Speeches and Articles by Former Consul General Joseph R. Donovan Jr.

U.S. Consul General Joseph R. Donovan Jr.:

"The Global Economic Crisis: New Opportunities for Hong Kong"

to The American Chamber of Commerce in Hong Kong

Wednesday, February 25, 2009

(As Prepared For Delivery)

I am delighted to be here today to address the American Chamber of Commerce in Hong Kong. The men and women of the Chamber have played an important role in promoting positive changes in Hong Kong for 40 years, both in the business climate and in other areas that improve Hong Kong's quality of life. Whether advocating stronger intellectual property protection or pointing out how air pollution harms Hong Kong's competitiveness, you have consistently been front and center. I commend your efforts to make Hong Kong a better place to work and to live.

You are particularly fortunate, in these troubled times, to have a strong and active leadership team. Steve DeKrey has done a fine job over the last year to advance important and influential initiatives, including the Air Pollution surveys. Steve's focus as chairman on improving Hong Kong's human resources is especially relevant in the current economic climate. I'd like to thank him for his service and offer my congratulations to David Cunningham, a long-time member of the AmCham Board of Governors, who has just assumed the Chairmanship. In his remarks to the AmCham membership shortly after he took the reins, Dave outlined a great agenda for this year:

• boost Hong Kong as a gateway into and out of China
• help Small and Medium Enterprises
• improve education
• deepen understanding of pressing environmental issues
• and
• facilitate cross-border transportation

Those of us at the U.S. Consulate General look forward to working closely with the chamber on this agenda.

We have a lot to do. The worldwide economic crisis that began late last year has proven one thing at least -- that once-fashionable talk about the de-coupling of Asia from the rest of the global economy was just plain wrong. Former United Nations Secretary General Kofi Annan once said, "Arguing against globalization is like arguing against gravity." It's a great analogy. The forces that link the major economies are real, and the bigger one's economy, the stronger its pull.

And, as the world's biggest economic and financial center of gravity, what happens in the U.S. significantly affects everyone in the global economy. And as President Obama said earlier today, our economy is in crisis. In these extraordinary times, the United States has undertaken extraordinary steps to stabilize our financial system and open up the flow of credit that families and businesses depend on to keep our economy strong. Global imbalances in trade and financial flows contributed to the size and scope of this crisis, to be sure. But we understand, along with everyone else, that many of the seeds of the current economic downturn were sown in the United States. We have recognized our need to get our own house in order and are now facing the challenge head-on. President Obama has signed a US$787 billion stimulus package to get the U.S. economy moving again. It will create 3.5 million new jobs, rebuild infrastructure, help consumers and homeowners, and help protect the environment. As the President has said, now is the time to act boldly and wisely -- not just to revive our economy but to build a new foundation for lasting prosperity. I am confident that the American people will respond to the President's call and pick ourselves up, dust ourselves off, and get back to business.

I arrived in Hong Kong last August to take up my new job, just before AIG had to turn to the U.S. government for support, Lehman Bros collapsed and Washington Mutual was taken over by JP Morgan Chase. The timing of my arrival was entirely coincidental, I assure you.

What is not coincidental and what the economic crisis has underlined is the fact that Hong Kong and the United States are linked in so many ways. Not just by our financial and trade ties, but also by a similar set of values. And these values, particularly the belief that economic and individual freedoms serve as an engine of growth and increased prosperity, are the key to Hong Kong's well-deserved reputation as a vibrant and dynamic, open society. Hong Kong's commitment to free markets and the rule of law, its entrepreneurial spirit, its belief in a strong but limited role for government, are the foundations of Hong Kong's success and are central to its continued prosperity. In addition, Hong Kong's free press, its independent judiciary, and its respect for individual and human rights ensure that the people of Hong Kong have the opportunity to reach their full potential.

The Heritage Foundation recently released its 15^th Annual Index of Economic Freedom, and once again Hong Kong is on top. While we can debate the methodology and even the value of such rankings, one thing is clear -- countries that are classified as more economically free are generally more prosperous, more democratic, with populations that live longer, are better educated and have higher standards of living. Economic freedom empowers people, improves their quality of life, and nourishes other liberties. And of course, these freedoms require constant tending.

The current economic climate reminds us that economic freedoms can be at risk from too little regulation as well as too much. A failure to regulate responsibly can create opportunities for excess -- for individuals to take advantage of the system -- and those excesses can lead to bubbles and even crises. But these economic freedoms also create opportunities for success -- as individuals are encouraged to innovate and develop new products, services, and ways of doing business. These are also the values that make it possible for us to adapt, change and recover relatively quickly from crises when they do occur, regardless of the cause.

The history of Hong Kong is full of examples of how this city has reinvented itself to adapt and thrive in changing circumstances. Hong Kong started as a trading port -- moving goods in and out of China. In the post-World War II period, Hong Kong's natural trade with the mainland was severely limited, but the inflow of entrepreneurs and capital -- combined with an open economy that encouraged risk taking and innovation -- allowed Hong Kong to develop a thriving textile industry. That in turn spawned the development of other labor-intensive industries. Most of these ventures were started by small entrepreneurs who saw these opportunities and had the courage and confidence to seize them.

I'd like to use the example of one Hong Kong firm, Li and Fung, to make my point. In many ways, their story parallels the story of Hong Kong. Li and Fung started out as a small trading company at the turn of the 20^th century, exporting bamboo, porcelain, silk, and fireworks from China through Hong Kong. Like many businesses, Li and Fung was forced to close its doors during World War II. But as refugees flooded into Hong Kong in 1949, they sparked the development of labor-intensive manufacturing. Despite the loss of its traditional sources of goods, Li and Fung was able to grow by linking its business to Hong Kong's newly developing manufacturing economy, exporting garments, toys, electronics and plastic flowers. By the 1970s, Li and Fung had become a modern and professional company; its shares were oversubscribed more than 100 times when it listed on the Hong Kong stock exchange. Of course, Li and Fung is just one of many examples of Hong Kong's entrepreneurial spirit. I could easily have chosen from many others, citing well known names like Harilela, Li, Kadoorie, and Kwok. Each story is unique, but they all share a common theme -- and would only be possible in a place that ascribes to those values of economic and individual liberty.

Hong Kong was able to begin the process of reintegration with China's economy in the late 1970s and the early 80s. This marked another turning point for Hong Kong's economy as the lower cost of labor in the Mainland led many Hong Kong manufacturers to move their operations to Guangdong. There were those who saw this as a crisis for Hong Kong, but again the flexibility of Hong Kong's economy and the high quality of Hong Kong's human resources helped it not just survive, but thrive. Hong Kong's economy continued to grow as it resumed its traditional role as a finance and logistics center for trade with China. What's more, the service sector quickly became Hong Kong's biggest employer, rising from 52 to 80 percent between 1980 and 2000, while manufacturing fell from 39 percent to 10 percent in the same period. All this during a time when the unemployment rate averaged less than 3 percent.

Again, I'd like to use Li and Fung as an example. For the better part of 30 years, their business was tied closely to Hong Kong's manufacturing economy. But as Hong Kong manufacturers began to move to Guangdong, taking advantage of lower operating costs to increase production and boost profits, Li and Fung didn't sit back and watch their business walk out the door. Instead, they recognized an opportunity to expand and began setting up regional offices, not just in China, but around Southeast Asia as well, to take advantage of the new trade dynamics. In doing so, they solidified their reputation as a model trade and logistics company. In addition, they brought new businesses on line, including getting involved in consumer retailing for the first time through Circle K stores, Toys-R-Us, and representing branded fashions like Ferragamo and Calvin Klein.

Amidst some uncertainty, Hong Kong returned to China on July 1^st, 1997. Coincidently, on July 2^nd, the Asian Financial Crisis began in Thailand; that crisis and the SARS outbreak a few years later presented huge difficulties to Hong Kong. But they also provided opportunities to demonstrate how Hong Kong's flexibility and creativity help it to survive and thrive in difficult times. While Hong Kong was hit hard by these challenges, its increasing integration with China, as well as its strong ties to foreign markets, allowed Hong Kong to continue to prosper.

From the beginning, Hong Kong's many small and medium sized enterprises have been an important part of Hong Kong's astounding success story. SME's have the flexibility and courage to take risks, innovate, and lead the rest of the economy to new ways of doing business. They sometimes succeed wildly and become large conglomerates like Li and Fung did. They also sometimes fail, but a strength of the Hong Kong economy, and, I'll add, the United States, is that failure doesn't prevent a determined person from starting anew and putting the lessons of failure to use in the next successful venture. Hong Kong's government has done a good job of finding ways to assist SMEs in the current economic downturn, providing loan guarantees and helping them to comply with changing regulations in Guangdong. But more can be done to ease both the financial and regulatory burdens on SMEs and I note that the AmCham has made that effort one of its priorities this year.

While it's hard to predict the future, I'd like to suggest that the current crisis holds opportunities for Hong Kong to move closer to its often stated goal of becoming a global city. The past 30 years have seen increasing economic integration between Hong Kong and the Mainland. That positive trend will continue -- witness the announcement in December that Hong Kong and the Mainland would take several steps to improve the flow of goods and capital, including speeding up plans to build infrastructure links between Hong Kong and Shenzhen and making it easier for Hong Kong companies to use the RMB in settling transactions.

But this may also be a good time for Hong Kong to consider looking more closely in other directions as well. Over the past 30 years, Hong Kong has been the door through which foreign investors have entered China. But with foreign capital scarce and China flush with capital seeking good investment opportunities, Hong Kong's strong legal, financial and trade services sector make it the natural choice as an intermediary for Chinese investors looking abroad. InvestHK tells us that now a full 20 percent of their clients are Chinese companies seeking to use Hong Kong as a base for outward expansion. The opportunities for Hong Kong to leverage its strong ties to both China and the rest of the world are enormous.

The current crisis provides Hong Kong the opportunity to build closer economic ties with the rest of Asia by making the city's expertise in trade services, logistics, finance and other services available throughout the region. As a friend recently told me, in order for Hong Kong to be a real "hub," it is important that all the spokes aren't pointing in just one direction. This may be an opportune time to do more to expand the market for Hong Kong's services beyond the Pearl River Delta.

I would venture that, looking ahead, an important part of Hong Kong's becoming a truly global city -- Asia's World City -- will be its ability to maintain an open regulatory approach and standards easily compatible with global best practices. This creates efficiencies and new business opportunities, even in unexpected sectors. The government's completely eliminating the excise tax on wine is a great example of this. Over two years, the excise tax on wine went from 80% to 0%, which has proven good for business and consumers. And this change also is opening up a whole new sector for Hong Kong business, and creating new jobs -- Hong Kong is poised to become a major center for warehousing, distributing and promoting wines throughout Asia.

In contrast, the recently passed nutrition labeling law is an example, in my opinion, of a regulation, which while well intentioned, may have the opposite effect. In fact, it may make the Hong Kong market less open to high-quality food products from trusted trading partners, increase costs and reduce choice for consumers. I remember in the 1980's, when I was stationed in mainland China, we used to look forward to shopping trips to Hong Kong because it was the only place where we could buy the latest and best American and international brands of our favorite foods. Coming home to Beijing, loaded with these products, always made my family excited and my colleagues envious. But now, if Hong Kong's nutrition labeling laws take effect as expected, we may see many hundreds, if not thousands of nutritious, high-quality products from America, Japan, Europe and other countries disappear from Hong Kong's shelves. It will be very ironic if we have to start making shopping trips from Hong Kong to mainland China to buy these goods!

Of course, there are many more bright spots as Hong Kong moves to become a global city. The HK government has an inspiring vision to make Hong Kong into a regional educational hub. The percentage of university students here from outside the SAR already has risen from 2% to 10%, and the government is discussing increasing this to 20%. The majority of these students now come from mainland China. This is a terrific development, but Hong Kong still has room to broaden and diversify its student body: the more varied and cosmopolitan Hong Kong's student bodies and faculties are, the richer the university experience here will be, to Hong Kong's cultural and economic benefit. Competition for university slots is fierce for local students. But further opening this particular market, while expanding available slots, would be a wise policy that invests in Hong Kong's most precious resource, it's youth.

The Chief Executive has made "creative industries" such as film, digital media and industrial design a high priority, as well. This makes perfect sense. Hong Kong's free and open society allows artists, filmmakers and designers to do what they do best: be creative, test new ideas and innovate. Hong Kong's strong rule of law and intellectual property protection provide further incentive by protecting creative output. Fostering these creative industries will also require investment in education and technology -- areas where the U.S. has a lot to offer. In fact, I was pleased to learn that the Savannah College of Art and Design (or, SCAD) -- an outstanding American university for art, film and new media -- plans to establish a branch campus in Hong Kong. I expect that SCAD will not only cultivate Hong Kong's home-grown talent but also attract the region's most creative minds.

Considering Hong Kong's wonderful tradition of adaptation, creative use of markets and openness, Hong Kong today is well-poised to serve as a global platform for market-based financing to resolve our critical environmental challenges. Here's an intriguing example of potential U.S.-Hong Kong-China collaboration in this field: The Chicago Climate Exchange, the Tianjin Climate Exchange and the Hong Kong Stock Exchange are jointly exploring cooperation in environmental emissions trading. Devising incentives and finding funding for green projects, and helping to control carbon emissions, will be key to resolving our daunting environmental challenges. Keeping Hong Kong an international financial center on the cutting edge of innovation, such as carbon trading, will require bold leadership and vision.

Hong Kong clearly intends to take advantage of its many strengths to move up the industrial value chain, and I'm encouraged by the government's deliberate focus on R&D in the vital areas of health, science and the environment. In one more example of forward-looking Hong Kong-U.S. collaboration, last year, DuPont, a pioneer in technology development, established a solar energy R&D center in Hong Kong. I am sure that more American firms will recognize the many advantages of developing and protecting their intellectual property in Hong Kong, a stone's throw from manufacturing in Southern China.

In conclusion, the current economic crisis is another test for Hong Kong. How will it respond? As I see it, the people and government of Hong Kong can go down one of two roads. The government can try to shield Hong Kong businesses and people from the so-called "dangers" of competition and responsible free choice. Or, Hong Kong can do what it has done best in the past and, by seizing opportunities to take advantage of the freedoms that are the basis of Hong Kong's prosperity, make Hong Kong better off. I am confident that the strengths that have served Hong Kong so well throughout its history will continue to do so as it faces new challenges.

Thank you.

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