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Following is the speech by the Chief Secretary for Administration, Mrs Anson Chan, at the International Conference on "The Future of Asia", organised by Nihon Keizai Shimbun (Nikkei) today (Friday):

Mr Tsuruta, distinguished guests, ladies and gentlemen,

It is a great honour for me to be asked to share Hong Kong's views and experiences with this distinguished audience. And very timely. After almost a year which could be described in economic terms as Asia's annus horribilus, we all need to be realistic and face the fact that the situation for many in the region may get worse before it gets better.

I say this not to strike a note of gloom - I am by nature and training an optimist - but simply to recognize the challenges we face and the obstacles we need to overcome before we return to normal. And what do I mean by normal? My definition of that is a stronger, wiser, more mature and more transparent Asia, comfortable with its place in the global economy, and the community of nations. An Asia that is confident and self-assured, but not cocksure. An Asia where the traditional cultural characteristic of humility is more apparent than the less familiar one of hubris. An Asia that can demonstrate that it has the wisdom and wherewithal to learn from its mistakes, and turn adversity into opportunity, as it has done in the past. We need to show that the brilliant achievements of this region over the past 30 years have not been a flash in the pan of history. I have no doubt that we will do so.

Hong Kong is my case study to support that statement. In my lifetime, from the day I arrived as a little girl with my family from Shanghai, I have seen Hong Kong transform itself, like a chrysalis, from a small trading port with a refugee mentality, to become a major financial and business centre - Manhattan at the crossroads of East and West. Hong Kong has a regional and international significance wholly disproportionate to our size and natural resources which consist of no more than a marvellous harbour and one of the most entrepreneurial and hardworking communities to be found anywhere on this planet.

We are used to adversity in Hong Kong, but we have made it a habit to profit from our problems. It may have something to do with our cultural heritage: as you know, the Chinese character for crisis is made up of two others which mean danger and opportunity.

I can recall at least five situations in the past 15 years when storm clouds gathered and then unleashed their force on Hong Kong. The first goes back to 1983 when we introduced our linked exchange rate system. This was during a period of great anxiety when Britain and China were negotiating what became the Joint Declaration on Hong Kong's Future, the treaty which set the foundations for the high degree of autonomy which Hong Kong enjoys today under the One Country Two Systems policy of the Central People's Government. But more of that later.

Back in the early 1980s, the Hong Kong dollar, which had been allowed to float, suffered a 100% devaluation - falling from an exchange rate of five Hong Kong dollars to one US dollar in 1981 to almost ten Hong Kong dollars in 1983.

That link, set at HK$7.8 to US$1, has been in place ever since. And events during the last 15 years have demonstrated how Hong Kong and the dollar link have weathered the storm - the 1987 stock market crash, the 1989 June 4 incident in Beijing, the 1990 Gulf War, the 1995 Mexican peso crisis, and now the Asian financial crunch. Through all these turbulent times, the Hong Kong dollar has remained rock solid. Today, it is the only freely convertible currency in the region that has survived the turmoil unscathed. While other currencies were plunging, in some cases by almost 60%, the HK$1,600 billion in our banking system lost none of its value.

In recent months, there were suggestions that some of the Asian economies try to re-establish exchange rate stability by again fixing their exchange rates, possibly through the adoption of the currency board system, which has operated so successfully for Hong Kong. However, it takes a lot to establish credibility in a fixed exchange rate system and Hong Kong has been able to do this but over a relatively long period of time.

Our track record of exchange rate stability is an impressive one - and for good reason. We have a soundly based, market-driven economy and our fundamentals are amongst the best in the region - GDP growth, albeit slowing this year; strong fiscal reserves; low unemployment, although this is edging up as a result of the present crisis; no government debt; and the world's third largest foreign exchange reserves. Standing at more than US$96 billion, our reserves provide not just 100%, but some 800% backing for our currency.

As I have already said, Hong Kong has learned from past experiences, from the adoption of the currency board system in 1983 to the rigorous regulatory controls on our banking and financial sectors that we pushed through following the 1987 stock market crash. And we have put in place additional reform measures since then, in certain instances ahead of time rather than catching up in a crisis induced situation. We have survived, and survived well.

The Chief Executive of the Hong Kong Futures Exchange noted recently that the one thing that sets Hong Kong apart from the rest of Asia is that some nine years ago a concerted effort began to build an infrastructure under Hong Kong's markets that "could withstand an earthquake". Well, the level of the economic Richter Scale headed towards 9 last October. But during the huge plunge in the stock market, no trading restrictions were imposed on either stocks or foreign investors. The market did not close, as it did in 1987, and the Hong Kong dollar held firm, despite the most severe market volatility in our history. The Hang Seng Index plunged in a record magnitude by 1,438 points or 13.7% on October 28 but rebounded by 1,705 points or 18.8% on the following day.

But we should distinguish volatility from instability. While we experienced extreme volatility in the financial markets in October last year, the systems remained very stable. Even on the days of big plunges in the stock market, there was no panic selling, as evident in the high daily transaction of over $30 billion on each of those days. All transactions were processed as usual, and capital and financial requirements on intermediaries were fully and promptly met. The banking system and the exchange rate remained as stable as rock.

In Hong Kong, we operate what the Washington-based Heritage Foundation has rated the world's freest economy. Our market regulations are strong. We do not protect special interests. And we do not intervene in the market place. Nevertheless, the speed with which the Asian financial turmoil engulfed the region has highlighted some valuable lessons to be learnt, and not just by the countries feeling the full impact. Investment companies and banks in Europe, in the United States and elsewhere, need to apply the same prudence in their lending to Asia as they would exercise in their home markets.

Already, we are seeing a painful process of reform, restructuring and implementation of prudent fiscal practices which, hopefully, will result in a liberalization of the Asian markets. Openness and accountability of companies, financial institutions and finance ministries; better information about markets, allowing better monitoring by regulators and stock holders; and replacement of political intervention with market disciplines of these processes will help to establish a more stable Asia of sustainable prosperity in the next century.

And how does Hong Kong fit into the picture? We are at the heart of Asia - but an Asia with a difference. It has been argued by others, quite successfully I believe, that Hong Kong represents the model of economic management that others in Asia are realizing they should try to follow : a truly free market under the rule of law; a government that is clean and believes in prudential supervision not directing or micro-managing the economy; a well-managed and well-regulated financial sector; a reputation for playing by the rules on a level playing field; openness and accountability.

Of course, we have not been immune from the Asian turmoil. And we could not be, as a small externally-oriented economy. But the virus has proved to be more infectious and fast-acting than we could have expected. Just over a week ago, we announced a severe downturn in our GDP growth for the first quarter of the year.

We will need to revise our annual growth rate forecast of 3.5% but we believe it would be premature at this stage to do so before we have a better fix on the trend.

By and large, our indicators tell a story that has become familiar on Asian radar screens. Our stock market is down 34% in US dollar terms since from its peak in August last year. Our property market sector has fallen back by about 40% from its highest level last October.

But, just as Shakespeare wrote in Henry VI, "every cloud engenders not a storm", that is true of Hong Kong today. Inflation is falling, the drop in property prices means lower rentals, and with wages also set to moderate as the labour market eases, this will help contain the cost of doing business, and so improving external competitiveness for Hong Kong. It will also help home buyers.

We also have a generous package of tax concessions and help for home buyers from our Budget last February working their way into the system. And our vision of the future remains clear, our plans intact. In a month we open our brand new airport, one of the best in the world. That will put the seal on a massive US$20 billion dollar civil engineering project. We have already started work on an even bigger one involving railway, road and other transport links into the Mainland which will cost US$30 billion over the next 5 years, hugely upgrading facilities both for our community and for our economic links into China. Just as important, we have embarked on educational reforms and a high-technology programme designed to place Hong Kong at the cutting edge of the Information Age. We have launched a Mandatory Provident Fund Scheme which will not only provide security for our rapidly aging population, but provide a new stimulus and dimension to our financial services sector.

Sustained economic growth in the mainland of China and the United States should also give strong support to Hong Kong's export performance. These two major trading partners together account for more than half of our exports. We are also looking for comfort from the expected revival in some European economies.

Although the large currency depreciation in the East Asian economies is likely to dampen the competitiveness of both Hong Kong's and the Mainland's exports, the impact is likely to be diluted by the following considerations -

* The product mix of both Hong Kong's and the Mainland's exports is not entirely comparable to those of the East Asian economies.

* Large currency depreciation will increase inflation and cost of production in the East Asian economies concerned. Also, the substantially higher interest rates in these economies will pose a much heavier financial burden for their producers amidst tight liquidity.

* The currency depreciation in the East Asian economies also creates pressure for further cost saving, productivity improvement, product upgrading and up-market movement in both Hong Kong and the Mainland. We know we can deliver on that.

We in Hong Kong also take comfort from the determination of the leadership in Beijing to resist calls for the devaluation of the Renminbi. This is not simply a matter of rhetoric or empty reassurance. A competitive devaluation of the RMB will only trigger another round of instability in the region. That is in nobody's interests, including China's. And Chinese leaders are keenly aware of the effect of devaluation on Hong Kong, and on the role of the Hong Kong dollar whose strength and stability has acted as a firewall against further regional turbulence.

Overall, our view of China's economic development remains positive. Growth is forecast at 8%, and inflation is under control. Given the powerful economic and trade bonds between Hong Kong and the Mainland, reinforced and enhanced by the smooth and successful reunification on July 1 last year, this will underpin own strong economic fundamentals.

Japan's economic well-being is of great importance to all of us particularly in this region. Recession in Japan will continue to hamper intra-regional trade. The on-going financial fragility and the more stringent capital requirement arising from the Tokyo Big Bang implemented on April 1, 1998 are likely to dampen the flow of credit and investment capital from Japan to the region for some time. Also, a weak Japanese yen could further drag down the currencies of the East Asian economies. We very much hope that the fiscal stimulus packages announced lately by your government will bring about a much-needed revival in sentiment.

The task of re-igniting the mighty Japanese economic machine is a very difficult one. As a friend, and as a representative of one of your most valued and long-term trading and investment partners. Let me say that we all look for the vision and courage which are required to re-establish Japan's leadership role in the regional and global economy. Our hopes of recovery are pinned very much on that.

Ladies and gentlemen, I would like to touch briefly on how I see the role of our sovereign, China, in the context of the Asian turmoil. What is happening in China is a transformation of the lives of millions of men and women who are being lifted out of poverty and given new opportunities. The transformation is on a massive scale and is likely to surpass programmes of a similar nature attempted anywhere this century.

The vision for the China of the 21st century has been clearly mapped out. The country is determined to continue the process of reform, particularly in the banking sector and in state enterprises. There is also a commitment to reduce the size of the bureaucracy, to fight corruption and to continue the march towards a free market. As I have already said, I do not expect to see a devaluation of the RMB. I believe China will continue to be competitive even after the marked depreciation of other Asian currencies. Labour costs in the Mainland are still lower than most Asian economies. On the other hand, the effect of devaluation in those countries is likely to lead to higher inflation, higher import costs, and higher interest rates which, in turn, will push up manufacturing costs.

Finally, I cannot let this opportunity pass without giving a brief report on what is, in essence, the completion of the first twelve months of Hong Kong as a Special Administrative Region of China. The fact that the change of sovereignty occurred at midnight on June 30 last year, is now a matter of history. And while there was a measure of anxiety in the Hong Kong community and abroad in the run up to the Handover, I am delighted to report that we have experienced a smooth and successful transition. So much so, that apart from the obvious visible changes, such as the new flags and the new symbols, the majority of people would not have noticed any change at all. The principal officials who were in place before the Handover are still there running Hong Kong under the high degree of autonomy promised by China under the Basic Law, which is our constitutional document. The One Country Two Systems concept ensures that China maintains a hands off approach to Hong Kong, except in foreign affairs and defence. The leaders in Beijing have gone out of their way to see that this is scrupulously observed.

In addition to guaranteeing our existing structures and capitalist way of life for 50 years, the Basic Law also ensures the free movement of goods and capital and Hong Kong's status as a free port and separate customs territory. We continue to determine our own monetary and financial policies; we do not pay taxes to China; we continue to issue our own freely convertible currency; property rights, foreign investments and people's fundamental human rights are protected. We have retained the common law system; the independence of the judiciary is guaranteed; the right of free movement into and out of Hong Kong; and the right to conduct external commercial relations are also guaranteed. Importantly, the right to demonstrate is also alive and well in Hong Kong. Hardly a day goes by without some protest action in the streets or outside government offices. And, contrary to some reports, the press is as free and robust as ever. In fact, some would argue they are even more outspoken than before, particularly if we, as a government, don't perform to expectations.

The elections to our first legislature on May 24 set the seal on the transition. They did so more successfully than many had thought possible. A record number of just on 1.5 million voters - half as many again as in the 1995 election - went to the polls. They came from a record number of registered electors and voted for a record number of candidates. We heard many criticisms of the electoral arrangements, but Hong Kong citizens in unprecedented numbers passed their judgement by taking part in the poll and voting for candidates of their choice representing all colours of the political spectrum.

The elections, as we promised they would be, were fair, open and honest. They produced a legislature representative of all sectors of our vibrant community. The Administration that I serve will be wholly accountable to the legislature. And while I do not for a moment expect that the executive and the legislature will agree on everything, I take comfort knowing that we will share the same basic goal: the continuing stability and prosperity of Hong Kong.

The election showed beyond doubt that our community wants to have a say in the running of their affairs. It put to rest once and for all, I hope, the canard that Hong Kong people are only interested in making money, and have no interest in civic affairs. This was never so, and the turnout rate on May 24 eloquently underlined this point.

I have heard it said that the election result showed that Hong Kong people wanted more, not less democracy. That is precisely what will happen. The Basic Law provides a very clear road map for the development of our democratic institutions. It contains a mechanism by which our community can decide in the year 2007 how to proceed to universal suffrage for our legislature.

With two increasingly democratic elections in between, that provides us with time for a discussion of how such a process can solve some of the problems inherent in the relationship between an executive led government which has no seats in the legislature, and an assembly returned by universal suffrage. There are big issues which need to be resolved.

Ladies and gentlemen, today, Hong Kong and China serve as an anchor for stability in the region. Greater prosperity leads to greater stability. I emphasize again that a rejuvenated Japanese economy would provide the necessary leadership and momentum to help other Asian countries out of the current financial turmoil. The countries of East Asia have the ability to emerge from the storm in better shape than before. With the region's enormous and gifted population, high savings rate and thirst for infrastructure developments, the 21st century will still hold out the promise of an Asia that may well be the world's largest producer, capital lender, and capital borrower, as well as the largest consumer market.

Ladies and gentlemen, thank you very much.

End/Friday, June 5, 1998

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