the expansion of railway networks as well as the Kai Tak Development project. Each of these infrastructure projects brings multiplying effects in creating jobs, promoting efficiency and strengthening connectivity with key markets.

     We are also spending $10 billion to help phase out high-polluting pre-Euro IV commercial diesel vehicles. This initiative, together with other clean-air measures, will substantially help reduce roadside pollution in our central business district and, in turn, help us attract and retain hopefully high quality talent from Hong Kong and overseas.

     With lessons reinforced by the recent debt crisis in advanced economies, and in light of a shrinking workforce due to an ageing population, maintaining fiscal prudence is more important today than ever. As a caring society, while we see the need to provide the necessary assistance to the less fortunate members of our community, maintaining economic efficiency and ensuring fiscal sustainability will continue to be the overriding guiding principle of our economic strategy.

     There are also occasions when market forces alone are inadequate to maintain market equilibrium, and government intervention is appropriate.

     Our property market has been at the eye of a perfect economic storm in recent years. Ultra-low interest rates and plentiful liquidity coupled with tight supply and strong demand have combined to send local property prices on an almost uninterrupted uptrend in the past few years. Market forces alone had not been effective in increasing supply and curtailing demand because of the lag in supply of new flats and the general demand-side expectation that prices will continue to rise.

     Overall flat prices in August this year were 135 per cent above the trough in late 2008 and have exceeded their 1997 peak by 42 per cent. The home purchase affordability mortgage-to-income ratio worsened to 56 per cent in the second quarter of 2013. That far exceeds the long term average of 48 per cent over the past two decades. If interest rates were to rise by three percentage points to a more normal level, the ratio would soar to 72 per cent.

     Past experience has highlighted how wild fluctuations in property prices could have significant ramifications for our city's macroeconomic and financial stability.

     While the Government is releasing more land for homes, it will take some time to have a substantive impact on the market. To cope with the immediate market distortions and avoid the formation of a property bubble, the Government has taken steps to manage demand and reduce the possible risks to financial stability arising from an over exuberant property market.

     After three rounds of demand-side management measures since 2010 and six rounds of macro-prudential measures since 2009, the property market is finally showing signs of stabilising since early this year. Transactions have cooled, market sentiment has begun to reverse, and there is now a greater expectation for a general price correction in the market.

     Unfortunately, uncertainties remain, including the US Federal Reserve's pace of tapering its bond-buying programme and the movement of hot money. This could have a significant impact on global asset prices, including flat prices here in Hong Kong. We must remain alert.

     I want to emphasise that these multiple rounds of counter-cyclical initiatives are extraordinary measures during extraordinary times. They have been imposed to cope with market failures, and by no means represent a departure from our firm commitment to free market principles. They are not permanent features. They will be withdrawn once the property market becomes stable and healthy again. But, they must become law first. I would urge our legislators to facilitate early passage of these bills.

     My final topic today is the Statutory Minimum Wage (SMW) introduced in May 2011.

     Legislating for a minimum wage is an important policy initiative of the previous Government to protect low-income workers in vulnerable sectors.

     In introducing the SMW, we took into account the need to maintain flexibility in adjusting wages and prices in response to adverse economic shocks. Our SMW regime provides a wage floor to forestall excessively low wages, while not unduly affecting Hong Kong's labour market flexibility and economic competitiveness.

     The results so far have been encouraging: low-income families have seen a significant increase in their wages, businesses continue to do well, and our job market continues to operate at full employment. We are mindful that the long-term effect has yet to be observed and the performance in periods of economic contraction remains untested.

     The implementation of the SMW does not represent a shift in policy direction at all. Economic freedom is the cornerstone of Hong Kong's competitiveness, and we continue to cherish the attributes of a market economy.

     Ladies and gentlemen, thank you so much for this opportunity for me to talk about some of the challenges that our city is facing, and how our commitment to maintaining a free and open market has helped to keep Hong Kong on its toes and on top of its game.

     We are committed to embracing fair competition, we are committed to strengthening our business-friendly market mechanism and upholding the rule of law in sharpening our competitiveness.

     Hong Kong's number one ranking by the Fraser Institute in its Economic Freedom of the World Report is strong motivation for us to further open up our markets and demonstrate to our trading partners and to the rest of the world that a free economy is the way of the future.

     Thank you very much.

Ends/Thursday, October 17, 2013
Issued at HKT 21:47


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