It's now the Year of the Monkey. And will the monkey bring good fortune? I think it will.

Just look at the character of monkeys. They are active, agile, intelligent, resourceful, full of vitality, and a little mischievous - not unlike Hong Kong people. I believe the monkey brings hope for a more upbeat year.

Our economic recovery has been much swifter and stronger than anyone anticipated. As a result, we have raised our growth estimate for the year to 3 per cent. The IMF is projecting real GDP growth of 4.5 to 5 per cent for 2004. Some other forecasts are even more optimistic. For example, the Centre for Economic Development at the Hong Kong University of Science and Technology is forecasting real GDP growth in Hong Kong of 6.7 per cent this year.

Of course, it is impossible to predict the future. But what these optimistic forecasts do reveal is a genuine belief that there are brighter days ahead.

MasterCard International conducts a semi-annual survey of consumer confidence around the Asia-Pacific region, and its December survey registered a huge rebound in Hong Kong. In just six months, since the SARS outbreak receded, Hong Kong people have gone from being among the most pessimistic in the region to among the most optimistic.

This surge of consumer confidence is borne out by the latest retail sales figures, which increased 5 per cent in both volume and value terms in November from a year earlier. Since the retail sector was one of the hardest-hit by SARS, this is good news indeed. It is also a reflection of the impact of Beijing lifting travel restrictions on mainland tourists.

Want more good news? There is talk that deflation may disappear by the end of this year. Certainly it is finally easing off after five years. Unemployment, while still too high, has dropped dramatically from its peak last July. Funds are flowing into Hong Kong and we remain the second-largest recipient of FDI in Asia, after the mainland. By the end of the third quarter of 2003, FDI inflows into Hong Kong had already exceeded the total amount of FDI in 2002, by US$2 billion. This, in turn, has helped the stock market stage a strong rally in recent months with substantial turnovers. Through it all, the value of Hong Kong's exports has continued to grow at a healthy pace.

And, at last count, the number of overseas companies using Hong Kong as their regional headquarters had reached 966, an all-time high. This proves once again that Hong Kong is the best place to be for international companies doing business in the Asia-Pacific region, especially China.

None of this progress is happening in isolation. Of the world's 10 largest economies, China is growing the fastest. The World Bank predicts that by 2020, China will be the world's second largest exporter. As the mainland opens up under its WTO commitments, it is driving an increasing share of the world's economic growth. Hong Kong is well positioned to help feed this growth by providing the high-value-added services the mainland needs. And by feeding this growth, benefiting from it.

Hong Kong's long-standing institutional advantages stem from the rule of law under the "One Country, Two Systems" principle, a fully convertible currency, high standards of corporate governance, and the list goes on. On this foundation, we have developed a concentration of value-added services - financial, logistics, transport, distribution, marketing, packaging, design, management, accounting and legal.

Geographically and historically, we have another key advantage - and that is our close partnership with the Pearl River Delta. It is known as the "factory of the world", producing some US$300 million worth of goods every day, thanks in large part to the 60,000 Hong Kong-invested factories there employing over 10 million mainland workers.

We are working hard to build stronger and more beneficial links with the mainland economy. As Sir John Bond of HSBC said, what we are heading towards is in fact "One Economy, Two Systems."

Perhaps the most significant recent step has been the free trade agreement signed between the mainland and Hong Kong under the Closer Economic Partnership Arrangement, or CEPA. Hong Kong products covered by 374 mainland tariff codes can enjoy zero tariffs when exported there. It came into effect three weeks ago, and the first tariff-free goods have begun to move across the boundary. Exporters are slowly getting involved, but it is still very early days. The opportunities are there. Government can only open the door. It is up to individual businesses and entrepreneurs to go through and grasp the opportunities.

CEPA also offers tremendous opportunities for foreign companies to set up in Hong Kong, to partner with Hong Kong companies, or even to acquire a company in Hong Kong. We expect to resume discussion later this year with our mainland counterparts on expanding zero-tariff status to even more Hong Kong products.

I want to mention at this point that the Central People's Government has been extremely supportive of Hong Kong's desire for greater economic co-operation with the mainland. In addition to CEPA, Beijing has instituted an Individual Visits Scheme, under which people in several big mainland cities may now visit Hong Kong on their own, instead of being part of a tour. This has been a great benefit to our tourism, retail and catering industries.

Beijing has also agreed to allow Hong Kong banks to handle personal renminbi transactions, a big step in itself, and one that could eventually lead to Hong Kong becoming an offshore renminbi centre.

But we are certainly doing our bit to make Hong Kong more competitive. For example, on January 14 the government issued a consultation paper on a proposal to exempt offshore funds from profits tax. Not that our tax level is excessive, but this would bring Hong Kong in line with other major financial centres like London and New York, and would increase Hong Kong's attractiveness to offshore fund managers.

We are also busy upgrading the quality of our financial market, and we are consulting the financial community on ways to further improve areas such as listing requirements and corporate governance.

We are already one of the world's most sophisticated financial centres. Our stock market ranks eighth in the world and second in Asia by market capitalization. We are the world's seventh-largest centre for foreign exchange trading. Virtually all of the world's major banks have a presence in Hong Kong.

So, we are perfectly placed to take advantage of the unprecedented opportunities arising from the opening of the mainland economy. Hong Kong has long been the preferred place for mainland businesses to raise capital. At the end of 2003, mainland shares accounted for 29 per cent of the Hong Kong stock exchange's market cap, and 43 per cent of the equity market turnover. The biggest share offer in the world last year took place in Hong Kong when China Life Insurance raised US$3 billion. Other mainland companies are lining up to list in Hong Kong, and there appears to be a hunger for China-related stocks among Hong Kong's investing public.

Western think tanks have consistently rated Hong Kong as the world's freest economy, not least because it is a bastion of free trade. We are the world's No 1 container port - shipping 34 TEUs per minute - as well as the world's No. 1 airport for international cargo, flying four tons of cargo each minute.

To maintain our position, we have some exciting infrastructure projects in the works - new container terminals, a new Exhibition Centre near our award-winning airport, Hong Kong Disneyland opening in a couple of years, and several new transport links with the mainland, including one in the planning stage that will extend 29 kilometres across the Delta to Macao and Zhuhai.

These are just a few of the initiatives we have under way. But there is still work to be done.

For one thing, we need to address the budget deficit, which is a major issue for much of the international business community as well as the local community. The financial secretary has set a target of balancing the budget in the 2008-09 fiscal year. This will take strong political will, especially since we don't want to damage Hong Kong's attractiveness to investors by abandoning our low and simple tax regime.

You may have read about the constitutional reform issue that has been featuring in the headlines lately. It is a hot topic in our community, and we are giving it full airing in Hong Kong. But rest assured that Hong Kong people are as level-headed and realistic as ever. Whatever transpires in the way of political reform in Hong Kong, you can be confident that it will take place in a calm and rational way.

As I have said, we are positioning ourselves as the optimal platform for doing business with the Chinese mainland, and for the mainland to reach out to the world. If you have not visited us for a while, I recommend that you come back to Asia's World City, and see for yourselves. I am sure you will not be disappointed.

(HK Edition 02/02/2004 page7)