The figures would have so many finance ministers lighting fat cigars in delight – 5% annual growth, 3% unemployment, inflation around 8%, reserves of around # 13bn and per capita GDP exceeding most EU states. All this when as a symbol of future financial confidence the government is building one of the world’s most expensive airports on an artificial island.
In that sense Donald Tsang’s position as financial secretary for Hong Kong must be the envy of many. But look at it another way; what finance minister would accept having a big brother state across the border breathing down his neck? Who could stand having his hands tied knowing he must not only please the public of Hong Kong, but the Beijing’s new Governor in his next budget in March 1997. Then China will, in effect, have a veto.
Another problem will be pleasing a volatile parliament, the Hong Kong Legislative Council, which must approve next year’s budget just months before it is to be replaced by Beijing’s puppet assembly.
The first Hong Kong born Financial Secretary in 153 years, Tsang is serious, tense and to the point. He admits that, considering he is a civil servant, the last decade has been nothing but politics – the product of working for an appointed Governor, but answering to what is in 1996 a totally elected legislature. The politics began in 1985 when he was made deputy secretary of the Hong Kong General Duties Branch, responsible for implementing the 1984 Sino-British Joint Declaration on the handover.
“It is a different ball game in Hong Kong to elsewhere,” said Tsang.
“Here a civil servant is exposed to politics. We have to think in those terms. I craft my budget to meet genuine community aspirations. The Legislative Council, understands where I come from.”
Politicians in a territory where the mood swings from ebullient to jittery overnight have accused him of being very aggressive. “I am, I am,” he readily admits. “But then they are also aggressive towards me and that is the name of the game in Hong Kong now.”
Not surprisingly he plays down the fact that with the handover less than a year away he is not in total control. Tsang talks of drawing up the 1997-98 budget “in cooperation” with China.
On paper Hong Kong’s mini-constitution, the Basic Law and the Sino-British Joint Declaration cover the budget leading up to the handover. “The Basic Law says we should aim at balancing the books, we should not allow public expenditure to grow at a rate faster than the economy as a whole. This is the sort of thing we have been practising,” said Tsang. “The whole civil service has been working within those parameters for a long time so there is no need for us to change.”
But it is not so simple. Take welfare spending, for instance – itself raised by 14% this year. China is not happy about large increases in welfare costs. This could be for two reasons: either it is just politically incorrect to create too large a welfare sector; or, and this is what many suspect, China would like to see welfare payments kept low now so that it can look generous by boosting them after 1997.
“You just cannot say ‘I will stop welfare spending’ if the world out there asks you to spend more,” said Tsang. “I think they are worried there may be very little scope for them to spend more in that field rather than that we are spending too much on welfare today.”
Obviously he is astute enough to hide his fears about the process of drawing up the next budget. “I do not anticipate any insurmountable difficulty in that putting a budget together we will reflect our own philosophy and it will be something the Chinese can be comfortable with.”
He claims to be led by “community aspirations” as much as anything. “Twenty years ago we concentrated a lot on community housing and for the last decade we have been concentrating on schooling, tertiary education and so on. For the last few years the flavour has been for welfare spending.
I will not be much bothered or fussed providing all that spending comes within the guidelines.
“I have told them (the mainland Chinese) that I am going to put a 12-month budget to the legislature in the same way I did last year and there will be no change whatsoever.”
China will be aware that the eyes of the world are watching. It is the one strong card in Tsang’s hand. “The whole international community will be looking to us for assurance that the fiscal system, the expenditure programme of Hong Kong after 1997, will be exactly the same as it is now,” he said. The implications are clear, so long as China understands them.
Tsang believes Hong Kong is such an open society now that there is no longer much chance of a misunderstanding.
Nobody ever doubts Tsang’s loyalty to Hong Kong itself. He travels on a Hong Kong British passport and didn’t join the rush to acquire a foreign travel document like so many thousand other Hong Kongers seeking a post-Tiananmen insurance policy.
“I make no bones about it. If I wanted to settle in Britain and apply for British citizenship I would probably be granted it as most senior civil servants in Hong Kong would be,” he said. “But I have decided not to as a matter of personal choice because I am ethnic Chinese. I derive a lot of pride in being able to work in my current position. And one of the requirements of my position is that I have no right of abode elsewhere.”
Tsang has no guarantees whatsoever that his appointment will be allowed to straddle the handover. That will be up to the Chief Executive-designate, and nobody knows who he or she will be. Nevertheless, his handling of budgeting affairs has been adroit to date.
Sophie Lewison of the Economist Intelligence Unit says his last budget was “both conservative and cautious” satisfying both the British colonial administration and the Chinese government. She believes it is unclear how much power he will have from now on and the preparation of the next budget will test his powers of diplomacy.
Nonetheless it would be good if he could continue in position beyond the transfer of sovereignty because many of his policies, particularly on implementing a previously proposed pension scheme for the territory, had been forward looking.
Tsang might have every reason to think he will be persona non grata.
It was he who led much of the Hong Kong work on the passport package the British government brought in following the Tiananmen Square massacre.
It was Tsang who sat on the Joint Liaison Group as it often fruitlessly wrangled with Beijing’s team over the handover details.
Indeed he is not the favourite to hold the position post-1997. That goes to Joseph Yam, the chief executive of the Hong Kong Monetary Authority widely believed to be China’s best-trusted Hong Kong public servant who is known to have a very good working relationship with top figures at the People’s Bank of China.
Tsang does not admit to having good contacts in China, claiming in defence it is not easy for senior figures like himself to travel there without immediately coming under the glare of the media.
At first as we spoke he appeared quite stoical about his future chances.
“Principal officials will have to submit themselves to a renomination process under the Basic Law,” he said. “I think it’s a fair game. The Chief Executive comes in and he doesn’t want a whole host of people around him with whom he cannot work.”
But then a facade dropped. Quite suddenly and with a real note of sadness he admitted that if he is not reappointed he will be a “broken man”. “I have waited 30 years for this moment (the handover),” he says, “and I want to be part of the process.”
His retention in the post would be a sign that China is happy with the way Hong Kong’s finances have been handled so far, his departure might send the wrong signals.
A leading independent member of Hong Kong’s Legislative Council, Christine Loh, stressed: “We really should not write people like Tsang off. China and the new Chief Executive-designate need people like him.” But then Christine Loh, outspokenly anti-Beijing, knows she will likely be out of a seat too. She says Tsang is reasonably well regarded in Hong Kong.
“Nobody has said he is not suitable for the job. He is a very good civil servant in the sense that he is extremely dedicated. As an individual he is, I think, sometimes unrelaxed, but not in a negative or offensive way. If he relaxed a bit more he would probably be very much better at what he does, it probably takes its toll on him.”
There are many who feel China is so insensitive to what makes Hong Kong tick that it could easily ruin the place and send investors and businessmen scuttling off down the road to Singapore.
Tsang says there are four pillars upholding Hong Kong’s prosperity now.
The first is the rule of law: investors know that their investments are protected by law and a good judicial system, not by party apparatchiks, cronyism or the say-so of certain people with influence.
The second is that of a free enterprise spirit and a level playing field so foreign investors do not feel they are discriminated against in favour of local investors, that they get treated in identical terms.
The third is a corruption-free public service. Businessmen must not try and curry favours for themselves, he says. They must not try and undermine it.
The fourth is a free press, free flowing information. “Businessmen attach great importance to this. They need to know how the market is moving and do not want the government to hide what is happening inside that market.”
“These four pillars are responsible for Hong Kong’s prosperity,” said Tsang. “But if they are going to lose any of these then our own commercial values are going to suffer.”
He believes that to measure the strength of an international city such as Hong Kong you just measure the visibility and the strength of those pillars. London has all four, Singapore has about three and a half, Shanghai, upon which China is vesting so much faith and investment, has none.
“Our future is therefore very much in our own hands,” he said. “The legal framework is there in the basic law, the goodwill is there from the Chinese leadership. It is important for Hong Kong people to realise they must protect these values because it is in the interests of Hong Kong and China at the end of the day.”
One constant source of irritation for a man who believes so strongly in the level playing field has been the way Hong Kong is constantly being squashed between China and the US over issues such as piracy of goods and design and the abuse of intellectual property rights.
Each year senior Hong Kong officials, including Chris Patten tread the path to Washington and urge the US to renew its most favoured nation status for China – it is in Hong Kong’s interests because it depends upon China for its every prosperity.
But a succession of disputes has made life difficult. “There is very little we can do though,” said Tsang. “We have been following the books, we have been good international citizens and comply with the provisions of the World Trade Organisation much better than anybody – for that matter including the US. So at the end of the day it is our own businessmen’s decision whether they want to have exactly the same sort of exposure in the US as in China.
Tsang is gloomy when asked for his analysis of Europe. He spent much of this spring and early summer travelling around Europe and admits to having returned to Hong Kong with a certain pessimism about outlooks in general.
“The central bankers I met, the businessmen I met and the bureaucrats I met tend to be much more Euro-centric than they were before,” he said.
“They are preoccupied with their own problems of over-spending, balancing budgets, deficits here and there, unemployment and they are looking at their own problems in a very apprehensive way.
“Europe should externalise its problems and look at opportunities in East Asia rather than spending a lot of time looking inwards and protecting its little turf. That would be to everybody’s benefit.”
Pointing to the fact that the UK still has import quotas on Hong Kong-produced garments, he sees the EU as racked with protectionist tendencies and says it should start to think big. Tsang is not some simplistic laissez-faire merchant. Some have accused him of toying with a form of corporatism, or state intervention, a charge he denies.
He recently spent some time in Singapore and that made some people suggest he might be looking to emulate some of the real interventionist policies of Singapore’s Economic Development Board.
But Tsang said he sees government, fiscal and treasury policy as complimenting the strengths of the private sector. “If it goes lock, stock and barrel into the service industry then I must create an environment which is conducive to the service trade, and that is what I am doing. But I don’t intervene in the market as such and I don’t force it to go into a certain sector of service industry for that matter. I will not say ‘go into bonds, fund management or insurance’. I don’t do that and that is quite different from what the Singaporeans are doing.
“There are a lot of things Hong Kong and Singapore can co-operate on because we are from common origins, but we have parted company in terms of the way we run our own economies. Philosophically we have very different styles.
“Neither of us can claim our system is superior to the other side. I certainly will not go in and intervene in our own markets. But I don’t want to be left behind with a governmental system which is devoid of relevance to what is happening in the market place.
“I want to be up-market, to move with the private sector, that is what I am doing. But I am certainly not interventionist, I am certainly not going to dictate investment priorities.
“I think my colleagues understand me genuinely. Yes, I tend to be a perfectionist at times but in the case of Hong Kong what I am trying to achieve is the kind of excellence that has been achieved in the private sector – that must be mirrored in the public sector.”
China recently started talking about making sure civil servants take “loyalty tests” but then backed down on its plans. Tsang claimed there would be little difference between serving the new government and, for instance, serving a new colonial governor. “There is no alternative but for a civil servant to be absolutely loyal to a Governor, or to a future Chief Executive.”
Tsang sees the Hong Kong civil service as a formidable force. “It has its own ethical code and it has earned its place within the community and it will be the future responsibilities of the senior members of that civil service to uphold its position and status.”
He plays down long-term dangers, warning: “We must watch out that we don’t fall into welfarism. Welfare yes, but without the ‘ism.”
Inflation is coming down nicely from being above 10% a few years ago, unemployment is not rising, wealth is being maintained and investor confidence is coming back because consumers are now getting more encouragement.
But there are problems with success. “One issue is the euphoria that will be created by the unification of Hong Kong with China attracting overseas investment at a level we have not seen before. I would then have a different set of problems altogether – not of capital flight but of capital inflow, an enormous amount that will generate pressure for spending more, come over with high inflation or a deduction of taxes which could undermine the tax structure. That is what I will have to contend with in 1997/98.”
China’s investment in Hong Kong, including its recent seizing of a stake in the airline Cathay Pacific, created much attention. Tsang does not believe though that Beijing has a central strategy on investment within Hong Kong. Instead it just goes for opportunities as they present themselves.
He claims it would be too expensive for Beijing to go all out to buy dominance in one particular sector. He also believes the gap between Hong Kong and Tokyo as international financial centres will narrow in the next few years because: “We have a free system all poised to make faster growth than Japan.”
Whatever happens after 1997 Hong Kong is well past being challenged by others of the tiger economies – “We are going to look at Tokyo now. Nowhere else can replace Hong Kong’s strategic position as an investment window into China. So 1997 is coming and China will make it a very great success,” he said. “It will be sad if Europe cannot focus on this phenomenon and opportunity.”
David Wallen is European editor of the South China Morning Post.
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