This year's Policy Address by the Chief Executive was announced at the most awkward moment: The terrorist attacks have been pushing the already weak domestic economy into recession, dampening the business prospects and aggravating the unemployment situation, whereas economic restructuring has been hampered amid the burst of the "technology bubble" and intensified competition. The public has been maintaining high expectations on the government, but at the same time, Hong Kong's public finances have been under critical condition. Nevertheless, the Policy Address has been able to take into consideration both short and long-term needs of the society, and will bring forth favourable impacts to the economy and also opportunities and challenges for the banking industry.

Measures and Strategy

Traditionally, the Policy Address covers three areas: the governing principles, the government's long-term strategy set in accordance with the development trend, as well as its policy objectives and measures for the coming year. This year's is of no exception.

The Policy Address recapitulates the SAR government's people-oriented governing principle. It fixes Hong Kong's role more sharply and accurately, emphasising three areas in the long-term development strategy. They include: fostering economic growth by developing and upgrading sectors already possessing a competitive edge, attracting overseas and Mainland enterprises to establish their regional base in Hong Kong, and benefiting from the growth momentum of the Mainland through proactively enhancing economic cooperation between Hong Kong and the Pearl River Delta. It points out explicitly that Hong Kong's long-term direction is to "use our existing solid foundations to move up the value-added ladder". It particularly stresses that the current difficulties will persist for some time, but reminds us of Hong Kong's various advantages. Furthermore, it highlights the initial thinking of the accountability system of principal government officials.

Investing in education continues to be the primary issue addressed. Various measures are mentioned, with the commitment to increase funding. For assisting people to pursue continuing education, the government is going to set aside $ 5 billion.

Similar to the past, upgrade of hard and soft infrastructures will continue this year. Concerning the former, in addition to pushing ahead with the construction of infrastructures and railways, the attitude towards developing infrastructure links with the Pearl River Delta has become more positive. Concerning the latter, measures are put forward to assist the traditional sectors to upgrade.

In light of the current difficult situation, the government puts forward two relief measures. One is to reduce the people's burden directly, including the reduction of rates and the increase of tax-deduction ceiling for housing loan interest, together with the measures announced by the Housing Authority and the Hong Kong Monetary Authority. The other is to create job opportunities.

Adhering to Principles

Public response towards the Policy Address has been mainly positive. Yet, there have also been criticisms for having insufficient relief measures, particularly after the Singaporean government announced its S$ 11.3 billion supplementary budget.

This year, the Singaporean government has already put forward two sets of supplementary budget measures, with a total of HK$ 58 billion additional spending, which exceeds that announced in Hong Kong's Policy Address by more than two times. Nevertheless, this should by no means be the basis for comparison. For one thing, Singapore is going to hold an election. Besides, there exists huge divergence between both sides in terms of economic philosophy, tax system, social policy and fiscal position.

Considering economic philosophy, the Singaporean government plays a more active role in the economy, with a clear industrial policy. It has been called a government-led market economy. In Hong Kong, the free market is always emphasised instead, which has made it the freest economy in the world. Thus, when facing adverse development, government help is always deemed necessary in Singapore whereas market adjustment is being relied on in Hong Kong. For this reason, even though the Hong Kong government intervenes during compelling situation, it has been criticised for departing from Hong Kong's tradition.

Considering the tax system, Singapore's tax base is broader. Excluding those targeted sectors receiving preferential treatments, its tax rate is also higher. Therefore, Singapore's ratio of tax revenue to gross domestic product is much higher than that of Hong Kong. In 2000/01, the former reached 16.3% while the latter was only 8.8%. Higher tax burden implies that government assistance is more necessary during economic downturn.

As for social policy, basing on the conclusion that "national welfare and subsidies tend to weaken people's desire to strive for success" drawn during the 1960s and 1970s, coupled with its early implementation of the retirement fund scheme, Singapore has no social security safety net and does not offer free basic medical service. Hong Kong, on the other hand, provides a comprehensive, and also expanding, safety net covering housing, education, health care and social security. As a result, Singapore's lower income people suffer more during economic downturn while Hong Kong's beneficiaries of the safety net are less affected by economic cycles.

Both Hong Kong and Singapore are the few economies in the world that have fiscal reserves. Singapore's tax revenue is more stable and it has rarely encountered deficits. Hong Kong, however, has been facing fiscal deficits since 1998/99 (excluding 1999/00), due to structural problems. Deficit for the current year may even reach historic level. As consensus on tax reform and broadening the tax base has not yet been reached, and conditions for implementation would probably remain unavailable for some time, global economic development may cause more significant adverse impacts on Hong Kong's economy and public finances. Facing such circumstances, the Policy Address has already made a good job by responding to different demands and investing in the future.

Critics of the Policy Address suggest allocating more resources for relief measures. Nevertheless, with limited resources, this will only crowd out investment in education, infrastructures and etc., which is crucial for the success of Hong Kong's economic restructuring. The key to the knowledge-based economy is talent. The average education level of Hong Kong's overall labour force, however, is not high. Efforts to upgrade should not be spared, otherwise, building a knowledge-based economy will become an empty talk. Hong Kong's direction for economic restructuring is to upgrade and develop advantageous sectors, and to be a window on the world for the Mainland. This requires high quality infrastructures, particularly those linking with the Mainland.

Resources allocated for relief measures in the Policy Address are partly for job creation. Therefore, the public will only feel the benefits through rates and rent reduction, and increase of the tax-deduction ceiling for housing loan interest. While direct assistance will exacerbate people's dependence, creating job opportunities will encourage self-supporting, which is also more effective in boosting the economy.

Relieving Hardships, Fostering Restructuring

With proper ideas and policy direction, as well as suitable measures, the Policy Address will generate positive impacts on the Hong Kong economy.

On the macro level, it will boost confidence, relieve hardships and foster economic restructuring. It will boost confidence because: It embraces the self-assurance of the SAR government and its determination to lead the people out of difficulties. It states objectively Hong Kong's difficulties and advantages, and thus helps people overcome their fear of adversity and undue self-effacement. It confirms the decision to introduce the accountability system of principal government officials which will enhance administrative efficiency. As for its effect on relieving hardships and fostering economic restructuring, it will be demonstrated in sectors or areas as the following.

1. Small and medium enterprises

The Policy Address not only accepts fully the proposals of the Small and Medium Enterprises Committee, but also increases the sum of the four proposed funds from $ 1.3 billion to $ 1.9 billion. SMEs can get more support from these measures, particularly in installing business equipment, enhancing competitiveness, training of employees and marketing. These measures are highly practical and will meet the needs of the SMEs.

2. Tourism

The tourist industry has always received top attention by the government. New measures are also proposed in the Policy Address, including the consent by the Central Government to abolish the quota system for Mainland visitors, increase the number of Mainland agencies that organise tours to Hong Kong, extend the validity period for business visas and etc. This will expand the "people flow" from the Mainland, thereby increasing the customer sources for Hong Kong's tourism. It is estimated that with these measures, Mainland visitors will increase by 300,000 and tourist receipts will rise by $ 1.5 billion, while further increases are being anticipated. Tourism can bring about immediate stimulus to various related businesses such as transport, shopping, restaurants and entertainment.

3. Logistics

Measures fostering the development of logistics are many, including the new Steering Committee on Logistics Development to be chaired by the Financial Secretary, the Logistics Development Council that provides a forum for both public and private sectors to discuss, co-ordinate and carry out joint projects. Besides, development of hard infrastructure is also relevant for logistics. Due to the lack of government coordination and support, Hong Kong, though possessing the advantages and foundation for developing logistics, has not made much progress. Now, the Policy Address has removed the obstacles and will generate greater momentum. The outlook for Hong Kong to become the largest logistics hub in Asia is now more positive.

4. The Property Sector

This year's Policy Address says little about the property sector. It only mentions again the moratorium on the sale of home ownership flats and the review on public housing framework. In the Policy Objectives of the Housing Bureau, it is proposed to accelerate the gradual replacement of rental flats by "rental coupons". At the same time, the goal to attain 70% home ownership is reiterated by correcting the misunderstandings of the media. On the whole, the impact on the property market should be moderately positive. The 70% home ownership target has been considered a major reason for the tumbling of property prices in the past few years. However, a different means is employed to attain such a goal, i.e. through financial assistance instead of selling public flats. Together with the moratorium on sale of home ownership flats and reduction of future supply, pressure on the private property market should be alleviated. Moreover, replacing public rental housing by "rental coupons" will boost rental demand for private flats, thereby enhancing their attractiveness for investment.

5. Employment

Job creation is a major objective in this year's Policy Address. This is attained through accelerating public works and strengthening social services. The additional 34,000 jobs to be created represent approximately 1% of the total labour force and will be quite effective in tackling unemployment. The measures to help SMEs will also serve the purpose as SMEs increase employment or cut fewer staff. Further, promoting continuing education and increase re-training opportunities will also soothe the pressure on the labour market. Anyway, amid poor economic conditions, these measures would probably only decelerate the rise of unemployment modestly.

Opportunities and Challenges for Banking

The Policy Address mentions little about banking. Nevertheless, as it affects the Hong Kong economy, it will certainly bring about opportunities and challenges for the sector.

1. Residential Mortgage Loans in Negative Equity

The Policy Address does not directly mention the problem of negative equity, but rather soothes the burden through reducing rates and increasing tax-deduction ceiling for housing loan interest. Besides, the Hong Kong Monetary Authority subsequently issues a guideline which allows banks to refinance properties with loans not exceeding the market value. Such a measure does not depart from Hong Kong's market principle. However, with outlook for the property market still uncertain, this may shift the burden from the government to the banks. Hence, there are both opportunities and challenges: while banks can compete for refinancing business, lowering the mortgage interest rate will further cut into the banks' profit margin. Banks have to make proper assessment before taking appropriate steps.

2. Assistance to SMEs

Among the four funds mentioned in the plan, the "Business Installations and Equipment Loan Guarantee Scheme" and "Small and Medium Enterprises Development Fund" are more related to banking. Both will commence by the end of this year or early next year. If terms similar to the special credit scheme launched in 1998 are to be applied, the government will guarantee 50% or more of the loans. As the credit culture is being transformed from one relying on "brick and mortar" to one not emphasising securities, a government guaranteed low-risk loan scheme will allow banks to accumulate experience, create and expand their customer base. On the other hand, amid the current deteriorating operating environment, credit risk for SMEs is rising. As the scheme is not of large scale, SMEs unable to benefit from the scheme may lose ground in the competition and go bankrupt, and bring about more bad debts for the banks.

3. Accelerating Infrastructure Construction

The Policy Address and Policy Objectives indicate that the government will not cut its financial commitment of $ 30 billion for infrastructures while the expenditure for creating jobs through additional public works amounts to $ 2 billion. Besides, Phase 2 Construction of the Science Park, Route 9 and 10, South East Kowloon Development Plan and Phase 3 Central District Reclamation Work will commence soon. In the beginning of next year, construction of Ma On Shan Railway, Chok Ko Wan Railway and Tin Shui Wai Light Rail will also commence. These public works will generate demand for funds. Contractors of government financed projects will have working capital needs while railway companies will require various types of loans. Different financing instruments will probably be employed, but competition among financial institutions will also be tight.