11 June 1998
Speech on "Hong Kong: One Year After the Transition" by TDC Chairman Dr. Victor Fung at the High-Level Conference "Hong Kong: Business Opportunities in the New Millenium", Chicago
Distinguished Guests, Ladies and Gentlemen.
Thank you for coming to this luncheon. It gives me great pleasure to be back in Chicago, especially now, when your basketball team is making its annual "Bull" run at the NBA title. I have no doubt about the outcome. I just wish I could say that Hong Kong was bullish right now as well - but times are a bit difficult in our part of the world at the moment. Still just as your team is the strongest performer around - Hong Kong also knows a thing or two about competitiveness - we' ll bounce back.
One of the highlights for me personally last year, was opening our new Convention and Exhibition Centre in Hong Kong. I mention this because there was a strong Chicago connection. In keeping with Chicago' s great architectural tradition - the design was a joint venture between a local Hong Kong company and a Chicago firm.
Another sign of closer ties between Hong Kong and Chicago is that recently one of your air carriers established a direct link with flights every day between Hong Kong and Chicago. This directly reflects the growing business between our firms and yours here in the Midwest.
What I' d like to do this afternoon is to offer a "big picture" update on three things: first, a look at the Special Administrative Region' s (SAR's) first year; second, how Hong Kong is responding to the economic crisis in Asia - in particular, how we are faring on the competitiveness front - and thirdly, I would like to share some thoughts about the challenges and opportunities facing Hong Kong. And why I am confident of Hong Kong's continued pre-eminence as Asia's centre for international business.
The SAR' s First Year
The return to China has been smooth and successful. The Central People's Government in Beijing has kept its promise of letting Hong Kong people run Hong Kong.
There has been no interference. The fears everyone read about have not materialised. There is a great deal of confidence evident among Hong Kong people about the way "one country, two systems" is working.
For such historic and unprecedented circumstances, it is interesting that so little has changed. The flag has changed. The Chief Executive has replaced the Governor, and we now have the Court of Final Appeal rather than the Privy Council. But that is basically it.
On the operational level nothing has changed. As you know, Hong Kong' s currency, immigration and customs systems and legal system all remain the same. So do its low tax rates, free trade policies, free information flows and level playing-field - which is why Hong Kong continues to be one of the world's most open, competitive and predictable business environments.
The civil service and its leadership are still basically the same. And Hong Kong continues as an active member in our own right of the World Trade Organisation, APEC (Asia-Pacific Economic Co-operation forum) and other international economic bodies.
The essential character of Hong Kong has not changed. We are still as outwardly focused as ever. Hong Kong remains a dynamic, cosmopolitan city with a pluralistic community, characterised by pragmatism and tolerance. The press is free and vigorous. Our anti-corruption culture remains strong. And English is still an integral part of Hong Kong life.
And yet if the operational side of Hong Kong and its character have remained remarkably stable, there has been a wave of change and challenge in other areas over the past year.
Asia's Economic Crisis - Hong Kong's response
I think you all know the story of Asia's currency and economic crisis, which began to unfold across the region last summer. By fall, it spread to Hong Kong in the form of attacks on our currency. Part of the SAR's natural adjustment mechanism was a rapid fall in asset prices.
Let me give you a quick sketch on where Hong Kong stands now
- Our property market is off by about 40 %.
- The stock market is down 40 % from the post-handover high.
- Interest rates are high and credit is tight
- Unemployment has gone from 2.7 % last year to 3.9 %, which is very high by Hong Kong's standards.
- And for the first time in 13 years Hong Kong has recorded negative growth rate - minus 2 % for the first quarter of 1998, a trend that our Government officials say is likely to continue in the next quarter.
Because of the severity of the region-wide crisis and the openness of our economy, Hong Kong was never going to remain unscathed. But despite the considerable economic pain we are feeling, we are in relatively better shape than most of our neighbours.
- our currency remains strong and firmly linked to the US dollar.
- we have the world' s third-largest foreign exchange reserves standing at US$97 billion.
- Hong Kong runs a fiscal surplus.
- our external economy remains healthy and trade with our two largest trading partners, China and the US, is still growing.
Of crucial importance throughout these difficult months has been that Hong Kong's fiscal and regulatory systems are modern, transparent and sound. Many of the sorts of institutional problems neighbouring economies are now facing were, in fact, resolved years ago in Hong Kong. Our institutions have stood the test remarkably well, leaving the market free to determine the magnitude of the adjustment
But the crisis has had a profound impact on Hong Kong in other ways. Domestically, it has produced an uncharacteristically pessimistic mood. In many ways this is understandable. After all, almost an entire generation of Hong Kong people has grown up not knowing words like "negative growth" or "recession".
There has been undeniable asset depreciation in the stock and property markets. And losses, even if they are only on paper, create pain. So, too, does increased unemployment. For the first time in years there is anxiety in Hong Kong over employment.
And yet for all the bad news and negative sentiment, it is important to keep things in perspective, especially when making business decisions and developing business strategies for the longer haul.
Hong Kong' s Economic Strengths
Hong Kong's built-in strengths and ability to adjust quickly are such that we will be among the first economies to recover from the crisis.
I mentioned the systemic advantages that Hong Kong already enjoys. The rule of law, the effective regulatory climate, free flowing information, low taxes and the international business environment. These qualities provide the bedrock that makes Hong Kong attractive to multinationals choosing an Asia-Pacific base.
But there are many other aspects of Hong Kong's competitive advantage which project far beyond the present downturn and which underpin the reasons why on balance I remain optimistic.
The infrastructure of Hong Kong - its world-class port, ultra-modern airport - soon to be the best in the region - trade fair facilities and extensive telecoms systems.
Our special connection with China. Handling half of China' s trade and foreign direct investment and now providing a lot of the funding and expertise that is fuelling economic modernisation. Hong Kong's capabilities as a base for accessing the Chinese mainland market are unmatched.
Our services. The region' s strongest array of professional expertise. And the world' s fourth most important financial centre.
Our manufacturing network. Spread out across China, all over the region and around the world with enormous flexibility and strength in delivery and distribution.
And finally the entrepreneurial skills of Hong Kong people - particularly among the 300,000 small and medium-sized enterprises (SMEs) which form the backbone of our economy. For their size, they have an exceptional degree of experience in trans-national business.
Despite the downturn, these strengths will continue to bolster Hong Kong's long-term competitiveness. However, I feel something equally important is happening to Hong Kong at a deeper level. It involves a widening of opportunities, presents major challenges and represents yet another transition for the SAR. This time, an economic one.
Hong Kong as a Global City
At some point in these recent years, Hong Kong became a global city. Not yet on a par with New York, London and Tokyo - but not far behind.
Between 1990 and 1995, Hong Kong's per capita income almost doubled from US$13,000 to US$22,400. It is now US$26,400, higher than for many advanced industrial economies.
In merchandise trade, Hong Kong shot up from being 23rd to 8th in the world in just two decades.
In services, for the last 15 years Hong Kong has had the world's fastest growing services sector - averaging 16 % growth per year.
The numbers are impressive and help to explain the growing importance of Hong Kong as a trading and investment hub for China - and the preferred business base for multinationals in the Asia-Pacific.
During this period, Hong Kong influence has extended even further afield.
In finance and investment, Hong Kong is now:
- the 4th-largest source of foreign direct investment in the world and the largest among APEC and ASEAN economies
- the second-largest capital and venture capital market in Asia after Tokyo.
- Asia's premier fund management centre
In infrastructure development, Hong Kong companies have particular expertise in providing the range of services, technology and financing needed for major projects around the Asia-Pacific and even as far afield as South America.
In manufacturing, the network of Hong Kong factories I mentioned earlier is backed by significant expertise in distribution technology and supply chain management, enabling customers to share in the competitive advantages of Hong Kong companies.
In trade, Hong Kong's expertise as a middleman operating in many different economies has grown to the point where the value of Hong Kong's offshore trade - that is trade conducted by Hong Kong companies but which never passes through Hong Kong - is estimated to be about US$135 billion, equivalent to 85 per cent of our recorded re-exports.
What all this points to is that Hong Kong's economy is increasingly global in outreach. It has taken on the characteristics of a metropolitan economy co-ordinating finance, services, trade and manufacturing across a large hinterland - much the same way that New York or London operate in the United States and Europe.
The opportunities resulting from this increasingly global reach should continue to widen. But this is where the challenge comes in.
For that to happen Hong Kong has to really focus on its competitiveness. Steep currency devaluations elsewhere in the region during Asia's economic crisis make us, in relative terms, more expensive than ever.
To some degree the higher cost is to be expected in a global city. London and New York are certainly not cheap places to do business. But to continue attracting business despite our premium prices, we have to strengthen our capability to offer a different product than neighbouring economies. And as competition becomes ever more intense, we have to raise the value we add.
Easier said than done. But if any good has come out of Asia's economic crisis for Hong Kong it is that the entire community is now focused on this issue. New initiatives have been introduced, for example to accelerate the use of information technology in commerce, to upgrade services to SMEs and to tackle longstanding problems in the quality of our education system. All these are now seen as crucial to long-term competitiveness. And the need to be more competitive is, in turn, accepted as crucial to resuming healthy growth and better living standards.
The Road Ahead: embracing the future
Psychologically, we are better prepared to take up the competitive challenge of the future than at any time before 1997. For years Hong Kong had an enclave mentality. The drawn-out uncertainty over our future led many in business to think and plan short-term; to speculate more than they otherwise might.
The transition has engendered a new type of thinking. With our return to China, Hong Kong has embraced a new destiny and joined an entity far larger than itself - at a time when the Chinese mainland is committed to economic reform on an epic scale.
All this is encouraging longer-term thinking; fostering a sense of stability and a deeper sense of belonging. Suddenly Hong Kong is looking at a future that stretches far ahead. Our people are becoming more actively engaged and vocal in shaping that future. The record voter turnout at last month's elections for the post-handover legislature was an eloquent expression of this trend. Another, is the coming-together of government, business and political leaders from across the spectrum to thrash out ways to stimulate the economy, create more jobs and ease some of the pain Hong Kong people are feeling in the downturn. Expect a vigorous and healthy debate!
Yet at the same time, there is a remarkable degree of consensus in Hong Kong that, at the end of the day, the best way forward is to remain true to the free market principles on which we built our past success. Few challenge the long-held philosophy that the role of government in Hong Kong should rest at minimum intervention, maximum support - and prudent fiscal management. That leaves the ball squarely in the private sector's court in terms of creating prosperity and business success. It is up to us to run with it.
Closing remarks: a higher potential
The massive infrastructural changes that have been going on in Hong Kong provide a conveniently symbolic backdrop to this psychological embracing of the future.
Hong Kong has quietly moved ahead in this tumultuous period with the opening of the world's longest road and rail suspension bridge, a third cross-harbour tunnel, an extension to the region' s largest exhibition and convention centre and completion of Asia's most modern airport.
I believe all these are the hallmarks of a people and a place yet to reach their full potential. I hope we will have many opportunities to work together as that potential unfolds.