PACIFIC BASIN ECONOMIC COUNCIL
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Keynote Address The Honorable Tung Chee Hwa Chief Executive, Hong Special Administrative Region, People's Republic of China Monday, May 17, 1999 The Challenges of the Next Century for the Pacific Basin 32nd International General Meeting of the Pacific Basin Economic Council Hong Kong Convention & Exhibition Centre Hong Kong, China May 17-19, 1999 Introduction Good morning, ladies and gentlemen. I thank you, Chairman, for that kind introduction. Hong Kong is very proud and privileged to be given the chance to host the 32nd International General Meeting Session of the Pacific Basin Economic Council, which convenes the Pacific Rim's top government and business leaders. On behalf of the SAR Government and the people of Hong Kong, may I take this opportunity to welcome all of you and to wish you and the session every success. The topic of this year's PBEC General Meeting is "The Challenges of the Next Century for the Pacific Basin.” This is a most timely topic. It is all the more appropriate as all of us here today, heads of states, ministers and business leaders, are charged with the responsibility to navigate through hostile environment, manage challenges and provide leadership during a time of vast uncertainty and change. Vision, leadership and resolve are important during good times and nothing short of critical during times of flux and transition. Today, I will briefly talk about the major challenges Hong Kong faced over the last 22 months, the challenges Hong Kong will face as we move into the millennium. I will also briefly touch on some of the challenges I believe that Asia Pacific region will face in the near future. During the two years since the establishment of Hong Kong Special Administrative Region, we have come across two major challenges. I am happy to report that we stood up to those challenges and have managed to emerge with greater confidence and determination to succeed. Handover 1997 The first challenge for Hong Kong came about because of the change from being a British colony to becoming part of China under the "One Country, Two Systems" principle. For most of us in Hong Kong, China's resumption of sovereignty over Hong Kong on 1 July 1997 was a proud moment and the dawning of a new era. To some, it represented uncertainty. There were some naysayers who predicted that Hong Kong would cease to function. There were those who predicted vast capital flight and a change in our way of life which we so treasure. The challenge for the SAR Government was on the one hand leading the community under the principles of "One Country, Two Systems", a system that is pioneering and untested in the world, and on the other illustrating to the international community that Hong Kong post-1997 presented greater opportunity for all. It has been almost two years since the handover, our way of life, including the freedoms which we have always enjoyed, has not been changed. The rule of law continues to be very much part of our social fabric. Indeed the results of successful implementation of the "One Country, Two Systems" are for everyone to see. Since the handover, the leadership in Beijing has given us their maximum support in all our endeavours. But at the same time they have made it clear time and again that it is up to Hong Kong people to run their own affairs with the high degree of autonomy promised in our constitutional document, the Basic Law. Asian Financial Turmoil A very serious challenge we faced over the last 22 months was how to deal with the impact of the Asian financial turmoil. During these 22 months, the Hong Kong economy has gone through a very difficult period. Our economy has shrunk more than 5.1 per cent. Unemployment has increased to 6.2 per cent and is likely to grow. The fact is that during much of the 1990's, years of close to double digit inflation and high property prices eroded our competitiveness. Adjustment would have been necessary to regain our competitive position. The Asian financial crisis accelerated the process of adjustment. This adjustment has been painful, but is very necessary. In the last 18 months, values of residential units have fallen by 50 per cent; values of commercial premises have fallen by about 60 per cent. These are huge adjustments. Adjustments in salaries and wages are continuing. I believe that at the end of the day, when the process is completed, our cost structure will be that much more reasonable and would make us that much more competitive. To adapt to the economic downturn, our Government have taken effective measures; first, to alleviate the pain; secondly, to spur economic growth; and thirdly, to pave the way for our long-term recovery. In the 1998 and 1999 Budget, we introduced selective increases in expenditure as well as tax cuts with a view to stimulating the economy and to building for our long-term future. The increases in expenditure are mostly investments in new roads, railways and schools. These projects will make us much more efficient and effective in the long run. There would be deficits of two per cent and three per cent of our GDP in the 1998 and 1999 Budgets, respectively. There will continue to be a small deficit in the year 2000 but we expect the budget to return to surplus by year 2001. Over a five year forecast period, the total deficit would amount to about US$6.5 billion. Against an accumulated fiscal surplus of about US$50 billion, and Government have no debt, this is quite bearable and affordable. Another short-term measure which we took, which was controversial at that time, was the fact that we entered into the stock market in August. When we took the decision to do it, it was a very difficult decision. What we saw in the months immediately leading to August was speculative pressure on the Hong Kong Dollar. Given the fact that our dollar is linked with the US Dollar, and that it operates under a currency board system, any pressure on the Hong Kong Dollar would result in tremendous pressure on interest rates, and that in itself then causes a decline in the stock market as well as the futures market. The interaction was predictable. There were international short-term capital flows that were taking advantage of this, building up huge positions in the currency markets and stocks and futures markets. It came to a point that our market was no longer free anymore. The purpose of doing what we did was to protect the integrity and freedom of our market place. The decision was controversial, by any standards, particularly by Hong Kong standards. But I am glad that many months afterwards there is an increasing recognition in the world that the action we took was the right one. Hong Kong's Role in Asia Pacific Region Where are we today? As things stand, consumer spending remains quite flat; real interest rates remain high; loan growth on year to year basis has been negative; indeed the economic adjustment will continue for much of 1999. But 20 months after the financial turmoil began, stability has returned to our financial markets; property prices have been corrected. Confidence, I believe, is slowly but surely recovering. While we tackle the effects of the financial turmoil on Hong Kong, we've never lost sight of the importance of our long term objectives. The world is changing. Asia is changing. China is changing. As the new millennium unfolds, where would we position ourselves? Hong Kong's future lies in its strategic position - in the heart of Asia. As Asia recovers from the financial turmoil, as surely she will, Hong Kong must be positioned to take full advantage of Asia's recovery. Hong Kong's future also lies in even greater participation in the growing Chinese economy. First of all, we want to strengthen areas where we are already well known for. We will make major efforts to enhance our position in Asia as the major financial centre, centre for tourism, centre for logistic and transport for air and sea cargo, centre for multinational companies operating in Asia as well as manufacturing service centre. In addition to building on our existing and traditional strengths, we need to help our economy respond to change and seek out new engines for growth. Innovation and technology are important drivers of economic growth. In a knowledge-based global economy, they are essential in adding value, increasing productivity and enhancing our overall competitiveness. In this respect, in the years to come, Hong Kong will additionally focus on areas where we have substantial competitive advantage as compared with our neighbouring communities' areas such as information technology, hub for telecommunication, centre for Chinese medicine, creative art etc. China's economy will be one of the most important in the world in the future. Chances are good that China will be joining the WTO soon. Hong Kong is uniquely positioned to take full advantage as China's economy opens up further. We want to participate in every respect as that economy continues to grow. As the 21st century unfolds, I see Hong Kong in Asia as New York of North and South America and London of Europe. Indeed, Hong Kong is well positioned to be the premier international city in Asia as well as one of the major cities in China. In the process of positioning Hong Kong in the 21st century, we need to anchor on certain fundamentals. We know that the 21st century economy will be a knowledge-based economy. We have to get the standard of our education to a higher level than today. Already education is the single-largest expenditure item we have in our budget. Obviously improvement in language skills, both English and Chinese, all these will be important too. As an international financial centre and a centre for innovation and technology, we have to attract the best talents from all around the world. Furthermore, for our 6.5 million citizens the quality of life must be the best anywhere. So we will be sparing no efforts in areas such as arts and culture to enrich the livelihood here. But even more pressing, greater effort is needed in the area of environmental protection. The Government realise much more needs to be done. Environmental protection is one of my top priorities in 1999 and in the next few years. We are very deeply rooted in the rule of law, and we recognise the importance of the independence of our judiciary. We treasure very much our way of life. Under the "One Country, Two Systems" concept, these are all being preserved and will continue to be strengthened. Hong Kong has always had a corruption free, dedicated and efficient civil service. However, as the new millennium unfolds and in order to meet the many new challenges which Hong Kong now faces, we are also making a determined effort in civil service reform. Our objective is to make our civil service even more efficient, accountable and responsive. Over the years, we have built up a track record in areas of fiscal prudence and, in our believing in a free-market economy. And these are some of the philosophies we want to stick to, and to make sure that we would do better in the future. For 22 months, Hong Kong has been a Special Administrative Region of China. Hong Kong has also faced a major economic downturn. Nevertheless, Hong Kong people still move forward with pride and confidence. A survey conducted by the Chinese University of Hong Kong on 9 May revealed that 80 per cent of Hong Kong people feel that Hong Kong is "an ideal place to live". And more than half of the respondents expressed confidence in Hong Kong's economic prospects over the next three years. We have clear vision of our future. The challenge for me, for my colleagues and for Hong Kong as a whole will be to ensure that our vision for the future becomes a reality and I have every confidence to believe that we will be able to do so. Asia Pacific Challenges in the 21st Century Asia has seen better times than 1998 and 1999, to say the least. The Asian financial turmoil first came to the surface in Thailand and soon spread to South East Asia, North Asia and reverberated around the world. By 1998, almost a quarter of the world economy was in recession. Despite economic setbacks over the last two years, it is my belief that Asia will again emerge as an influential player in the 21st century. Let us take a look at what Asia has achieved over the last two decades. Over the last two decades, growth in Asia has been at approximately 7.5 per cent compared to 2 per cent in Europe and the US. Millions have been lifted out of poverty and entered into the life of the middle class. Export and import growth for the region has been between 10 per cent to 15 per cent for 20 years. Before the financial turmoil, Asia accounted for 26 per cent of world exports and 24 per cent of world imports, making it a larger importer than the US. Even after a decade of faltering growth, Japan's economy is still twice the size of Germany's. Six Asian economies account for some 37 per cent of non-gold reserves held by governments around the world. Given these circumstances, you might say I am engaged in what Mr Alan Greenspan calls "irrational exuberance". This is not the case. I just want to remind everyone what we have achieved in the past, but also the fact that I believe that Asia's health remains vital to everyone else in the whole world. The fact is many of the critical success factors of Asia's past success are still with us today. Our success was built on the hard work, the thrift, the skills, the ingenuity, and the determination of people in the region to develop and to reap the full benefits of economic growth. And it was built on the work of regional governments in developing the infrastructure and systems necessary to support and nurture that growth. Those qualities, skills and infrastructure remain in the region. And many nations are enormously rich in natural resources. We in Asia should not lose heart because of the current difficulties. There is much potential for us to rebound strongly. I will not dwell on the cause of this global financial catastrophe, but instead will focus on the challenges that face all of us: How do we all work together to minimize financial crisis of such a scale as we have seen over the past two years? First and foremost, many countries in Asia need to instil more discipline and need to carry out reform. There is no doubt in my mind that better regulated banking and financial system, more transparency and improved supervision on the part of each economic entity will play a large role in preventing over-excess, over-leverage, and over extension. Two issues remain central to the institution of such policies. First, the leaders of each respective economy must have the political will and determination to make far-sighted and often difficult decisions. Developing strong support for strong policy that stresses short-term sacrifice for long-term benefit is often politically unpopular and difficult. Second, leaders must ensure that such long-term benefits are broad-based and will be shared across the entire spectrum of society. Reform and discipline needs to be initiated at the top but cannot be realistically achieved and executed without the support of the community at large. Second, there needs to be a way to manage massive capital flow on one hand, ensure general openness and free market principles on the other. In the latter half of 1996 and early 1997, there was an inflow of capital into Asia ex-Japan/China of over $100 billion. In the second half of 1997, there was an outflow of over $100 billion. It is perhaps unrealistic to expect nations who are not yet fully equipped and developed to withstand such volatility. Openness can promote greater competitiveness, more economic growth and as a result raise the general standard of living. Ultimately, open economies will benefit in the long term. At the same time, however, given the extreme volatility of capital flow, each developing economy needs to come to terms on whether it is fully equipped to face the pressure of a wide open market. If not, it is the responsibility for each administration to gradually and continuously condition itself for the full integration. Third, while receivers of such capital have to take full responsibilities for their own lax controls and excesses, providers also need to tighten their own financial discipline and investment supervision. Hong Kong's own experience shows that short term capital flow can be devastating no matter how healthy the systems are. Furthermore, over-leveraged hedge funds, if unsupervised and lacking in risk management controls, can create havoc to receivers and investors alike. We need to promote regulatory focus on risk management and broaden disclosure by providers of capital so that great market discipline will be enforced by their own sources of capital. The challenges in the years to come for all of us in Asia are for the economy in Asia to confront the need for reform head-on and to tackle the reform with resolve and with determination. Lastly, we need also to recognise the inter-dependence of regional economies and their implication on the global economy. It is paramount that the international community can together alleviate problems created by rapid short-term capital flow especially in situations where stress is caused not by economic failure but by loss of market confidence due to flaws of the system. At the height of the crisis, there was widespread consensus that the governments and central banks across the globe need to develop the new world financial order. It is important that we do not lose sight and momentum in this effort despite signs of stability in the world financial market. It is my firm belief that the urgency to better coordinate cross border monetary policy, accountability, and supervision of short-term capital flow still exists. As the region that bore the brunt of the crisis, it is our common challenge to push for the true realisation of a new global financial architecture as pronounced by G7 in 1998. China continues to act as a pillar of strength in the Asia Pacific Region. During the financial turmoil in the past two years, China's stability was crucial to the region. Today, China is the sixth largest economy in the world. In 25 years' time, she may be amongst the top three. A strong, stable and open Chinese economy is beneficial to both the region and the world. In this respect, a stable and constructive Sino-US relation is crucial not only to China and the US, not only to the Asia Pacific Region, but also to the world as a whole. In dealing with China and many other developing nations, the challenge for the US as the only superpower in the world is for her to understand and remain sensitive to the aspiration of these nations. The US has to recognise that different countries have different history, culture and are most likely in different stages of social and economic development have different needs. Each nation needs to find her own way forward as she develops. These are some of the challenges facing us in the Asia Pacific Region as the new century unfolds and undoubtedly there are many more. Conclusion As financial markets settle and confidence gradually return to Asia, we set out on our immediate task of putting ourselves back on the road to recovery. China and indeed Asia will continue to grow and take on more responsibilities in the international arena. At the end of the day, a strong and prosperous Asia will benefit all. I, for one, hope that this transition will be completed in the early part of the next century and Asia will be emerging strong and confident again when this happens. For us here in Hong Kong, we are positioning ourselves to play a meaningful role in a world that will see a more prosperous China and a more stable Asia Pacific Region. Ladies and Gentlemen, Hong Kong has been through a turbulent period. We have tackled our share of challenges but in the process have always kept our long-term vision in mind. It is our responsibility to come up with solutions that can not only cater to the immediate challenges but also accommodate our aspirations for the future. I believe that we have stood up to our challenges for the past two years, and will continue to do so in the future with resolve, confidence, vision and the support of the community at large. Thank you.