Hong Kong 1997: Sense and Sensibilities
by Donald Tsang, Financial Secretary, Hong Kong
(Speech at the 1996 IMF/World Bank Annual Meetings, Washington DC, USA)
30 September 1996
I would like to thank you for coming today to this luncheon and allow me to welcome you all in advance to the 1997 Annual Meetings of the World Bank/IMF, which will be held in Hong Kong.
1997 marks an important year in the history of Hong Kong and China. Much has been said and written about Hong Kong in 1997: some make a lot of sense and others, sheer nonsense. When I was first appointed as Financial Secretary, a local wit told me that, given the political transition we face, this was a "mission impossible". I did not agree and saw my mission in a more positive light. Yes, 1997 will be a historic year for Hong Kong. My challenge is not only to see through the transition, but to build the foundations for a stronger and more prosperous Hong Kong beyond 1997. Events have since unfolded and shown that it is not only a possible mission, but one that is already being realised. Perhaps we should think more of sense and sensibilities.
Let me start with the "dollars and cents" part of the equation: the economy. There is no doubt Hong Kong has been an economic success story. Of the 25 high income economies classified by the World Bank, between 1985 and 1994, Hong Kong had the second fastest growth in per capita real income. This is a record which any Minister of Finance would be proud of.
It is true that Hong Kong has experienced uninterrupted economic growth in real GDP over that past 35 years. As we evolved into a service economy in the 1990s, we have stabilised onto a trend growth rate of about 5 per cent in real terms. Considering that Europe is still struggling with recovery, and the rest of Asia is adjusting for the overheating in the last few years, the consolidation that has taken place in Hong Kong is a blessing in disguise. Our inflation has slowed down to 6.1 per cent for the first eight months of this year. Our property market has fully recovered, with a healthy demand at the primary market, and our stock market has been one of the leading performers in 1996. Our banking sector has had bumper year and the Hong Kong dollar stands rock solid against a strong foreign exchange reserve and no public debt.
The global outlook for Hong Kong's major trading partners is positive. The US economy is still moving ahead briskly, the Japanese economy is slowly but surely recovering, while the rest of Asia is adjusting to the overheating of the last few years. As Governor Dai will surely reiterate, the Chinese economy, which has spurred Hong Kong's growth, has achieved an excellent soft landing, with declining inflation, an enviable strong growth and a healthy balance of payments. All these add up to good signs for the Hong Kong economy and the transition through 1997.
The political side of the equation also gives us much hope. In the last few years, we have had to live with a political cloud that shadowed Hong Kong's continued economic success. Thankfully, Sino-British relationships are continuing to improve, while tensions across the Taiwan Straits have eased considerably. In the last few months, we have witnessed several major milestone in co-operation that would lead to a smoother transition through 1997 -
- First, agreement has been achieved on the Court of Final Appeal and discussions for the 1997/98 budget have progressed in a highly constructive and positive direction.
- Second, protracted discussions over infrastructure development, such as the Airport and the container ports have been resolved, so that the much needed expansion in communications infrastructure are continuing without delay.
- Third, China has now clarified her monetary relations with Hong Kong post 1997, thus strengthening the interpretation and operation of the Basic Law and underlining the financial and fiscal autonomy of Hong Kong under the "one country, two systems" principle.
In my view, good sense and sensibilities from all sides have prevailed over rhetoric, and this is as it should be, in the continued development of the Hong Kong's economy, and in augmenting its position as a premier international financial centre.
Someone asked me what my major concerns were. I have gone on record to say that post 1997, once people wake up from the excessive pessimism, there will be a real boom in Hong Kong. Our current stock market P/E ratios and sovereign risk ratings have been low reflecting undue pessimism about the change of sovereignty. A re-rating to even the normal levels associated with our neighbours will bring in a flood of investment into Hong Kong and a surge in activity. Ironically, through 1997, I may have to once again deal with the dangers of overheating.
Let me now turn to the key challenges that Hong Kong faces post 1997, and the opportunities that these entail. There has been a school of thought that as the Hong Kong economy matures, its growth will naturally slow down. Hong Kong, as an increasingly service-oriented economy, with an aging population, will suffer malaise of welfarism and stagflation. I want to demonstrate here why this view is plainly wrong.
First, Hong Kong is already a post industrial economy, with more than 80% of our GDP attributable to services. Between 1980 and 1994, the share of services in our economy rose by 16 percentage points - a larger rise than in any of the OECD economies.
Second, of all the global service economies, Hong Kong has the best conditions of staying the course of fast growth, fast transformation. Consider the following:-
- Hong Kong is strategically located at the centre of the fastest growing region in the world - region that has huge investment and services needs.
- Hong Kong has world class infrastructure. We are completing in 1998 one of the most modern airports in the world. Our container port has the highest worldwide throughput. We have the highest concentration of optic fibre cables telecommunications per square mile in the world. By year end, we are putting in place one of the most modern RTGS interbank payment systems in Asia.
- Hong Kong is a world class financial centre: fifth largest in external banking assets, fifth largest in forex turnover, eighth largest in stock market capitalisation.
- Because of our open policies, we have world class support services - the largest concentration of expatriate accounting, legal, marketing, design, telecommunications and tourism experts in Asia.
Third, we are not complacent. In my first Budget Speech, I have already mapped out the way forward for Hong Kong as a service economy. I set up a Task Force on Services Promotion and received considerable advice from private sector members. The Task Force has already set out an eight-point "Framework for Action" and 14 individual Action Agendas. An expert working group is already working on how we can continue to upgrade Hong Kong's financial technological infrastructure to meet its future needs.
In the past two years, we have taken the opportunity to review completely our strengths and weaknesses. Hong Kong's problems have never been a shortage of demand, as manifested by extremely low unemployment rate and slightly higher inflation. Hong Kong's strategic advantage of being the key international services centre for the Chinese economy illustrates this point very simply. Consider the following. Currently equities turnover per capita in China is less than 1% of that in Hong Kong. As the Chinese securities market opens up, and the average equities turnover reaches even a tenth of that in Hong Kong, we will see a turnover of US$2-3 trillion annually. The consequential demand for financial services from Hong Kong, from securities trading, investment banking, and related accounting and legal services would simply be astounding.
The basic complaints against the high costs of doing business in Hong Kong are essentially supply-side oriented - shortage of land and high cost of skilled labour. In both areas, we have moved to ensure that such issues will not be constraints on future productivity and growth. Specifically:-
- We will ensure that land and planning permission will be made available so that there will be healthy growth in the area of residential and commercial property. Indeed, the pressure on housing comes not only from Hong Kong's internal demand, but also from the return of emigrants who have brought with them new skills and talents.
- As the labour force grows healthily at an average rate of 3% per annum, we will devote greater efforts to training, retraining and overall education to upgrade skills and labour productivity.
- We will continue to keep government lean and small, and as business friendly as possible. I have asked all government departments to streamline their operations, eliminate any over-regulation and unnecessary bureaucracy, and where possible, transfer services to the business sector. As a government we are already one of the smallest among developed economies, with the entire public sector taking up no more than 18% of our GDP.
In short, the ingredients to Hong Kong's success will all be maintained.
- We will maintain the fixed link with the US$. Alan Greenspan does a great job and we see no need to change this.
- Our low, simple and predictable tax regime will continue.
- Despite continued spending on the Airport project, we shall revert to a budget surplus this year. We expect another surplus next year. And the year after.
- Under the "one country, two systems" principle guaranteed by
the Basic Law -
- We, as a people and government, will continue to live under the rule of law, with clear, transparent rules of the game;
- we will continue to formulate and implement our own economic and social policies;
- we will remain a separate customs territory; and
- we will retain our separate membership and our own distinct voice in 29 international organisations.
To sum up, Hong Kong's great strength is the entrepreneurship, innovation, resilience and flexibility of her people operating in an enlightened, stable and legal environment and on an unrivaled level playing field. There are great opportunities, as well as challenges in the years ahead through 1997. I am fully confident, that with good sense and sensibilities, Hong Kong's glorious days are yet to unfold.
As I put it in my first Budget speech, Hong Kong's destination is "a high value-added, technology-based manufacturing sector and a world class services sector". I invite all of you to share with us in making this vision a reality.
On behalf of my colleagues, let me invite you once again to visit us at the World Bank/IMF Annual Meetings in Hong Kong this time next year. You will see for yourself the brand new Convention Centre Extension that we are building for the occasion. It is a fitting symbol of the confidence that we all have in the future of Hong Kong, well beyond 1997.