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Following is the speech by the Chief Executive , Mr Tung Chee Hwa at the Hong Kong Federation of Insurers Annual Dinner this (Wednesday)evening.

Mr Chan, Ladies and Gentlemen, Good Evening,

I was hoping to come here for a nice and friendly dinner among friends. Firstly I didn't know I had to make a speech and then I had to listen to all the lobbying and I think it is really highly unfair. But I want to assure you of one thing, Government will compete for the best brains with the industry. That we will do.

I was also very pleased that MPF was finally part of a very important legislation. As a 61-year-old, I do need it except I am afraid that by the time I retire the benefits accrued to me probably would not be sufficient. But it really gives me great pleasure to speak at your 1998 Annual Dinner this evening.

1997 was a wonderful year for Hong Kong, a very proud year for Hong Kong, where we see the resumption of sovereignty by China over Hong Kong in a seamless and very smooth transition.

'98 is a very important year for the insurance industry, not only because you will, for the first time, be represented in the legislature but also it is really a milestone with the passing of the legislation on the MPF. But before I get on to speak about the MPF, if you don't mind I will just spend a few minutes talking to you about our economy because I know it is a subject of major concern for many people.

Over the last few months we have successfully defended the linked exchange rate. It is something which needed to be done for Hong Kong's own financial stability.¡@We have done it successfully, it is lauded around the world, with our own Central Government, as well as in Hong Kong. In the process, of course, it has created pain here in Hong Kong. But let me first assure you, the defence of the linked exchange rate was very important for Hong Kong. Without it, you only need to look around us at other countries in Asia. The instability or the uncertainty that is created by an unstable exchange rate would be of such consequence that it is not something we dare to really dream of.

But why have we succeeded in defending the linked exchange rate? First and foremost because for years we have practised very prudent sound financial policies. Year after year, since the linked exchange rate was established, our fiscal reserves every year average about 2% of GDP. And in the year just closed, March 31, 1998, our budget surplus was a full 5.8% of GDP. Our banking regulation, financial regulation, also have been good. The high degree of transparency has been very important to us. We also have a foreign exchange reserve which is the third largest in the world and covers the currency in circulation - not one time, not two times, not three times but eight times over.

So, we have all these fundamental reasons to make the defence of the linked exchange rate successful. Of course we were lauded all around the world:¡@how important it is for Asia, how important it is for the world that Hong Kong's currency is stable; how important it is for the world the Renminbi is not devalued. But let me emphasise, we did this for Hong Kong because it is in Hong Kong's interest that we maintain the linked exchange rate.

Let me go on, also, to say that the Currency Board operation which the linked exchange rate operates under causes the interest rate to go up every time there is an attack on our currency, and that as a result of that the interest rate has gone up a few times in the last few months. That has created an economic downturn and the fact is that when you defend a currency the result would be asset price deflation, deflation in the value of land, homes, as well as the stock market. This is unfortunate but this has happened.

Of course I understand very well the pain that some in the community are experiencing as a result of this huge adjustment. This has extended, of course, beyond housing, beyond the stock market, on to the retail sector, on to the tourism sector and all this pain is being borne by the community as a whole. But let me also go on to say this, that years of inflation close to double digits, and negative interest rates, inevitably have brought about asset price inflation. Property prices were too high, wage increases were too rapid and Hong Kong's competitiveness was being eroded.

Adjustment to that is necessary and the Asian currency turmoil has forced the adjustment pace. We are now going through an adjustment period which is difficult, which is painful, but I want to assure you, at the end of the adjustment period Hong Kong will be that much more competitive and Hong Kong's long term economic vitality will be that much more assured. Yes, it is painful at this time. We have all to bear with this. But the end of the adjustment period should not be too far away and at that time Hong Kong will be better, Hong Kong will be stronger.

Many have asked me: Well, what is the Government doing about it? Why don't we see anything from the Government? The fact is that we have been concerned about this issue from the very beginning. And nothing is more demonstrated in what we did, what the Financial Secretary did in the Budget. I would like to draw to your attention that in the Budget which was presented on February 18, we have reduced taxes by HK$13 billion which is a full one per cent of GDP; we have increased expenditure, direct expenditure - investment in infrastructure projects - to the tune of $40 billion. Altogether, between the increase in expenses and investment and reduction in taxes it is equal to almost 4% of GDP. It is a huge sum of money, it is a huge commitment, and the reason why this was done was in recognition of the possible slow down in the economy and that we believe this tremendous stimulus package will get our economy going again.

Of course we don't have instant medicine. But with this stimulus package we are confident that the economy will recover. And more important than that, ladies and gentlemen, other countries in Asia with the financial turmoil have to scale back all their programmes in investment, in expenditure. But what we have done in Hong Kong, we have increased expenditure, we have cut taxes. This we do not only, hopefully, in the short term to provide employment opportunities but also in the longer term to make us more competitive. Because our investment in infrastructure, in roads and railways, in schools and in education and in information technology is going to make us a lot more competitive as we move forward into the 21st century.

So, I ask you, ladies and gentlemen, to be patient. And I know, although there are no instant solutions, I believe what we have done will work. It will take time. In the meantime the adjustment period, the adjustment process, is now in hand. It is going to be painful for a little while longer but at the end of the day we will be that much better off.

I really feel that by doing what we are doing, by going through this adjustment period, by investing in our future, we will be ready to take on all competition from any quarter in the 21st century.

1998 is also a year when, as I said earlier on, your industry has become represented or will become represented in the legislature. It is the year when you have demonstrated why you deserve your success in securing a functional constituency seat in the legislature.

- You have a 92% voter registration rate, the second highest among functional constituencies.

- And you have a 88% turnout rate at the Election Committee Sub-sector Election, again the second highest among all functional constituencies.

I have every confidence that you will make another milestone on Election Day, May 24. As I see it, by seeking to have your own representation in the legislature, you have demonstrated your commitment to business in Hong Kong. More importantly, you are showing to the rest of Hong Kong that you are committed to ensuring that the insurance industry is here to serve the best interests of Hong Kong.

But Frank, let me just remind you probably you'll find it easier to lobby government civil servants than the other 59 members of the legislature.

I would like to take this opportunity this evening to briefly talk about the Mandatory Provident Fund (MPF). As you all know, care for the elderly is a subject very close to my own heart. People aged 65 or above now account for 10% of our population, and the percentage is expected to increase rapidly in the decades to come. This population profile demands that we put in place a formal system of retirement protection in Hong Kong as early as possible.

I was very pleased, therefore, that the Provisional Legislature eventually enacted the Provident Fund Schemes Legislation (Amendment) Ordinance in late February and passed the two sets of Regulations three weeks ago, after several months of very intensive scrutiny of the legislation and vigorous debates. These were two very important steps towards the early implementation of MPF.

In both exercises, the insurance industry played a significant role. The Federation's representatives and other experienced members of the insurance industry provided the Financial Services Bureau and the MPF Office with very solid support and sound advice in developing a workable, cost-effective and secure MPF System. I would like to take this opportunity to thank you all for your effort and for your contribution. And I believe the harmonious working relationship will be carried through to the next phase of the preparatory work this year and all the way to the actual implementation of the MPF System.

In the next phase of preparation, the Government will need to focus on several implementational issues. Let me mention just three which will concern you a great deal :

- First, manpower and training needs for the industry, which is crucial to the successful implementation of the MPF. Let us not fight about talents. Let us train them together.

- Second, the interface of the information management system of the MPF Authority with the computer systems of service providers.

- Third, guidelines for service providers.

The Government will start work on these areas as a matter of priority, and we look forward to having your advice and your support.

I know that the Secretary for Financial Services and the Director of MPF Office will aim to achieve two major goals when they work together with you on the three implementational issues :

- First and foremost, the MPF System must provide quality service in the most cost-effective manner so that scheme members can get the most out of their MPF contributions. In both manpower training and information management aspects, therefore, there must be an adequate level of resources input to produce the quality and cost-effectiveness of services.

- Second, the MPF System must be highly secure to give scheme members a high level of confidence in the system. They rightly deserve to be given such assurance. Therefore, in producing the guidelines for the observance by service providers, there must be sufficient provisions to facilitate service providers to comply with all the rules stipulated in the MPF legislation. I fully endorse their approach. While these goals set a high standard for all of you to meet, they are commensurate with the spirit of free market competition which we all embrace. In giving you our commitment to a minimum level of regulatory controls, we expect you to give us your commitment to providing the very, very best service to MPF scheme members.

The insurance industry has been a key provider of provident fund and retirement scheme services in Hong Kong. Your services are significant both in terms of the number of schemes and the size of funds managed. The introduction of MPF will, nonetheless, open up new opportunities and challenges to you. But I am sure you will continue to be a major competitive force in the MPF market, as you have been in the voluntary retirement schemes regime. In fact, MPF will create new business opportunities not only for the life insurance industry but also for the general insurance industry. The latter will be expected to offer professional indemnity insurance products because the trustees for MPF schemes will be required to take out such insurance.

The MPF will, furthermore, bring you to wider horizons in the future. With MPF, people will become more familiar with professional fund management and feel more confident investing in unit trusts, mutual funds and other investment funds offered by insurers, fund managers, and banks. The rate of contractual savings will increase in the long run. As insurers, you are well positioned to reap the benefits of these great

opportunities.

I always believe that great success will come by if we are committed to continually improving our services and rise to the challenges and aspirations of the members of our community.

In fact, apart from direct business interests for the insurance industry, MPF will bring new developments to many other sectors in Hong Kong, and insurers, as part of the Hong Kong community, will also benefit indirectly from these new developments. MPF will create a pool of retirement assets. Annual contributions to private schemes will rise to 30 to 40 billion dollars a year, or 4% of our GDP. This will inject one or two billion dollars a year at the start into the debt market. I believe that both the size and long term nature of these assets will foster the growth of our capital markets. It will, in particular, deepen and broaden our debt market, stabilize our stock market, enhance the further development of hedging investment tools in Hong Kong and, ultimately, further strengthen our status as a leading international financial centre.

At the more 'micro' level, I see MPF creating many job opportunities for our well-educated workforce. I have been talking to a number of potential MPF market participants, and I know that they are planning to recruit and strengthen their work teams as they should do. Even this morning, I read from newspaper reports that a number of market participants have estimated that they would need to double or triple their existing teams to handle the new business which MPF will bring. While this is not the primary aim of MPF, the job opportunities which it will create for members of our workforce is nevertheless a bonus which, particularly at this time, we will all welcome very much.

May I finally take this opportunity to wish you all a successful and prosperous year ahead. Thank you very much indeed.

End/Wednesday, April 22, 1998

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