Posted in: Press Releases, Speeches and Presentations

November 17th, 2009

Excerpts from Hong Kong Chief Executive Donald Tsang’s speech at the Singapore Management University on Nov. 16.  He was visiting Singapore as one of the leaders of the Asia-Pacific region for the annual APEC meetings.  He focusd on regional partnership in his speech, and on how Hong Kong and Singapore can help make this the Asian Century.  

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Asia is becoming more and more important as a region, while at the same time more integrated within itself and with the rest of the world. For historical reasons, we were divided by colonial history and regional conflict. But trade has become the integrating factor, with intra-Asian trade now accounting for about 55% of total Asian trade.

Intra-regional foreign direct investment accounts for 60% of the region’s total. So, we are truly investing in each other’s futures. But intra-regional financial integration is lagging. We are more financially integrated with London and New York than we are with each other. East Asian economies are net exporters of capital and have placed our surplus savings in the West.  Perhaps it is time to put some of those savings to work in our own backyard.
The current crisis has highlighted, in stark detail, the extent to which all of our economies are linked together. It has made us much more inter-dependent and also much more vulnerable when crucial parts of our networks experience trouble. Who would have thought that the securitised mortgage of an over-stretched home owner in Miami would have such a huge impact on an exporter of IC boards in Singapore, or photocopiers in Japan, or lorry drivers in Hong Kong? But that’s what happened, and now we need to look for ways to prevent that from happening again.

Thanks to our self-insurance, in the form of higher foreign exchange reserves and the lessons learnt from the last crisis, we were more ready for this tsunami. The economic fundamentals in Asia are much better now than they were 12 years ago. But there is no room for complacency.

Much deeper and broader-based financial integration in East Asia is important for a number of reasons. It will reduce the region’s vulnerability to external shocks and capital withdrawal. It will help us – and the world – to better absorb volatility. It will help us develop our capital markets, which will reduce the over-reliance on banks. And, it will broaden the world’s financial system by reducing the over-reliance on the US and European markets.

Some time in the future, we may need to look at the prospect of establishing an Asian currency regime as one of the building blocs of the global currency system. Just as the euro took years, Asian financial and monetary integration will take years, if not decades. A pre-condition for such integration must be deeper intra-regional financial co-operation. Only by planning and strategising now about the best way to tackle large volatile capital flows can we smoothly integrate major Asian currencies into the regional and global financial systems.

The right way forward is to build what is non-controversial – Asian financial infrastructure based on global best practices and standards. For example, the regional credit rating agencies have to be upgraded and regulated according to global standards. Similarly, India and China have closed capital accounts. What happens when the rupee and renminbi become freely traded? How will that affect global financial markets? And, what will it mean for Asia?  To prepare for the next lap, we need to build stronger Asian institutions. We should embrace the work of groups such as APEC and ASEAN, particularly in areas that will make cross-border trade and investment easier.

We cannot build the Asian region without strong partnerships. Certainly, Hong Kong and Singapore will be in the thick of the action. As leading financial centres in the region, both cities have major roles to play.
Because both cities are paragons of the benefits of free trade within a rules-based system, we must work together to push for more open markets, more access for business and greater alignment of rules and regulations.

There is much we can do together, both regionally and internationally. Working in international forums, we can together push to strengthen these multi-lateral institutions so that more Asian economies can reap the benefits of free and open trade. We can work together to support and encourage those regional economies that lack the capacity or expertise to implement the necessary financial sector reforms to their systems. We need to help each other to improve the global public good.

Of the US$3.3 trillion in cross-border portfolio investments from East Asia, some 62% went to the US and Europe, and only 9% stayed in East Asia. This pattern holds true for cross-border bond holdings and bank claims.

Hong Kong and Singapore are well placed to develop much stronger, more innovative and more resilient financial markets to handle these investments in Asia. We had a great start with the Asian Bond Market Initiative, but we can build on this by supporting the development of a regional infrastructure funding market.

Another example is financial regulatory reform. Currently, there are major reforms at the policy and structure level in Singapore and in Hong Kong, but they are disparate. Our financial regulatory agencies can join forces to help strengthen this area to the whole region’s benefit.

As China and India begin to open up even more, including the internationalisation of their currencies, both Hong Kong and Singapore will have roles to play. It is in our own and our regional interests to ensure that the opening up of the capital accounts of these huge regional economies will happen in a stable manner.  More of our academic and research institutions, as well as regulatory agencies and financial institutions, should proactively look for ways to work with each other and with regional counterparties to further the regional integration agenda.

Asia generally has developed excellent hardware, but lags behind the West in software and services, areas where Singapore and Hong Kong have comparative advantage and experience. In Hong Kong, for example, we have identified six areas where we enjoy a competitive edge for further development – educational services, medical services, testing and certification, environmental industry, cultural and creative industries and innovation and technology.

We are not abandoning our long-held belief in “Big Market, Small Government”. We are simply playing to our comparative advantages.

Whether Asia makes it to the next level – despite our enormous potential – must be a collective effort. No Asian economy can do it on its own. Hong Kong and Singapore, as two leading cities in the region, should work together with our partners in the region to ensure that we build a successful Asian Century. None of us wants to be witness to the Century of Lost Opportunity.