Eric’s Bits and Bytes Issue 33 (March 2004) (Translation)
The signing of the Closer Economic Arrangement Partnership between Hong Kong and the Mainland has made it possible for Hong Kong to play a pivotal role in triggering China’s economic development. Optimistically speaking, Hong Kong gains dual benefits as it can play an active role in the global market on the one hand and motivate the development of the vast Mainland market on the other. All these are a timely – and essential – merger of good timing, geographical convenience and harmonious human relationships.
However, we should not fail to see that despite Hong Kong’s advantageous position, it still possesses problems that, if unsolved, will weaken its competitive edge. On the one hand, to pursue drastic political reforms will not benefit Hong Kong as this will spark off social differentiation, causing turmoil and instability. On the other hand, problems concerning education, medical services, social welfare and the budget deficit will need the SAR government to improve their structural deficiencies in order to ensure that Hong Kong will continue to prosper in the coming 50 years.
To ensure success for the “one country, two systems” policy, it is a must to strictly adhere to the Basic Law and a must to accommodate the democratic camp. We must seek common ground while reserving differences in order to implement the policy effectively. To exercise a high degree of autonomy, Hong Kong must decline the intervention of the “ultra-left” trend of thought. Even more, it should not seek the intervention of political influence from overseas countries.
In order accurately to feel the pulse of the accounting sector on political reform, I have already commissioned The Public Opinion Programme of the University of Hong Kong independently to design and analyse a questionnaire for an extensive consultation. I hope that for the benefit of Hong Kong and for our next generation, you will all voice your opinions actively.
The Budget Speech - before and after
Eric Li: Budget deficit expected to drop to HK$50 billion
Setting aside some entry problems or special government expenditure, Legislative Councillor Eric Li yesterday estimated that it was hopeful that the 03/04 budget deficit might drop to the HK$50 billion level. (Ming Pao, 8 March, 2004)
Budget deficit may be less than HK$50 billion
Regarding the soon-to-be-announced budget speech, Legislative Councillor Eric Li did not expect any drastic movement other than to allow the community to take a respite and build up its strength. He said in view of the strong bounce-back during the latter half of last year, it was estimated that this year’s budget deficit would not be as big as expected. It would be in the region of HK$50 billion. And although there was a hidden concern that the economic forecast was still affected by external factors, the overall performance should not be too bad. Besides, the SAR government has announced various revenue-generating measures, it is expected that the next two years will still be sailing smooth waters, with the budget deficit probably less than HK$50 billion. This, however, does not indicate that the structural deficit has already been solved.
Economies benefited make a powerful bounce-back
Eric Li pointed out that as the government reduced quite a substantial amount of expenditure last year, particularly on basic infrastructure, work on which almost came to a halt, the annual HK$29 billion of basic infrastructure expenditure was reduced by at least HK$10 billion. In addition, the expenditure of the vibrant economic activities for the SARS period was also less than expected. This, together with the booming of the property market and stock market, which has increased the government’s income from stamp duty, has led to the estimation that the budget deficit for this year would only be around HK$50 billion.
Looking ahead into the coming year, the revenue-generating measures announced by the government, including the securitisation of five tunnels and one bridge, the merger of the two railway corporations and the privatisation of Hong Kong International Airport, are expected to be effective and will increase the income of the government. The increase of 0.5% in salary tax and the actual implementation of a civil service pay cut will also increase the income of the Treasury. The budget deficit pressure for the next two years will therefore be reduced and the deficit could even be below HK$50 billion.
However, he stressed that the structural deficit has still yet to be solved and the government should still resort to broadening the tax base to increase its income in the future.
Eric Li said the government estimated that the economic growth for this year would reach 6%. This is possible because the effect of “SARS” is only temporary and the extent of the economic bounce-back during the post-SARS period was much higher than predicted. Besides, the pace of economic growth in the Mainland has been rapid, reaching 9.1%, and the economic performance of the US was still not bad. All these were advantageous factors for Hong Kong, which possesses an economic system that is easily affected by the external economic environment.
Structural deficit still needs to be solved
However, he pointed out that the economic forecast still embodies some hidden concerns, including the concern of quite a number of people that the US economic growth may not be sustained. Besides, this year is the year for a US presidential election , which may bring changes to financial policy. It is believed that after the election, the US will raise interest rates in order to control internal spending. The global economy will “stagger” then.
As regards the mainland, Eric Li felt that the pressure for revaluation of the renminbi is very great. This will enhance inflation, thereby directly widening the chasm between the rich and the poor. This is why national leaders have reiterated their hope for an orderly increase of the economy instead of heating up the economy too rapidly. Relying on Treasury Bonds to stimulate spending is not a long-term strategy. Therefore, the road ahead of the mainland economy could also affect the outlook for Hong Kong’s economy.
Economic growth not easy to reach 6%
Eric Li also pointed out that although the recent stock market and property market have been favourable, Hong Kong will certainly not experience the powerful recovering level as experienced immediately after SARS. And even the investment return of the foreign exchange reserve could not be as ideal as last year’s. Whether Hong Kong’s economic growth could maintain a higher level by then is worth some deep thought, and we must not be “prematurely” happy. Last year was an odd year with great economic swings. This kind of situation will not recur. He is of the view that it would not be difficult to attain 3% growth, but a certain degree of luck would be needed if the growth rate is to reach 6%. (Wen Wei Po, 9 March, 2004)
No more empty talk on reserves top priority for deficit reduction
Legislative Councillor Eric Li, representing the accounting sector, said the government is suffering from “incessant bleeding” because it does not have a way to stop the bleeding rather than depending on the reserve of the blood bank. Li said: “If there is only HK$150 billion reserve but we can eliminate deficit, then the HK$150 billion reserve would be adequate. However, if it takes a very favourable economic situation to attain a balance between income and expenditure, then a HK$500 billion reserve will still be inadequate!” He also pointed out that the government has in the past decided on a reasonable reserve level but still could not maintain it, further talks on a reasonable reserve level would only result in further mistakes. (Ming Pao, 3 March, 2004)
Government’s issuing of bonds increases competitiveness
While agreeing that the government should issue bonds, Eric Li believed that it would already be competitive to fix the interest rate below 4%. Besides, this would not compete with the securitization of the five tunnels and a bridge introduced by the government in terms of attracting investors. This is because at present, the citizens have substantial savings in the bank but they lack investment outlets. He hoped that Henry Tang would come up with some concrete directions on government’s saving measures in his budget speech. As regards government income, he hoped that the government fees and charges, which have been frozen for two years, will be “defrosted”. (Oriental Daily, 29 February, 2004)
Medium range forecast of 3.8% appropriate and stable
Legislator Eric Li of the accounting sector said: “Although the government’s medium range forecast of 3.8% is slightly lower than expected in general, in light of the possible changes in the global economy, the government’s forecast is appropriate and stable.: (Hong Kong Economic Times, 11 March 2004)
Corresponding to respite goal
Accounting functional constituency legislator Eric Li expressed support for the budget speech. He said the content fully corresponded to the goal of allowing the community to take a respite and build up its strength. The reduction of infrastructure items, Li said, would be favourable to alleviating the financial burden. However, whether the application of this “expenditure brake” within such a short period would adversely affect the sustainable development of the local economy would need to be seen. (Hong Kong Commercial Daily, 11 March, 2004)
Expenditure reduction more difficult when economy recovers
Legislator of the accounting constituency, Eric Li, said when the economy recovers and the salary of the workforce improves a few years later, it could be more difficult for the government to reduce civil service expenditure, making it possible for the government to fail to reach the targeted reduction of expenditures. (Hong Kong Economic Times, 12 March, 2004)
Government’s slowness in deficit elimination prompts complains from Rating Agency
Henry Tang yesterday attended the Legislative Council’s Finance Committee meeting to explain his first budget speech. Legislator Eric Li of the accounting profession pointed out that it would take three or more years before the government’s “trimming” measures can take effect. This, he said, would not be something that the Rating Agency would want to see. In response, Henry Tang said the views of the Rating Agency are sometimes different from the market’s. (Hong Kong Economic Journal, 12 March, 2004)
COMMITMENTS AT THE LEGISLATIVE COUNCIL
New member of
Questions and Debates
Revitalising the Economy
The Acquisition and Clearance of Shipyard Sites
Reasons why adults score the highest suicide rate
Advice for Action
Extend tax exemption reduction period for mortgage interest
Legislator Eric Li of the accounting sector agreed with the extension of the tax exemption reduction period for mortgage interest. He even suggested that it should be set as a “permanent tax reduction item” as this would alleviate the pressure on the “lower and middle class”. He pointed out that quite a number of countries have long set this tax reduction item as permanent. (Ming Pao, 10 January 2004)
In his budget speech this year, the Financial Secretary suggested to extend this tax reduction offer for another two years from five years to seven years, with the highest reduction rate to maintain at HK$100,000 per annum. This will take effect from the 2003/04 tax year. (The Financial Secretary moved that the Appropriation Bill 2004 be read a second time on 10 March 2004)
Accrual basis reflects service cost
Legislator Eric Li, who represents the accounting constituency, maintained the advantages of accrual basis accounting. “Any private organisation which shoulders such a huge amount of potential salary payment equity cannot fail to put aside certain reserves,” he said. He opined that under the “cash basis”, the salary payment equity is not known. In the future when the government borrow loans and fails to see the capital cost or balance sheet, even the service costs among government departments could not be reflected under the “cash basis”. Therefore, the advantages of “accrual basis” should not be denied just because the new accounting system has caused some “short-tem distortions”.
However, Li believed that the “accrual basis” is helpful in revealing the government’s “messed-up budget”. He cited an example and said the government’s inter-departments service costs were originally not reflected under the “cash basis”, but the whole picture came out under the “accrual basis”. In fact, the government has calculated the inter-department service costs of 11 departments but because these departments objected to revealing these data, the government has decided not to disclose the figures for the time being. Eric Li said should these figures be released, it would show how expensive the departments’ service costs are and would help promote the efficiency of the departments. (Sing Tao Jih Po, 30 December 2003)
HK$300 billion salary payment will not eliminate budget deficit
In its editorial on 6th January, Hong Kong Economic Journal pointed out that although the existing economic climate has improved and that the government should have a more sizeable revenue income, the several hundred billions of budget deficit is still difficult to improve. The core of the problem is high civil service pay which prohibits the downward adjustment of the government’s overall expenditure (staff salaries contribute to 70% of the total expenditure). There is also no room for adjustment over teachers’ salaries, which are tied in with the civil service salaries. And 75% of the education budget allocated to primary and secondary schools goes to staff salaries. As a result, the education budget cannot be cut. All these inter-locked relations have resulted in the budget deficit being unable to really improve.
We felt that as a long-term solution, it is inevitable for the government to resort to sales tax. In fact, all major economic systems in the world have incorporated a sales tax and Hong Kong is only one of the exceptional few without a sales tax. This year, Singapore has even introduced a 1% increase in sales tax in order to increase its income. As proposed by the tax professionals, the government should now start to study the details regarding the introduction of a sales tax in order to save the budget deficit from being worsened.
Accountants’ practice in Beijing increases chances of success
Although the demand for local accounting professionals has risen recently, China’s accession to the World Trade Organization and the introduction of the Closer Economic Partnership Arrangement (CEPA) have prompted an irreversible trend of having local accounting professionals open up new markets in China. It is absolutely not easy to pass the examination for acquisition of professional qualifications in China. Hong Kong people who sat for the “China’s Examination for Registered Accountants” had suffered a zero pass rate. Eric Li, who represents the accounting sector, felt that the main reason was that local people were not familiar with the way of examination and the accounting operations in the mainland. Budding accountants could seize opportunities to work in the mainland so as to gain more experience to increase the success rate for passing the examination. (Sing Tao Jih Po, 19 February 2004)
In his budget speech this year, the Financial Secretary said: The conference on professional services held in Beijing last month made good progress in many areas, including mutual recognition of professional qualifications and practicing requirements. We will continue to hold discussions with the Mainland authorities on the mutual recognition of professional qualifications and the entry threshold for different sectors in order to enable Hong Kong’s service providers to play fully to their strengths in the Mainland market. (The Financial Secretary moved that the Appropriation Bill 2004 be read a second time on 10th March 2004)
Securitization of five tunnels and one bridge should start early
Convener of the Breakfast Group Eric Li said: “The securitization work has been prepared for quite some time and now comes this sudden brake. All the preparation work might have been wasted.” He told Ming Pao after the meeting that the act of the Democratic Alliance for Betterment of Hong Kong and Hong Kong Federation of Trade Unions was a waste. “I understand that some Councillors who are not familiar with the securisation may need time to consider different aspects. But it would be a pity if this could not be dealt with in March. The government’s budget deficit would see an increase of more than HK$10 billion.” Li criticized that too many Councillors are scared of being scolded and as a result, the overall Legislative Council efficiency is affected. (Ming Pao, 10 January 2004)
Legislator Eric Li of the accounting sector indicated that should the motion fail to pass before March, it would affect the content of the budget speech. Therefore even if a committee is to be set up, it is hoped that it would be passed before the budget speech. (Hong Kong Economic Times, 10 January 2004)
The proposed resolution under the Loans Ordinance moved by the Secretary for Financial Services and the Treasury was passed by the Legislative Council at its sitting on 18th February 2004.
Abolish estate duty to attract immigrants
Eric Li suggested that to attract wealthy immigrants from places like Southeast Asia, Europe and the US, the government can resemble Singapore in fully abolishing the 20% estate duty. This is because the related income is only HK$1.5 billion per annum, but the abolition of the estate duty can attract income that is calculated in terms of billions of dollars. (Hong Kong Daily News, 5 March 2002)
In his budget speech this year, the Financial Secretary pointed out: Many people have suggested to me that estate duty be reviewed in order to attract foreign capital, thus developing Hong Kong into the premier asset management centre for Asia. Towards this end, we will study the effects on the economy and on government revenue of adjusting estate duty and how best this should be effected to achieve the purpose of attracting foreign capital. I will present the findings of the study in next year’s Budget. (The Financial Secretary moved that the Appropriation Bill 2003 be read a second time at the Legislative Council sitting on 10 March 2004)
Different aspects of discussion on political reform
Meeting American committee members to reflect different voices
There are voices in society that the visit of the US-China Economic and Security Commission to Hong Kong at this sensitive time would affect the consultation of the political reform development presently in progress. Eric Li, who will soon attend the meeting, said that although this kind of meeting has been held in the past, he will not “say what they like to hear” when he meets them this time. He will also point out directly to the delegation that if they really want to do Hong Kong a favour, perhaps they should reconsider whether they should not visit Hong Kong at this sensitive time. Eric Li said: “It is good to let them (the Americans) hear different voices.” (Ta Kung Pao, 18 March 2004)
Eric Li: (US) involvement will hinder progress
At the meeting, Eric Li said he understood that the US was concerned about Hong Kong. He stated, however, that this was not the right time for them to get involved, otherwise it will enhance the sensitivity of the issue and will hinder any progress. (Ming Pao, 19 March 2004)
Inappropriate to criticize one’s nation in front of foreign countries
Breakfast Group convener Eric Li pointed out that as politicians, one must be responsible for one’s words and actions and must absolutely not go to foreign countries to criticize one’s own mother country. This will make the central government feel uneasy. He believed that at present, the words and deeds of some of the politicians have upset the central government and damage the benefits of Hong Kong. (Wen Wei Po, 21 February 2004)
Chinese People’s Political Consultative Conference member Eric Li also pointed out that the democracy camp must not stab Hong Kong because it was inappropriate to discuss Hong Kong affairs before foreign countries. Congressmen of overseas countries will praise their own country in front of foreign countries even if they are not in favour of the ruling party. (Hong Kong Daily News, 6 March 2004)
Worry that Legislative Council may become platform for political confrontations
Another Hong Kong Chinese People’s Political Consultative Conference member, Eric Li, also Breakfast Group Convener, was worried that the discussion of the visit of legislators from the democracy camp to the US at the Legislative Council sitting will turn into a weapon for political confrontation among political parties. He would not move to discuss this item at the Legislative Council. (Sing Tao Jih Po, 9 March 2004)
Chinese People’s Political Consultative Conference member and Legislative Councillor Tsang Yok-sing and Eric Li were both of the view that Article 79 of the Basic Law already has provisions for handling Councillors who are in breach of oath and it would not be necessary to set up a new mechanism to handle this. Eric Li felt that the issue has already been fully discussed by the community and there was no need to bring this issue to the Legislative Council to avoid it from being turned into a forum for political assessment among legislators with different political views. (Oriental Daily, 9 March 2004)
Delegate power to the Secretaries Boost savings through contract-out work
Legislator Eric Li of the accounting sector showed discontent over the slow pace of reform of the civil service, the structure of which is still bulky, in the face of steep budget deficit. He suggested that the government should delegate more power to the heads of departments to allow each department to increase its contract-out work in order to boost government’s savings.
In a RTHK programme “Letter to Hong Kong”, Li pointed out that the extent of contract-out projects of the civil service is still not satisfactory as there still exists a substantial number of grades in the civil service system. Besides, the civil servants salaries are still higher than those of equivalent grade in the private sector, contributing to 60% of the government’s expenditure.
Directors’ complaint: We can only control 10% of budget
Eric Li pointed out that although the government has already used accrual basis accounting, directors of government departments could still fail to retrieve some important financial data, such as civil servants’ pension, leave and the service costs of inter-departments etc. Because of this, they are not in a position to set a budget target for their respective department in order to improve its financial situation and seize opportunities to contract out their work. Li even pointed out that some department heads have complained to him personally that they can only control 10% of their department’s budget.
Eric Li said the government should abolish the system whereby public services are monitored by the central authorities and should delegate more power to the management rank instead, to allow them to keep track of the financial information and utilize the accrual basis accounting. He also suggested that any redundant staff in any department should be given back to the Civil Service Bureau for co-ordination. (Hong Kong Economic Times, 23 February 2004)
Eric Li: Speed up pace for civil service reform
Eric Li, Chairman of the Legislative Council’s Public Accounts Committee, used a dinosaur to describe the existing bulky civil service structure. He said the existing 400-plus grades and 1,200 ranks of the civil service are ridiculous for a small government like Hong Kong. Li said although the Director of the Civil Service Bureau has made it clear that there would not be any drastic reform this year, he said there is a need to fasten the pace of civil service reform. He said quite a number of overseas places have successfully shrunken the whole government structure through civil service reform measures and as such, lowered the salaries tax and turned deficit into surplus. (Hong Kong Daily News, 23 February 2004)
Conflict intensified Political battle not advantageous to Hong Kong
Breakfast Group Convenor Eric Li said the recent political reform debate has intensified the conflict between the pro-China camp and the democracy camp. This, he said, is not advantageous to Hong Kong. He appealed to both Hong Kong and the mainland to listen to the views of the democracy camp, which he hoped would fight for democracy through its own efforts without begging the mainland or seeking sympathy from foreign countries.
In the RTHK programme “Letter to Hong Kong”, legislator Eric Li of the accounting sector suggested Hong Kong and the mainland come up with policies that absorb the views of the democracy camp, and urged the democracy camp to do likewise. He said should this step not be taken, it is very difficult for Hong Kong to suddenly increase its pace to reach full-scale democracy.
Eric Li said if Hong Kong wishes to enjoy a high degree of autonomy, it must first stand on its own feet rather than seek frequent help from others. He said Hong Kong should not beg China, and should not seek external influence to help to solve local arguments.
Moreover, Li believed that it is time for Hong Kong to learn to handle foreign affairs in a wiser manner. He suggested Hong Kong should develop professional diplomats to handle international political and commercial issues while allowing those officials and politicians who lack experience to maintain distance from the political parties.
As regards the recent arguments between the pro-China camp and the democracy camp, Eric Li said this indicated that at this critical moment, the development of political reform has already derailed from the normal pace. He believed that Hong Kong people are wise and should be able to differentiate which political moves are for the real benefit of Hong Kong and which are for personal gains. To engage in political arguments would only freeze the passion of Hong Kong people to participate and support the development of political reform.
Eric Li said Hong Kong already has a high degree of autonomy and the ultimate goal of reaching universal suffrage has been clearly listed in the Basic Law. He doubted if it is worth taking the risk of creating serious conflicts with the central government to implement a speedy reform and ignore the wish of those who truly care about the political and commercial development of Hong Kong. (Sing Tao Jih Po, 22 March 2004)
Eric Li proposes mutual recognition of accountants on the Mainland and Hong Kong at National Committee of the Chinese People’s Political Consultative Conference
Member of the National Committee of the Chinese People’s Political Consultative Conference, Eric Li made a proposal on “Regarding public practice of and mutual recognition of accreditation for certified public accountants on the Mainland and Hong Kong”at the Tenth National Committee of the Chinese People’s Political Consultative Conference in Beijing. In the proposal, he said he hoped to see the Chinese Institute of Certified Public Accountants (CICPA) exempting Hong Kong Society of Accountants (HKSA) members who have completed the professional qualifications programme offered by HKSA from the three papers on Accounting, Financial and Cost Management, and Auditing of the CICPA unified national examination for certified public accountants. HKSA, on the other hand, can consider granting exemption for CICPA members who have passed the CICPA unified national examination from taking the examination of the three modules on Financial Reporting, Financial Management, and Auditing and Information Management.
Eric Li said the HKSA, the Ministry of Finance and CICPA should set up a joint working committee as soon as possible to investigate the implementation details of the mutual examination exemption. The investigation should be completed within 6 months. To encourage more people to participate in the examination, professional organizations of both sides could study the possibility of appointing specific academic organizations to co-ordinate and arrange for tutoring programmes, and to set up a bridging programme for members of the statutory licensing bodies of accountants of both sides whose memberships are obtained by ways other than taking the required examinations.
Concern over the handling of overseas loans secured by local governments
Member of the National Committee of the Chinese People’s Political Consultative Conference, Eric Li, said since the implementation of the policy of opening up and economic reform on the mainland, local governments have set up a number of foreign-related commercial organizations locally, and established subsidiary bodies and businesses in Hong Kong and Macau, some of which are listed in Hong Kong. These foreign-related commercial organizations obtained legal loans from overseas financial organizations in Hong Kong, either guaranteed by local governments in the form of undertaking or with security (normally land resources). A few appropriated part of the funds and invested them in municipal infrastructure lacking commercial value, plunging them into severe financial difficulties and disabling them to repay the principal and interest on their loan to the creditor banks or financial organizations. As a result, the borrower and lender came into commercial dispute, with some of the borrowers even declaring bankruptcy.
To protect the reputation of the country and to ensure the realization of the commitment made by local governments, Li suggested that, in the long term, laws and regulations on insolvency should be continuously improved so that creditors are clear about their rights and can make reference to the law while local administrative organisations are also clear about their duties. No more attempts should be made to ease their financial plight through unfair means directed at creditors with the principle that “politics outweighs the law”.
Li suggested that the People’s Bank of China should take the lead to establish an ad hoc group with representatives from the Ministry of Finance, the Ministry of Foreign Trade & Economic Co-operation and the Supreme People’s Court. The group would address complaints from foreign investors within a definite period of time and appoint an ombudsman to the respective location to conduct an investigation to determine the validity of the complaint. It is also useful to allow the complainant to provide funding for employing independent professionals to assist the ad hoc group in the investigation. It is believed that the proposal would help the central government to strengthen and improve the existing efforts to attract foreign funds.
Enactment of human rights and privacy in Constitutional Law attracts national attention
The Constitutional Law is the fundamental law of a nation. Any amendment is a major event for any nation. No wonder Eric Li, a member of the National Committee of the Chinese People’s Political Consultative Conference, described today’s motion moved by the National People’s Congress Standing Committee (NPCSC) on “The Amendment to the Constitution of the People’s Republic of China” is a historical moment and that he would certainly attend the NPCSC meeting this afternoon. Li has raised the voice for quite a number of people in this regard. (Hong Kong Commercial Daily, 9 March 2004)