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Speech by FS at Heritage Foundation Dinner in Washington, DC (English only)(with photo)

     Following is the speech by the Financial Secretary, Mr John C Tsang, at the Heritage Foundation Dinner in Washington, DC, yesterday (October 8, Eastern Standard Time):

Ed (Dr Edwin Feulner), ladies and gentlemen,

     Good evening.

     It is my great pleasure to join you all this evening. First of all, I wish to pay tribute to Ed and the Heritage Foundation for your unparalleled contribution to economic freedom. This is an opportune moment for the Financial Secretary of Hong Kong to thank you on behalf of the people and businesses of Hong Kong for championing Hong Kong as the model of economic freedom for the past two decades.

     Economic freedom has made Hong Kong what it is today. It is the key to sustaining Hong Kong's economic strength and competitiveness. This is particularly relevant in the new century, which has ushered in an even greater degree of interdependence among global economies.

     As a small and open economy, Hong Kong relies hugely on international trade, and is naturally susceptible to external shocks. Remaining true to our firm belief in free market philosophy has guided us through more than a few global crises over the recent decades. Our free-market philosophy allows for the free play of market forces and ensures speedy and efficient adjustments in our economy.

     The Heritage Foundation's four aspects of economic freedom - the rule of law, limited government, free and open markets and regulatory efficiency - align perfectly with Hong Kong's free-market principles. Indeed, these very principles have proved to be the cornerstones of our economic stability, growth and prosperity.

     Let me share with you how these four principles contribute to the enhancement of Hong Kong's market economy and our transformation into a world-class city for businesses. I know I am preaching to the converted, but truth is worth repeating and reinforcing.

     First, the rule of law. We take pride in the fact that this single-most-important tradition is firmly established in Hong Kong. The rights and freedoms of individuals, businesses and organisations are explicitly protected and guaranteed in our constitutional document, the Basic Law.

     Judicial independence is also guaranteed in the Basic Law. We even go the extra mile and invite senior judges of other common law jurisdictions to sit on our Court of Final Appeal in making judgments on cases.

     The rule of law is not only enshrined in the Basic Law and embraced by the entire community, but also fearlessly guarded by our vocal, critical and unfettered media. Our journalists are never too shy to articulate their concerns that the rule of law may somehow be hampered. They would rather ring a false alarm than let any slight indication go unnoticed.

     We take a zero tolerance approach towards corruption. Institutional and systemic corruption has been wiped out since the mid-1970s, when our Independent Commission Against Corruption, the ICAC, was established. Then, as now, its mandate is to pursue every single corruption case impartially, without fear or favour.

     In our latest annual survey on combating bribery and corruption, just 1.2 per cent of respondents said they had experienced corruption in the past year. This proportion is very low, even among advanced economies.

     Property rights are well protected in Hong Kong. So are intellectual property rights. This was achieved after several waves of large-scale law-enforcement and extensive public education. I can vouch for that. As the former head of the Customs department, I was responsible for at least a couple of those waves. And there's more to come. We are also updating and refining our copyright regime to stay abreast of technological development and enhance protection in the digital environment.

     Second, limited government. Hong Kong has a simple tax system built on low tax rates. Our maximum salaries tax rate is 15 per cent and the profits tax rate a flat 16.5 per cent. Few companies and individuals would find it worth the risk to evade taxes at this low level. And that helps keep our compliance and enforcement costs low.

     Keeping our government small is at the heart of our fiscal principles. Leaving most of the community's income and wealth in the hands of individuals and businesses gives the private sector greater flexibility and efficiency in making investment decisions and optimises the returns for the community. This helps to foster a business environment conducive to growth and competitiveness. It also encourages productivity and labour participation.

     Our annual recurrent government expenditure has remained steady over the past five years, at 13 per cent of GDP. There have been comments in recent years that, given such a low level of expenditure, the Government has not paid enough attention to the plight of the poor in Hong Kong. That is not true, and we have not responded irresponsibly to these populist calls by introducing social policies that increase government spending disproportionally. We have instead implemented sensible measures that provide employment opportunities for the working population and a safety net to help only the really needy.

     The fact that our total government expenditure on social welfare has remained at less than 3 per cent of our GDP over the past five years speaks volumes about the precision, as well as the effectiveness, of these measures.

     The modest rise in government expenditure in recent years has largely been related to infrastructure investment and non-recurrent stimulus packages. Infrastructure spending on roads, bridges, schools and hospitals serves to enhance Hong Kong's capacity for future economic growth. The stimulus packages are counter-cyclical measures. They have protected jobs and boosted our domestic economy during the recent global financial crises.

     Our commitment to small government demands strong fiscal discipline. Fiscal prudence, one of the core principles enshrined in the Basic Law, requires us to keep expenditure within the limits of revenue. It is my responsibility to keep expenditure growth commensurate with growth in our GDP.

     I have been fortunate to return surpluses every single year since I became Financial Secretary seven years ago. This has enabled us to accumulate a respectable level of fiscal reserves, equivalent to 21 months of government spending. That, in turn, has provided Government with the necessary resources to create favourable conditions for economic development. It has also allowed us to assist companies and people in need, especially when our economy has faced downside risks.

     We remain virtually debt-free. Government debt is only 0.5 per cent of GDP, and that is something of my own making. I set up a Government Bond Fund in 2009 to issue bonds, not for the purpose of raising cash to make our ends meet, but to help build our bond market, which, I feel, should become a more developed component of our financial services industry. The fund also helps introduce innovative products. Last month, for example, we issued the first US dollar-denominated sukuk originated by a triple A-rated government. The sukuk recorded an over-subscription of 4.7 times and was allocated to some 120 global institutional investors around the world, with 10 per cent going to American institutions.

     We do not spend the money raised in the Bond Fund. The proceeds of our bond issues go directly to our investment portfolio, rather than the expenditure account. To date, it has generated handsome financial returns after interest payments.

     Our fiscal position is strong, but we want to make it kryptonite-proof, so to speak. Last year, I set up a Working Group on Long-term Fiscal Planning to conduct a fiscal sustainability health check. We did it because we are keenly aware of Hong Kong's low fertility rate and ageing population, not unlike many advanced economies. And that can pose challenges to public finance in the longer term.

     A series of expenditure-control measures, including a 2 per cent efficiency enhancement over the next three financial years, has been rolled out. All government departments are now reviewing their policy priorities and streamlining their work processes, while ensuring effective and efficient delivery of public services.

     I would hope that some of those governments in Europe, those that have accused Hong Kong of being a tax haven, would look at the way they conduct their own fiscal policies. I believe they could learn a lesson from us about the virtues of small government.

     Third, free and open market. Hong Kong is a staunch supporter of free trade, open markets and competition. We are firmly committed to the free flow of goods, capital, information and talent. After all, it has helped make Hong Kong a leading global trade, business and services hub, with business connections worldwide. Some 7,500 overseas companies operate in Hong Kong, including some 4,000 regional headquarters and offices.

     We are a free port and we have a zero-tariff regime. We welcome foreign service providers in all sectors. In fact, some of our trading partners find it unnecessary to have a free-trade agreement with us, simply because they already have free access to our market.

     We do not think that's a good reason not to negotiate a free-trade agreement with us, but we do not regret maintaining a free-trade regime. In fact, we are the biggest beneficiary of this free and open market policy. Just to remind you of a few facts:

* our trade in goods and services makes up about four times our GDP;

* our airport is the world's busiest air-cargo hub, and our port is among the top five in cargo throughput;

* Hong Kong is world's fourth largest recipient of FDI, after the three giant economies of the United States, Mainland China and Russia; and

* Our zero wine duty, which I introduced in 2008, has made Hong Kong the wine-distribution centre of our region and the world's wine auction capital.

     We provide a secure and predictable environment and a level-playing field for all businesses. We do not offer concessions to attract preferred companies to Hong Kong. All companies, local or foreign, big or small, are treated equally. This is a real level playing field, unlike other so-called free markets.

     In fact, we have a clear nationality-neutral policy. Foreign firms, like their local counterparts, are qualified to enjoy the same benefits provided under all our trade agreements with other economies. For example, service providers, regardless of their origin, may take advantage of CEPA, our free trade agreement with the Mainland, to gain access to the Chinese market.

     In addition, it is a long-standing policy of the Hong Kong Government not to engage in services that the private sector can provide. Unlike many other economies, our bus services, ferry services, airlines, power plants, oil and gas supply, telecommunications services and other services are owned and operated by private companies. This avoids unfair competition between the Government and the private sector, and enables the private sector to make more efficient use of the limited resources available in the community.

     And finally, the fourth principle: regulatory efficiency. Hong Kong is well known for its business-friendly environment. Indeed, we remain the second easiest place in the world to do business, according to the World Bank.

     Our Statutory Minimum Wage came into effect in May 2011. It is the equivalent of about US$3.8 per hour. The minimum wage has been carefully determined. So far, it has successfully forestalled excessively low wages and maintained labour market flexibility, two apparently conflicting objectives. Low-income earners have received substantial pay rises. Companies continue to do well. But we are mindful that the long-term effect, particularly during economic contractions, has yet to be observed. And we will remain vigilant when adjusting the minimum wage in future.

     Ladies and gentlemen, the Hong Kong Government fully embraces a market economy. And we will continue to rely on market forces in running our economy, because it works, certainly for us. Our per capita GDP has doubled in the last two decades, and we are now a leading global business hub and one of the world's major financial centres.

     Our economic success over the years owes much to our resolute commitment to openness, transparency and free-market values.

     And our consistent ranking in the Heritage Foundation's Index of Economic Freedom and other equally credible rankings in economic freedom is a strong motivation for us to continue doing what we do best: upholding the rule of law, maintaining a small government, embracing a free and open market, and enhancing business efficiency.

     Staying true to our principles will continue to reward the people and the businesses of Hong Kong. As for the Government of Hong Kong, we are content to stay on the sideline, to allow market forces to work their magic. We trust that this is enough to keep us in the good books of the Heritage Foundation.

     Ladies and gentlemen, I would like to end my speech this evening with a candid statement on the recent protests in Hong Kong. The protests are concerned with the Chief Executive election in 2017. The Government is fully cognisant of the protesters' wishes. I should add, however, that a sizeable segment of the community holds different views. We will do our best to build consensus between our divided community. It is not an easy task, but it is something that has to be done.

     It is unfortunate that the protests have resulted in serious confrontations not seen in Hong Kong in the last 50 years. Some people were injured. Fortunately, no one suffered serious harm. No broken windows, no scratches on vehicles, no looting. And that's typical of Hong Kong. It speaks of the civility and decency of Hong Kong. After all, both the police officers and the protesters are Hong Kong people. And they share the core values that we all cherish.

     Most of the protesters have now left, and the Government has made engagement with student representatives. Meanwhile, the markets are operating smoothly and we have not encountered any difficulty in our trading activities. Life has returned to normality. On that note, thank you.

Ends/Thursday, October 9, 2014
Issued at HKT 16:03


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