Speech by Director-General of Trade and Industry - "Making the Most of China's Accession to the WTO" HKMA 2000 Annual Conference on"Developing a New Economy for Hong Kong"(30 October 2000)
Chairman, ladies and gentlemen,
I am honoured to be invited to participate in the Hong Kong Management Association's 2000 Annual Conference. The theme for today's Conference, "Developing a New Economy for Hong Kong", cannot be more timely and appropriate. It is important that we should discuss this interesting topic at this juncture when we are trying to cope with globalisation and the e-revolution to prepare ourselves for the knowledge based economy and to build Hong Kong into the world city of Asia.
2. This morning's opening session is devoted to looking at the Key Pillars for a New Economy. For Hong Kong, one of the most important pillars is, of course, our economic and trading relations with Mainland China. And this is a dynamic relationship. In view of China's impending accession to the WTO, I think it would be useful for us to take a look at what effect that would have on Hong Kong in terms of future opportunities and challenges. And how Hong Kong should prepare itself in order to capitalise on such development.
The Broad Implications of China's Accession to WTO
3. With the accession of China, the WTO will become a truly global multilateral trade organization. And China's full integration into this global trading system, with all its inherent rights and obligations, will give her an even more important role in shaping future global economic relations. Domestically, this will result in two irrevocable steps:
further opening up of the Mainland market
accelerated transformation towards market economy
4. On the first point. Substantial tariff reductions will no doubt generate more external trade, and external trade of a better quality. Other than greater access to the Mainland Chinese market, tariff reductions allow comparative advantage a greater play, eliminate trade distortions and facilitate more efficient allocation of resources among trading partners. According to a World Bank estimate of the growth potential of China's trade following its accession to the WTO, China's share in world exports will double in a space of five years: from the present 3.7% to around 7.3% by 2005. It's share in world imports is expected to rise marginally faster than its share in exports: from the present 3.4% to 7.2% in five years'time. Goldman Sachs in its report last year estimated that the Mainland's trade volume would increase to US$600 billion by 2005 compared to US$361 billion in 1999.
5. Turning to the second point. Accession to the WTO will also speed up the transformation of the Mainland economy. Increased foreign competitions in areas such as telecommunications, financial services, retail and distribution services will force Mainland enterprises to accelerate their reforms to meet the challenges. In the longer run, further economic liberalisation and integration into the global economy will undoubtedly be a stimulus to regulatory and institutional reforms on the Mainland. The transformation of the Mainland market will open up further opportunities for foreign businesses. These include demand for modern management, financing and professional services, as well as infrastructural support, all of which are instrumental in bringing the Mainland closer in touch with the best business practices in more advanced economies around the world. All these changes will make the Mainland a more attractive market for international trade and an even closer business partner of Hong Kong.
6. The general picture that emerges is clear: Although we will strive to make the best use of the opportunities, Hong Kong will by no means be the only winning party. The Mainland itself as well as the rest of the world will also benefit from the expanded economic activities. But looking at it from our perspective, China's WTO accession carries two important messages. First, it reinforces globalisation of the world economy on which Hong Kong must leverage if we were to maintain our position as a world class trade and business centre. Secondly, in order to seize the vast opportunities ahead, Hong Kong has to further develop and secure our role as a strategic partner not just to the Mainland but also between Mainland and the rest of the world.
Opportunities and Challenges for Hong Kong
7. Needless to say, the Mainland has been our largest trading partner since 1985, accounting for nearly 40% of our total trade. About 90% of Hong Kong's re-export trade are Mainland related (US$136 billion in 1999). And Hong Kong has been the largest external investor on the Mainland for many many years. As at end-1999, Hong Kong's direct investment there amounted to US$156 billion, accounting for 51% of the Mainland's total. About 120,000 enterprises involving Hong Kong interest are operating on the Mainland, predominantly in Guangdong. On the other hand, Mainland enterprises have played an active role in the local economy, with over 1,000 enterprises in active operation in various sectors of our economy, including banking, trading, tourism and distribution businesses. These are just some of the more obvious indicators of the close trade and investment ties between Hong Kong and the Mainland.
8. Hong Kong has often been described as the gateway to China. It is estimated that as a result of China's WTO accession, our re-export trade, involving the movement of goods to and from the Mainland through Hong Kong, will be considerably boosted. Our annual GDP growth rate will be raised by somewhere between 0.5 to 1%, i.e. from a trend growth rate of 4 to 5 per cent, going up to 4.5 to 5.5 per cent. Yet it is too easy to forget that in modern days, this gateway role is not confined to physical movement of trade in goods. More importantly, it also covers intangible linkages and networks of information, talent management, shared culture and values. Over the years, these linkages have served to cement the close partnership between Hong Kong and the Mainland and, through which, between the Mainland and the rest of the world. But proximity and early access to the Mainland market will not necessarily guarantee our edge over others. The crucial question is whether Hong Kong can secure a unique partnership with the Mainland which could leverage on the kind of expertise and experience that are greatly sought after by both the Mainland in reforming its economy and by international trading partners in gaining entry to the Mainland market.
9. The opening up of the Mainland's services to foreign participation will provide Hong Kong companies with the opportunity to establish or consolidate their foothold in the Mainland's lucrative services markets, including banking, securities, insurance, tourism, distribution and the professional services. The outlook is that in the near-term these sectors will be considerably boosted - and enriched - by the Chinese enterprises that are seeking to upgrade their capabilities and governance methods to handle expanded business activities and meet foreign competition. These sectors will also be in great demand by overseas investors in search of advice on how to maximise opportunities on the Mainland. Indeed, there are clear signs that this boost is already in progress, in anticipation of China's WTO accession.
10. Whilst we look forward to many new opportunities, there will also be challenges. With the progressive opening up of the goods and services markets on the Mainland following WTO accession, there are those who believe that Hong Kong's intermediary role in many areas will be eroded in the longer term, as traders on the Mainland can deal directly with the rest of the world. There are others who worry about fierce competition from both multinational corporations and the Mainland's own enterprises.
11. No doubt we will face greater competition from other global players. However, while the proportion of the Mainland's goods that physically pass through Hong Kong may decline, the actual volume of such goods is unlikely to decrease, given the likely substantial growth of the Mainland's overall trading volume. Moreover, I believe Hong Kong companies will continue to play an important intermediary function in sourcing and marketing the products. And given our long experience in China business, Hong Kong companies will be the ideal joint venture partners for foreign investors, especially SMEs wishing to enter the China market. It is also likely that this role will develop gradually from one of intermediary to one of proprietor, as more and more opportunities are available to Hong Kong investors by the further liberalisation of China's economy.
Making the Most of the Hong Kong Advantage - a strategic partnership
12. For Hong Kong to secure a strategic partnership with the Mainland, we must be able to leverage on our distinct advantages over other global players to capitalise on the opportunities presented by China's accession into the WTO. Our businessmen have a common language and culture with their counterparts on the Mainland. They have very profound knowledge of the Mainland business landscape, and a great deal of practical experience. They also enjoy close proximity and have well-established connections. Furthermore, Hong Kong businessmen and investors' established foothold on the Mainland is not limited to the prosperous coastal regions and big cities like Beijing, Shanghai and Guangdong province. They are also present in the developing inner and western provinces. These so-called "second-tier" markets account for 60% (US$ 111 billion) of the Mainland's imports last year, and should be of great interest to Hong Kong's small and medium enterprises.
13. Apart from that, Hong Kong is particularly well suited to provide value-added trade-related services to the Mainland when the latter becomes a member of the WTO. Indeed, Hong Kong can become a logistic centre to support e-commerce on the Mainland, as well as to provide overseas customers with 'one stop' export or trade-related services, e.g. freight forwarding, insurance and quality inspection. We are well placed to do this because our private sector has established good corporate governance practices and assumes a leading role in business deals in the region. Professional and business service providers in information technology, telecommunications, legal, accounting, logistics and other consultancy services are bountiful in Hong Kong. Lately, our businesses are actively exploiting the opportunities arising from the new e-commerce era. Industry estimates put the value of e-commerce transaction in Hong Kong at the end of this year at US$1.9 billion. This value is expected to reach the level of some US$69.6 billion by the end of 2004, and the figures for the Mainland will show an even stronger growth.
14. Another advantage is our position as a leading financial centre in the region, giving us very naturally the role of a major capital-raising centre for China. I expect many Mainland enterprises will come to Hong Kong to raise capital for expansion and reform to meet the challenges and opportunities arising from WTO accession. As at end 1999, a total of 44 Mainland state-owned enterprises are listed on the Hong Kong Stock Exchange, raising equity capital of US$8.4 billion. Goldman Sachs estimates that foreign direct investment into China would increase from its current level of about US$40 billion to as much as US$100 billion by 2005. Such huge inflows of capital will generate significant business opportunities to Hong Kong's financial institutions and professional service providers.
15. Last but not least is our flexible, well-educated and bilingual workforce, which forms the backbone to our success as an international financial centre and services hub. WTO accession will have profound impact on the Mainland's business environment and practices, as well as corporate governance of Mainland enterprises. Hong Kong's professionals in finance and other business services, with their strong cultural linkage to the Mainland and international exposure and training, are uniquely positioned to assist Mainland enterprises to compete in the global economy, to the mutual benefit of both the Mainland and Hong Kong.
16. China's accession into the WTO will intensify the increasing globalisation of the world economy that is facing Hong Kong. Early access into the Mainland market has given us an edge but it is no guarantee for continued success. Sheer pessimism due to fear of competition will not help us either. For Hong Kong to succeed and sustain our role as a world class business centre, we must re-position ourselves and to identify our niche. We need to put our strengths into good use and to secure linkages between the Mainland and the world economy. Whether we can succeed depends largely on whether we can secure such a partnership that could reinforce our role as a gateway and service centre to capture and the trade and investment opportunities arising from the Mainland's continued growth and market liberalisation.
17. Thank you.