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Steer a Sound Business Course

A good budget should give a clear steer for Hong Kong's direction of economic development. This is especially relevant at a time when business globalisation is taking place rapidly and China looks set to join the World Trade Organization (WTO). Armed with advance technological skills and massive capital, multinationals have recently landed many new ventures in Hong Kong and as a result, brought about increasingly fierce competition. It now takes much more than just good financial skills and a sharp sense of the market for individual business to succeed.

I believe that our government can in fact find a crucial role to play. It could help to identify accurate economic trend, and then proactively help to remove any artificial trade barriers for the business sector to ensure fair competition. It should stay alert in managing risks of our volatile financial markets. The government should also support our entrepreneurs in their bid to explore business opportunities overseas.

To put it in another way, I am not saying that the government should adopt an economic planning approach and deploy public funds to instigate business projects so as to boost-start a particular sector of the economy. What we want is a government with a good sense of direction, clear vision and a wide international perspective, a government that can help bolster our competitive power. Take, for instance, information technology (IT), which is the talk of the town. The government has been doing quite well in this respect but I am convinced that it can do even better.

The government should (1) support Hong Kong businesses in their bid to enter the mainland market; (2) support e-commerce by providing services and infrastructural facilities like logistics centres, goods delivery services and data processing centres; (3) develop a risk management culture about IT shares investment; (4) and step up its overseas publicity campaigns.

Moreover, the government can (1) use IT to enhance efficiency; (2) introduce new sources of revenue (e.g. Electronic Road Pricing system and e-commerce tax), and privatise departments with great potential for electronic services (e.g. the Post Office and the Company Registry).

Tapping the mainland market: easier said than done

China's entry to WTO will definitely bring about enormous business opportunities for Hong Kong. Everyone knows we should enter this fertile and untapped market. But there are many obstacles in the way. Mainland companies are patronised by the central government or regional authorities. The US government takes into account the interests of American enterprises when dealing with China over the issue of WTO membership. But Hong Kong businesses are struggling alone.

Again, take IT as an example. Hong Kong is a small place where the opportunities and market capacity for IT applications are limited. If we want our e-businesses to achieve critical mass to compete in the international market, we must first win a place in the mainland market. Yet everyone in the IT and telecommunications business knows that the IT market in mainland China is in fact not really a open market - it is subject to strict administrative regulations. This is why the US government is trying to use WTO membership to entice China into opening its market to American companies. Under these circumstances, it is easier said than done for Hong Kong enterprises to enter the mainland market without any help from the government.

At present, Hong Kong mainly serves to help raise capital and to provide management expertise for the development of IT. In order to thrive in the international market, it must be up to the businesses themselves to provide the right kind of IT services or products that are competitively priced. But the SAR government can play an active part at the political level that will give Hong Kong businesses the needed edge in the competition for the mainland market. At least, the SAR government can support Hong Kong companies in their bid to compete fairly with the European and American counterparts in gaining a foothold in the mainland market. As a warming-up exercise in preparation for China's entry to the WTO, the SAR government can also facilitate better cooperation to mutual benefit between Hong Kong and mainland companies.

Developing E-commerce

People enjoy easy access to new technological services and products such as online information, online shopping, smart cards and mobile phones. Some hi-tech products seem easy to manufacture. But in fact these businesses need huge financial backing and infrastructural facilities to add value to our economy.

E-commerce depends on a number of factors: a safe and secure transmission system that protects information from leakage, adequate legislation on e-commerce, an elaborate network of bank credits and transactions (e.g. credit cards), an efficient transportation system, logistics centres, delivery services, warehouses, professional investors interested in the IT market, a capital formation market with high liquidity and capacity, and professional expertise in innovation, administration, promotion and data processing. All these factors must be present if e-commerce is to thrive.

Market forces alone are not enough to create a good environment for e-commerce. Government involvement can contribute to the healthy, balanced development of a newly emergent market. In addition, government commitment can help create more jobs and give Hong Kong the edge in the international market.

At present, the government should give top priority to reviewing and streamlining its infrastructure. The government should stress Hong Kong's strengths such as its advanced financial services and sound legal system. The government should also seek to overcome its weaknesses. For instance, Hong Kong lacks the transportation network and warehouses suitable for the smooth functioning of logistics centres. Moreover, the government should develop new services. For example, we can retrain the redundant low-skilled workers, make better use of the industrial land that is lying idle, and encourage the business sector to set up data processing centres which will be competitive in the international market.

Proper Management of Investors' Risks

Although the climate is ripe for a smooth restructuring of the economy, there is no room for complacency about the management of changes. The government should intervene when investors become over-excited, otherwise over-optimism may cause a collapse that recalls the episode of the 'Great Leap Forward'. Now the IT investment market has already come to a point where a government warning is in order.

The property developers of Hong Kong are quick to lead in redirecting huge capital in IT investments. At the present rate, they have the potential to make more money by spinning off IT companies for public listing as speedily as properties are developed and sold in Hong Kong. Short-term investors who used to be active in the property market may now stake their money on the more buoyant and dynamic stock market.

From a positive point of view, this means an abundant flow of free capital. The danger is that there is a misallocation of resources. Much money available, without sufficient IT contents mature enough for the e-commerce market. The basic forces of demand and supply will then inflat a bubble economy and increases the risk for the participants. IT Stock investment is now a tricky game. Amateur small investors looking for quick returns are likely to end up being the losers. If the government looks on with folded arms, it will be free from any legal responsibility but will not escape being held responsible on moral and political grounds.

Recently I have publicly urged the authorities concerned to develop a risk management culture and review the strategy of the Growth Enterprise Market (GEM) so that amateur small investors and professional intermediaries such as accountants will be better protected. I hope to incorporate some of my specific suggestions in the motion debate sponsored by me on May 3 so that I can discuss the issues thoroughly with my fellow legislators and the government.

Using IT to Enhance Government Efficiency

IT development brings with it chances as well as challenges to the internal operation of the government. The Post Office is a good example. A few days ago, I wrote a letter to the Secretary for Economic Services about my views on the matter. In my opinion, traditional postal service has become outdated, while online shopping has turned into an irreversible international trend. To provide online shopping services, one of the main prerequisites is for a supplier to develop an extensive delivery network. In this respect, the Hong Kong Post has a great advantage over its competitors.

The Government frequently rely on outsourcing as a means to enhancing efficiency of civil services. But, in my opinion, the government can also use more efficiently its existing resources to provide small and medium enterprises with good, inexpensive services. I feel confident that the Post Office, if it succeeds in updating its mode of operation, can be privatised, just like the MTRC. This will give Hong Kong people a good investment opportunity and contribute substantially to the government's additional revenue.

However, if the civil service is bent on short-term benefits and stay indifferent to the outside reality, it will lag behind the commercial sector, which is striving to cut down on costs and continues to improve on productivity by investing in IT with vigor. The result will be persistent and unstoppable calls for more outsourcing government services and growing discontent with the civil service. In the long run, this will give rise to a vicious circle that is detrimental to the morale of the civil service and the public's confidence in the civil service. It is, in fact, worse than to have to endure a major shake-up once and for all.

IT can help reduce public expenditure and increase government revenue. Electronic Road Pricing system is a case in point. IT can make us reconsider what was previously considered to be impossible. Now it is possible to use one single smart card for the Electronic Road Pricing system, parking fees, tunnel tolls and public transportation fares. In addition, a smart card can help police to conduct speed checks on highways. It can also be used for automatic payment of fines. With great benefits and comparatively lower costs, the above suggestions could be considered by the Government as a reserved revenue raising option.

Crying Wolf?

I just mentioned the sources of revenue. This seems a good place to bring to an end my 'IT version' part of my Budget speech and turn to the question of whether the recurring deficit is a structural problem.

It is easy to see that the economy goes through cycles, with ups and downs. The effects of economic cycles are nothing new. The budget deficits recorded in the previous consecutive years cannot be explained just in terms of the effects of economic cycles. Moreover, if we fail to deal with the question of deficits when we are having a recession, then are we going to wake up and face the problem only when it occurs during a boom? Economic fluctuations are inevitable and part of our lives. What we need to do is to ensure the government can collect stable revenue in order to maintain a basic and sustainable level of public services. It would be unrealistic to expect civil service to swell or shrink at will according to the economic cycles. It is stated in the Basic Law that we must maintain a balanced Budget, regardless of the state of our economy. Thus a resilient tax system with a broad base and stable revenue is most suitable for Hong Kong.

A structural change of our tax revenue is increasingly obvious. If the government deliberately maintains an artificial policy of stablising property prices, it is inevitable that there will be a significant drop in land-related revenues. Each year billions of Hong Kong dollars which can be collected from land sales and premium will be flushed down the drain, and such an immediate and structural change is no doubt the chief cause of the budget deficits in the past three years. Tax avoidance through e-commerce will be a problem, although we have not yet seen its real impact. However, with the rapid development of IT application in Hong Kong, we can foresee that no matter how hard the Inland Revenue tries, similar overseas experiences tell us that a fall in the revenue will be inevitable, and this can be regarded as a medium to long term structural problem.

Last year the government investment earnings was $36 billion, together with the $44 billion this year, the total amounts to $80 billion. The main source of the earnings is from the Hong Kong shares that the Government acquired during the market incursion in 1998. The profit soars as a result of an over 10000 points surge of the Hang Seng Index in two years. The $44 billion investment earnings equals 19.2% of the $230 billion total revenue, far greater than the $37 billion expected profits tax revenue and the $23.8 billion expected salary tax revenue. If the investment earnings is cut by half, say back to the original estimate of $22.2 billion, this year's deficit will soar to $23 billion, and it will be impossible to maintain a balance budget by the mere tinkling of the profits tax and the salary tax bases.

The Financial Secretary was therefore not crying 'wolf' when he talked about tax increase. But the Financial Secretary should also take note of the 'dragon' that is the dangerously optimistic stock market. In the long run, the non-recurrent investment earnings cannot be a reliable source of revenue, and it in fact involves a risk of loss. The accountancy sector welcomes the government's move to review the tax system and strengthen corporate governance. Such positive moves reveals the government's political wisdom and its long-term commitment to sound financial management in the future.

A Government Prepared to Battle

The budget speech has won my immediate support. I welcome the government's positive attitude on international competition, the review of the structure and governance of the financial market, and the restructuring and reform of government departments responsible for overseas promotion activities. These measures will help local enterprises to take advantage of the business opportunities and get ready to battle for the lucrative Chinese market after its entry to the WTO. I welcome the Financial Secretary's declaration of war on the rigid and inflexible culture of the overstaffed civil service. I also welcome the government's move to review the tax system and corporate governance; this shows the government is ready to combat problems which have been causing concern among professional accountants.


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