Legislative Council

LC Paper No. CB(1) 145/98-99
(These minutes have been seen
by the Administration)

Ref: CB1/PL/TI/1

Panel on Trade and Industry

Minutes of meeting
held on Wednesday, 22 July 1998, at 8:30 am
in the Chamber of the Legislative Council Building

Members present :

Hon CHAN Kam-lam (Chairman)
Dr Hon LUI Ming-wah, JP (Deputy Chairman)
Hon Kenneth TING Woo-shou, JP
Hon James TIEN Pei-chun, JP
Hon David CHU Yu-lin
Hon Cyd HO Sau-lan
Hon NG Leung-sing
Prof Hon NG Ching-fai
Hon Mrs Selina CHOW LIANG Shuk-yee, JP
Hon MA Fung-kwok
Hon CHEUNG Man-kwong
Hon HUI Cheung-ching
Hon CHAN Kwok-keung
Hon SIN Chung-kai

Members attending :

Hon Fred LI Wah-ming
Hon Ronald ARCULLI, JP

Members absent :

Hon Mrs Sophie LEUNG LAU Yau-fun, JP
Dr Hon Philip WONG Yu-hong
Hon CHIM Pui-chung

Public officers attending :

For item IV

Mr CHAU Tak Hay,

Secretary for Trade & Industry

Mr Francis HO,

Director-General of Industry

Mr Brian DAGNALL,

Director of Accounting Services

Miss CHEUNG Siu-hing,

Deputy Secretary for Trade & Industry

Mr Sidney CHAN,

Assistant Director-General for Industry

For item V

Mr CHAU Tak Hay,

Secretary for Trade & Industry

Miss CHEUNG Siu-hing,

Deputy Secretary for Trade & Industry

Clerk in attendance :

Ms LEUNG Siu-kum,

Chief Assistant Secretary (1)2

Staff in attendance :

Miss Becky YU,

Senior Assistant Secretary (1)3

I. Confirmation of minutes of previous meeting
(LC Paper No. CB(1) 55/98-99)

The minutes of the meeting held on 14 July 1998 were confirmed.

II. Information paper issued since last meeting

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

III. Date of next meeting and items for discussion

3. The next meeting would be held on Monday, 7 September 1998, at 2:30 pm to discuss the following:

- Tradelink;

- Sale of textile quota; and

- Enforcement against copyright piracy activities.

IV.Special Finance Scheme for small and medium enterprises

(LC Paper No. CB(1) 54/98-99 (01))

4. At the invitation of the Chairman, the Secretary for Trade and Industry (STI) highlighted the salient points in the information paper. Members then proceeded to examine the various aspects of the Special Finance Scheme (SFS).

Capital commitment

5. A member was of the view that the initial capital injection of $2 billion into SFS was inadequate, in particular after the recent chaos at Super Terminal 1 of the Chek Lap Kok Airport which had caused financial hardship to many small and medium enterprises (SMEs) in various trades. He urged the Administration to consider increasing the funding to $20 billion in order to optimize the number of beneficiaries. In reply, STI considered it difficult to determine the adequacy of SFS having regard to the substantial number of over 290,000 SMEs in Hong Kong. The launching of SFS, which was designed prior to the air cargo problem of the Chek Lap Kok Airport, was to help ease the tight liquidity of the banking system as a result of the regional financial turmoil so that lending institutions would be more willing to lend money to SMEs to meet their genuine business needs.

Assessment of applications

6. While members expressed support to SFS, they apprehended that if the Government were to rely solely on lending institutions to scrutinize loan applications, the latter would assess applicants' credit worthiness on the basis of their usual lending criteria viz. the availability of collateral rather than business prospect. Such assessment criteria would defeat the original purpose of SFS. Members cautioned that some SMEs, in particular those innovative industries which lacked sufficient capital assets as collateral, might still find it difficult to obtain loans from lending institutions. For those which used properties as security for loans might also face a cut in the credit line as a result of the recent fall in property prices. Some members considered that there was a need for the Administration to draw up lending guidelines on SFS to ensure that lending institutions would make sufficient loans to needy SMEs.

7. STI responded that it was appropriate to give autonomy to lending institutions in scrutinizing loan applications as the Administration did not have the expertise and knowledge to assess the credit worthiness of applicants. Besides, any Government intervention would lengthen the assessment process. On the suggestion of drawing up lending guidelines, STI advised that as different lending institutions had different lending policies and principles, a set of all-embracing guidelines might not be feasible. Furthermore, the imposition of restrictions on the part of lending institutions would reduce their interest in joining SFS which was also the major cause of failure of the Credit Guarantee Scheme (CGS). The Director-General of Industry (DG of I) supplemented that apart from collateral, lending institutions would take into account factors such as track record, business prospect and repaying ability of an applicant in assessing the loan application. Having said that, STI stated that the Financial Secretary would issue a letter to all interested lending institutions reiterating the intention of SFS and appealing for their co-operation in helping those SMEs which were creditworthy but suffering from the credit crunch. As regards assistance for SMEs involved in innovative high technology industries, DG of I advised that this fell within the remit of the Applied Research Fund (ARF). Consequent upon a review on ARF, the Administration had injected a further sum of $500 million into the Fund to facilitate more technology ventures and research and development activities in the private sector. It was anticipated that the Fund Managers of ARF would start to identify suitable applicants in September 1998.

8. While acknowledging that the introduction of SFS was a short term measure to address the liquidity crunch, a member emphasized the need for a long term strategy to support the future development of both manufacturing and service industries. He considered that the Administration should model after Singapore in appointing a financial specialist to ascertain the development potential of individual industries and to allocate to them necessary government funds. Another member suggested the establishment of a development bank through which enterprises could obtain loans to meet their business needs. In reply, STI assured the members that the high-level Commission on Innovation and Technology recently set up by the Chief Executive would look into various means to stimulate and foster innovation and technology development in Hong Kong, including the effective use of government funding. As regards the setting up of a development bank, STI cautioned that it would be dangerous to make loans to industries according to policy directives. The current economic situation in South Korea was a case in point. He explained that market-driven was an important principle in designing any finance scheme to support industries. He also noted a suggestion to set up a credit guarantee organization under which the Government could act as the guarantor for 70% of the loans provided to enterprises.

9. A member asked if the Administration would press for expeditious assessment of loan applications. STI advised that as the scrutiny of applications would be undertaken by lending institutions in accordance with their established principles, it would not be appropriate for the Administration to intervene in such commercial decisions. DG of I supplemented that it was the intention of lending institutions to expedite the approval process, but it might take longer time if an applicant could not provide the necessary information in support of an application, such as a systematic accounting record.

Eligibility

10. In view of the limited funding under SFS, a member opined that priority should be accorded to applicants who used Hong Kong as the production base. This would help to revive the economy and to create more job opportunities for local people. DG of I took note of the member's concern but pointed out that given the trend of trade globalization and the fact that Hong Kong's manufacturing industries had expanded to South China and further afield, it was inevitable that Hong Kong would no longer be a production base, but a base for higher value-added manufacturing activities, such as design, marketing and financing. Such an economic evolution was important to the Hong Kong economy as a whole and had also provided job opportunities for the local people. Therefore, it would be inappropriate to impose any restriction on the eligibility of applicants under SFS.

Guarantee period

11. Members generally felt that the maximum guarantee period of 365 days was too short in view of the fact that it would take two to three years for the economy to revive. Moreover, as different trades had different credit terms, some beneficiaries might not be able to repay the loans within the specified period. Members urged the Administration to set up a procedure to facilitate the beneficiaries to extend the loan period when necessary. While acknowledging members' concern, DG of I emphasized the need for a definite guarantee period so that SFS could offer credit guarantees to more SMEs in need upon the repayment of loans under guarantee. Furthermore, the proposed guarantee period was already an improvement to the normal credit insurance period of 180 days. Where necessary, a beneficiary could make a new application after the expiry of the guarantee period. Members however remained of the view that the guarantee period should be extended.

Interest

12. In reply to a member's question, DG of I confirmed that unlike CGS where a fee equivalent to 0.77% of the guaranteed sum would be charged on successful applicants, no application fee would be charged on SFS as all administrative work associated with the Scheme would be undertaken by the lending institutions. At the same time, the lending institutions would determine the interest for the loans they offered to SMEs in accordance with their established principles. DG of I supplemented that the Administration considered a spread of 3% between the interest a bank charged a successful applicant and the interest it paid to the Government for the corresponding deposit reasonable.

Arrangement for default cases

13. On the basis for capping the risk sharing ratio at 50% of the approved loan, DG of I explained that an equitable ratio would ensure that lending institutions would be more prudent in assessing loan applications. In reply to a related question, STI advised that the Administration did not have a pre-determined bad and doubtful debt rate for SFS as it would be difficult to predict the level of risk involved at this stage. To facilitate a better understanding, Mr SIN Chung-kai requested the Administration to provide the following information before the funding proposal was submitted to the Finance Committee on 31 July 1998:

- the bad and doubtful debt rate for loans under $4 million offered to SMEs over the past three years; and

- the percentage of these loans to the total amount of domestic loans.

STI undertook to relay the member's request to the Hong Kong Monetary Authority for follow-up.

(Post-meeting note: The required information was circulated vide LC Paper No. CB(1) 91/98-99 on 30 July 1998.)

Review and monitoring

14. DG of I assured members that a monitoring mechanism would be developed to ensure that no applicant could at any one time apply for more than one credit guarantee under SFS.

The way forward

15. In response to a member's question, STI advised that the continuous provision of SFS would hinge on the overall economic climate and liquidity situation. The need for SFS would no longer exist if the liquidity situation improved. Meanwhile, efforts would be made to promote SFS to both SMEs and lending institutions. Members urged the Administration to implement SFS as soon as possible. At members' request, STI undertook to report regularly to the Panel the progress of SFS after it became operational.

16. Given the current volatile economic situation, Hon Ronald ARCULLI urged the Administration to adopt a more flexible approach in drawing up the final funding proposal for submission to the Finance Committee so that no supplementary funding would be required.

V.Prepayment for goods and services

(PLC Paper No. CB(1) 54/98-99(02))

17. As the subject was raised by Hon Fred LI, the Chairman invited Mr LI to brief members on his concerns. Mr LI said that the recent announcement of a time limit on redemption of prepaid coupons by KPS Retail Stores Limited had aroused public concern on prepayment for goods and services, in particular on the legitimacy for traders to unilaterally revise terms in consumer contracts without consent of their customers. Having regard to the impact of the case on consumer protection, Mr LI was disappointed that the Consumer Council (CC), instead of taking a proactive role in addressing the issue, had once declined to use the Consumer Legal Action Fund to help the affected customers. Expressing similar concern, a member asked if the Administration could require CC to initiate legal action against businesses which failed to honour terms of consumer contracts.

18. In reply, STI explained that as CC was an independent organization, it would be inappropriate for the Administration to intervene with its day to day operation. On the suggestion for CC to initiate legal action, STI considered it not feasible because CC was not the affected party. He added that for disputes relating to terms of contracts, consumers could seek judgment from the court as the Unconscionable Contracts Ordinance already empowered the court to refuse to enforce or revise unconscionable terms found in consumer contracts. Consumers might apply for the Consumer Legal Action Fund should they require financial assistance for the legal action.

19. To enhance consumer protection against malpractices involving prepayment, Mr LI asked if the Administration would consider adopting a similar measure taken by banking institutions to require the concerned businesses to retain a certain amount of money for consumers' compensation should a business go into liquidation or bankruptcy before supplying the prepaid goods and services. STI considered a direct comparison with banking institutions inappropriate as the default of a bank could have a much greater impact on the economy as a whole. In reply to a member's question on overseas experience, the Deputy Secretary for Trade and Industry advised that apart from some specific trades such as funeral services, there was no across-the-board legislation overseas to regulate business practices involving prepayment for goods and services. STI further cautioned that regulation would likely generate administrative cost which the private sector would inevitably pass onto consumers. A member asked if traders could be required to specify the expiry period of prepayment. STI responded that it was inappropriate for the Administration to intervene in business operations in the private sector. He said that a better way to protect consumers' interest in making advanced payment for goods and services was to increase their awareness of the need to balance the benefits against potential risks that such advanced payment involved.

20. In view of the popularity of prepayment for goods and services, members urged the Administration that efforts should be made to protect consumers in the course of trade transactions.

VI.Any other business

21. There being no other business, the meeting ended at 10:45 am.



Legislative Council Secretariat
31 August 1998