Interview of John Tsang

As consulted with the Commercial Radio of Hong Kong (香港商業電臺, the Cantonese to English transcription of the interview does not breach copyright law.

Interviewers: Loh Fai (transliterated), and Ho Chui Ping
Interviewee: John Tsang Chun-wah (曾俊華), Financial Secretary of Hong Kong
Date: March 2, 2013

Interviewer: Good morning. (Good morning). As May is not feeling well today, we have Ho Chui Ping (also hosting) today. Of course, with us today in the studio today is John Tsang, Financial Secretary of Hong Kong. Good morning, Mr Secretary. (Good morning, Mr Secretary.)
Interviewee: Good morning.

Interviewer: Since the budget has been announced recently, and everybody has been discussing about it, including its policies. And recent surveys revealed that… (split into half?) yup, half of the respondents reported satisfaction, while the half are unhappy with the budget. Mr Secretary, how do you respond to feedback from all walks of life?
Interviewee: Feedback from all walks of life comes from various angles. And the angles are different from one another. But for me it is more or less as expected. Speaking of the budget, you have to observe in different industry to see its influence. Before finalising the draft, we worked very hard together with our colleagues to work on this budget. So that we can strike a balance. If the feedback has been one-third each from three groups of respondents, that is in some way a sort of balance.

Interviewer: (Laughing) Do you feel disappointed if the feedback reflects that it has been criticised for being not innovative, that it scores poorly, or that the financial give-outs are insufficient?
Interviewee: Not really. When we were preparing the budget, innovation is not our first priority. The first priority of ours has to be observing the current economic situation and our financial status. And suggestions raised by Hongkongers, how can we make good use of our resources to cater to their needs? How do we help the needy group so that our society can move forward? This is our first priority. It doesn’t matter if (the method) is old. Being innovative is not our prioritised consideration.

Interviewer: So innovation is not what your budget prioritises. And as you announced your budget you have made it clear that it aims to enhance employment and give the economy a leg up. Since logistics and trading employ nearly half of Hong Kong’s workforce, and they represent quite a high ratio in the economy. In your budget you said that several lots of vacant land can be offered to logistics. And they are located in Tsing Yi and Tuen Mun. Can offering of vacant land help boost the logistics industry so that they can perform better and employ more workers?
Interviewee: Or I should put it into perspective. We have four pillar-industries. And there have been some opinions that we should look for new industries. But my point of view is that the four pillars of Hong Kong have been well developed for decades, and they became our advantage today. Why not harness these advantages – since we have already had them? Looking at current development of global economy, we can still create some room for improvement for our pillar industries. Particularly the logistics industry, which is a large industry employing 700,000 to 800,000 workers. It is considered the biggest industry in Hong Kong, contributing one quarter of our gross domestic product (GDP). It is a big industry. In the past we rarely mentioned about logistics, but this time round I specifically picked it out for discussion to find out if we can understand more about logistics so that we can bring our economy to another level up. And that would offer more job opportunities such as transportation work for Hongkongers of grass-root level. It is a good job for them. So this is our direction, and this is the background of the industry.

Interviewer: Logistics has been described as a sunset industry, and nearby areas are joining the competition. Why are we rethinking our position in logistics and try to enhance it so that it can become our heavyweight industry in the future?
Interviewee: This is definitely not a sunset industry. Looking at the economic and political development around the world, there are actually many opportunities for us. It is about several aspects. Firstly, the economic weight shifts eastward. Many fields and wealth come to this region for future development. And we have strong demand for expensive products, as well as some special demand which is different from the west. Viewing such development from a logistics point of view, can we turn Hong Kong into a transportation hub? It depends on how to meet the requirements in the region. How do we achieve it? We need to research about it. Looking at traditional western economies, since the aftermath of September 11 incident, the westerners have been worrying about security matters. They have this sentiment that they want their import to be 100 per cent safe. That’s how they push it. This is the window of opportunity for Hong Kong to become a transportation hub to export safe produce. Having discussed at length with Hong Kong Customs and Excise Department, we came up with a Hong Kong Authorized Economic Operator (AEO) Programme. How it works? Hong Kong export companies have to meet their criteria, and the customs verify that their system is safe. That accreditation in Hong Kong also seeks accreditation in U.S. or Europe, so that it is easier for our goods to be exported into their economies. If goods from Hong Kong can be cleared faster at U.S. or Europe customs, that is another advantage for us. If we can grab the two opportunities that I mentioned just now, that would be a very good chance for us.

Interviewer: That is making good use of Hong Kong’s branding. Can it blend with Closer Economic Partnership Arrangement (CEPA) to boost the economy?
Interviewee: CEPA is also a good opportunity for us. We know there are many foreign companies which want to enhance their production process in Hong Kong. If they produce their goods in Hong Kong, and they are given a Made in Hong Kong recognition, that means their goods selling into China are duty-free under CEPA. And you know for those expensive goods, they pay a lot of duties to get into China. So this is a good opportunity for us. CEPA is such a unique agreement – that it is a free-trade agreement only exists between Hong Kong and mainland China. You don’t see it elsewhere in the world. Which is why we aim to make good use of our system to develop our industries.

Interviewer: All of sudden I thought of milk powder production being shifted to Hong Kong so that dairy products can enjoy duty-free export into mainland.
Interviewee: It has to be produced in Hong Kong. But that’s tougher, because country of origin of milk powder has to be a place which breeds cows. (Laughing)

Interviewer: Going to the 15th floor. (Laughing) But given such background that logistics employs 700,000 to 800,000 workers – about 20 per cent of our manpower. And including the supporting industries, they make up half (of the manpower). So you see this as an opportunity for Hong Kong, and we offer three lots of vacant land. Of course you need land for further development. When the land is offered, how do we expand the economic pie?
Interviewee: We have two lots of land. The first is a two-hectare lot located in Tsing Yi. On the western part of Tuen Mun there is a ten-hectare lot. We don’t have the details for future development just yet. The lot at Tsing Yi can be introduced this year (2013). I think the best way should not be the government planning the usage of every inch of the land. I believe that the market understands the most efficient method. We are looking forward to discuss this matter in details with the stakeholders of the industry. We are looking into how we can best introduce this programme to better utilise our very precious land.

Interviewer: Have some companies already been knocking at the door and are trying to offer their expertise?
Interviewee: I believe many businesses would be interested in this. Not only the local companies are interested, foreign companies of good reputation are also seeking to take advantage of Hong Kong’s transportation network. In Hong Kong, whether you are driving or catching a ship or traveling by flight, within two to three hours you can reach out to half the world population. We have over 1,000 flights everyday flying to almost all destinations (in the world). If you need to send out valuable goods, this is a very good transportation hub for you. As far as I am concerned, many foreign companies wish to set up their presence and offices in Hong Kong to reach out to more customers. And the western economies know that if they are to expand their business, America and Europe are not the options anymore; the way out must be Asia. How do they find themselves a transportation hub? This is something they have to ponder.

Interviewer: As for logistics, the new piece of land has been offered and infrastructure can be put in place to enhance its services. Speaking of the budget, logistics has been our core industry, funds are also looking good. For example, private funds can now look up to offshore funds in that they can be exempted of profits tax. Do you see more private funds coming to set up and run business in Hong Kong? (Just as the effect we saw earlier on when we exempted red wine tax…)
Interviewee: Another perspective on this matter is that wealth is concentrated in Asia. And there are more and more wealthy people in Asia. The economic weight is shifting to the east, which thus increases the demand for wealth management. We have to look into our system to see how we can attract more wealth coming into Hong Kong. This is a good industry. Finance industry contributes 16 per cent of Hong Kong’s GDP, but it employs only six per cent of our workforce. Which means it is highly value-added. This is an industry which needs a lot of professional services, such as legal and accounting services and many more. It also boosts other industries including logistics as well as food and beverage. This is a crucial industry. We are looking into the possibility of loosening up tax obligation so that we can attract various funds to run business in Hong Kong. If private funds can set up more businesses here, it will provide more jobs and improve the industry as a whole. This is the case. But some are worried if those financial crocodiles…

Interviewer: Including hedge funds…
Interviewee: Are the crocodiles coming to launch financial attack again? If you compare today’s regulation with what we had around 1997, you will find out they are two different matters. Having learned from the previous experience, our regulations have been uplifted to a very high standard – to the extent that some (counterparts) said ours is exceeding global standard. Because we have to be careful on our regulations and continue to upgrade them. With stricter regulations we will be able to attract more businesses. Investors always want better regulations before they invest. We will carry on with our work on this area.

Interviewer: Speaking of the funds, we have the policies and measures, and consultation has to go on and some rules need amendment. About when it is going to start business?
Interviewee: We will keep on introducing them. We have been discussing with regulating authorities, and we will consult relevant industries and Hongkongers. We believe we can launch it pretty quickly and seek approval at the legislative council to pass some laws. With that we will be able to kick start the programme. This is a good opportunity. Another aspect which I wish to put in more effort is that foreign bankers have raised the issue of developing the insurance industry. As we all know we are going to set up Office of the Commissioner of Insurance this year (2013). We will have a bill to seek approval at the legislative council. Once the Office of the Commissioner of Insurance is established, we will be able to further develop relevant services. In the budget I mentioned about captive insurance.

Interviewer: Captive insurance companies can turn the risk to the insurance companies. So the budget mentioned about captive insurance synchronizing with self-insurace, for they are similar in essence. To what extent we can promote it?
Interviewee: Mainland is now encouraging Chinese insurance companies to have self-insurance. Because it is tough when they look for insurers from outside. If they work on this part, that would be good. If we can attract these business opportunities to come to Hong Kong, we can uplift the industry to another level. And it provides job opportunities of better standard.

Interviewer: How big the business is? There is only one captive insurance company in Hong Kong, but there are over 60 of them in Singapore. We are lagging behind.
Interviewee: Some asked me if we have lost a lot of tax revenue? I said not really, for we don’t have it now. (Laughing) If we can attract more opportunities here, we would enhance the overall economic benefit as well. And it offers many job opportunities. Since young Hongkongers are better educated now, we should provide them jobs of better standard. I believe our society will welcome this.

Interviewer: Finance services include government bond and iBond. Government bond is to raise 200 billion HKD, up from 100 billion HKD. Can ordinary Hongkongers invest in it? Is the bond open for small-time investment?
Interviewee: In the current environment of low interest rate, nobody is interested to invest a small amount of money in bond. It offers lower than one per cent of return. U.S. bonds offer lower yields, and Hong Kong can’t offer much either. Bonds across the world now offer lower return. About 70 billion HKD of bond is purchased by companies. A mature bond market is what we lack in Hong Kong. You know the curve line of the chart? We can’t even come up with that for our bond market.

Interviewer: It is still not there just yet.
Interviewee: Can’t come up with that now. With 100 billion of bond we sold 70 billion of them, and we try to attract more bonds to come into Hong Kong. That way, we can run a more maturer market. If we have more bonds setting up in Hong Kong, it offers another investment channel, and it is another way to raise capital.


Interviewer: Good morning, in the studio with us today is John Tsang, Financial Secretary of Hong Kong. (Good morning)
Interviewee: Good morning.

Interviewer: In the first half we discussed about how to expand the economic pie of Hong Kong. As the budget has been announced, many called it sharing the pie, while we called it making the pie. Speaking of making our economic pie, Mr Secretary also mentioned that the economic situation is about to face some risks. Other than investment in infrastructure, we also have some measures to accelerate the economic growth. Chief executive also mentioned that we should halt the economic downturn and try to spur faster growth. Are you confident in this matter? Given that there are uncertainties.
Interviewee: The economic situation is truly uncertain. Ten to twenty years in the past, our annual growth registered an average of 4.5 per cent. As for 2013 our growth is only 1.4 per cent. My initial forecast is one to three per cent; (the median) we are talking about 1.5 per cent. So we are quite accurate in our forecast for economic growth. Hong Kong economy is exposed to external factors, which are not doing well now. And our export experienced a slump when there is lesser demand from America, Europe, and Japan. Export business volume recorded lower. We maintained 1.4 per cent of growth because of local demand. When we were drafting the budget last year, we saw this risk and we introduced some measures worth 80 billion HKD. So it enables a 1.5 per cent growth. This is effective, and it allows Hongkongers to have more money to spend in local marketplace. Hong Kong’s unemployment rate remains low, currently stands at 3.4 per cent. Which is rare in the world. Many advanced economies recorded unemployment rate of double digit. If we can expand our economic pie, we can improve our employment rate. Hongkongers are concerned about our jobs; when we have jobs we work hard to improve standard of living. Employment is the area concerned me most.

Interviewer: Your measures aimed to add on another 1.3 per cent of growth. From 1.5 to 3.5 per cent of growth, if the actual rate falls on the lower end, does that mean we are dependent on the measures for a rather weak growth?
Interviewee: This year I am worrying if the unemployment rate is about to increase. But the economy seems to be doing better than last year, which is why I estimated a 2013 growth of 1.5 to 3.5 per cent for Hong Kong economy. Which is about to fall in around 2.5 per cent. With our measures the growth is 1.3 per cent. With this we hope to maintain low unemployment rate and boost local economy. External factors are risky; the U.S. is doing better, property-purchase shows recovery, and many companies are reportedly doing better. If the capitals are to be reduced, it is going to affect U.S. economy and harm market demands. The most worrying of all is Europe. Italy would have an election and things are uncertain. So is Germany. How politics is affecting the economy? We are worrying as well. Continuous quantitative easing in Japan is to a certain extent affecting Hong Kong as well. The Japanese are suppressing yen value to enhance their competitiveness in export business. We have to pay attention to all these matters. In the budget I mentioned about three wars, namely currency war, trading war, and war of geopolitics. We have to pay attention to these matters.

Interviewer: Since the external factors are so uncertain, Hong Kong’s local demand is standing on its own feet. While we managed to register some growth, grass-root level Hongkongers are facing tremendous pressure in their daily life. Is it possible that we make it a regular practice to render assistance of grass-root workers? For example, we can allocate certain portion of the budget for aids relief. That way, perhaps we need not reset the portion year in year out? If we make it a regular practice, wouldn’t it be better for grass-root residents in Hong Kong?
Interviewee: Looking at the entire budget, we offered 33 billion HKD in aids relief – which constitutes 7.5 per cent of the budget. Which is quite a small portion. On the areas of welfare, education and healthcare we have to spend 60 per cent of our budget. The expenditure for this year is HK$ 440 billion. Compared to last year, the total expenditure increased 15.6 per cent. This is quite a huge increase. And the three areas expanded much too. On social welfare we spend 33 per cent more for this year, which is quite a big step forward. I believe that Hong Kong residents can sense that service quality has improved this year. Putting aside total expenditure, we increased recurrent expenditure as much as 10.5 per cent – or 28 billion HKD. This is also another huge figure. And every Hongkonger stands to be benefited on the areas of welfare, education and healthcare. Expenditure on these three aspects is more practical. One-off aids relief is not the main course; our main course is recurrent expenditure, which we have expanded a lot.

Interviewer: Once the budget is approved and being implemented, you are confident that Hongkongers can sense the overall enhancement of the quality of government service?
Interviewee: Government takes care of many matters; it has to provide more services as the population grows. For example in medical line it involves prescription, better clinic service, and new hospitals – we are offering more services. And Hongkongers can sense it.

Interviewer: Are we lacking some effort in the care service of the elderly? As you mentioned in your budget, ageing population is a problem we have to tackle. The problem of ageing population is perhaps reflected in the slowdown of economic growth. And we are coming up with a fund to conduct research on how an ageing society affects our budget’s expenditure and tax revenue. Are we lacking the effort to improve the standard of living of the elderly?
Interviewee: Not really. Care service for the elderly is another area which we offered new services. As everybody knows we allocated 8.3 billion HKD for elderly stipend, covering some 400,000 people. As for elderly fund we have allocated 300 to 400 million HKD for community care voucher. It is a first-phase programme to test run. We want to see if such financial aid can help them. Some expenses help add on some slots of daycare centres, also more slots for dormitory and more financial aid. In addition, we allocated more fund to offer nurse training programme for social service industry. This aims to train and provide more nurses for old folks homes.

Interviewer: Whether to spend more money or less money, do you have some disagreement with chief executive on such matter?
Interviewee: Not really. We all understand that the government introduces new measures, on the fiscal front we have to complement them. And many services will be introduced. We have the same goal, which is to make good use of our limited resources to help more Hongkongers within our financial means.

Interviewer: There are many committees coming up to conduct research on new policies. So the fiscal policies will coordinate accordingly as well?
Interviewee: Yup. Government generally leads the policy making. How are those policies going to be implemented? What are the details? Are Hongkongers welcoming those policies? On the fiscal part we have coordinate comprehensively. We have to get ready. If we have more income, we have more fiscal means for various policies.

Interviewer: It is important to spend within our means. And you mentioned about the importance to maintain fiscal discipline. Your estimation of budget surplus or deficit has not been accurate. And you explained that growth forecast is not an accurate benchmark to predict expenditure. But expenditure figures are not the best reference either. Can we come up with a new measurement instead? Perhaps not 20 per cent of Hong Kong’s GDP? Even looser than that perhaps? We are running a surplus of over 60 billion HKD, and we have 700 billion HKD of reserves. These figures are going to increase.
Interviewee: Yup. We are accurate in expenditure forecast. Whether economically it is sunny or rainy day, we still have that much expenditure to run our hospitals, schools, and take care of social welfare and aids. These have to be continued. We estimate expenditure accurately. But our income is related to external factors. In January we have to predict what is going to happen in next year’s April. It is an estimation of over ten months. Which is difficult. The basis of our estimation is the current economic situation. Last year we estimated 1.4 per cent of growth for this year, which is quite accurate. With 1.4 per cent of growth we then estimate our income. As you know 1.4 per cent is very different to 4.5 per cent, the current rate is one-third of what we had in the past. Which is why we are conservative to estimate our income. Some tax revenues are surprising though. For example, profits tax has an additional of 25 billion HKD, and stamp duty, 6 billion. But we need not mind too much about income. The most important matter is that our expenditure has to achieve a reasonable growth. A 15.6 per cent of growth in expenditure is good enough to provide services to Hongkongers. And growth rate in expenditure is double that of income growth. We have to narrow the discrepancy.

Interviewer: So you will handle the fiscal policies in a flexible manner according to the actual situation.
Interviewee: That’s right.

Interviewer: And you won’t be much restricted. Land supply is quite a big problem in Hong Kong. As the new pieces of land open for sale, some of them have not been regulated for residential purpose. Many are worrying if land supply is insufficient. What’s your take on this matter?
Interviewee: As Paul Chan Mo-po (Secretary of Development) pointed out, we will adhere by the current system of Town Planning Board. The board will continue to supply land. The core problem is land supply. We have to increase the supply. This year we are sure that 24,000 units of new flats will be supplied. In coming three to four years 67,000 units of new flats are to be made available. So the supply is coming up. On management strategy we have to decrease the number of home-buyer waiting list. Given the current volatile market, when Hongkongers buy new flats they should be careful and examine their financial status before buying property.

Interviewer: If land sale note is hard to come by and new land supply is rare in next year, would it be hard to continue supply new land?
Interviewee: Which is why we are coordinating a small committee to search for land. Our colleagues are looking at areas suitable for reclamation, and location for cavern development. In the long term these new land lots can be developed. And we have to look at residential and commercial buildings. Government institutions are going to move out from Central. 10,000 government servants at three buildings in Wan Chai will also move out. As they are moving out, office space can be leased or sold. Which adds up to the supply of commercial office space. In these aspects we are looking to increase supply; we are looking to strike a balance.

Interviewer: This is quite a big bottleneck; the budget invests some 4.5 billion HKD. When can the government get it back? Or any reclamation is starting now?
Interviewee: We need to do it step by step; those programmes have procedures. And we need the support from Hongkongers. We have to have a common understanding is that if we don’t reclaim land, our future growth will be hindered.

Interviewer: Many thanks to financial secretary for today’s interview. (Thank you.)
Interviewee: Thank you.

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