The following is the full text of the keynote speech "Coming down the track � International Financial Influences on Canada�s Outlook" given by the Principal Economist, Ms Elley Mao, at the 2005 Economic Outlook/Policy Forum held on August 23 in Kingston, Ontario:

Distinguished Guests, Ladies and Gentlemen,

Good afternoon. I feel greatly honoured to be invited to address this congregation of renowned business professionals, fellow economists and government officials.

Lately, we have seen a common resurrection of interest about the China economy at dinner parties, business conferences and board meetings. Quoting from a recent article in New York Times, it says "there comes a moment when somebody mentions China. A hush typically ensues as panelists draw their breath, gather their thoughts and struggle to put the bewildering vastness of the topic into a few words". The sheer size of the China economy and its rapid transformation and opening up in the last twenty years has drawn much attention to the likely impact of its emergence (or re-emergence). As pointed out by a prominent Hong Kong banker some months ago at a public forum, some 200 years ago, China had once contributed 33% of global GDP and Asia then took up some 60% of world GDP and was home to more than two-thirds of the world's population. China now accounts for about 4% of world's GDP. Though probably only a small step forward, it is definitely a big improvement from the starting point some two and a half decades ago.

Clearly, our discussion today would be incomplete if we cannot devote some thoughts to the economic developments and outlook for the China economy, as it gradually and steadily integrates into the global arena in trade, investment and finance.

Over the past decade, the sophistication of technology and information flows has shortened distance and helped mobilise global resources more effectively and efficiently. This in turn has driven globalisation and triggered emerging markets. While many tend to view "globalisation" and for that matter "emerging markets" with awe and at times skepticism, no-one can possibly deny that this is and will remain a potent force driving fundamental change in the global economy and a major realignment of economic relations among the emerging and the developed markets.

Today's Forum therefore fits in very well with the growing worldwide concern about the impact of globalisation and emerging markets on international trade, investment and finance. And I would like to congratulate the organisers on putting together very nicely a very lively and topical programme.

In the following 15 to 20 minutes, I would like to walk you through the economic achievements so far made and building on which to map out a visionary outlook for the China economy in the foreseeable future. As for Hong Kong, the Special Administrative Region, which is part of China but operates under the arrangement of "One Country, Two Systems", we are too close to Mainland China to ignore the changes that are going to take place over there. From the business perspective and reckoning the international financial centre role of Hong Kong, we must position ourselves well to make the best of the opportunities that come along with the economic liberalisation of Mainland China.

Economic backdrop
Two and a half decades ago, China kicked off its economic liberalisation with the opening up of its secondary industry. Industrial value-added took off quickly, with output expanding by 14-folds reaching US$759 billion by 2004. Along with this, GDP rose by 9 times to US$1.65 trillion. And exports are now equivalent to almost 36% of GDP, compared with merely 5% some 25 years ago. 93% of the exports are manufactured goods. The sustained rapid growth of the China economy has attracted much foreign investment interest, so much so that it is now an important destination for world foreign direct investment (FDI).

In 2004, China was the second largest recipient of foreign capital, absorbing about 10% of the world FDI flow. Over the past five years, inflow of realised FDI into China rose at an average annual rate of 9%. In 2004, the increase was 13%. This has earned China the reputation of being the world's manufactory (or disreputation in view of lately the growing international trade pressures fairly or unfairly imposed on China manufactured goods). Nowadays, over half of China's exports are attributable to the foreign funded enterprises (FFEs). All along, Hong Kong has been an intimate partner. Its share in the total FDI flow into Mainland China averaged at 34% in the last five years, and not an insignificant part is likely to come from other parts of the world using Hong Kong as the "conduit".

The opening up of the China economy coincides well with the general trend of globalisation. Globalisation has made possible the massive application of innovative technology to churn out new products at a much faster pace than any time in history. With shortened life cycle, mass production is important for creating economies of scale and reducing unit output cost. The relative abundance of low-skilled and low-paid workers provides the underlying condition for the elementary and low-value added industrial processes to kick off a large-scale industrialization in China in the 80s and early 90s. The critical mass and volume effect in turn helps groom the domestic enterprises to grow and flourish. In the last five or six years, we have seen a gradual value uplift, content diversification and emergence of the supply chain both upstream and downstream in a number of industries, such as personal computers, optical instruments, hand phones etc along the coastal regions in the Pearl River Delta and the Yangtze River Delta areas, thereby further enhancing China's attractiveness to both domestic and foreign investors.

Indeed, the secondary industry in China, as represented principally by its manufacturing production, has already reached a scale and maturity that needs to be matched by comparable expansion and deepening of the tertiary/services industry to bring more balanced development of the China economy. Reflecting on this need, China's services market has become more open to international participation. In a way, China's WTO accession can be seen as a milestone of its eventual complete integration into international trade on the one hand, while marking the beginning of a new journey to join the international league of business services and finance on the other. In consequence, international investors are no longer focusing mainly on industrial production for exports. They are eyeing China with rising interests and solid confidence in its business potential as a growing market for domestic demand. With this in mind, FDI into China has been rising by leaps and bounds. It is further envisaged that such investment will see a much more diversified and broadened portfolio in the years to come, in line with the extended opening of the China market to the tertiary services sector.

Business prospects in China
With years of rapid growth, China's economy has reached a size of US$1.65 trillion in 2004, 7th largest in the world, close to that of Italy (US$1.68 trillion, 6th in ranking). Like most other Asian economies, China runs a large foreign reserves heading towards US$610 billion by end-2004. Also, savings rate in China is among the highest in the world, accounting for more than 40% of its GDP. Bank deposits amounted to US$3.1 trillion. All these figures suggest that China today is not lacking in capital. What is really lacking is perhaps "quality" capital.

With the China market becoming more open and more international, one can expect competition to become keener, although business opportunities will also rise. The large influx of foreign investors in recent years has posed rising challenge. Many of these are large multinational firms with strong competitive power, operating on advanced management model. However, the level and the growth in output per worker in China�s tertiary industry are still lagging behind.

To stay competitive, the Mainland enterprises have to embrace quickly modern management skills and up-to-date technology to uplift efficiency to meet the challenge of globalisation. Moreover, the need to reform and upgrade the tertiary/services industry to support an enlarging industrial base has become increasingly pressing. The importance of foreign capital to China thus lies in the knowledge, technology and management skills that it embodies.

With China's savings rate being among the world's highest, the effective channeling of private-sector savings to finance fixed asset investment is important. However, up to now, the financial system in China is under-developed. China remains preponderantly reliant on the banking system in intermediating funds. Last year, bank financing accounted for over 90% of the total funds raised in China. There are clearly needs for China to develop other channels of financial intermediation in the longer term, in order to ensure financial stability as well as to better serve the more sophisticated needs of an increasingly more diversified economic structure.

More likely than not, as the China economy continues to grow, it will not only be a major destination of investment, it will become a source of foreign investment as well. Indeed, this is what financial intermediation should mean in today's globalised world. And I believe this is already in the horizon. At end-2003, China's cumulative outward investment stood at US$11 billion. Although this is still fairly modest, there are a number of eye-catching deals like Hai'er's investment in South Carolina and Lenovo�s acquisition of IBM.

Looking ahead, the remarkable economic performance of China over the years will show up in its consumption demand. With a huge and increasingly affluent population (especially along the coastal regions where the Government has chosen as the test ground for economic reform and modernization in the early phase of China�s economic opening and liberalization), China is a vast market with unfathomed potential. In 2004, China's retail sales reached nearly US$652 billion.

Among the major economic regions, the Pearl River Delta and the Yangtze River Delta stand out with the highest per capita income with some cities such as Dongguan, Shenzhen, Guangzhou, Suzhou and Shanghai reaching near US$6,000 and over. According to some studies of the income-consumption behaviour of emerging markets, per capita income rising above US$3,000 can be a critical benchmark spurring a hike in consumption pattern. Lately, we do see a boom in demand for residential property and automobile in the large cities in China. In 2003, the Pearl River Delta region, with a population of over 40 million (inclusive of the non-resident workers) incurred total retail sales of consumer goods of US$48 billion. In the same year, total retail sales in Hong Kong amounted to US$22 billion, and of this, US$2.6 billion came from shopping expenditure of visitors from Mainland China.

Opportunities and challenges for Hong Kong
While Hong Kong has always been a partner to all these changes in Mainland China, it is no longer the exclusive "gateway" to the increasingly more opened China market. To ensure that Hong Kong can stay competitive and continue to clinch a close partnership relation with the Mainland in its future economic growth and development, it has to re-orientate and broaden its role to meet the changing needs of Mainland China.

What China lacks today is a well-developed financial system to promote economic diversification, and prudent risk management to ensure financial stability and sustainable growth and development. But Hong Kong has sound legal system, well regulated markets, and good knowledge of modern management principles, as well as international business standards and codes of behaviour. Through frequent business dealings and exchanges between the two places, Hong Kong can assist China to establish a more "rule-based" market system to replace the
"relationship-based" practice in the past. This is the first and foremost function of Hong Kong in the modernization of the Mainland economy.

Secondly, Hong Kong cannot remain as a mere source of capital to finance industrial production in China as in the past two decades, it has to turn itself into a conduit of �quality� capital in order to stay competitive and ahead of the other foreign investors in China. As China grows and continuously opens up its services industry, one can envisage rising needs for more sophisticated financial intermediation services. This is where Hong Kong should have a significant role to play. More than 300 Mainland enterprises are listed in the Hong Kong Stock Exchange and they together account for about 30% of the total market capitalization value. Hong Kong is thus an important fund raising centre for the Mainland enterprises. Moreover, listing in Hong Kong put these enterprises under the supervision of the Hong Kong authorities, and indirectly should help improve governance and elevate management standards in these enterprises.

Thirdly, the Hong Kong stock market also benefits, from a much broadened industry base. In the first half of 2005, the Hong Kong Stock Exchange was ranked first in Asia and fourth in the world in terms of capital raised. A recent investor survey revealed that about 36% of our stock market turnover is generated by international investors, reflecting a significant presence of foreign savings in the Hong Kong stock market.

Fourthly, to many investors, Hong Kong remains the financial market where liquidity, talents, knowledge, international experience and accessibility, and most important of all corporate governance, transparency and property rights are unrivaled in Asia. Increasingly more multinational companies choose to base their regional headquarters and offices in Hong Kong, and such headquarters and offices have now reached more than 3,600 in number (an increase of over 43% since 1997). There are over 200 authorized financial institutions and 84 representative offices operating in Hong Kong.

Finally, to many Mainland Chinese enterprises, Hong Kong is still "a window to the world". The free flow of funds and free flow of information, freely convertible currency, work ethics of the Hong Kong workforce, and the cross-cultural lifestyle remain often cited as the major attractions to foreign companies and expatriates alike.

China � Hong Kong synergy
The economic reform now underway in China is unprecedented in both breath and depth in its recent history. There is this famous quote by our late Chinese statesman, Mr Deng Xiao-ping, who paralleled the economic reform of China as "crossing the river by feeling the stones". In this vast country with a population of nearly 1.3 billion, and reckoning the enormous socio-economic diversity among regions and immense income gap between the urban and rural areas, any change has to be gradual and taken with care. While many may call this "gradualism" and some may even regard this "ultra conservatism", I will say this is the "pragmatism" approach. A formidable task for the Chinese government today is not only to keep the stomach of its people full, but it has to satisfy the hopes of a large, energetic and aspiring population - aspiring to the modern lifestyle of the advanced economies. This will remain a challenge for China in many years to come.

Hong Kong, being part of China under one country and given its well-established market system and strong financial infrastructure, offers a convenient test ground for China�s reform initiatives. It should have much valuable experience to share. Recently, Hong Kong has been made the first centre for the conduct of personal RMB business outside Mainland China (including deposit taking, currency exchange, remittances and credit cards). Presently, nearly all Hong Kong banks are offering the first three types of services. Some Hong Kong banks also started issuing renminbi credit cards to facilitate cross-boundary spending by Hong Kong residents. It is not unlikely that this is only the beginning of further development of additional RMB services in Hong Kong.

In the longer term, as the China market grows and matures, we will see market realignment happening in a big way. There will be horizontal and vertical integration both within and across firms, and there will be merger and acquisition to create economies of scale and consolidate strength as demonstrated by the previous experience of the developed economies. It is this very juncture that the financial hub role and effective gateway function of Hong Kong will come to its full play. Leveraging on its well-established financial infrastructure and diversified intermediary services, Hong Kong is well positioned to engage in a three-pronged financial intermediary role by bringing foreign savings to finance investment with sound prospects in Mainland China, China�s savings to invest in profitable venture overseas, as well as China�s (domestic) savings to finance viable domestic projects in the Mainland. As the pace of China�s financial system reform permits, the prospects for business are enormous.

Meanwhile, reflecting sustained economic growth and wealth accumulation as a result, there is ample room for development of fund management services in Hong Kong. In 2004, the size of asset under management amounted to US$465 billion, and over 60% of which is sourced from overseas investors. In the past four years, despite worldwide market volatility, disinflation and record low interest rates, the fund industry in Hong Kong managed to maintain growth at nearly 25% per annum. Hong Kong also has the world�s most open and international insurance industry. Currently there are about 180 authorised insurers operating in Hong Kong. About half of these are from overseas, and twelve of the world�s top 20 do business in Hong Kong. Gross premium income reached US$16 billion last year, equivalent to 9.5% of GDP.

Summing up
Looking ahead, the Mainland China � Hong Kong relations will no longer be uni-direction as in the past, from manufacturing to manufacturing and from overseas to the Mainland via Hong Kong. It will become multi-direction cutting across a whole range of economic activities with two-way flows of people and capital from overseas to the Mainland and vice versa. In both instances, Hong Kong can play the role of either the home, or the host or the middleman.

The signing of CEPA (known as the Closer Economic Partnership Arrangement) lays the foundation and provides the catalyst for this new business relation between Mainland China and Hong Kong to evolve. The Arrangement allows this to happen by opening up a host of services industries to investment from Hong Kong, and at the same time, allows freer exchange of people and expertise to take place. Also the recently concluded Pan-PRD Regional Co-operation (also known in brief as �9+2� involving nine provinces plus Hong Kong and Macao), apart from the benefits of an expanded hinterland of the Pearl River Delta region, will make up a fertile ground for the experimentation of the CEPA spirit in the regional context.

As China steers forward its economic reform, I remain confident that this China-Hong Kong synergy will continue to produce miracles.

Thank you.