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Following is the speech by the Chief Secretary for Administration, Mrs Anson Chan, at the Asia Society Annual Dinner in Washington D C on Thursday (Washington time):

"Hong Kong : Riding out the Asian storm"

Mr Jessup, Mrs Daly, Ladies and Gentlemen,

Thank you first of all for your kind introduction. I am delighted and honoured to be invited to this big occasion to celebrate, together with the Asia Society Washington Center on the eve of the first anniversary of the establishment of Hong Kong as a Special Administrative Region of the People's Republic of China. So much has happened since then that it seems barely credible to me that at this time last year we were in the final throes of the last minute preparations for the spectacular ceremonies which marked that historic occasion.

I am acutely aware that some watched the ceremonies unfold with morbid fascination. They were anticipating the worst; that Hong Kong would somehow slide off the edge of the map; or at least be swallowed up by the Mainland - Asia's Magic Dragon lost forever as one of the world's truly great cities.

There were, of course, those of us who knew better; who understood that despite all the drama and difficulties, many years of hard, unglamorous and painstaking work had gone into often tough and complex negotiations to put in place the myriad of detailed arrangements essential to the orderly transfer of sovereignty whilst allowing Hong Kong people to rule Hong Kong.

I was reminded of this when I looked back at the last time the Asia Society dedicated an annual dinner to Hong Kong. That was in May 1990, when our then Governor Sir David Wilson - now Lord Wilson - spoke to a large dinner gathering in New York about the prospects for Hong Kong after July 1 1997. He delivered his address against the unpromising background of the events in Tiananmen Square less than a year before in June 1989 which had produced such serious concerns about what they might augur for Hong Kong.

Sir David made a very powerful and persuasive case for calm and careful thinking, based on the framework of the Sino-British Joint Declaration and the overwhelming self-interest of all of those involved to overcome the challenges and bring about a transition which would leave Hong Kong's unique qualities and fundamentals intact - a Hong Kong with which the local and international communities would feel comfortable and view with pride. In short, One Country Two Systems as a reality. Hong Kong People Running Hong Kong.

Have we managed to do that? I believe we have, and we have done so in a manner and with a style that has confounded our critics and surprised even some of our supporters and well wishers. Hong Kong, as ever, works. One Country Two Systems is working. Hong Kong People are Running Hong Kong.

I'd like to come back to all that in a moment. Firstly, I would like to deal with some issues outside of the confines of Hong Kong in a way which I hope addresses both the wider interests of the members of this distinguished organisation and carries some significant messages about the kind of place Hong Kong is and, I believe, will remain. I refer to the financial and currency turmoil which has rocked the Asia region over the past year.

I am sure that an audience as well informed as this one does not need yet another detailed post-mortem of what went wrong with the Asian markets. I offer you the view from Hong Kong as much to underline why we are one worry the IMF will never have as to anticipate the key problems which have bedevilled some of our friends and our neighbours.

Put simply, the overheating of some ASEAN economies after nearly a decade of uninterrupted growth produced a massive oversupply of properties; excessive current account deficits and large non-performing loans in the financial sector; borrowing short in US dollars to invest long in local currency projects; borrowing foreign exchange without foreign exchange income. A sad case of poor credit risk management. More fundamentally, the crisis exposed a lack of regulation, an absence of transparency and, in some cases, too cosy a relationship between business and government.

By contrast, in Hong Kong we practise what Adam Smith preached. We believe in the invisible hand of the free market. We have a level playing field for business. We think business decisions should be taken by businessmen and women, not by bureaucrats. We see our responsibility as providing the physical and legal infrastructure which enables enterprise to flourish, which maximises the opportunities for men and women to exercise their freedom to choose, to make their own decisions, be they about life or business.

We run a small, competent, clean administration. We govern with a light touch. In managing our economic and financial affairs, we stay firmly focused on the fundamentals. A sophisticated currency board protects our linked currency exchange rate with the US Dollar. That is underpinned by a sound monetary system, a well supervised and generally healthy banking sector; tight fiscal discipline; surplus budgets and strong reserves.

All of these are vital for maintaining confidence in Hong Kong as an international financial center. It is adherence to these fundamentals which is seeing us through the regional crisis in relatively better shape than most. And it is our constitutional obligation - and determination - to stick to them which augurs so well for our future.

I would not want to give you the impression that our belief in certain basic principles means intellectual, political or administrative rigidity. We know that in an increasingly global world you have to keep running just to stay on the same spot. We know that we need to be flexible and innovative to stay ahead of the game.

We think we have one of the most effective banking regulatory systems, comparable in its rigour to those in New York, London or Tokyo. We have over the years reaped the rewards of reforms stretching back many years. That was amply demonstrated during the recent regional financial crisis. But we have now embarked on a major review of the banking system, a review that was planned long before the recent crisis. This review will scrutinise everything from Internet banking and electronic cash to the effect on Hong Kong of bank mega mergers abroad.

And in the aftermath of the currency crisis, when our exchange rate link came under attack, undercutting our stock and currency prices, we launched a wide ranging review of the technicalities surrounding the operation of our currency board and our securities and future markets. There was - and is - no intention to abandon the link. It is here to stay. But the review provided us with the opportunity to introduce a series of measures which will fine-tune our regulatory framework and increase transparency and accountability of our markets.

The key underlying objective to all of this is to provide continuity, certainty and stability. That's what our community wants; that's what business and investors want. That's what we are careful to provide. These are the strengths we need to ride out the storm that has engulfed Asia.

Furthermore, we deliver this within the framework of the rule of law. A common law legal system familiar to Americans, administered by an efficient and honest Government and tested by an independent and well-respected judiciary. The rule of law, equality for all before the law, is sacred to Hong Kong people.

I know this is true of any decent society, but it means much more in Hong Kong because the geopolitical constraints of our history have affected the development of democracy in Hong Kong. This prompted the Economist recently to suggest that if Hong Kong society has a defining ideology, it may be the rule of law. Indeed, one of our most outstanding legal authorities - and we have a good many of them in Hong Kong - has argued that the commitment of Hong Kong people to the rule of law may be greater than their commitment to democracy.

Whatever the truth of this, we have seen some significant manifestations of a commitment to both the rule of law and democracy since the transition. We have witnessed court challenges to the provisional legislature and to our policy on the entry of child immigrants from the Mainland, for example. And there have been vigorous public debates over decisions not to prosecute in cases where there were fears - completely unfounded, as it happens - that political considerations were involved. Similarly, where legislation transferring legal exemptions from the outgoing to the incoming sovereign raised similar fears - again, in my view, unfounded.

Whatever else these debates demonstrated, they were a testament to the state of health of Hong Kong as a plural, open society where our citizens remain vigilant in protecting their freedoms under the rule of law, that they are prepared to speak out to defend them if they perceive them to be under threat or challenge.

As for Hong Kong people, they provided a very visible demonstration of their commitment to their democratic future spelt out in the Basic Law when they turned out in huge numbers and in atrocious weather to take part in the first legislative council elections of the SAR Government.

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 goals : 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.

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 These are big issues which need to be debated and resolved.

As I have already said, so far the transition has gone remarkably well. Fears were expressed about the erosion of the rule of law; the dilution of human rights and civil liberties; the curtailment of press freedom; the creeping in of cronyism and corruption. None of that has come to pass.

The success of the transition so far is due in no small measure to the commitment of the Beijing leadership in honouring the promise to Hong Kong people that they will enjoy a high degree of autonomy in running our own affairs. Beijing's scrupulous observance of its hand-off policy towards Hong Kong has been widely recognised both at home and abroad. It has been acknowledged by the British government, the co-signatory to the Joint Declaration and in positive terms in the recent State Department Report to Congress under the US Hong Kong Policy Act. An American Chamber of Commerce poll of its members in Hong Kong produced a 96 per cent vote of confidence in the SAR. And the most reliable of our opinion polls in Hong Kong has shown that public confidence in Beijing's handling of the Hong Kong issue has recovered from a low of 16 per cent in 1995 to over 60 per cent following the transition.

So, our problems have not emanated from Beijing, despite predictions to the contrary. Our difficulties have been largely economic. Nor have they been self-inflicted. They have impinged on us as a result of what has happened in the region. An externally-oriented economy such as ours could not have avoided the fallout from such a crisis. The recent downturn in our economy has shown how even the strongest economic immune system can be infected. I know that Americans watch what is happening to us with great interest, if for no other reason than worries over what collateral damage it may inflict on your own economy. And in that warm and friendly way that is characteristic of the generous American spirit, I am often asked : what can the US do to help?

I have one specific request. It is this : the US can play an important role and part in removing potential economic instability in the Asian region by renewing MFN status for the Mainland of China. To revoke China's MFN status would have a devastating effect on the Hong Kong economy. Our re-export trade from China could be slashed almost 50 per cent; our economic growth rate further savaged; jobs lost in their tens of thousands at a time when we are still struggling with the aftermath of the Asian contagion.

A strong economy is vital to Hong Kong's ability to continue to play the role of a firewall in the Asian financial crisis. Hong Kong is facing a tough year. Our commitment to defend the US/HK dollar link has made us a bastion of stability in the region. Withdrawal of MFN will not only deal a further severe blow to business confidence in Hong Kong at a critical time, it will also take away a stronghold and a powerful line of defence in the economies of the region which are coming to grips with the effects of recent events. We simply cannot afford another wave of uncertainty.

There is, of course, a much wider and even more compelling argument. As the world's greatest proponent - and example - of the virtues of free trade, we have never believed in mixing trade and non-trade issues, even non-trade issues as important as human rights. Our argument has always been that the two issues must be tackled separately - there can be no winners if the two become intertwined. The most likely result would be a deterioration on both counts. If history has taught us anything, it is that economic progress inevitably brings with it progress on all the other aspects which are important to the human condition. We have in the recent past witnessed how much can be liberated by the power of market forces.

I would like to conclude my address by speaking to you for a few moments as a private individual and not as Hong Kong's Chief Secretary for Administration. I'd like to share with you something of the personal journey I - and I'm sure many Hong Kong citizens - have travelled in these eleven months since July 1, 1997.

None of us could know how our world might change after June 30, 1997. We had no precedent to compare with or to follow. What we did have were the genuine good intentions and the best wishes of all parties involved. But even before the transition, I had felt that in the final analysis, it would be up to us, the people of Hong Kong, to make the transition work. What has happened in the past eleven months has if anything reinforced that view.

Many of you watched the handover on television. Most will remember images of the People's Liberation Army crossing the border at midnight. Some of you may even believe that our streets are now patrolled by mainland troops. Unfortunately for the media reality is not so telegenic. At least not our reality. We do not have the high drama of foreign troops in our streets, nor have we simply exchanged London for Beijing. The real transition has been much more complex, subtle and profound. In many ways, it has asked more of us than we expected. That is because the real transition is about identity and not sovereignty.

No nation, city state, town, village, family or individual can hope to determine their fate without first knowing who and what they are. I think I have always had a strong personal sense of identity. I know who I am, where I came from and my place in the life of my family and the community. But my home, Hong Kong, has sometimes felt a provisional reality. This is not because I ever thought of leaving but because its fate has always seemed to be in someone else's hands. But late on the evening of June 30, 1997, between the lowering of one flag and the raising of another - in that instant when Hong Kong seemed truly without identity - identity became the issue.

That was one of the handover's defining moments and is the challenge Hong Kong faces today. For me personally, the defining moment occurred later in the year, long after the tensions of the actual handover had passed.

The People's Republic of China was formally established on October 1, 1949. 1st October is our national day. We in Hong Kong celebrated it for the first time on October 1, 1997. Our celebrations began in the morning of that day with the raising of the flag and the playing of the national anthem. A new flag and a new anthem.

As I watched the flag unfurl in the early morning breeze, I was suddenly filled with emotion. The ceremony, brief as it was, the sight of the flag and the sound of the national anthem touched something deep inside and moved me in a way that is very difficult to describe. I think for the first time, I began to appreciate the spiritual propriety of Hong Kong's return to the mainland. I am Chinese. I was born in China. My family - like many in Hong Kong - did not leave China willingly. We left because we felt we had to. We have been a country and a people divided travelling different roads and shaped by different events. Now we have an opportunity to be whole.

Am I becoming an apologist for China? No. Am I beginning to turn my back on Britain's legacy? No. It would be as difficult for the people of Hong Kong to turn their backs on Britain's legacy, as it is for us to ignore the emotional and spiritual connection many of us have with China. What I am doing is acknowledging who and what I am.

How will this search for identity impact our society, our institutions and our future? Ultimately I think it will make us a more united and democratic society. I believe that democracy begins with the individual establishing his or her identity. Soon we find common ground with others, form a community and learn to speak out for shared interests. Finally we elect those individuals who can best represent those interests and truly reflect the needs and aspirations of the community as a whole. I believe that a sound democracy, a lasting democracy must grow from the needs and will of the community. To endure, it must be an evolutionary democracy, not an imposed democracy. This takes time, patience and tolerance.

Hong Kong has weathered the Asian economic crisis in large part because our institutions are governed by the rule of law, and administered by men and women of good conscience. Our willingness to discuss openly and frankly our failings - from chicken viruses, to red tides, to incidents of corruption in both government and the private sector - speaks of a maturity and confidence many nations have yet to achieve.

If we base our governance on a full and frank understanding and acceptance of who and what we are, we cannot go wrong. But if we begin to bow to outside interests, and allow external forces - however well meaning - to shape our policies and the structure of our government, we will fail.

I believe very firmly that Hong Kong's moral foundation is sound. I believe our continuing cultural evolution - and search for identity - to be vital and invigorating. And I believe this journey; a journey we began on July 1, 1997, will be a continuing source of strength and the guiding principle of our future success.

My candour this evening in expressing what are highly personal thoughts and feelings, speaks of my confidence in the stability and resilience of Hong Kong's administration and the strength of the will of its people. It also speaks, I think, of my profound personal commitment to Hong Kong and the hope I feel for our future.

Mr Chairman, Ladies and Gentlemen, I would like to thank you once again for this opportunity to address such a supportive and knowledgeable audience. Hong Kong and America have been friends for many years. Your marvellous Asia Society Hong Kong Center is glowing testimony to that. But our friendship runs deeper than just investment and business links. We have shared values and shared interests in maintaining and developing the ties that have bound us together for over a century and a half. Our new status as a proud part of China does not alter that. We have a special contribution to make to the development of our country. You have a special contribution to make to Hong Kong through trade, investment, expertise understanding, support and friendship.

Thank you very much.

End/Friday, June 12, 1998

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