Speech by Mr K C Kwong, Secretary for Information Technology and Broadcasting at ITAC Board of Directors Meeting

22 September 1998

Ladies and Gentlemen,

I am delighted to come to Canada again since my last visit here in May 1997. My last visit was made shortly before the resumption of the exercise of sovereignty by China over Hong Kong. There was a lot of speculation then about whether Hong Kong would make it through the transition. It has now been 15 months since the transition. So, I would like to take a few moments to brief you on the latest situation in Hong Kong.

One country two systems

As you may know, China has adopted a "one country two systems" policy in respect of Hong Kong. Under this policy, Hong Kong will exercise a high degree of autonomy and enjoy executive, legislative and independent judicial power. Also, the previous capitalist system and way of life in Hong Kong shall remain unchanged. Many people questioned whether or not China will keep to her promises despite the many assurances given by top Chinese leaders before the transition. One year on, the facts are there for everyone to see. We have continued with our own capitalist system; we have adhered strictly to the rule of law; we determine our own fiscal policy and prepare our budget without interference from the Central People's Government in Beijing; we continue to set our own economic policy; we maintain Hong Kong as a separate customs territory from the Mainland of China; and, above all, we have continued to uphold the traditional freedom and rights which are so cherished by the people of Hong Kong. So in a nutshell, the one country two systems policy has been implemented faithfully and scrupulously by China and, apart from the change of flag, Hong Kong is no different from the Hong Kong before the transition.

Impact of the Asian financial turmoil

While the "one country two systems" policy has worked well in Hong Kong, like all other economies in Asia, we have had to face a very different and difficult economic environment since July last year. I am, of course, referring to the environment created by the financial turmoil which first hit Asia and which, unfortunately, seems to be spreading to other parts of the world. Hong Kong as an open international city cannot be immune to the contagious effect of this financial turmoil.

As a result, we have seen property prices falling by as much as 40% to 50% in the past year; the Hang Seng Index (which is the key stock market index in Hong Kong) down by some 50% from its peak in 1997; tourism contracted by 20% so far this year; and unemployment doubled to 5% , a 15- year high. In all, our latest assessment is that Hong Kong's GDP will fall by 4% in 1998.

So, indeed, Hong Kong is having a hard time. Some may be tempted to put the blame of all these on the financial turmoil in Asia. But the truth is the economic adjustments which I have outlined were almost inevitable given the asset price inflation up to 1997. Indeed, with hindsight, one can say that the bubble was there already, waiting to be pricked. Our property prices and wage levels were then so high that they would make Hong Kong non-competitive in the long term. Our economy needed the adjustment anyway. From this perspective, the Asian financial turmoil has merely hastened the pace of this adjustment.

With the flexibility in costs and prices in Hong Kong, our economy has been adjusting rapidly and efficiently. Wages are softening; property prices and rentals have fallen substantially; and inflation is now down to its lowest level since 1986. The cost of living and cost of doing business in Hong Kong have both moderated. It may be of interest to note that Hong Kong was voted the best city to do business in the world in the 1998 Business Travel Survey recently conducted by the Business Traveller Asia-Pacific magazine.

We expect that the economy will continue to adjust in the rest of the year, and perhaps early next year. However the adjustment will ultimately lead to the emergence of a much leaner and more competitive Hong Kong. This is the silver lining to the Asian financial cloud.

Recent measures to counter speculative activities

Very recently, the Hong Kong SAR Government has taken some special measures in the stock and futures markets to counter speculative activities. Our action has led to some worries that we may have deviated from our long-standing principle of positive non-intervention and reliance on the market. I want to use this opportunity to clarify that what we do is no more than what is necessary to provide a stable and orderly environment for our economy to undergo the economic adjustment. The only purpose of our action was to push away the manipulators from the markets so as to restore order in our markets. This is what will be expected of a responsible government when the stability and integrity of its market is under speculative attack and when market disruption has occurred as a result. I want to emphasise that it is not the intention of the Government to artificially support our stock market at any pre-determined level. In fact, the Government fully accepts that our asset prices must adjust according to changing economic conditions and external environment. So, let me assure you that we take action only to ensure that our economy adjusts in an environment without serious distortions caused by market manipulation.

Our operations in the stock and futures markets are just part of our overall strategy to strengthen Hong Kong's financial market. Earlier this month, we announced a series of measures aimed at tightening up market discipline, restoring market order in the securities and futures markets, and further strengthening our defence against manipulators in the foreign exchange and money markets. These measures would lead to a higher degree of market transparency and disclosure, with heavier penalties for breaches of securities legislation and market rules. We are confident that all these measures will improve the ability of Hong Kong's monetary and financial systems to withstand cross-market manipulation by unscrupulous speculators.

Turning adversity into opportunity

As I have just said, the financial turmoil has hastened the adjustment process in our economy which was waiting to happen, and the adjustment will ultimately make Hong Kong more competitive. From another perspective, we can say the financial turmoil has brought us an opportunity to re-establish our competitiveness. I would now like to focus on some of the initiatives under my policy portfolio which are aimed at increasing our competitiveness. These are initiatives related to the opening up of the telecommunications and TV markets, as well as to the development of an information society.

Liberalisation of the telecommunications market

First, on the telecommunications field. We have excellent telecommunications networks in Hong Kong, and I think this is well known. Our fixed telecommunications networks have been fully digitised since 1995. We have 3.6 million exchange lines serving the entire population, or about 108 exchange lines per 100 households, which is among the highest penetration rates in Asia. Our mobile telephone penetration rate is equally impressive. At 37%, it is one of the highest in the world. All these were achieved by investments from the private sector, operating in a market under fair and transparent regulation.

To maintain Hong Kong's position as the pre-eminent telecommunications centre in Asia, we have recently announced a package of proposals to further open up the telecommunications market in Hong Kong. Of particular interest to you may be the proposals relating to external communications. Our proposals are that there should be free competition for external telecommunication services from January 1999 and free competition for external telecommunication facilities from January 2000. We shall let the market set the number of licences to be issued for these external services and facilities.

The liberalisation will certainly enhance the attractiveness of Hong Kong as a place for investment in telecommunications, encourage competition and innovation, and maintain Hong Kong's leading position as a telecommunications hub.

Liberalisation of the TV market

I would like to turn now to the TV market in Hong Kong. Our TV penetration rate is over 99% for wireless TV; our cable TV network passes 79% of homes and our satellite TV reaches 28% of homes. The world's first commercial scale video-on-demand service was launched in Hong Kong in March this year. But we feel that there is still scope for further development.

In order to create an environment which is conducive to the continued development of the TV market and the introduction of innovative multi-media services using new technologies, we have announced a range of proposals to liberalise the TV market in Hong Kong.

The first initiative is on network sharing. We have proposed to open up the existing cable TV network so that its full potential for delivering multi-media and telecommunication services could be realised. We have also proposed that the telecommunication networks be allowed to deliver multi-media and other electronic services.

Our second initiative is to open up the pay TV market. At the moment, there is only one broadcaster providing subscription TV services. We believe that the opening up of the pay TV market will help to speed up technology transfer, stimulate the growth of related industries, attract new investment and create employment opportunities.

Apart from opening up the networks and the market, we will also facilitate the development of digital terrestrial television (DTT) which will allow better utilisation of the spectrum as well as open up opportunities for innovation and improvement in services. We are planning to conduct technical trials early next year so that, if feasible, DTT can be introduced in the year 2000.

We have also proposed to modify the regulatory regime for broadcasting to make it easier for broadcasters to uplink from Hong Kong.

All these initiatives will enhance Hong Kong's position as a leading broadcasting centre in the Asia region.

Hong Kong's IT Future

Apart from telecommunications and broadcasting, another area of rapid development is IT. There are indeed few areas of modern life that are not touched by IT in one form or the other. If Hong Kong is to maintain its status as a leading international financial and business centre and to remain competitive in the global market, it has to keep itself in the forefront of IT development, and to make the best use of advances in information and communications technology to improve the quality and efficiency of the services that it can offer.

IT is too big a field for me to cover all its various facets in the next few minutes. I would therefore like to focus on one important aspect of IT development, namely electronic business. With the extensive reach of the Internet, the opportunity for doing business on-line has increased substantially in the past few years. This is evidenced by the rapid growth in Internet users. In Hong Kong, the number of Internet accounts has been rising sharply, by some 30% to 40% every six months in the last two years. We now have over 570,000 internet account holders, or over a million internet users. We are also witnessing the emergence of some innovative use of the Internet for the delivery of services on-line, such as supermarket shopping, banking and cyber bookshop. But this is not enough. There is tremendous potential for the further development of electronic commerce in Hong Kong. The reason is simple - we have an excellent communications backbone on which business applications could be built; and we have the people who are receptive to new technologies and advanced modes of transactions.

To encourage the development of electronic commerce, it is important that the government provides the right environment. Specifically, we believe that the government should take the lead and deliver its services on-line. In the process of implementing this Electronic Service Delivery scheme, we aim to identify and remove any impediments which might hamper the development of on-line service delivery. For example, we will have to deal with the fundamental questions of security, authentication and payments. To this end, we are planning to establish a local Certification Authority (CA) by the year 2000. In addition, we will establish a clear legal framework in order to provide certainty in the conduct of electronic transactions. The framework will cover issues such as legal recognition for data messages and electronic signatures, as well as the establishment of CAs. These are all essential to the development of electronic commerce in Hong Kong.

In developing our Electronic Service Delivery system, we will adopt an open, common interface so that it may be used by the private sector for transacting electronic commerce at a later stage. Of course, we will leave it to the market to decide if businesses want to use this common infrastructure.

We believe that the Electronic Service Delivery scheme will not only enable us to improve the quality and efficiency in the delivery of public services, but also serve as a catalyst in promoting the wider use and further development of on-line services and electronic commerce in the private sector.

The Advantages of Hong Kong

The success of all the initiatives I have just mentioned greatly depends on whether there is a stable environment for businesses to thrive. Despite the impact of the financial turmoil and the chaos which it brought in some Asian countries, the fundamentals of Hong Kong remain robust. As I said earlier, we continue to enjoy political stability, and economic and financial autonomy. We also remain committed to continue building for the future.

For example, we are moving ahead with our ambitious infrastructural programmes. We will spend US$30 billion in infrastructural projects over the next five years. We shall continue to invest in education and training of our people by spending some US$6.8 billion [or 23% of the Government budget (US$29.9 billion in 1998-99)] each year.

But this is not all. Hong Kong, as a Special Administrative Region of China, is uniquely well-placed to develop business relationships with the Mainland. We will continue to capitalise on our management skills, entrepreneurial drive and marketing networks with other countries to further expand our role as the gateway to the Mainland of China. And in this, we would particularly welcome opportunities for cooperation and partnership with our friends in Canada.

In closing, I would like to thank you for giving me the opportunity today to share with you our experience in riding the Asian financial storm and our plans to to turn adversity into opportunity.

Thank you.

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