Panel on Trade and Industry (Minutes) 4 Jan 99

Legislative Council

LC Paper No. CB(1) 916/98-99
(These minutes have been seen by the Administration)

Ref: CB1/PL/TI/1

Panel on Trade and Industry

Minutes of meeting held on Monday, 4 January 1999, at 2:30 pm in Conference Room A of the Legislative Council Building

Members present :

Hon CHAN Kam-lam (Chairman)
Hon Kenneth TING Woo-shou, JP
Hon James TIEN Pei-chun, JP
Hon David CHU Yu-lin
Hon NG Leung-sing
Hon Mrs Selina CHOW LIANG Shuk-yee, JP
Hon CHEUNG Man-kwong
Hon HUI Cheung-ching
Hon CHAN Kwok-keung
Hon Mrs Sophie LEUNG LAU Yau-fun, JP
Hon SIN Chung-kai
Dr Hon Philip WONG Yu-hong

Members absent :

Dr Hon LUI Ming-wah, JP (Deputy Chairman): Hon Cyd HO Sau-lan
Prof Hon NG Ching-fai: Hon MA Fung-kwok

Public officers attending:

For Item III
Mr CHAU Tak Hay,: Secretary for Trade and Industry
Mr Sidney CHAN,: Assistant Director-General of Industry
Mr Bobby CHENG,: Principal Assistant Secretary for Trade and Industry
For Item IV
Mr CHAU Tak Hay,: Secretary for Trade and Industry
Mr Stephen Selby,: Director of Intellectual Property
Mr K Y WU,: Principal Assistant Secretary for Trade and Industry

By invitation :

For Item III
The Hong Kong Small and Medium Business Association
Mr Simon K B SHI,: President
Mr Bally S H CHAN,: Vice Chairman
Mr David S L LAU,: Advisor of loan to enterprises
Fulcom (Cameo) Co. Ltd.
Mr Ben NG Bing-kin,: Marketing Manager
Mr Alan WONG Cheuk-lun,: Project Manager

Clerk in attendance :

Ms LEUNG Siu-kum,: Chief Assistant Secretary (1)2

Staff in attendance :

Miss Becky YU,: Senior Assistant Secretary (1)3

I Information paper issued since last meeting

Members noted that no information papers had been issued since last meeting.

II Date of next meeting and items for discussion

2. The next meeting would be held on Monday, 1 February 1999 to discuss the following:

Existing funding schemes for manufacturing and service industries; and
Fees for the use of copyright works.

III Special Finance Scheme for small and medium enterprises

Meeting with the Hong Kong Small and Medium Business Association (HKSMBA) (LC Paper No. CB(1) 693/98-99(01))

3. At the invitation of the Chairman, Mr Simon SHI highlighted the salient points in the information paper tabled at the meeting. While appreciating the intention of the Special Finance Scheme (SFS) to ease the impact of the credit crunch on small and medium enterprises (SMEs), Mr SHI pointed out that the criteria adopted by lending institutions basing on the availability of collateral rather than business prospect in assessing applicants' creditworthiness had defeated the original purpose of SFS since many SMEs had difficulties in providing sufficient capital assets as collateral. He therefore considered that the Government should increase its risk sharing ratio of SFS from the current 50% to 80% so that lending institutions would be more willing to offer loans to SMEs. The maximum guarantee period should also be extended from the present 365 days to three years to allow sufficient time for SMEs to repay the loans. Furthermore, the spread of 3% between the interest a bank charged a successful applicant and the interest it paid to the Government for the corresponding deposit should be waived in order that lending institutions could apply a more favourable interest rate, say 6%, for SMEs.

4. Mrs Selina CHOW asked if HKSMBA had statistics on the number and the successful rate of member companies by respective trades which had secured loans through SFS. Mr SHI replied that HKSMBA did not keep such information. However, the majority of HKSMBA members were from the manufacturing and the import and export segments. They had expressed difficulties in obtaining adequate financing from lending institutions due to the credit crunch. Even those which used properties as security for loans in the past were also facing a cut in the credit line as a result of the fall in the property prices. Mr SHI therefore proposed that consideration should be given to assess applicants' creditworthiness basing on their past profit tax records or size of their employees.

5. On the suggestion of increasing the Government's risk sharing ratio to 80%, Mr CHEUNG Man-kwong pointed out that as the lending was not fully guaranteed, lending institutions might still be reluctant to offer loans to SMEs having regard to the possible risk involved. Mr David LAU replied that lending institutions would tend to be more lenient in approving loan applications when the risk ratio decreased. As regards the basis upon which the proposed interest rate of 6% for SFS was arrived at, Mr SHI advised that this was modelled after Singapore and Taiwan where specific loans at low interest rates were made available for SMEs. He stressed that a low interest rate was essential to enhance the competitiveness of Hong Kong's industries. Mr CHEUNG however expressed worries that some SFS beneficiaries might use the interest differential to make profit. Mr SHI took note of Mr CHEUNG's concern but emphasized that these were only individual cases, and that the interest of SMEs as a whole should not be compromised because of a small number of unscrupulous entrepreneurs.

Meeting with Fulcom (Cameo) Co. Ltd.
(LC Paper No. CB(1) 693/98-99(02))

6. Mr Ben NG said that SFS would become futile if lending institutions insisted on using collateral rather than business prospect in assessing applicants' creditworthiness. To ensure that SMEs could benefit from SFS, Mr NG suggested that the Government should run the Scheme on its own without involving lending institutions.

7. On behalf of the Chinese Manufacturers' Association (CMA) of Hong Kong, Dr Philip WONG remarked that although CMA supported in principle the introduction of SFS, it did not agree that the Government should rely solely on lending institutions to assess loan applications. The Government should have a over-riding power over the decisions of lending institutions. Dr WONG added that CMA had received four submissions on SFS from its member organizations. In sum, they considered that the Administration should lower the risk sharing ratio of lending institutions to encourage the latter to offer loans to SMEs; apply a more favourable interest rate on the Government's guaranteed portion of the credit facilities; extend the guarantee period; and assess loan applications according to individual merits.

Meeting with the Administration
(LC Paper No. CB(1) 693/98-99(03) and (04))

8. Before commencing discussion, the Secretary for Trade and Industry (STI) took the opportunity to respond to views expressed at the meeting. He said that the design of SFS was based on the principles of market driven, risk sharing, risk capping and administrative simplicity. Under the market driven principle, lending institutions were allowed to exercise their established lending criteria in assessing loan applications. He cautioned that some lending institutions might choose not to participate in SFS if the Administration were to interfere with their decisions. This would in turn reduce the choice of lending institutions available to SME applicants. On the suggestion for the Administration to assess loan applications on its own, STI explained that this would incur substantial administrative cost since the Administration did not have the expertise to undertake the assessments and would need to employ a large number of new staff to do so. He added that the proposals to increase the Government's risk sharing ratio and to extend the guarantee period would reduce the total number of beneficiaries under the Scheme. As regards lowering the interest for the Government's guaranteed portion of the loans, STI advised that this had to be considered very careful to ensure proper use of public funds.

9. Members remained concerned that even if some SMEs could demonstrate their business prospect, they were still unable to obtain adequate finance from lending institutions due to the lack of collateral. To better utilize the Scheme, members urged the Administration to take the lead in encouraging lending institutions to put more emphasis on development potential rather than collateral in assessing loan applications, particularly those from SMEs with marginal creditworthiness which were facing a cut in the credit line as a result of the fall in property prices. STI took note of members' concern but reiterated that as the Scheme was run on a market-driven basis, it would be up to the lending institutions to decide whether loans should be offered. Mr CHEUNG remarked that the Administration should review its interpretation on market driven taking into account creditworthiness of entrepreneurs in countries which advocated market force were assessed on their business potential rather than the availability of collateral.

10. On risk sharing, Mr Kenneth TING opined that the risk sharing ratio of lending institutions should be lowered in order that they could assess loan applications on a more favourable basis so as to benefit more SMEs. Dr WONG did not agree to such a proposal. He considered that if the Government's commitment remained at $2.5 billion, a reduction in the risk sharing ratio of lending institutions would only decrease the contribution of lending institutions to SFS and would in turn reduce the total number of beneficiaries under the Scheme. Mr TING however pointed out that as SFS was a pilot scheme, additional capital would be injected into the Scheme if necessary. In response, STI clarified that SFS was an one-off injection, and that such additional commitment had not been considered.

11. On risk capping, Dr WONG asked if the Administration would consider relaxing the upper limit of credit guarantee of $2 million for each firm to meet the needs of some SMEs. STI replied that lending institutions would determine the amount of loans to be offered in accordance with their established lending principles and the Administration would not intervene in such commercial decisions.

12. As to whether the Administration would require lending institutions to keep separate accounts for SFS to ensure that the latter would not use SFS to offset other loans accrued from the beneficiaries, STI replied that loan applications were only subject to the usual prudent scrutiny by the lending institutions. Other than those limitations on the use of the loans which might be imposed by the banks, the Scheme did not impose restrictions on the specific uses of the loans. Moreover, the Administration would not know if SFS had been used to offset other loans since it did not have the manpower and expertise to check all the accounts of lending institutions.

13. Mrs CHOW asked if the Administration had conducted an analysis on the applications received by lending institutions, including those not subsequently referred to the Government. STI advised that consequent upon a question raised by Mr SIN Chung-kai at the Council meeting on 23 September 1998, the Administration had sent out a questionnaire on SFS to all the 77 participating lending institutions. 33 out of the 52 lending institutions which had responded to the questionnaire indicated that they had records on all applications. Of the 1,663 applications received by these 33 lending institutions, 1,391 had been rejected mainly on the grounds that:

applicant's financial situation was unsatisfactory;
they had no confidence in the applicant's repaying ability;
applicant's track record was unsatisfactory;
applicant had unsatisfactory repayment record;
applicant did not have sufficient collateral;
the prospect of the industry concerned was uncertain;
applicant was not an existing customer of the lending institutions;
the management of the applicant's company was unsatisfactory;
the proposal submitted by the applicant had little market prospect; and

collateral was based in the Mainland which would not be considered. As regards the 5,825 enquiries referred to in the Annex to the information paper provided by the Administration for this meeting, STI clarified that these were enquiries received by the Industry Department and the Treasury, not by lending institutions.

14. In reply to the Chairman, STI advised that he was aiming to complete the comprehensive review of the Scheme would be completed in February 1999. The review would assess feedback on the Scheme; whether it had met its objective of assisting SMEs to obtain financing; and whether and how improvements should be made. He assured members that all views and comments expressed at the meeting would be considered in detail in the review.

IV Pirated recording of movies in cinemas
(LC Paper No. CB(1) 693/98-99(05))

15. On behalf of Mr MA Fung-kwok who was out of town, Mr NG Leung-sing briefed members on a case which illustrated the rampant bootlegging of movies in cinemas. When the movie "Prince of Egypt" was released in the Grand Theatre on 12 December 1998, both the film distributor and the cinema operator took extra precautions to prevent bootlegging as this was the global premiere of the movie. Additional manpower was deployed to perform patrolling. During the show, seven persons in the audience were found making a video recording of the movie being shown. The film distributor and the cinema operator tried to stop the gang and they started quarrelling. The Police was summoned to help but they declined to confiscate the video camera and the tape on the ground that these were private properties. The film distributor then called the Custom & Excise Department (C&ED) hotline but was told that the hotline was for reporting the sale of pirated optical discs only. The Police later brought both parties to the Tsuen Wan Station and requested the assistance of C&ED officers to deal with the case. To the disappointment of the film distributor and the cinema operator, the gang was released without further follow-up by either the Police or C&ED.

16. While acknowledging that the video camera and the tape were private properties, Mr NG pointed out that the images inside the tape belonged to the film distributor. Therefore, anyone who videotaped such images without the consent of the film distributor committed an offence of theft and this should be a case for the Police. He also questioned the function of the C&ED hotline. The Director of Intellectual Property advised that although it was an offence under the Copyright Ordinance for anyone to make for sale or hire, or to possess for the purpose of trade or business infringing copies of copyright works, the making or processing of such copies for private and domestic use was not liable to criminal prosecution. On bringing charges against a suspected bootlegger, it would be necessary and yet difficult for the prosecution to persuade the court, beyond reasonable doubt, that the recording was made for sale or hire and not for private use. He nevertheless undertook to follow up the case referred to in the preceding paragraph with C&ED.

Admin

17. Mr CHEUNG opined that apart from combating unauthorized video recording in cinemas, efforts should be made to strengthen the existing copyright protection regime as a whole. STI replied that the Copyright Ordinance had been in place to protect intellectual property since August 1997. It would however take time to assess its effectiveness and to see whether improvements were required. As regards the role of the Police in the enforcement against copyright piracy, STI explained that under the existing laws, the Police was not empowered to take actions against copyright pirates. Nevertheless, C&ED maintained close liaison with the Police and they would join forces in large scale enforcement exercises if required.

18. Mr SIN Chung-kai considered the proposal to make it an offence for the possession of video recording equipment in a cinema too stringent. In response, STI clarified that the proposals set out in the information paper were only preliminary ones which required further examination. On the suggestion of making unauthorized copying in public places of entertainment an offence regardless whether such copies were used for private consumption or trade purpose, STI said that the Administration had to consider the proposal very carefully as this involved legislative amendments. Mr CHAN Kam-lam asked if cinema operators could set their own regulations to prohibit videotaping in cinemas as was the case with concerts. STI advised that this was a commercial decision to be made solely by the cinemas operators.

V Any other business

19. There being no other business, the meeting ended at 4:30 pm.

Legislative Council Secretariat
1 March 1999