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Following is the speech by the Chief Secretary for Administration, Mrs Anson Chan, on "Hong Kong: Stability Amid The Asian Turmoil" at the Hong Kong Trade Development Council annual dinner at Waldorf-Astoria Hotel, New York on Monday (June 8, New York time):

Victor, Commissioner Halligan, ladies and gentlemen,

Good evening. First of all, Victor, thank you very much for those very kind words. I think it was Mark Twain who said that a compliment can last one several months. On that basis, I think Victor has just assured me of immortality. I know that New Yorkers don't need much of an excuse to have a party. That's one of the many things Hong Kong has in common with this great city. Nevertheless, we have a few milestones to celebrate tonight, and I would like to mention them briefly.

Firstly, of course, there is the inauguration of this Hong Kong Trade Development Council dinner in New York. It means a great deal to me to be invited as guest of honor. I'm sure that this occasion will do much to cement the bonds between our two communities.

Secondly, this is an opportunity to pay tribute to the Hong Kong/US and US/Hong Kong Cooperation Committees which were established in 1984. That was the year as you all know Britain and China signed the Joint Declaration on Hong Kong's future, and set in train a near 13-year transition, sometimes rough, sometimes smooth, which reached its historical climax on

July 1 last year when we became a Special Administrative Region of the People's Republic of China. More of that later. I just want to say now how much we in Hong Kong have appreciated the support of Americans over the last dozen - plus years. The two co-operation committees stood out like beacons in their symbolism of that support and friendship. And they still do.

Finally, we in Hong Kong and the mainland of China are about to celebrate the first anniversary of the reunification which took place before a worldwide television audience last July. I realise that some people were holding their breath. I know that there were others who were hoping for the best, but fearing the worst. I acknowledge that the prophets of doom were in seriously dismal mode. They hovered in the shadows of doubt and despair, wringing their hands as they tolled off one worry bead after another.

Hong Kong was about to go down the tubes. Our freedoms would be rolled over. Democracy would be crushed. Corruption would creep back. The rule of law would be eroded. There would be government by guanxi.

Not for the first time in our history, Hong Kong has confounded its critics. The worst fears have proved to be unfounded. And something better and more important than sheer hope has been realised. I refer here to the solemn promises that were made to the people of Hong Kong and the international community by the Central People's Government in both the Joint Declaration and the Basic Law.

The promises of a high degree of autonomy for Hong Kong have been honored in word and deed. One Country Two Systems. Hong Kong people are now running Hong Kong within the framework of our own constitution which is the Basic Law - which embraces us as part of the nation, but sets us apart as a fully functioning free and pluralist society practising capitalism in pretty much the same way Milton Friedman might describe it in a text book. As the New York Times once said, nobody has ever made any money betting against Hong Kong.

This is good news for the people of Hong Kong. It is good news for the leadership in Beijing which has invested so much energy and prestige in a successful transition. And it is good news for the rest of the world which has come to accept and respect Hong Kong as an integral part of the webbing which makes up the global economy. It's certainly good news for Americans, who have commercial, cultural and family ties with Hong Kong going back more than a century and a half. We hope that these ties will continue to flourish and prosper.

Let me say without hesitation that Hong Kong people have taken 1997 in their stride. We hit the ground running. Let me also add immediately that we have had more problems to deal with than we had bargained for - the bird flu scare; a post-Handover drop in tourism; and the fallout from the Asian financial crisis which precipitated predatory attacks on the HK/US dollar link; and a sharp downturn in our economic growth.

The point I would like to make now is that our problems have not been of the sort so confidently predicted by the critics, that is interference in Hong Kong affairs by Beijing; the diminution of our rights and freedoms. As I have already noted, the Beijing leadership has been scrupulous in honoring its guarantees of a high degree of autonomy for Hong Kong. The best demonstration of that commitment came during the attack on the HK Dollar last October. The leadership made it plain that this was a matter for Hong Kong to handle on its own, while offering support should it be needed. Beijing has a number of solid economic and financial reasons NOT to devalue the Renminbi, but they also say freely that concern for Hong Kong plays a part in their thinking.

So how does Hong Kong look today, almost a year after the Handover? I think that most fair-minded observers would say it looks pretty much the same - which is how it should be.

The institutions of civil society i.e. the rule of law, an independent judiciary, an elected legislature, a free press, churches, non-governmental organisations - remain not just intact, but vibrant. Political protest is alive and well. We've had more demonstrations in the year since the Handover than in the year before. And you will all have seen on your TV screens how peacefully the commemoration of the June 4 incident went in Hong Kong.

There have been a number of serious legal challenges to the government in the last year, including one to the validity of the Provisional Legislative Council which was set up after the Handover. There was also controversy when we adapted Hong Kong's law to provide certain State immunities which had applied to the British Crown prior to the Handover. But this adaptation, I want to make clear, was carried out in line with Common Law principles and precedents. And of course, the Basic Law guarantees that the Common Law will continue to be practiced in Hong Kong.

The fact that this particular adaptation exercise aroused debate and questions - which I hope we satisfactorily answered - was to my mind a positive sign that we have in Hong Kong a community which has an absolute commitment to the rule of law, and the vigilance and confidence to speak up when they perceive it - rightly or wrongly - to be under challenge.

Those concerns were very much reflected in our media which continues to flourish as it does and as it must - in any open society. Our press is not afraid to take on the Administration - we have the bruises to prove it. Furthermore, it reports and comments on issues sensitive to the mainland authorities, including Taiwan, Tibet and mainland dissidents. So, it is very much One Country Two Systems. Of course, we hear claims of self-censorship - but that's something we in the Administration do not approve of, or indeed encourage.

We understand fully that the free and unfettered flow of information is vital to the success of Hong Kong as an international business center, and to the well being of our community. A free market in goods and services also means a free market in ideas. That's why papers such as the Wall Street Journal, the International Herald Tribune and the Financial Times have chosen to publish their Asia editions out of Hong Kong.

You will have read recently in these and other distinguished journals about our May 24 elections, the first to be held in the Special Administrative Region since the Handover and, as one writer noted, the first multi-party elections in China. I am aware of criticisms that the election arrangements were flawed, that they were designed to lessen the prospects of the pro-democracy candidates, and boost the chances of the so-called China-friendly candidates. I believe the outcome proved otherwise. I would also ask you to consider the following -

* We had a record number of voter enrolments, a record number of candidates stood for election, and a record voter turnout of just on 1.5 million, which is half as many again as the turnout in the 1995 elections. There were no boycotts, but plenty of hard, noisy, colorful campaigning, which is very much Hong Kong style.

* The elections were conducted freely, fairly and honestly. They produced a balanced legislature, including a good slew of members who were most critical of the arrangements.

* The elections were the first critical step in the process laid down in the Basic Law which eventually envisages full universal suffrage. Some people want us to move faster, some wish we would slow down. Our aim is to keep our eye on the ball so that we don't miss the goal of universal suffrage at the end of the field.

* Whatever message you may think was sent by the voters on May 24, I think two stand out : (1) - that Hong Kong people want to be part of the process of government; and (2) - they laid to rest once and for all the patronising canard that Hong Kong people are only interested in money, and not politics.

Hong Kong people believe that democracy is the backbone of an open and plural society like Hong Kong. The future that has been charted for us in the Basic Law is a democratic one, and the Administration that I serve will be ever mindful of that.

Finally, I believe these elections have been a watershed, marking as they do the final squaring of the circle of our transition from British colony to Special Administrative Region of China.

All of this, however, has not been our only, nor indeed our major concern this past year. Our attention has been firmly fixed on what has happened to the Asian economy and the knock-on effects that has had on Hong Kong. We were not - could not - be immune from the turmoil in so many of our neighboring countries.

Despite a strong performance in the first three quarters of 1997, our growth for the year moderated to 5.3 per cent as the economy took a downturn towards the year end. We went into negative growth in the first quarter of this year, but it is too early yet, given the volatility and uncertainty surrounding us, to say what our growth rate will look like at the end of the year. Our stock and property markets have undergone quite a substantial contraction of asset values, tourism has not picked up, and our unemployment rate has risen, albeit to 3.9 per cent. We make no bones about any of these problems. Hong Kong people are, after all, not unused to the ups and downs of economic cycles.

While the Government will do our best, within the principles of a free market economy, to help relieve the immediate pain brought by economic hardship, we must, at the end of the day, rely on our core competitiveness to build a better tomorrow.

Hong Kong's core competitiveness consists of both our institutional and our business strengths. To maintain our US/HK Dollar link, we have an effective currency board system backed by the third largest foreign exchange reserves in the world, a high savings rate, a strong fiscal position with no government foreign debt, and remarkable productive capacity underpinned by a competent, flexible, labor force and first-class infrastructure.

We are putting the finishing touches - literally - to the world's largest civil engineering project : our new airport and all of the roads, tunnels, bridges and new towns associated with it. We are coming in on schedule, and below cost. Before that mammoth project has even finished, we have embarked on an even bigger and more spectacular housing and railway development program that will cost half as much again - US$30 billion - as the airport venture.

Apart from our institutional strengths, Hong Kong's confluence of business strengths is second to none in Asia. I would include among them our services sector which now accounts for 83 per cent of our economy, our value-added manufacturing network, and our special connection with the mainland of China, physically, culturally, and constitutionally. These positive attributes should enable adjustments in the economy to take place promptly and effectively.

Despite current difficulties, I believe our economic prospects for the longer term remain good. This is underpinned in particular by sustained high economic growth and further reform and opening up in the mainland of China and, of course, the continued buoyancy of the US economy. These two trading partners together already account for more than half of Hong Kong's exports.

And, keeping our vision long and wide, the downturn in residential property prices and commercial rents will alleviate asset price inflation, which is so often associated with a bubble economy. A soft landing of property prices and rentals will eventually help contain the cost of doing business in Hong Kong and improve our external competitiveness.

Finally, to that massive public investment program I mentioned a moment ago. Our government is supporting a huge expansion of Hong Kong's domestic and cross-border rail networks that will address both our internal transport requirements and the long-term development our own economic and trade links with the mainland. In addition, these projects will generate employment for several years to come, add greatly to Hong Kong's economic efficiency early in the next century and provide ample business opportunities for our trading partners and investors. So, I hope American business will take note.

Ladies and gentlemen, the problems of the region are serious, but the resources and the determination are there to overcome them, and I am confident that will happen. As for Hong Kong, we were the last to be hit. I have no doubt we will be among the first - if not the first - to rebound. That is the nature of a genuinely free market economy.

I mentioned earlier the attack on our currency. And being just a subway ride from Wall Street, I should address the notion that Hong Kong should cut its link with the US dollar, or to devalue our currency. The SAR Government has firmly resisted such suggestions. We have put our money where our mouth is in doing so.

Competitive devaluation is simply not a solution to current problems : particularly not for Hong Kong. Hong Kong has never competed on cost alone. Our competitive advantage lies also in certainty : certainty in the high quality of products; in prompt delivery; in fair and business-friendly Government practice; and in the sure value of our currency. To subject the Hong Kong dollar to fluctuation is to give up one very valuable asset. We do not see any justification for us to contemplate going down that route.

I wish I could stand here tonight and tell you that the worst of the Asian crisis has passed. That there will be no more shocks, or after shocks. Better still, tell you exactly when the recovery will begin. I will leave that to others. I would rather look beyond the crystal ball to the lessons that need to be learned.

We believe that an open economy with well-regulated and transparent banking and financial sectors, and prudent public finance policy are fundamental elements for a healthy and sustainable economy. That is the clear Hong Kong message to emerge from recent events.

Encouragingly, economies in our part of world are reforming themselves towards this direction. Of course, these reforms are inevitably painful. As a traditional Chinese saying goes "Medicine that Cures Tastes Bad". And there is a long way to go in some cases. However, the reforms will lay stronger economic bedrocks for Asia, and in the long term enable the region to become a better tuned engine for global economic growth.

Of course, other voices have been heard. Questions have been raised about the wisdom of the free flow of capital and trade. Given the recent turmoil, some have questioned whether unfettered capital flows really benefit our region. There were others closer to home here in the US who were concerned that depreciation of Asian currencies would eventually enlarge trade deficits with Asian countries. Free trade, or free trade with Asian countries, was viewed with suspicion in these quarters.

To us, the financial turmoil actually reinforces, not weakens, the arguments for a free, transparent and robust financial regime. Only where such a regime is sustained may we expect to reap the full benefits of foreign direct investment. Increased liberalisation, bolstered by transparent regulations, and built on solid foundations, should continue to be the goal of economies in the region.

Our commitment to free flow of capital is actually enshrined in our Basic Law which requires the Hong Kong Special Administrative Region to maintain a freely convertible Hong Kong currency, the free flow of capital and no foreign exchange controls. These constitutional requirements ensure that Hong Kong has, and will continue to have, probably the world's most liberal investment regime.

Our commitment to free trade is equally well known. Free trade is probably one of the oldest traditions of Hong Kong. We have been a free port since the middle of the last century. Our economic well-being has improved out of sight since then but our bedrock free trade policy remains the same.

We have been ranked the world's freest economy by the Heritage Foundation four years in a row. We impose no tariff, quota and any other form of trade barriers on imports. The only change about our free trade policy is that it has now been written into our Basic Law. We are probably the only place in the world which codifies its free trade policy in the constitution.

That makes us doughty opponents of protectionism. It is our strong belief that protectionism diminishes economic growth on both sides of a trade barrier. It shields ineffective industries from improving themselves to face competition, denies consumers choice and frustrates legitimate trade. A small-size, externally-oriented and open economy like Hong Kong also relies on the healthy functioning of rule-based multilateral trading to provide the security and certainty for businesses to compete in the world.

Hong Kong therefore has been playing an active role in the WTO, APEC and other trade forums in advancing the goal of the free flow of global trade and investment. We will continue to work with the US and other trading partners to roll back market barriers that shackle the potential of our own and every community in the world for mutual growth.

One of the most important principle in the world of free trade is Most Favoured Nation Status. We welcome President Clinton's recent decision to renew MFN for the Mainland of China. We know that Congress will soon vote on this decision. This is always an important vote, but even more so in this turbulent year. The vote this time carries implications way beyond the issue of bilateral trade between China and the US. It is a vote on whether the US would like to see prolonged potential economic instability in the Asian region, or whether she would like to help by providing a more stable economic environment instead.

Should the US revoke MFN trading status for the Mainland of China, Hong Kong would, of course, suffer as a result of the reduction in trade flows. There would be a loss of income of up to US$4.5 billion and around 61,000 to 87,000 jobs. The impact on our GDP would be very severe at a time when it has already dropped sharply. This would not only deal a devastating blow to business confidence in Hong Kong when we are grappling with the fallout from the regional turmoil. It would also undermine our ability to continue to play the role of a firewall in the Asian financial crisis. Eventually, it would take away a stronghold, a powerful line of defence in the economies of the region which are coming to grips with the effects of recent events. None of us, including the US, can afford another wave of uncertainty.

The US has been an active player in Asia and, I hope, it will continue to be so. Continued US investment in and trade with the region are of utmost importance to the revitalisation of the hard hit Asian economies. We in Hong Kong are especially pleased that the US/China relationship has now entered a more constructive phase. We know that President Clinton will soon visit China and we look forward to welcoming him to Hong Kong. There is a lot for him to see. From our own point of view, we want him to see and feel how well the transition has been managed and what sets Hong Kong apart from the Mainland. Good Sino-US relations are crucially important for Hong Kong as we are not only a major trading partner of these two economies, but also a major gateway for their economic and trading exchanges.

As an integral part of China, and standing at the heart of Asia, Hong Kong has great confidence in the future for ourselves, our country and the region. We will continue to play a vigorous and constructive role as a major international center for business. We strongly believe that a successful Hong Kong will contribute to the success of China. China is already a major economic force. But it is sometimes very hard to fathom the sheer size of this market and just how profound an effect its full development will have on world trade. A successful China will contribute to the success of Asia. And a successful Asia, fortified by the lessons learned from recent adversity, will resume its role as a catalyst for growth of the global economy.

Thank you very much, ladies and gentlemen.

Photo: The Chief Secretary for Administration, Mrs Anson Chan, delivering a keynote address to more than 400 guests at the Hong Kong Trade Development Council's dinner held at New York City's Waldorf-Astoria Hotel today (Monday, June 8, New York time). The dinner capped Mrs Chan's first day in New York where she met prominent members of New York's business and financial community. She also attended editorial board meetings with various publications.

End/Tuesday, June 9, 1998

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