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Hong Kong Business Summit '99
"Hong Kong, China: Into the Next Millennium"

December 2, 1999

Speech by K K Yeung on Hong Kong's "SMEs"

In the past two years, the regional financial turmoil has caused substantial disturbance to Hong Kong's economy. The survival of SMEs was never before so threatened. They faced prolonged problems on financing, not to mention their pressing need to upgrade the technology in use in order to cope with the ever-advancing development in electronic media. There are other problems, i.e. the declining role of the middlemen, and the enhanced competition from surrounding countries which have devalued their currencies. The casualties can be reflected in the rising number of bankruptcies and winding up cases. In addition, there may be a large number of SMEs who just fall short of insolvency but are still struggling to survive, with reduced credit facilities and order books.

Despite this, there are, in March 1999, still 280,775 (98.37%) SMEs establishments amongst the 285,004 businesses in Hong Kong. SMEs continue to account for about 63% of Hong Kong's GDP and employ about 60% of the total workforce in Hong Kong.

Most SMEs start with very limited equity capital and hence very thin collateral could be offered to banks. Accordingly, most of their borrowing has to come from short term loans which they have to use to finance long term needs such as capital equipment. The regional turmoil and the fall in the value of collateral have created a liquidity problem for SMEs. The Government has somewhat helped to alleviate the difficulties when it offered its HK$2.5 billion loan scheme to SMEs. This has certainly helped to ease the temporary shortage of working capital. However, the lack of long-term money remains unaddressed.

Traditionally, SMEs are mostly founded by employees-turned-employers who, having obtained good experience of a trade, decided to set up their own businesses. They have to rely on specialised support, such as accounting, financial management, IT, legal etc, which knowledge they did not acquire in their past work. However, SMEs have limited resources to engage management consultants and other professionals for help, not like major operators who either can take on these specialists in-house, or pay a price to obtain their service from the outside.

The recent signs of recovery of Hong Kong's economy shed some hope on better time to come for the SMEs. The SMEs in better shape will have an opportunity to invest in the low period. They can look forward to a gradual resurgence of their business, possibly supported by a moderate increase, or at least, a stabilisation, of the value of collaterals with banks who, hopefully, will relax the presently very tight credit policy.

The SME Committee of the Chamber has worked strenuously in the past two years, to explain the plight of the SMEs to the banking sector.

We at the Chamber believe that SMEs, coming out of the recent regional financial crisis with hard lessons learned, will have new and interesting opportunities ahead.

Firstly, SMEs should be able to expand their business in an increasingly affluent mainland market. Also, the overseas markets in the developed countries, like US and Europe, all register continued economic advancement and as such, SMEs should regain the benefit from these traditional but important export venues.

Another opportunity will arise from the celebrated completion of the negotiations between the US and China over the latter's entry to the WTO. SMEs will have an open, less costly, and level playing field to enter the mainland market. As major multinational enterprises set up more operations in the China market place, SMEs who are traditionally capable and efficient to offer sub-contracting services with their vast mainland-linked experience, are bound to gain.

An opportunity will also arise from an improving regional economy. Although the regional territories still have an edge on export performance because of their devalued currencies, this will increase their shopping demand for supply services from Hong Kong. SMEs will therefore be able to look forward to an increase in their South East Asia order books.

Through cooperation between Government and business, the cost of doing business has come down and stabilised at the present level. This has more than compensated for the relatively higher Hong Kong dollar value. This favourable position is gaining momentum as more global buying missions, especially those for garment and toys, re-visit Hong Kong. On the other hand, with an emphasis on the good quality of SMEs output, the SMEs also look forward to re-gaining orders from the surrounding economies.

Although the lack of long-term capital financing remains a difficult issue for SMEs until more direct investment agencies are interested in Hong Kong's SMEs, the emergence of the growth enterprise market (GEM) in Hong Kong will help those SMEs which are in the upper-size bracket.

In general, Hong Kong SMEs have weathered the storm and survived reasonably well through the turmoil, and will grow from strength to strength in the millennium and into the next decade.

Thank you for your attention.