Policy Statement & Submission

HONG KONG GENERAL CHAMBER OF COMMERCE
2008/09 POLICY ADDRESS SUBMISSION

In looking toward your next Policy Address, my colleagues and I have consulted with our members and compiled some thoughts as set out below on the priorities we believe should be in the forefront of our minds as we look to the future. We trust they will be received in the spirit in which they are offered, that is, for the benefit Hong Kong.

Enhancing Competitiveness Amid Uncertainty

The US, and increasingly the world economy, is facing a very difficult road this year. High oil and other commodity prices are consuming spare cash at a time when the financial credit crunch and falling consumer confidence are curtailing demand. As asset price bubbles in both equities and real estate burst, consumer confidence is slipping. This, then, is a time for caution and careful consideration of all the outcomes of policy.

Good policy management requires identifying, understanding and preparing for both expected and unintended consequences. Where a decision may positively affect one group, it may all too often do so at the expense of another. Interfering with the economic signals markets send has a well-documented distorting effect on the behaviour of consumers and companies. In this uncertain economic environment, therefore, any regulatory measures undertaken by government should be very carefully thought out, thoroughly considered, very specifically targeted at explicit ends, and simply and easily administered. To do otherwise is to impose unnecessary costs to business.

While the world economy is at a cross-roads, our domestic demand has remained strong. Economic growth in the first half of the year slowed to less than 6%, even while retail sales grew nearly 16%, and external trade just under 12%. Thus far, job growth is outpacing the rise in the labour force by two-to-one, reducing both unemployment and underemployment to the lowest levels in more than a decade. Undeniably, the vibrant growth in the Mainland economy has generated outstanding opportunities for Hong Kong.

At the same time, inflationary pressures are building very rapidly, spilling over into wage increases and lost competitiveness. Food prices rose more than 10% in the first half, putting pressure on the least well-off in our society. The unprecedented prices for energy and other commodities affect us more than economies with natural resources, and even where our competitors are not well endowed, they have responded with tax cuts and other measures aimed at ameliorating the worst effects of the economic storm. If we are to remain the premier business, finance, information and talent centre in the Asian half of the world, we need to pay close attention to the ever-narrowing competitive gap.

Each year when we write to Chief Executives about our priorities and concerns, we point to the need to understand the impact of regulatory change on business. Seemingly small adjustments in copyright legislation are not free of charge to the commercial sector. Major initiatives such as fixing wages, defining competition or revamping healthcare financing necessarily add to the time and effort companies must spend complying with the law. Although not all companies will feel the full force of labelling law changes or statutory backing for listing regulations, a rewrite of the Company Law directly affects every business in Hong Kong.

We feel that the overall impact of changes in legislation has been too long ignored, and needs to be brought to the forefront of policymaking. Our priority is that necessary changes are done well, and unnecessary ones avoided. Our concern is that government does not appear to pay attention to the cumulative effects of many small changes on the business environment. While our competitors are crafting comprehensive plans to entice business to their shores, we are seemingly unaware of the compounding effects of regulatory change.

As we amend or create new regulations, we need to understand both how the business sector and the community will react. A case in point is the decision to suspend the retraining levy on foreign domestic helpers. While the intention was to reduce the burden on family finances, an unintended consequence led to the dismissal of thousands of helpers, who were subsequently re-employed. Similarly, if we contemplate legislating a selective minimum wage law based on the average rate of pay, the unintended consequences need to be thoroughly assessed.

A second example is the pending Competition Law. In February 2007, we said, "whether or not a competition law will protect the competitive environment and promote competition . . . will depend on how the law is designed and drafted." At the time, the Competition Policy Review Committee specifically identified certain bad behaviour as deserving attention: price-fixing, bid-rigging, market allocation, sales and production quotas, joint boycotts, unfair or discriminatory standards, and abuse of dominant position. What is emerging from the current consultation exercise, however, is a broad law with few definitions to which business can adhere with confidence.

Finally, there is the consultation on healthcare financing. While we fully understand and accept the need to rethink how we pay for essential services, we would have wished for more attention to basic cost control measures, a key feature of previous consultations. We also noted a tendency in the proposals to transfer more of the financial burden to taxpayers - both employers and employees - rather than to users. As with the previous two examples, we do not believe this would be to the benefit of Hong Kong's international competitiveness.

And so, against this background, we consider the following issues should be at the top of our minds as we consider the policy direction for the coming year:

- To ensure the sustainability of our future development, we must look after our environment.
- To ensure the sustainability of our economy, we must pay greater attention to our manpower needs, both in training and in the flow of people to and from our city.
- To ensure our competitiveness, we must continually benchmark what we as an international business, finance, information and talent centre offer to the world.
- To ensure that our companies remain profitable, so as to create the jobs and opportunities we need, we must reduce the cost of complying with regulation, and the rate of tax.
- And, to ensure that we can afford the government we need, we must reduce the size of the Civil Service, broaden the tax base and dismantle much of the archaic bureaucratic infrastructure inherited from previous governments.

Our Environment
At every turn, we find Hong Kong facing an environmental crisis. By their very nature, such threats are slow to materialise and hard decisions easily postponed. But, delay makes the problem worse and solutions more costly. As a business association, we have taken steps to raise public awareness about pollution, particularly the very poor quality of the air we breathe. We recognize, perhaps more than does government or even the public at large, that pollution is a threat our future. We understand that the full responsibility is not within our jurisdiction, but nonetheless insist that the origin of the emissions is no justification for complacency.

We urge you to bring together decision-makers throughout the PRD and work out an immediate and longer-term plan of attack. The 2010 emission reduction targets are closing fast, and while we have no doubt that Hong Kong will achieve its share of the goal, we are not as confident that other jurisdictions will be as successful. Beyond 2010, the larger question of what we do next remains unasked. The targets were not set sufficiently high, and the challenge of the coming years is to achieve concrete and visible results in air quality improvement, with the aim of eventually meeting the World Health Organisation air quality guidelines.

Nevertheless, we do see positive signs. The Arrangements for the Implementation of Clean Development Mechanism (CDM) Projects are a recent case in point. Through this initiative, the Environmental Protection Department will be able to contribute directly to the global effort against climate change. This is a position we have strongly encouraged, and subsequent to the announcement, warmly welcomed. We believe the Implementation Arrangements will enable Hong Kong to take advantage of the financing and technology instruments available from advanced countries for projects to reduce Hong Kong own greenhouse gas emissions. Moreover, Hong Kong-based companies and organizations will be able to contribute to the sustainable development of the nation, as well as the global drive towards a low-carbon economy. The CDM application to Hong Kong companies operating in Hong Kong is an important first step. Next, we urge the government to help ensure that Hong Kong companies can qualify for CDM projects in the Mainland, much in the same way that Hong Kong companies can gain market access into the Mainland through CEPA.

We note that government is prepared to move quickly to bypass opposition or legislate solutions to far less pressing issues, and cannot help but wonder what might be the outcome if that degree of effort and sense of urgency were to be focused on the most serious threat facing our economy and our people: air pollution. We look to your Policy Address for a clear plan for action, including vigorous engagement with other regions of the Mainland.. The voluntary efforts introduced by the private sector in the last two years have largely run their course, and now we look to you to take us to the next level.

Manpower
Hong Kong success is built on people, more than anything else. We do not, however, see sufficient attention being paid to maintaining and improving the quality of the talent emerging from our educational system. We are deeply concerned that students in the SAR are not being adequately educated and trained to fulfil the needs of the coming decade, and beyond. The skills mismatch is becoming alarming, and while liberalised immigration rules are allowing us to fill many of the positions available, constraints exist there, too. In addition to the air pollution noted above, it remains much too difficult to secure adequate numbers of international quality primary and secondary educational places for families in Hong Kong. As a result, language skills are not keeping pace with demand and those possessing the necessary talent are less willing to come here.

Language was a particularly sensitive subject this year, and from an unexpected quarter. As you know, we have strongly supported enacting anti-racial discrimination legislation for many years, and we are pleased that this embarrassing void has been filled. We did not support diluting the battle against racism with side issues unrelated to race, and worry that the inclusion of clauses related to languages may inadvertently undermine the development of a bilingual, triliterate workforce.

If we are successful in developing the skills we need, we may still expect demand for talent in Hong Kong to outstrip supply, as global competition for skilled professionals is only likely to intensify further in the years ahead. Moreover, rapid development in the Mainland, especially the Pearl River Delta, is expected to exacerbate the talent shortage in Hong Kong. To alleviate this inevitable shortage, Hong Kong must attract a deeper pool of international, regional and Mainland talent by adopting a more liberal immigration policy, and at the same time making our workforce more internationally and regionally astute to ensure they can meet the challenges in today's globalized business environment.

Benchmarking
Each year, Hong Kong is held up as the shining example of how a light regulatory touch can facilitate competitiveness. These indices of international competitiveness, economic freedom and other definitions of the business environment show that we have what it takes. One study, however, examines the actual implementation of rules and regulations, and here we are found to be less attractive. The World Bank's Doing Business series consistently points to the extra time - and expense to business - of getting things done. While it is easier to open (or close) a company in Hong Kong than in Singapore, it takes longer. Although we have fewer taxes to pay, the process takes more than 2-1/2 times as long. Trade documents are few, but processing is slow. Each of these delays adds to the cost of doing business.

We have long advocated government undertaking a comprehensive benchmarking exercise, comparing what we do and how we do it to the very best in the world. We believe the results of such a study would not only highlight the very positive advantages we have to offer, but also identify areas in need of extra attention. On a recurring basis, we would then be able to report to the international competitive researchers and to the global business and finance community, the progress we have made in bettering our offering.

As noted above, one of the key measures of the quality of the business environment is the time it takes to get things done. As we move toward further regulation of competition, wages, accounting standards, stock market rules and other fundamental costs to business, we need to ensure that we are not just dealing with the demands of one pressure group, but that we are doing what is best for Hong Kong.

Competitiveness
While we in Hong Kong have much of which to be proud, the constant theme we hear is one of competitiveness at risk. If these concerns are misplaced - which we doubt - government should be refuting them one by one. If there is merit in the argument that Hong Kong no longer enjoys an astonishing edge over the competition, then we need to identify the barriers and get to work finding solutions.

The Bauhinia Foundation report on our tax system is an excellent starting point. Many of the recommendations included in the study are ones the Chamber has long advocated and strongly endorses. Maintaining the competitive gap between our tax rates and those of jurisdictions offering direct incentives to investors is basic to maintaining our strategic competitive positioning. Implementing group loss relief and loss carry back, and enhancing tax certainty are the kinds of steps that need to be taken, and quickly. Adopting these recommendations would greatly facilitated by establishing a Tax Policy Unit independent of the Inland Revenue, to advise the Financial Secretary on the strategic, competitiveness enhancing policy choices available to us.

The next steps are more difficult, but we need to get started. On the revenue side, we need to think beyond taxation, and consider our dependence on land revenues as a serious threat to maintaining a competitive cost of doing business. Over time, and with adequate consultation, we need to move away from our unhealthy addiction to high-priced real estate. This can be achieved by a combination of reduced spending and a broadening of the tax base.

Finally, we are pleased to see that government is stepping up her facilitation role in helping the business with Mainland. The recently announced 5th CEPA supplement contains practical measures in trade and investment facilitation which we welcome, as does the Hong Kong-Guangdong cooperation agreement. Still, our manufacturing and trading establishments, mainly SMEs, are struggling from the industrial structure adjustment in response to the 11th Five-Year Plan, and we urge the government to play a more active facilitation role to assist them.

Affordability
Our last point addresses the cost of government itself. The Basic Law requires not that Hong Kong avoid a deficit, but that our overall fiscal position remains in balance, and recent budgets have not met this requirement. The Financial Secretary forecasts more than $200 billion a year in operating expenditure throughout the Medium-Term Forecast, and even on optimistic estimates for nominal economic growth, significant increases in spending as a share of GDP. While there is a small deficit planned for this year, longer term policy envisages taking an unnecessary, surplus to needs $50 billion a year out of the economy. To ask our few taxpayers to contribute for necessary government services is expected, and justified. But, to plan for excessive surpluses year after year - particularly in difficult economic times - is deeply unwise.

Control of the spending side of the equation has been overlooked for some time. If we are to use our fiscal policy as a macroeconomic tool, we need to stop spending more money when revenues are high, and spending still more when the economy slows and revenues decline. The details of our thinking on this subject have been included in our many submissions to financial secretaries' budgeting consultations.

As you know, the Chamber has long advocated modernizing human resource management in the Civil Service as a means of controlling costs and better rewarding our hard-working public sector employees. Yet, the entire subject of Civil Service reform appears to have fallen off of the policy agenda.

Chief Executive, the business community is deeply worried about the global economic environment. We recognize our responsibilities as members of the Hong Kong community, and we are willing to do our part. We ask, in return, that the measures that must be taken to ensure our sustainable competitive advantage be well considered ones, and that those which would harm our ability to provide opportunities for our people and to capitalize on the prospects surrounding us be avoided.

Yours sincerely,




Andrew Brandler
Chairman