Speaking about the long-term economic viability of Hong Kong in recent months, Tung Chee-hwa declared what he called the 'three highs' that have hampered competitiveness. High rents, high property prices and high salaries have reduced Hong Kong's competitiveness in the economic world. All have to be adjusted downwards to a more reasonable level. His cure for rocketing property prices was to promise that seven out of 10 families would become flat-owners in 10 years with the supply of 85,000 units annually, as well as a long-term land-supply plan. Originally aimed to bring prices down gently, the medicine was too strong for the economy when it was devastated by the financial turmoil. Prices plunged as much as 50 to 60 per cent in what many considered a free-fall. There was no sign of any bottoming out. As the Chief Executive was desperately trying to prop up the market and keep the price level stable, he was facing the challenge of the next, and last, round of price adjustments: salaries. On the same day Hongkong Telecom shocked the SAR with the announcement of across-the-board pay cuts of 10 per cent for its 13,000-strong workforce, Mr Tung was reassuring visiting Irish Prime Minister Bertie Ahern that the Government was fully committed to the free market in the adjustment process. 'We are aware that it is necessary to allow market forces to bring our prices to a level at which the market can afford. We are ready to take the pain arising from the adjustment process.' Mr Tung pointed out the adjustment in the labour market would 'take some time'. A united public, he said, was important to overcome the difficulties. 'Employers must be caring to their employees in this adjustment process in order to bring the best out of their employees,' he said. While Mr Tung might have taken the Telecom pay cuts as an inevitable development and the pain as the price to pay for long-term adjustment, the ramifications sounded the alarm for industrial dispute. Over the weekend, protesters massed outside the Telecom office and unionists decided to work to rule beginning Monday. As more than 1,500 staff staged a sit-in outside Telecom's Wan Chai office on Monday night, a group of unionists held a meeting with Mr Tung, asking him to step in. FTU chairman Cheng Yiu-tong recalled the Monday night meeting and said: 'He [Tung] said the Government should not intervene at the present stage. 'He said he was very concerned about it. 'We told him the next two days would be very crucial because unions would meet the management on Wednesday. 'If nothing came out, there would be a very strong reaction from workers and the community. 'On Tuesday morning we learned from other channels that the Government's stance was well understood by the management.' Another unionist, Lee Kai-ming, said he reminded Mr Tung about the 1967 riots. 'It was after the riots that the Government took action to improve labour relations. We've had stable labour relations for the past three decades. If we mishandle the present problem, the consequences will be disastrous. 'Adjustment can only be made under stability. If it stirred up the anger of people and created instability, no adjustment would succeed,' he said. The blow Telecom's management suffered in its radical pay-cuts exercise was a mixed blessing to Mr Tung. Some unionists gave credit to the 'intervention' by Mr Tung for the U-turn of Telecom's management, although his office immediately denied any role. The fact remains - a major industrial dispute has been averted and the unionists and management resorted to negotiation for a mutually acceptable solution. But the downside is equally clear. It makes the labour-market adjustment process more difficult and politicised. Unionists and employees will be inspired by the initial success of the Telecom staff in standing firm against any demands by employers to cut wages. They will be tempted to take their grievances over any pay cuts directly to the Chief Executive for him to put pressure on the bosses. This may explain why the CE Office is so keen to dissociate Mr Tung from the Telecom dispute. Furthermore, any direct intervention by the Chief Executive in an industrial dispute will send a bad signal to the business community at a time when the administration has already been accused of tinkering with the free market. Aides of Mr Tung are also anxious to explain the Chief Executive does not hold an opinion on whether employers should or should not cut the salaries of their staff to boost competitiveness. His spokeswoman said Mr Tung was only giving his own 'analysis' on the situation. If Mr Tung considered widespread pay cuts were inevitable, it is because there are few options for employers in times of recession, and the worst is yet to come. A reduction of production costs is the necessary evil to keep business afloat. Given a choice between pay cuts and massive sackings, Mr Tung may prefer salary cuts. This is because the alternative would worsen unemployment. Mr Cheng admitted both the unions and Mr Tung have to face the dilemma. 'Yes, we can stand firm and refuse to compromise [over pay cuts]. But it will be hard for us to say anything when the employers resort to staff cutting. 'Sooner or later, sacking of staff will have to be made if companies are running at a loss. At that time, what can we do?' Liberal Party chairman Allen Lee Peng-fei said it was a relief the dispute was settled before it worsened into social unrest. But he shared the view that the incident may make the unions more powerful when bargaining with employers over pay cuts. As head of the SAR Government, Mr Tung is playing a role in the annual pay adjustment for the 190,000-strong civil service. Pressure is building for the Government to follow the private sector in cutting the salaries of public servants. Officials, however, are firm in their defence of the existing mechanism in determining the pay adjustment by taking into account the Pay Trend Survey among dozens of selected major firms. How the Government handles the annual pay adjustment for civil servants next year will be controversial. The last thing tens of thousands of families who use large portions of their salaries to pay property mortgages want is retrenchments and salary cuts. This will create a vicious circle with a further drop in consumption and more jobless, resulting in deflation. If the crash of property prices has yet to make a direct impact on the millions of flat owners, it is because many are still able to keep their jobs and pay the monthly instalments. Learning a lesson from the property adjustment, Mr Tung should be more alert to the adverse implications of adjustment in the labour market. How to achieve a soft salary landing will be one of his major challenges ahead to avoid social unrest.