The vision of the peoples of Asia cooperating with each other for their mutual benefit and prosperity is not new. In 1955, in Bandung, the leaders of Asia and Africa, including the great giants of the time: Premier Zhou Enlai, President Sukarno, Prime Minister Nehru met for the first time to discuss ways to work together to bring progress and prosperity for their peoples. I like to think that the meetings at Boao are in a way a continuation of this process.
The leaders at Bandung had a vision of cooperation, but the political, social and economic conditions of the time were not quite right. Asia was divided by the Cold War and the countries of the region were preoccupied with their own problems, challenges of the post-colonial period recovery from ravages of World War II. Therefore, it has not been possible to develop, to work together, to reach out to each other as many of us wanted to.
But conditions have clearly changed. In earlier decades the economies of the region produced a basket of similar goods: agricultural and primary commodities and simple manufactured goods that did not make trade between them worthwhile.
Neither were they prosperous enough to generate enough surplus capital to invest in each other's countries. But in the last few decades, particularly in the last two decades, we have seen a great spurt of development that has transformed the economies of the region.
Regional trade now viable, important for growth
Our economies have diversified, and we produce an entire range of goods and services that makes regional trade very viable. We are generating capital flows that make regional investment an important tool for growth.
Peace and stability has brought about the countries in the region growing closer together. Trade and investment has been made possible by peace and prosperity. Peace and stability has brought progress and prosperity to this particular region.
We have seen concerted efforts to link our regional economies together embodied in APEC, in ASEAN plus China, Japan and Korea, or 10+3 process that we all hope will eventually lead to first an Asian Free Trade Area, then an Asian Pacific Free Trade Area, then of course a total Free Trade Area for the entire globe.
All countries must work together on global basis
I would like to echo what Prime Minister Goh Chok Tong has just said that Asia would not be prosperous if we exclude the other trading partners. We must work together on a global basis.
In Hong Kong we have watched and participated in these developments with great interest as our economic model is based on being open to trade and investment flows from all over the world, and on providing a world class business platform for those within the region and beyond to use and to benefit from.
We have been greatly helped by our Central government in our efforts. We have recently concluded an economic partnership agreement, CEPA, under which a range of goods manufactured in Hong Kong will enjoy duty free access to the Mainland from January 1 next year. Eighteen service industries will be able to enter the Mainland market ahead of China's market opening timetable under the WTO. This will give Hong Kong companies an immense advantage in entering the Mainland market.
Integration with Pearl River Delta creates opportunities
Also enhancing Hong Kong's value as a business platform is the growing integration with the Pearl River Delta, which as you know is one of the world's fastest growing regions. Several major cross boundary infrastructure projects - roads, railways, bridges - all these links will increase Hong Kong's connectivity with the Delta.
But perhaps more important than the infrastructure is the agreement we have reached with the authorities in Guangdong on working more closely together as a regional economy that would include Hong Kong, Macau and the Pearl River Delta.
This will be a huge regional economy. Today, Hong Kong and the Pearl River Delta have a population of just under 60 million people with a GDP of about US$250 billion.
In 10 years' time, we believe the combined GDP of the region would be about US$500 billion. If this region were a country, it would probably be the 11th or 12th largest economy in the world in a decade.
Hong Kong, Shanghai agree to build closer links
Earlier this week, Hong Kong and Shanghai, two of China's economically most important cities, agreed to build closer links and have identified eight areas of cooperation including transport, airports and ports, logistics, investment, trade and financial services. In each of these areas we will look for ways to leverage our respective strengths for the benefit of both parties.
I would like to put it to you that our agreements with the Pearl River Delta, and with Shanghai and the Yangtze Delta, are models for cooperation leading to win-win development.
In each of these cases, we have pooled together Hong Kong's competitive strengths: our world-class business and financial services industry, our business-friendly low tax environment, our excellent infrastructure and our clean and efficient system of government, with the competitive strengths of our partners to create a situation in which the whole is greater than the sum of the parts.
So we are moving forward in Hong Kong. I also want to take this opportunity to talk about another subject which as a financial centre we are particularly sensitive about. I want to share these thoughts with you. The issue is about economic security.
Volatile capital flows threaten financial systems' stability
"National Security" usually refers to the protection of the safety and territorial integrity of a state from foreign forces. This concept is normally used in the context of military defence. However, in recent years, the liberalisation of capital accounts and increased global linkages of financial markets, emerging market economies are increasingly exposed to international capital flows that could at times be very volatile and destabilising.
These volatile capital flows, coupled with a weak banking system and poor corporate governance, and improper or incorrect macro-economic management could threaten the stability of monetary and financial systems of these economies, as evidenced in the Asian Financial Crisis. As a result, the "national security" concept has also been extended to cover the security and integrity of the monetary or financial system of a state or economy.
As in the case of national security, a government is expected to take appropriate steps to protect the security of monetary and financial systems against external shocks, notably speculative attacks on currency and other financial markets that may undermine systemic stability.
The security of financial systems in Asia came under serious threat during the Asian Financial Crisis in 1997-98. What started as a currency crisis in some Asian economies had developed into banking crises that led to a near collapse of the financial systems in the crisis-hit economies.
Hedge funds can influence market dynamics
There were many causes contributing to the financial crises, namely, economic overheating, unsound macro-economic policies, weak banking system and poor corporate governance etc. However, the shocks and volatility experienced at the time were exacerbated by the speculative attacks by the highly leveraged institutions or hedge funds in the currency and other financial markets.
The hedge funds can influence market dynamics through the sheer size of their positions, achieved through significant leverage provided by the major international financial firms, relative to the size of the markets under attack. Large and concentrated positions can distort the normal functioning of the markets and overwhelm the price discovery process.
In other words, the hedge funds could force prices and the sentiment of other market participants to move in the direction that is in their favour even though the magnitude of such move may be well out of line with the underlying fundamentals. This would result not only in extreme volatility in the markets but also unbearable pressure that could threaten systemic stability. This is what we call the "elephant in the pond" problem.
Region's banks take steps to protect economies
Following the eruption of the Asian Financial Crisis, several economies took steps in self-defence. Of course we did that in Hong Kong. Shortly after Hong Kong launched the stockmarket operation in August 1998, Malaysia introduced exchange-control measures, which have largely remained in force up to now.
Thailand and Indonesia have introduced new legislation that follows the Singapore model in restricting non-residents' access to domestic currency borrowings in order to prevent speculators from building up massive short positions against their currencies.
Reporting requirements for banks had now been tightened in these countries to keep better track of cross-border capital flows. And as a result of their own efforts, we see corporate governance and the banking systems of the Asian economies improving.
In short, to have economic security, each economy must strengthen its banking system and corporate governance, and avoid economic overheating that create a bubble economy. But there is also a clear need to build a new international financial architecture to supervise, monitor, or at least to make the hedge-fund operation transparent.
New international financial architecture needed
However, with the recovery of the economies in the region and other more pressing issues that are being dealt with, the Asian financial crisis has become fading memory. It is important that Asian central bankers should continue to enhance their cooperation. This is happening already as manifested by the setting up of the Asian Bond Fund.
But based on our experience in the Asian financial crisis, it is even more important that we build up a new international financial architecture. This is particularly essential for those advocating a free-floating exchange-rate system. The presence of such an architecture will help protect our economy from the volatile international capital flows which are potentially destablising in nature.
Hong Kong is a Chinese city. Hong Kong is an international city. Hong Kong is the world city of Asia. Our excellent transportation links ensure that we are no more than three or four hours away from all the major capitals and business centres in the region.
Therefore I take this opportunity to extend an invitation to all of you, those who come to Hong Kong from time to time, and those who have not been to Hong Kong, to come and visit us, to explore the opportunities for win-win development.
Chief Executive Tung Chee Hwa gave this address at the plenary session of the Boao Forum for Asia Annual Conference 2003 "Asia Searching for Win-Win: Development through Cooperation".
