Sir Donald Tsang, Chief Executive, Hong Kong, led a 24-person delegation to the Gulf region in February.
Financial Review spoke with him to learn its outcome, his impressions of the region, what Hong Kong has to offer the Gulf investor, and his thoughts on comparative systems and current themes in the global economy.
How has your mission to the Gulf region turned out?
It was quite fruitful, and an exciting trip for me and many of my business colleagues. We have been to four cities: Kuwait City, Riyadh, Abu Dhabi and Dubai. This is for us a new theatre.
Over the past 20 years or so, we have been working hard on the single purpose of transforming Hong Kong into an international financial centre through the development of a network overseas of mature markets like America, Europe, Australia, Canada and Japan.
For the past few years we have been focusing on the mainland China market, and that has produced excellent results. But we believe that the time has come to look at the various source of funds on the one hand and the opportunities for development on the other.
We have seen enormous opportunities for development in mainland China - whether it is infrastructure, or housing or trading port - and have also been the custodian of an enormous amount of money in our securities market. But that money has never actually been enough.
So we are looking at other investors. Here we have found all the ingredients of good partnership between ourselves and the Middle Eastern countries.
The Gulf region has so far been rather hesitant about going into the mainland Chinese market. It is such a big market, of 1.3 billion people, with a different language and a different trading pattern, and firms going there in the past have not all made money.
But Hong Kong is the ideal intermediary. This is all Hong Kong is: we put people together, we try to syndicate funds, we provide the banking and insurance and all the financial support - this is what we are good at.
We have been trading there for over twenty years, since it opened up. We have learned the lessons; we are the number one investor in the whole of China, and in each and every province. We've got the expertise, we've got the connections, we know the system and we are the ready partners.
Are there any specific areas the Gulf investor is interested in?
They are into all sorts of things, such as securities. Listed Chinese companies can be tapped through Hong Kong. Most of the large mainland companies are listed there, although to a certain extent also in other markets. Then there is infrastructure - the ports, the power plants, the roads, and now real estate.
Whereas real estate elsewhere, like America, is going down, it's going up in mainland China, just like Abu Dhabi and Dubai. In our part of the world it is a different ballgame from excessive mortgaging, very conservative in terms of bank loans and so on.
Dubai is very advanced and very ambitious and doing what Hong Kong is doing, but we have an enormous opportunity for partnership. We are not in a similar catchment.
Dubai is now coming up to global scale, like New York, London and Hong Kong, but we are still half a trading day apart, so there is a lot of things we can do together without too much competition.
We do not have any structural links as such with DIFC, but the region has been investing in Hong Kong, but not yet in mainland China, where there is some hopeful objective. I would suggest that we are there to help them.
Is the purpose of your visit therefore largely financial? And what is your impression of how the delegation has fared in its efforts?
It is two-way traffic. I have brought on this occasion financial experts, but also architects, town planners, surveyors, lawyers, accountants, and those in municipal services. They never tell me how they are doing!
They cut their own deals; they won't tell each other. What I have seen from past experience is that very soon people go back again. (This time) I have seen very great interest among the participants in what is being done in the UAE.
Hong Kong does not lack funds. We have liquidity which can be invested overseas, but we also have experience which would be of interest to this part of the world: city planning and management, and how to create solid supervisory machinery for creating a financial centre.
What impression do you have of Dubai as an aspiring financial centre in direct comparison with Hong Kong?
They are doing very well. We came a bit earlier, but (it's not about) who is there first. What we do in Hong Kong is to demonstrate how cosmopolitan we are, and expatriate-friendly.
For example, if expats choose to come to Hong Kong, we have international schools: British, American, French, German, Swiss, Canadian, Singaporean, Australian, Japanese, Korean. We have a sizable expatriate community.
If you go into a supermarket in Hong Kong, you see them all. There are absolutely no ethnic or racial problems; everyone is dealt with on a level playing-field. But Dubai is doing marvellously in that as well.
The world is large enough to accommodate many of us. It is a matter of fair competition, at the end of the day. To be on different timezones, four or five hours apart, is wonderful from my point of view - just the right thing for partnership.
How about the political scene in Hong Kong, following its absorption into the one-country, two-systems formula?
There is still some issue of when direct democracy will be implemented. The question has been settled. There was a decision by the National People's Congress following a report made in Hong Kong after extensive consultation, on December 29 last year, agreeing to introduce separate elections for the Chief Executive in 2017 (the election after next) by universal suffrage.
The equivalent for the legislature will take place in 2020, the following term. So we need to get into exactly what sort of model we want, but now we have a timetable, we will move towards it - no-one's going to change the date.
Every person in Hong Kong will have the right to vote and choose their own leaders, while still preserving the formula for our success as an internatrional financial centre.
To me the hard work has been done; now for the nitty-gritty. For the Chief Executive, we should set up a nominating committee comprising representatives from the different sectors of the community, who will be chosen from by practically everyone over 18.
There's no party requirement, no restrictions. It is more complicated for the legislature. It will be an American-style Congressional model, but how exactly it will work ... We are not starting from a clean slate.
We have functional constituencies, we have directly-elected members, so we have to transform what we have into universal suffrage elections. The franchise has been enlarged. We still have time. We can argue and argue, but the argument must stop somewhere; we have to do something.
Can you discuss dollar pegging, considering the pressure that arises from the US Fed rate cuts, as well as the pressure on the Chinese mainland to adjust exchange-rate policy? Do you have a view to share on these matters, considering that the Gulf too faces such pressures?
Personally, I do not believe in small currencies, but in currency stability, because it is the most fundamental requirement for conducting trade internationally, on which we survive.
Why did Europe go into the euro, the Americans into Nafta - similar objectives of stability. It is important, for a relatively small community, that we give people the stability they want to trade on. It is for that reason that we have locked ourselves into the US dollar at a parity of HK$7.8 for the past 25 years.
Once you have done that, you have to take the rough with smooth. You have good times and bad times. When the American dollar goes down, our goods become more competitive, but we have to deal with inflationary pressure. When it goes up, then we become dearer, but we get inflation under control.
The Asian crisis (1997) was a very good case in point. We went into recession, allowing the real-economy to adjust in order to sustain the link. The parity level has not changed in all that time. It is not a peg, but a cast-iron link, a currency-board whereby we back up every banknote we print with foreign currency.
With very low interest rates, you (therefore) have inflation. Tell me how (you can avoid it by other means). There's no perfect monetary policy. Some others do 'inflation-targeting' (monetary policy), but sometimes you then get pain in the system and cannot grow as fast as you want. Or you do a 'dirty float', when the central banks decide the parity level.
I cannot give advice to the Gulf region. This is very much a sovereign decision. The link is suitable for Hong Kong. I don't see any other link stronger than the US dollar for the time being.
I suppose the Gulf states have a similar dilemma to what we have, but at the end of the day you have to decide what you want to do. When the issue has been raised by some counterparts here in the Gulf, they seem to agree with me.
There will be an Asian bloc coming, but it will be at a time when the yuan will be fully convertible. I don't know about the timeframe, but I can cite you an example. Both Korea and Taiwan have been trying to make their currencies fully convertible for the past 52 years. With economies much smaller than mainland China, they have still not
succeeded.
What are your thoughts now on the international economic condition, with the US supposedly going into recession? Is Asia able to decouple?
I don't subscribe to that view. Decoupling in a globalised setting is just unreal. There has been growth in the regional trade in Asia, but I don't know the extent to which that trade (ultimately) ends up in the bigger markets such as Europe.
So if the US declines, there will certainly be a decline in Asian regional trade too. We are all in this together. I would just advise people to put on their seatbelt! The talk at Davos that China and India would have the strength to resist US recession was right.
China has been growing at 12 per cent. US recession might 'take away' maybe three per cent. They are very comfortable!
What is your attitude towards sovereign wealth funds (SWFs), since you said there is no shortage of liquidity in Hong Kong?
I don't do 'sovereign funds'! We park our dollars, $100-odd billion, mostly in US Treasury bills. Some may take a more aggressive stance, into securities markets, into real estate, or into alternative investments such as hedge funds. I have respect for that - in fact it is a stabilizing force, if you take away the politics.
You may say: we don't want your money, which is OK, but (SWFs) are a lot better than commercial lenders who can just take away the money when you most need it. Sovereign funds just stay put; they are mostly pretty loyal, and mostly very passive.
I welcome any funds, and don't label them 'sovereign' or 'non-sovereign'. But I want stable investors, like any country would. Those people who worry about SWFs are large political bodies, like the US.
Do you think anybody can push them around with the money they put in?
