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HKGCC 140th Anniversary Distinguished Speakers Luncheon

A JOURNEY NOT A DESTINATION
The Impact of China’s WTO Accession

Sir Patrick Gillam, Chairman, Standard Chartered Bank

Good afternoon Ladies and Gentlemen. Congratulations to the Hong Kong General Chamber of Commerce on its 140th anniversary. I am delighted to have been asked to take part in this speaker series. Particularly as outside Mervyn’s office we have the certificate of membership 0001, signifying our 140 years of membership.

This is a very special honour for Standard Chartered. London may be our corporate headquarters, but Hong Kong is our home. Your success is our success. That is why today is so important to me.

To quote Martin Luther King, "I have a dream."

I have a dream… a vision… for the future of Hong Kong.

It is an international financial centre, Asia’s world city, with strong links to Shanghai, Beijing and Shenzhen.

It is part of a successful and fully integrated Pearl River Delta. Strong infrastructure in the form of rail, bridge and road links will make the divide between Hong Kong and the Pearl River Delta almost invisible. An efficient transport system makes this city a logistics centre.

It is a city with a high class educational system. A city of three languages, with a knowledge based economy bridging North and Southeast Asia.

It is a city with a pristine environment and no pollution. And it is an international, multi-cultural city with an excellent working environment. Yet arts, culture and music thrive, and Donald Duck brings in millions of new tourists who marvel at the food, the culture, the skyline and the people. Hong Kong will be a magnet for tourists from all over the world.

It is a centre of excellence in logistics, Chinese medicine, capital raising – and a benchmark for other cities in the link between business and universities.

This is my vision of Hong Kong’s future. This is my dream, which I know you share. IT WILL BE REALITY.

My background in the oil industry has taken me all around the globe. My wife and I have been coming to Hong Kong repeatedly for over 20 years, and we feel that it is one of the most vibrant and energetic places in the world. Any trip to Asia without a stop in Hong Kong feels somehow incomplete.

Make no mistake about it: the current global economic situation is testing your confidence. But with its infrastructure, strong resources, the rule of law and the drive and ambition of its people, Hong Kong will make it through this difficult period – and emerge stronger ever.

No external debt, strong reserves, the free market and its geographic position give it an edge.

Yes, Hong Kong has its challenges. So has London. So has New York. But I am confident that Hong Kong will meet those challenges and continue to grow. And Standard Chartered, as always, will be here – continuing to grow with Hong Kong.

LET ME SAY A LITTLE ABOUT SEPTEMBER 11^TH AND GLOBALISATION

In September, just after the terrorist attack on the World Trade Center; China successfully concluded negotiations with the World Trade Organisation on its terms of membership.

Within a single week, we saw two events that had a dramatic impact on the global economy.

The first was terrorism destroying one of the most potent symbols of world trade - with awful loss of life and it accelerating the economic slowdown.

The second event, which in my view is much more far-reaching, was China’s agreement to join WTO. This will alter the shape of world trade and accelerate its growth.

I am a strong believer in globalisation and the benefits that flow from it. Money and goods move around the world more freely than ever before.

In parts of the developing world, there is anxiety over the type of world that globalisation is creating and we have seen violent protests in America and Europe. But trade is a key engine for growth. It can and does help lift people in developing countries out of poverty.

Over the past few days, the WTO Conference in Qatar has focused, on removing both tariff and non-tariff barriers that impede exports from developing countries. It is estimated those countries stand to gain US$155 billion from further trade liberalisation, more than three times the US$43 billion they get annually in overseas aid.

LET ME TURN TO CHINA’S ECONOMIC TRANSFORMATION

I recall on many previous visits to Hong Kong, discussing and speculating about China’s accession to WTO. Today, it is finally true.

LET’S GIVE CHINA A BIG ROUND OF APPLAUSE.

The agreement to join the WTO concludes 15 years of negotiation. And in that 15 years, the business landscape in China has been transformed.

It is still a relatively under-developed economy but in trading terms it has become a giant. It is the world’s fifth largest trading power and second largest recipient of foreign investment. Last year its exports were worth US$250 billion – 4 per cent of the world’s total – and it attracted US$40 billion in foreign direct investment.

What does all this mean? If you look at indicators of economic success you see that:

Ten years ago there were, of course, no mobile phones in China; today there are more than 100 million; in 10 years’ time there are expected to be 500 million;

In 1990 there were 240,000 cars; now there are nearly 4 million; in 2010 there will be 70 million;

Business and economies rely on talented people - in 2000, China produced four times as many graduates as in 1990 and that number will increase threefold again by 2010.

There will be bumps along the road. There will be setbacks. But the next half century promises to be a very special time for China. The world will focus on China. And it will be the envy of the world.

CHINA’S BANKING LANDSCAPE

Let’s take a look at China’s banking landscape.

First, a little about our history. The Chartered Bank, which is one half of the Standard Chartered name, was set up nearly 150 years ago to trade with China.

We opened our first branch in Shanghai in 1858. Since then, we have never closed our doors and China has become a part of our make-up.

In mainland China we have one of the largest networks of any foreign bank with seven branches and six representative offices. We also have licences to lend Renminbi in Shanghai and Shenzhen.

However, although this means a great deal to us and to our customers, it needs putting in perspective. As China joins WTO at last, what is the Banking system like?

All the foreign banks in China combined account for less than half a per cent of banking deposits and less than one and a half per cent of lending. Between us all we have just over 450 bank branches, compared with nearly 190,000 controlled by domestic banks.

The big four state-owned banks still dominate, accounting for 68 per cent of all bank deposits. Between them, they employ about 1.7 million people.

Traditionally the banks have been cashiers for the Government. Credit and service standards have been low or non-existent. But the present Government understands that an efficient banking system is the key to a modern open economy. Reform is taking place.

Turning the banks into operations that can allocate the country's financial resources efficiently as well as managing risks properly, is a vital part of China's modernization.

Steps taken in recent years include the gradual withdrawal of government influence in banks' lending decisions as well as training to upgrade the skills of bank staff. We are helping with this.

An immediate and serious problem for the banking system is non-performing loans, which account for at least 25% of the banks' total. A series of steps have been taken to address this problem, notably the setting up of asset management companies to take away some of these bad loans.

Very, importantly, there is a new breed of leadership in the major banks and regulatory authorities. The average age of the chairmen of these institutions is around 50 - they are modernisers and extremely impressive. Men like Liu Ming Kang and Wang Xue Bing.

They are also facing up to commercial reality. On one trip to Beijing, I asked the head of one of the state banks what he was doing to help development in the west of China. He looked at me and said: … "Not much. There are few bankable projects in the west of China. I am now a commercial banker so I am careful with my shareholder’s money."

So the winds of change are really blowing through the state banks and they are rationalising.

To give you an idea of the scale of this, the head of another of the major banks told me that to be competitive, he needed to close more than 12,000 branches and to shed 200,000 jobs.

As these giant banks reorganise and reform, two groups of banks will benefit – the new and smaller non-state-owned banks and the foreigners. The non-state-owned banks are generally more modern and do not carry the inheritance of bad loans to State Enterprises – they will gain market share.

The foreign banks will also grow, benefiting from their international networks, superior credit systems and brand names. Our own research shows that China’s consumers, particularly the young, are receptive to banking with a foreign institution. The biggest opportunities are in products like credit cards, mortgages and investment services.

But this needs to be kept in perspective. We think that by 2010, all the foreign banks combined will still account for less than 10 per cent of total lending.

However, for the foreign banks involved, like Standard Chartered, even a small share of the China market will have a very significant impact on revenue and profit. It is a hidden jewel in our crown.

LET ME TURN TO THE IMPACT OF WTO ON HONG KONG

I know I am speaking to you when the world is on the edge of a recession, but even with this background it is worrying that Hong Kong is going through one of those rare periods where it doubts its own abilities. This is a cause of concern because I believe this city’s sense of conviction is its greatest strength and that is why I started this speech with the quote about my vision for Hong Kong.

You will be a beneficiary of the increased trade flows that WTO membership generates. The Hong Kong Monetary Authority estimates that this will boost GDP by a half to one per cent annually.

One of the comments about Hong Kong that I like best is from Victor Fung, former chairman of the Trade Development Council. Victor said: "We in Hong Kong don’t make things, we make things happen."

That sums up the spirit of this place. It is the quality you must hold on to.

Hong Kong has nothing to fear from WTO. Quite the reverse. It is the premier international financial centre in the region. It has the most liquid stock market and is the main centre of international expertise.

It is the biggest investor in China, the biggest provider of professional skills and it remains China’s biggest gateway.

China needs capital. Hong Kong can deliver it.

China needs to upgrade its regulatory framework and governance. Hong Kong can deliver it.

China needs professional experience and expertise. Hong Kong can provide it.

China needs international integration. Hong Kong can help.

China needs access to investment banking, accounting, legal and other expertise. Hong Kong can provide it.

Hong Kong can also become the offshore RMB market and the regional fund management centre.

Following WTO accession as China develops as one of the world’s leading and most respected trading nations, the pace of convergence between Hong Kong and the mainland will increase.

C. H. Tung was quite right in his recent policy speech when he focused on the attributes needed to stay ahead. Education is key, particularly the promotion of language skills, if Hong Kong is to be cosmopolitan and outward facing.

That will help a company like ours to meet demand for high quality staff, not only for our businesses here, but also to help develop our business in the mainland.

At the same time Hong Kong needs to consolidate links with its hinterland by continuing to strengthen the infrastructure that brings people and goods into Hong Kong from southern China. High speed rail links to Guangzhou, improved rail and road links to the port and proposals to open the border 24 hours a day are exciting and necessary developments.

In the financial sector, Hong Kong must maintain its leadership position.

Recently, we were forced by stock market volatility to postpone our plans to have a listing in Hong Kong. But, when overall market sentiment improves, we will press ahead with our listing plans here. This is part of broadening our investor base in Asia and raising our profile among the investment community in Hong Kong.

Now …. in case anyone thinks ordinary Hong Kongers are losing their commercial grip, let me tell you the first question I was asked when I landed last Thursday – by one of BA’s ground staff: "When are you going to let me buy shares in Standard Chartered in Hong Kong?!"

Conclusion, so what does all this mean ?

For China, joining the WTO is a journey – not a destination.

The process of reform and market liberalisation won’t end with China becoming a WTO member; instead, it will accelerate.

I have absolutely no doubt about Hong Kong’s continued prosperity. Yes, changes are required to education, to governance, to infrastructure. And yes, the divide between the rich and the poor needs to be managed. But as we look to the development of China, Hong Kong has everything to gain – and very little to lose.

Hong Kong should not be obsessed with Singapore or Shanghai. But it should be obsessed with being a centre of excellence in the arts, in infrastructure, in environmental control and in the development of other areas to truly become Asia’s world city.

There are a few cities in the world that everybody wants to visit at some stage of their lives. Hong Kong is – and will remain – one of these cities.

I am as proud as I have always been that Hong Kong is Standard Chartered’s home.

Ladies and Gentlemen, WTO is a reality. There is now no looking back.

Thank you.

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