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Hong Kong's Silver Lining

After weathering unprecedented economic storms, Hong Kong can now look forward to rebuilding its fortunes, says TUNG CHEE-HWA

Following is the abridged speech by the Chief Executive, Tung Chee-hwa, at the Joint Business Community Post-Policy Address Luncheon on January 12.

As I looked at Hong Kong's economic performance over the last few years, and the forecasts for the period ahead, I was struck by two things, the unprecedented scale of the economic storms we have had just weathered, and the enormous opportunities that lie ahead to rebuild our fortunes. We have gone through great pain, but we have now laid the foundation for unprecedented gain.

To understand the seriousness of the situation we faced, our GDP deflator has fallen 21 percent in the last five years. To find comparable figures, we will have to go back to the time of the Great Depression in the United States of America when the GDP deflator had fallen 26.7 percent in the four-year period between 1929 and 1933. In Hong Kong, we had indeed faced enormous difficulties. But our people persevered in face of these difficulties and our financial market and banking system stood the test of stress and strain imposed by the economic downturn. Indeed, what has happened in Hong Kong speaks of the tremendous resilience and strength of our society and its institutions that we have withstood such a storm without leading to political, social and economic breakdown.

Throughout this period of time, in addition to the dealing of the constant challenges facing us every day, we also frequently and carefully evaluated the challenges and opportunities posed by the changes on the Mainland and indeed around the world. Should we delink our currency? The answer has constantly been a resounding No! What are our own competitive strengths and weaknesses and what are those of our competitors? How can we emerge from the restructuring and be more successful than at any time in our history? One thing is clear -- we have benefited greatly from the rapid and orderly development of the Chinese economy, an economy which in the year 2003 continued to be the largest recipient of foreign direct investment in the world, the fourth largest trading nation in the world as well as potentially one of the largest consumer markets in the world. China has also become the largest and most efficient manufacturing base in the world.

It was clear that Hong Kong's future depends on ensuring access to the Mainland market for our businesses and our professionals, and on building on our capacities to service the trade and investment needs of the Mainland. An FTA-type agreement between Hong Kong and the Mainland, subsequently named CEPA ("Closer Economic Partnership Arrangement"), would be a tremendous benefit to us. It was also clear that while ensuring greater access to the Mainland market, we also needed to work with our colleagues in the Guangdong Provincial Government to ensure that we would be a major player in the growth of the Pearl River Delta. It was important for Hong Kong's future to arrive at a broad understanding on co-operation between the respective governments to ensure that our economic strategies did not work at cross purposes. Similarly, we realised for Hong Kong to sustain its position as Asia's leading financial centre, we must, in the long run, be an offshore RMB centre. Allowing our banks to do RMB business would be a good start.

Therefore, throughout the last few years, we were exploring with the Central Government as to how Hong Kong's competitive advantages can best be leveraged and how Central Government can help us to eventually emerge from our economic restructuring. These discussions accelerated in 2002 and came into fruition during 2003 with the signing of CEPA on June 29, 2003 here in Hong Kong.

We have indeed gone through a prolonged period of difficulties. But, in every cloud there is of course a silver lining. The economic difficulties that Hong Kong faced were severe, but they did lead to the bursting of an unsustainable bubble. High costs and inefficiencies had crept into our economy during the long boom that we enjoyed. In the decade of the 1990s, we were perhaps no longer the lean, efficient economy that we were in the decades before. I believe that, over these last few years, a lot of excess fat has been burned, and we are today once again on our way to becoming an extremely competitive and dynamic economy. Deflation has been painful, but it has brought down the cost of doing business here. Our currency peg with the US dollar has proven to be a hard economic taskmaster. But with the US dollar weakening, we are reaping the benefits.

At the same time, agreement with the Central Government on CEPA, agreements with the Guangdong Provincial Government and the Shanghai City Government on closer collaboration created enormous confidence in Hong Kong and enormous interests both on the Mainland and overseas. A scheme to allow individuals from the Mainland to travel to Hong Kong has instantly injected new life into our economy. Global economic recovery is also working in our favour. Property prices have stabilised and are edging up. Deflation is also easing. Indeed since SARS, we are in V-shape recovery. Prospects of this year and next year are encouraging indeed.

Although the prospects are better, we must generally look for dangers both internally and externally that may hit us again. Deflation and the fiscal deficits are internal issues that need to be resolved. Externally, globalisation may bring sudden and unpredictable fluctuations in areas such as shocks to financial markets, new diseases and epidemics, and international terrorism. Geopolitics and international conflicts could also affect us directly. These are of course challenges to overcome when they happen. In many cases, we are not in control of the situation. But, nevertheless, we must be on guard at all times.

In general, I am optimistic of our medium to long-term future. We have overcome economic difficulties of unprecedented scale and although economic restructuring may continue for some time, we have laid down the foundation to rebuild our fortune. Indeed, by 2020, the size of the Chinese economy will be quadruple and reach US$4 trillion. Obviously, given Hong Kong's special position, Hong Kong will benefit greatly from the continued expansion of the Chinese economy. Our long-term prospect is bright so long as we work hard to capitalise on the opportunities that lie before us.

What are the major tasks of the government over the next 12 to 18 months? First, of course, to ensure the smooth implementation of CEPA, so that the full benefit of CEPA can be felt by our businesses and professionals. Second is to consolidate our core activities in areas of financial services, logistics, tourism and trade and trade-related support services. Third is to encourage new areas of economic activity. On this front, it is for our business sector to lead the way and as a government, I can assure you, we would do the best to support you with necessary policies. We will also continue to support medium and small enterprises and the work of our professionals.

We will obviously need to tackle deflation and the budget deficits. On the deflation front, I am happy to note that the picking up of economic activity is helping deflation to ease. And there are reasons to believe that the prolonged period of deflation will end in the next 12 to 18 months. Budget deficits need to be dealt with too. The Financial Secretary has rightly announced the delay to the fiscal year of 2008 - 2009 to balance the budget. I have every confidence we will be able to do so. Given the pick up of the economy, we will also have the opportunity to find the right balance between the need to reduce budget deficit on the one hand and to safeguard people's livelihoods and the momentum of the economic recovery on the other.

One of our major tasks is to stay in close touch with our community and to improve our government's governance. We will work towards enhancing the accountability system, improving our policy-making capability and better grasp the public sentiment. We will strengthen advisory and statutory bodies so that they can truly participate in the process of policy making and in monitoring policy implementation. A legislature which monitors the work of the government is a cornerstone of effective governance. We will continue to work closely with the legislature. We will also enhance the work in the 18 districts to ensure that we can promptly and properly respond to the many needs of the local community.

We understand the concern of the community over our future constitutional development and the importance of the constitutional review. The government of Hong Kong has always attached great importance to the matter, and has consistently taken the position that we will be taking the matter forward in full accordance with the Basic Law. I have also been asked by the Central Government that before the beginning of the constitutional review, the Central Government needs to be consulted. There are issues of principle as well as legal issues that need to be clarified. I have decided to establish a Task Force, headed by the Chief Secretary for Administration with members including the Secretary for Justice and the Secretary for Constitutional Affairs to seriously examine these issues, particularly those concerning the understanding of the relevant provisions of the Basic Law, and to consult relevant authorities of the Central Government. The government will also encourage all sectors of the community in Hong Kong to continue considering these issues and expressing their views. We hope relevant arrangements may be made as soon as possible.

I want to sum up my talk today by sharing with you the conversation I had with Aman Mehta, the former CEO of HSBC Hong Kong who retired recently and is planning to go back to Delhi. He told me that he travelled extensively all around the world and almost weekly within Asia. He told me that every time he came back to Hong Kong, he felt good. Why? In Hong Kong everything works. Public service is effective; the government is corruption-free. The city is safe, law and order is upheld and after SARS, Hong Kong has become much cleaner. He thought Hong Kong can become a centre of attraction for people from the Mainland. He also saw there are some 60-70 million overseas Chinese and for some Hong Kong can become an alternative home base. They will find it comfortable to visit and live in Hong Kong because of the environment, the food, the low taxes, etc. It is chats like this that give us the encouragement and it is chats like this help us in setting our directions.

If you look around, of all the cities in Asia, Hong Kong does have the best opportunities to continue to be the world city of Asia. Indeed, I would say it is for Hong Kong to lose it and that I know it would not happen because we would all be working very hard for it. Business sector is the best catalyst for us to continue to stay ahead.

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