Policy Statement & Submission

22 August 2007


The Honourable Donald Tsang
Chief Executive
Hong Kong Special Administrative Region
Government House
Central
Hong Kong



Dear Chief Executive,

HONG KONG GENERAL CHAMBER OF COMMERCE
POLICY ADDRESS SUBMISSION


As we look forward to your coming Policy Address, the Hong Kong General Chamber of Commerce has 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.

Facing the Challenges of Success

The World Bank predicts that 2008 will be the sixth straight year of better than 4% real global economic growth, and the seventh year of less than 4% inflation. World trade, the key driver for our economy, grew faster in 2003-06 than in any four-year period since the late 1970s, and appears to be on a stable track this year. Add the remarkable growth in the Mainland of China in recent years, and the circumstances that bring us to your 2007-08 Policy Address are very fortuitous indeed. Recent financial market turbulence is worrying, but we believe containable.

Domestically, we continue to enjoy healthy consumer demand amid modest unemployment and low inflation. The 2005-06 boom in capital investment has persisted into the early part of this year, and companies continue to create new jobs at a rate that at least keeps pace with the high growth in our labour supply.

It comes as no surprise, therefore, that we continue to get very high marks from global observers. Our economic freedoms are the envy of many, and second to none. We whole-heartedly endorse the adoption of international standards of corporate governance, and strongly support the simple and transparent regulatory environment that has served Hong Kong so well for so very long.
Such success not withstanding, we also see threats lurking in the horizon. There is concern that initiatives such as that relating to statutory backing for listing rules may lead to an overexertion of government power that could damage our status as an international financial centre. Moreover, without a ig picture?overview, many small legislative steps in succession can pose a cumulative threat that will result in a loss of competitiveness. For example, the recent amendment to the Employment Ordinance did little to clarify the actual requirements of the law, while adding significantly to the cost employers must pay. We know this is not the direction in which you wish to lead us, but the piecemeal approach cannot adequately prepare us for the emerging set of challenges arising from our successes, and our bottlenecks.

We wish, therefore, to turn our comments to the two most important principles in framing public policies for Hong Kong in the coming years, namely, sustainable development and competitiveness. We look to the government of the HKSAR to ensure that we do not stand still in the increasingly competitive global business environment. At the same time, our development must be sustainable with full regard to the balance among the economy, environment and society. Sustainable development is increasingly itself becoming a competitiveness issue.

Against this background, we consider the following issues should be at the top of our mind as we consider the policy direction for the coming year:

Securing Sustainability of our future

To ensure the sustainability of our future development, we must look after our environment, and particularly the very poor quality of the air we breathe. Pollution is a threat to business and to our people, our families and our future prosperity. We understand that the full responsibility is not within our jurisdiction, but nonetheless insist that the origin of the emissions are no justification for complacency. We would urge you to bring together decision-makers throughout the PRD and work out an immediate and longer-term plan of attack. We know of no higher priority, no greater danger, and no excuses.

Likewise, important decisions in strategic sewage treatment and solid waste management remain outstanding, including the need to implement Stage 2B of the Harbour Area Treatment Scheme and the use of state-of-the-art "clean incinerators." Making the move to green procurement, too, will require leadership by example from government. These are controversial issues but they have to be confronted early as the window for sustainable solutions is rapidly closing.

We note that government is prepared to move quickly to bypass opposition or legislate solutions to 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 this most serious threat facing our economy and our people. We look to your Policy Address for a convincing plan of action on the environment. The voluntary efforts introduced by the Chamber and the private sector in the last two years have largely run their course, and now we humbly urge you to take us to the next level.

We are also deeply concerned about the sustainability of Hong Kong's talent supply. We find that students in the SAR are not being educated and trained to fulfil the needs of the coming decade, and beyond. The skills mismatch is becoming alarming. More than half of our members report concerns relating to inadequate language skills - both English (60.2%) and Putonghua (57.3%) - in the workforce, and only a bare majority (50.5%) are satisfied with the technical skill sets available in the marketplace. The immigration rules are still not liberalized enough to allow us to fill many of the positions available, and other constraints continue to exist, too. It remains too difficult to secure adequate numbers of international quality primary and secondary educational places for families in Hong Kong. Language skills are not keeping up with the very high demand, and, as mentioned, the regulatory environment is beginning to pinch.

To attract the talent we need, we must pay attention to the unconventional aspects of a world city that separate it from others. We need to ensure that our home is a place of vision, inspiration and optimism. Utilising the rare open areas around our harbour to project an image of a city that cares about design, originality and creativity will go a long way toward building that very mindset. Enabling and encouraging support for science and the arts is part of being a world city, and one where we need to do better.

Furthermore, there are the broader aspirations of the community for social harmony, political development and quality of life that must be addressed. Among these, we need to approach the task of constitutional development with an open mind, and a determination to do what is right for Hong Kong, regardless of sensitivities or individual preferences. As we have argued in the past, preparing the groundwork is at least as important as the timing of actual changes to our election procedures. When we are ready to take up our election responsibilities, when our political parties have matured into policy-based interest groups and when we recognize that voters have a responsibility to taxpayers, then we will be ready to move forward. Similarly, work-life balance has become a practical issue to be addressed, but while we support measures to improve working and living environments, we would remind the government that a way of life is not something that can be regulated, but rather calls for cooperation among various sectors of the community.

Securing sustainability of our competitiveness

As we move forward into the next decade, we must find creative ways to reinvigorate and defend our competitive positioning. While we in Hong Kong have much of which to be proud, the constant theme we hear is competitiveness at risk. If these concerns are misplaced - which we doubt - government should not let any one of them go by uncontested. If there is merit in the argument that Hong Kong no longer enjoys an overwhelming edge over the competition, then we need to identify the barriers and get to find the solutions.

While we are usually considered a very competitive business environment, we also see many adjustments on the horizon that threaten our standing. We are increasingly concerned that labour policy is deviating from our cherished principle that "market leads, government follows."In two examples - the minimum wage and civil service pay - we see a clear departure from established practices. In the case of the voluntary wage protection movement, we can only point to the deeply flawed methodology (the use of average wages to define the minimum wage) as the main reason companies are hesitant to accept this initiative. Raising the pay of all employees receiving less than the minimum to the average wage rate must, mathematically, increase the average pay rate. That, in turn, will trigger another pay raise and yet another. Yet, when we make this argument, businesses' reluctance to fuel a never-ending upward wage spiral is said to justify legislation. As for civil service pay, we have expressed our views: the larger-than-market rate pay increase for civil servants threatens the private sector's ability to remain competitive, and our overly large public sector places an unfair burden on those few called upon to finance it. Adding to the list of additional regulatory burdens, holiday and other statutory pay regulations were revised in favour of labour, and there are other policy changes that will place an additional burden on the business sector. Over the longer term, we see pressures building up for mandatory minimum wages and healthcare financing reforms that will increasingly saddle the private business sector with the cost of delivering society-wide benefits. This can only undermine our competitiveness, and needs to be reviewed, reconsidered and revised in a way that takes into account the cumulative effects of multiple small policy changes.

Chief Executive, in these and other ways the regulatory environment is increasingly becoming a drag on our competitiveness. We must remain alert that additional regulations are under consideration which would contribute to the cost of complying with the law. Chief among these is the prospect of a competition policy that would use a market structure or industrial concentration to determine whether a company was abusing its competitive position. As we have stated before, we do not object to punishing those who abuse their market power through corruption or collusion. But we are concerned that "regulatory creep" may lead to cases against companies because of their success, not because of a specific abuse of their market positions. We must keep this ideal in the forefront as discussion, debate and drafting proceed. We should be targeting those who abuse their positions, not those who succeed in the marketplace.

For the past several years, we have urged government to undertake a benchmarking exercise, comparing our offering with that of the best our competitors have to offer. Such an exercise would help identify bottlenecks and hidden barriers, to highlight best practices, and to warn where the cumulative effect of small regulatory changes is beginning to hurt us. To shed our image as a less-than friendly city, we need to understand what our "customers" want. To remain competitive, we also need to redefine our own expectations. Even where Hong Kong has fewer regulations than some of our competitors, it often takes longer to get things done. The World Bank's Doing Business series reports that it is easier to open (or close) a company in Hong Kong than in Singapore, yet it takes longer. Here, we have only one-quarter as many taxes to pay as do companies in Singapore, yet the process takes more than 2.5 times as long. We require fewer trade documents, but take just as long to process export papers and even longer for imports. Each of these delays adds to the cost of doing business.

Meanwhile, we are pleased to see that government is stepping up her facilitation role in helping businesses, especially with respect to their activities in the Mainland, where good opportunities have been generated from the vibrant growth in the Mainland economy. As the first Chamber in Hong Kong to advocate CEPA, we are particularly pleased to see the very positive outcome of the Fourth Supplement. We will continue to contribute suggestions for further liberalisation, but we feel it is more important to fully capitalise on the opportunities that have already been secured. Effective implementation requires strong support from both the HKSAR and the Mainland governments. We believe that the process of developing CEPA can be a foundation upon which the government can implement the comprehensive action agenda that you and your government have developed in response to the 11th Five Year Plan. At the same time, it is important not to forget that our manufacturing and trading establishments, mainly SMEs, are still playing a critically vital role in the economic development of Hong Kong. We urge the government to play a more active facilitation role to assist SMEs coping with their restructuring necessitated by the new policy framework under the 11th Five Year plan, in which industries are required to be more energy efficient, environmentally friendly and to contribute increased value added in their operations in the Mainland.

Public sector structures and finances

At the end of the day, the crux of Hong Kong's competitive challenge lies in the cost of doing business. As you know, we are not an inexpensive city in which to operate, which means we need to offer more to those who do seek to create jobs and opportunities here. In years gone by, the insurmountable gap between our own low tax rates and the higher ones demanded elsewhere was a critical component of our competitive positioning. That weapon, however, is no longer available to us. We now sit no more than one-half of one-percent below the Profits Tax rates prevalent in Singapore. Given the availability of Group Loss Relief there (but not here), and that city's generous incentives and subsidies, their effective tax rate is lower than ours.

Chief Executive, the business community has strongly supported the SAR Government through good times and bad. You may recall some years ago that our dangerously narrow tax base forced government to increase profits taxes at a time of extreme economic weakness. We did not like it, but we understood that the risks of cutting spending to sustainable levels during an economic depression were worse. At the time, we were assured that these were temporary increases.

Now, that danger has passed. We have, however, not seen anything like a reciprocal willingness to reduce government spending. Nor have we, who paid more in the hard times, had our profits taxes reduced to more competitive levels. We believe it is time to restore some balance, to take the strategic, competitiveness enhancing step of reducing the profits tax rate to 15% and implementing a policy of group loss relief, immediately, without any further delay.

To sustain a reduction in taxation, we need to keep the cost of government under control. If we are to continue to offer an extraordinary business environment to the very best people and companies in the world, we need to take a hard look at our public sector structures and finances. We cannot afford the government we need unless we make the hard decisions necessary to maximise public sector efficiency and economy. Earlier this year, the then-Financial Secretary forecast not only more than $200 billion annual operating expenditure, but also consolidated surpluses averaging over $50 billion a year until 2011-12. While we accept that a large fiscal reserve is needed to off-set the weaknesses of our narrow tax base, we believe this can be better achieved through less spending. Indeed, sufficient reductions in outlays would permit not only the necessary reserve accumulation but also leave room for pro-competition tax rate reductions and rationalization.

Much of the excess spending - and the processing delays noted above - that is in danger of becoming institutionalised is due to the government having too many layers of staff. We respect the honesty and integrity of our civil service, but we do not see a need for such a very large one. Singapore, for example, has only two-thirds as many civil servants - on a per capita basis - and their expenditure includes the need to staff foreign affairs and defence bureaucracies. Creating new statutory bodies or prolonging the lives of those which have served their purpose is not in keeping with the spirit that has served Hong Kong so well, the spirit of "small government, big market." There are other considerations, as well, such as the failure to fully corporatized the trading funds, and the lack of progress on privatisation. We need to return to the fundamental principle that government is not, and should not be the first avenue taken in addressing new challenges.

* * *

Chief Executive, the issues outlined above are the ones we believe deserve the greatest attention in your coming Policy Address. We faced numerous challenges in our first decade as a Special Administrative Region, and we survived. We proved the critics wrong because we retained our focus, our flexibility, our spirit and our determination to be the best. Those are the characteristics that have made Hong Kong prosper, and we look forward to your leadership in moving our community forward into a more prosperous future in which our people, especially the younger generation, can face the next decade with confidence, commitment and passion and that we can secure our sustainability of both our future development and our competitiveness.

Thank you.

Yours sincerely,





Lily Chiang
Chairman