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Q&A Session with the General Committee Panel

Members threw a wide range of questions at General Committee members on this year's business summit discussion panel. Following are excerpts from that question and answer session, which have been edited for length and clarity.

Question: Next year is going to be quite a political year for Hong Kong. Can you comment on the lack of a party that can represent the middle-class in Hong Kong?

James Tien: I see the problems that the middle-class is facing. They are commenting about taxes, about government policies which do not benefit them directly, negative assets, business prospects ... but I think CEPA, which the Chamber pushed the government for, will have a positive impact and help ease some of these concerns. What I am more concerned about is the overall consultation process, in that if the government does start political reform, will we be able to complete the consultation process in time? I think the consultation process will be very important. But if the government tries to do it in just six months, I am concerned that we will not be able to come out with the proper consensus and the people will again be split.

On the point of universal suffrage for our Chief Executive, I encourage the public to speak out more. I receive a lot of input from the public and members of the Chamber which I put forward to Legco.  But a lot of things that we need to do in Hong Kong are really about political will, and the business community has to raise its voice to push for what it feels is for the benefit of Hong Kong.

Q: The Chief Executive said we need to do more to develop an asset management business here in Hong Kong to serve as a financial centre for the rest of Asia. Compared to Singapore, which has done a lot to support the sector there, in your opinion, what should the government be doing to facilitate this?

David Eldon: There have been some changes that have been made here which are beneficial to asset management in Hong Kong. I don't think we are at a disadvantage to Singapore at the present time. Neither would I agree they are the second financial centre in Asia -- I think Hong Kong is. But there are always things that we would like to see happen, and we encourage any changes that could still be made to take place to facilitate that business here.

Q: How can we manage the risk of ever increasing GST rates, as has happened in other countries, if the system is introduced? Secondly, how about administrative costs? I understand that at least 1-2 percent of the rate will be used up in administration costs, so is it worth it?

Anthony Nightingale: First, on the point about the slippery slope to higher rates, for every time we talk about the need to broaden the tax base, we talk twice as much about the need to cut government expenditure. Of course that is the key. If we can keep government expenditure under control, then we would only need a GST at a modest rate to balance the books, and in our minds that modest rate means about 3 percent.

What happened in a lot of countries that introduced GST is that they had high corporate and income taxes, and they wanted to bring those down. This wasn't just a matter of balancing the books, they also wanted to broaden the tax base by making it a more secure and fair source of revenue. In Hong Kong, we already have, by world standards, low income and corporation taxes. But the risk is if we don't broaden our tax base, by something like a GST, we will see higher income and corporation taxes, and we all feel that is very negative for businesses in the long term.

On the second point, what is generally quoted as a yardstick in administrative costs would be 1-2 percent of the "total amount of tax collected," not 1-2 percent out of each 3 percent. At least as far as I understand it, and based on what the Chamber's Chief Economist has told me, it is a very efficient way of collecting taxes. There is one other benefit, and that the collection is done by the companies that have to pay it. Because they do not need to pay it immediately to government, they end up with some benefit to their cash flow in that they are actually using the VAT or GST collections as a method to partially finance their businesses.

David O'Rear: It is very straight forward. The cost collecting GST is among the lowest. You don't have to find out how much people earn and track their source of income. Once you have a receipt then you have a record of the transaction, and out of every 100 dollars that you collect -- two or three dollars -- depending on the rate, is charged for the GST. Yes, some of the cost of collecting it is borne by business, but it is generally agreed that there is a net benefit in the cash-flow area, particularly for small business.

Q: The prosperity of Hong Kong very much depends on China trade. The U.S. trade deficit with China has become a hot topic recently, could you share your views on the impact that this controversy might have on Hong Kong?

Michael Berchtold: When we look at the trade deficit between China and the U.S., one of the things we have heard is that China should do something about the revaluation of the renminbi. Our view on this subject is that is not the point. The RMB is not the issue here. The issues in China which need to be addressed are very core issues, including financial reform, and we think a stable currency is critical at this time. Second, this trade deficit is related to a very significant volume of exports going out of China to the U.S. About two-thirds of the export growth coming out of China over the last 10 years has been from foreign firms or foreign-invested enterprises. From those manufacturing bases, they are then exporting to other parts of the world, including to the United States, to take advantage of the low-cost manufacturing base. So we see that is a natural progression. We think it is a natural development. And we think there are some underlining problems and issues relating to the present situation in the U.S. economy. Some of these instabilities are related to the high-level of consumer debt and some important fiscal problems that the U.S. itself has to deal with. We don't see China needs to make any changes to revalue its currency. We think the growth of China is a very good thing for the growth of the global economy. And we see no need for any projectionist movements in any way, shape or form and if we can avoid those movements, we will be able to see Hong Kong continue to be the key financial centre for the region leveraging off the growing strength of China.

Mr O'Rear: The problems the U.S. faces are home-grown, and blaming it on China is very similar to what happened in the mid-80s when Japan was being blamed for problems in the U.S. at the time. As a result, there was a massive restructuring of exchange rates, which led to a Japanese bubble, and which led to a decade of depression. For China to go through that now would be horrific, because they are not prepared for it the way that Japan was, and even Japan had a very tough time.

Q: Mr Chugh, as an SME, how do you view CEPA, and what direct benefits do you see in it for your company?

Manohar Chugh: If you speak purely at our company, I don't see any immediate direct benefit. There may be some indirect benefits because the overall economy in Hong Kong will go up and we will benefit in that way, but directly I can't see anything. Being a CEPA-qualified company, I thought we might be able to go into partnership with a foreign investor, because some of our overseas importers have shown interest in CEPA. But overall, they lack confidence in China. They complain that China often drafts new laws and regulations, but never implements them. So they are resigned to a wait-and-see attitude on how well China is going to implement CEPA. However, a lot of my SME friends in the gem and jewellery business can benefit beautifully from the agreement. Before CEPA, the tariff for their goods going into China was 35 percent, but now that will go down to zero.

Q: Mr Li, and Mr Eldon, how do your companies plan to use CEPA?

Victor Li: To start with, certain operations that we have -- let's say manufacturing in other countries -- we are now thinking about moving them back to Hong Kong because the imports into China will be much easier and more profitable. One example would be the production of biotech materials. So that is one area where we thinking of putting some businesses back in Hong Kong.

Mr Eldon: Clearly, CEPA opens up more opportunities for smaller banks in Hong Kong to get into the China marketplace. I think what they will have to recognise is that competition is going to be pretty fierce, and they will probably end up having to focus on a niche market, rather than trying to go into the market in general terms. For us, it creates some opportunities. Having been operating in China for almost 140 years, we have a larger presence than just about anybody else there. Therefore, the ability for us to do significantly more businesses is limited. But there are areas, such as the insurance and the asset management areas, where we now have the ability to do things a little more quickly than we would otherwise have done under the WTO. But this is a limited window of opportunity. I believe the whole key for CEPA is that the door has been unlocked, but they are not going to hold it open for us. We are going to have to make sure we open it for ourselves and take advantage of what is available there.

More>>
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- Moving Hong Kong Forward
- Verging on a New Era of Growth
- Liberalisation of the RMB
- CEPA: Hong Kong Reloaded Or the Final Frontier?
- We Have Turned the Corner