May 7, 1998
Karen, Nick, Ronny, your excellencies, ladies and gentlemen,
First of all, Karen, let me thank you particularly for all those very kind introductory remarks. I very often would like to begin, because of years of studying in the West, begin a speech with a joke, but eight o'clock in the morning is really too early for that. It is nevertheless a great honour and privilege to be invited once again to the Asia Society gathering and to be speaking in front of this very distinguished audience. First of all, may I, on behalf of the SAR Government, extend our warmest welcome to our overseas friends for coming to Hong Kong and to this exciting city to witness how we are steering our future.
1997 was an extraordinary year for Hong Kong. July 1st saw the smooth and seamless return of Hong Kong to China, thereby ending 156 years of colonial rule. Indeed, the people of Hong Kong had looked forward to this great occasion with immense pride; pride in that we were at last reunited with our own country, and have become masters of our own destiny.
Indeed, we are confident in managing our future. The ultimate source of our confidence is, of course, the solid promises of the constitutional document, our Basic Law. It is a comprehensive document drafted by the people of Hong Kong together with people of mainland after some four years of consultation and discussion. The Basic Law provides a constitutional framework for the Hong Kong Special Administrative Region. It institutionalises the concept of "one country, two systems". It clearly prescribes that the social, economic and political systems in Hong Kong will be different from those on the mainland of China. It protects the rights, freedoms and lifestyle of Hong Kong people. It allows us complete financial autonomy, it establishes Hong Kong as a separate customs territory. The Basic Law guarantees the independence of our judiciary. And in fact, apart from foreign affairs and defence, it gives full responsibility to us to manage our own affairs.
Ten months had gone by since July 1st. The Central leadership has shown great determination to implement the principle of "one country, two systems", "Hong Kong people governing Hong Kong" with a "high degree of autonomy". We in Hong Kong are also determined to ensure the full implementation of the Basic Law. Indeed, the success is manifested everyday in Hong Kong and in every possible way. I invite you to stay long enough to witness this.
1997 was also an extraordinary year for Asia at large. Buoyed by years of continuous growth and prosperity, the region seemed ready to shrug off numerous structural weaknesses and continue its march into the next century. Some ten months ago, structural weaknesses of some Asian nations triggered a financial crisis that reverberated around the world.
The origins, causes and effects of the Asian crisis are complex, but the broad problems are fairly well known. In those countries which have been badly affected, it was a combination of private sector over-borrowing, inadequate bank regulation, poor risk management and tragic policy errors at the corporate and banking levels, both national and international. The growth of derivatives and modern information technology also contributed to this speed of the contagion. Furthermore, sound macro-economic policies which took into account of the new global, economic, financial and competitive environment are essential to any country or any community to succeed. Unfortunately, a number of economies were overstretched in the pursuit of high growth, not totally aware of the pitfalls of the global financial flows. The fact is, there are enormous benefits from financial liberalisation but such liberalisation must be built upon a robust financial system in order to cope with associated volatility in the financial markets.
The tidal wave that swept Asia has been devastating, and has sent ripples across the globe. But I must emphasise that Asian economies are not all the same. Those economies that have sound fundamentals, credible policies and low leverage, such as China, have succeeded in weathering the storm. Those with free markets, strong regulations, rule of law and stringent fiscal discipline, such as Hong Kong and Singapore, have passed the test.
Let me also point out that the recent Asian financial crisis is a new phenomenon brought about by an increasingly open global financial market system. The existing international and multinational structure for international trade and finance was designed 50 years ago and that needs to be upgraded to suit the new environments for the 21st Century. In this regard, Hong Kong fully supports calls for global efforts to design a new international financial architecture.
The financial crisis in Asia has been painful to us all. But the fundamentals in Asia haven't changed. We still have a young and flexible workforce, a very high savings rate, openness to trade and ideas and an indomitable spirit to improve ourselves. Some glaring uncertainty still needed to be resolved, but I would expect the Asian financial crisis to bottom out in a number of years and we shall then witness a slow but sure road towards recovery.
Now, let me say a few words on Hong Kong. Over the past decades, Hong Kong has achieved, in every respect, most enviable success. At US$25,000, our GDP per capita is the second highest in Asia. This has been achieved principally because of the hard work and entrepreneurial spirit of the people of Hong Kong. This has also been made possible because of the past 20 years of rapid and successful economic development on the mainland of China, which has given our economy boundless opportunities to move forward.
The success has also been achieved because we are committed strongly to prudent financial management. We have consistently been able to achieve budget surpluses averaging 2% of our GDP. For the current fiscal year ending March 31, 1998, which was about a month ago, our budget surplus was an astounding level of 5.8% of GDP.
Our robust financial system and monetary management mechanism, modern and prudent supervision as well as sophisticated financial infrastructure provide us with a foundation for a stable exchange rate. Our banking system is strong, with capital adequacy ratios of locally incorporated banks averaging 17% and bad debt ratios of less than 2%.
Additionally, we have a low, consistent and simple tax structure, an open and accountable government, and a lean and corruption free civil service. Most importantly, ladies and gentlemen, we believe strongly in upholding the rule of law.
Since 1983, Hong Kong, in order to ensure currency stability, has been operating under a currency board system which provides full US Dollar backing for our currency. In the recent round of attacks on the Hong Kong Dollar, the currency board system has proven to be most effective.
Thanks to our prudent fiscal management, at the end of 1997, Hong Kong's foreign reserves, foreign exchange reserves, which includes our 'fiscal reserve', stood at US$92.8 billion -- the third largest in the world. These huge reserves provide not just 100%, not just 200%, but 800% backing for the currency in circulation.
Many have questioned whether we need to devalue the Hong Kong Dollar. Indeed, people ask how can we remain competitive with the rest of Asia when currencies there have depreciated so much. I do not believe we need to devalue the Hong Kong Dollar. It is not in the interest of Hong Kong to do so. The fact is that the total value of our trade in goods and services in a year is equal to well over 250% of our GDP. Business engaged in these externally orientated economic activities want certainty in exchange rates. I realize one of the most important factors of competitiveness is about cost, but there are other important factors too. We know strict adherence to the rule of law, the need for corruption free society, predictable government policies as well as free flow of information and capital and people are some other very important other factors which will put investors, local and international alike, at ease. These are areas we have done well. I want to assure you these are the areas we will work hard to preserve and enhance because we know these are important to Hong Kong.
Although we do not wish to become more competitive through devaluation, I want to assure you that we are conscious of our high costs. Indeed, we know runaway high costs will, in the long run, hurt and stifle our economic growth. In fact, over the past few years, consistently close to double-digit inflation, high salary increases, and unrealistic property values have begun to threaten our future economic vitality. The SAR Government is extremely mindful of this. To tackle these problems, we have planned a series of measures which were announced in my Policy Speech delivered on October 8, last year.
However, because of the financial crisis, because of the currency board system we operate, interest rates will be pushed up automatically when the Hong Kong Dollar comes under attack. As a result of several attacks on the Hong Kong Dollar in the past few months, interest rates have gone up and have remained relatively high. This has resulted in the slow down of our economic growth. Unemployment has risen, stock markets have fallen and property market have declined very substantially from the peak. Although the markets have not totally settled down, and downsizing of organisations to gain the necessary efficiency are taking place, I believe essential structural changes are now taking place very rapidly. Structural adjustment had been painful to many and indeed it may go on for some time longer. But from a cost point of view, Hong Kong will begin from a much lower base once recovery starts. This will help our long term competitiveness. And this will help Hong Kong.
We are also aware competitiveness is also about the quality and creativity of the people. We have good people in Hong Kong. In preparing for the 21st century, we are committed to direct the focus of our entire community on to education at all levels and are prepared, to devote the necessary resources to ensure that we have the best brain power to meet the challenges for the future. Specifically, we are encouraging information technology effort on a community-wide basis, knowing fully well how important that it is to our future competitiveness.
For us to be a leading financial centre of the world; for us to attract the best people to live and work in Hong Kong, we have to ensure high quality of life here in Hong Kong. In this respect, better planning, better urban renewal, cleaner and greener environment are the areas where our effort will be directed.
As Chinese, we are all proud of the return of Hong Kong to China. At the same time we want to ensure that Hong Kong's international and cosmopolitan outlook is maintained. While we preserve the virtues of Chinese culture, we will continue to assimilate the knowledge and experiences of the West. Combining the best of the East and the West make each and every one of us a better person and in turn make our society that much stronger.
Indeed, we are not allowing the Asian financial turmoil to derail our long-term focus of building a Hong Kong which is fair, free, prosperous and economically competitive. Because of our very strong fiscal reserves of HK$450 billion - ladies and gentlemen, the government has no debt - and with a budget surplus of 5.8% of our GDP in the current year, we are able to, through the budget recently announced for this year, continue with our massive plan of investment in infrastructure and education which will make Hong Kong much more efficient and competitive in the 21st Century. We can do all that, and still expect to achieve a balanced budget surplus for the year. Indeed, despite the turmoil around us, we continue to build and invest for the future.
Ladies and gentlemen, if there has been any changes at all in Hong Kong since the Handover, it is the mindset of our people. Hong Kong is no longer an enclave economy with an artificial and psychological barrier created by the date of 30 June 1997 and the border between Hong Kong and the mainland of China.
Immediate years before the Handover and during 1997, tens of thousands of Hong Kong people who have previously migrated overseas have been returning home . They feel the pride, they sense the opportunity and they want to participate in building a better tomorrow.
Ladies and gentlemen, the world is progressing into the 21st Century. At the dawning of a new era, I would expect China to move confidently forward and become an engine for growth in this region and I would expect the rest of Asia to recover its economic vibrance. The future of Hong Kong will certainly be even brighter.
Thank you very much.
For more information on Tung Chee Hwa, visit the Hong Kong government’s site (http://www.info.gov.hk/ce/ce.htm) where you’ll find a bio, the text of recent speeches, his policy agenda, press releases and more.