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Following is the speech by the Chief Secretary for Administration, Mrs Anson Chan, at the Asia Society Conference on Hong Kong in Seattle on Monday (Seattle time):

"Hong Kong : Continuity in a year of change"

Ambassador Platt, Ladies and Gentlemen,

Can I first of all say how delighted I am to be here with you all this evening. I am delighted not least because of the sustained and positive interest the Asia Society has taken in Hong Kong over many years. I have just come from Washington - the one in the District of Columbia - where I was honored to be given the opportunity to address the Annual Dinner of the Asia Society there. We are very grateful for all the support we receive from the Asia Society, and I think of your very effective Regional Center in Hong Kong as a symbol of the bonds which bind the US and our region and, in particular Hong Kong.

Of course, I am also delighted that the conference is held in Seattle with which Hong Kong has much in common. We share the same way of making our living. Both places are blessed with good ports and live on trade. One out of four jobs I believe is supported by international trade here whilst for Hong Kong trade represents more than twice of our GDP. But we are not competing with each other. Rather, we have a lot to share, and this evening, I would like to share with you how Hong Kong has run its business in the past eleven months.

As a start, let me take you through what Hong Kong looks like after the re-unification with China.

Just about a year ago, almost everyone in the world had their eyes glued to Hong Kong. They looked at our transition with intense interest. Some had questions, and legitimate questions, about whether the "One Country, Two Systems" concept would actually work; whether Hong Kong would remain and retain its distinctive features and its fundamental values; and whether we had the ability to administer our own affairs. I answered these questions during my visit to the States six months ago. One of the messages that I delivered at that time was that our transition had been smooth. Hong Kong ran its business on its own and in pretty much the same way as we did before the transition.

But since then another six months have passed. The Hong Kong Special Administrative Region of the People's Republic of China will be celebrating its first anniversary in a few weeks' time. I have taken another look at our transition and I have revisited the message I delivered six months ago. I am delighted to be able to stand here and to say that it remains business as usual in Hong Kong, even if the economic climate has made business much more difficult. But more of that later.

All of the key features of Hong Kong as a free and vibrant city remain firmly rooted. The rule of law continues to prevail. We continue to live under our own statute laws and the common law. They apply to everyone in Hong Kong, the govern and the governed, the rich and the poor, Chinese and non-Chinese. There have been legal challenges to the provisional legislature and to a number of government decisions , for example, on child immigrants from the Mainland. The resolutions of these issues are not in the hands of the bureaucrats but independent judges. The only thing that has changed about our rule of law is that for the first time in our history, we have a Court of Final Appeal firmly rooted in Hong Kong.

We know too well that our future development must take place within the framework of the rule of law which is our most prized possession. It is the rule of law which provides a safe and secure environment for the individual, for families and for businesses to flourish. This is the best safeguard against arbitrary and overbearing government. It is the very essence of our way of life.

So what about other aspects of our day to day life? Since 1 July 1997, we have continued to enjoy the freedoms and rights guaranteed by the Joint Declaration and the Basic Law, which is our constitution. Hong Kong continues to be a free society, open to arguments and ideas. It remains a plural society with all the institutions of civil society: professions, churches, non-governmental organisations, political parties and newspapers which are free to comment on government policies and criticise them. Our Civil Service remains apolitical, clean, and efficient. The Hong Kong Special Administrative Region Government runs its own affairs without any interference from Beijing. And Hong Kong remains one of the safest cities in the world . Last year our crime rate was the lowest that we had experienced in the past 24 years.

And so we have had a virtually seamless transition so far. The promises of "one country, two systems", "a high degree of autonomy", and "Hong Kong people ruling Hong Kong" have been observed by Mainland authorities to the letter and to the spirit. If you think we are blowing our own trumpet, let me refer you to third party endorsements from Britain, co-signatory to the Joint Declaration on the future of Hong Kong and your own State Department and Congressional Reports. They all confirm that "the overall transition to Chinese sovereignty has gone smoothly".

Despite the smooth transition, however, this past year has not been an easy one for us in Hong Kong. The Asian financial crisis has bitten deeply into our economy and has had a profound effect not only on East Asia, but also in markets across the globe. Recession in the Japanese economy is particularly worrying, because we will not see a full recovery in Asia until Japan gets going again. Our GDP growth has dropped sharply in the first quarter; our stock market is down, property prices have fallen, interest rates remain much higher than we would like, and unemployment is rising.

We have also had to deal with some unexpected domestic problems - a downturn in tourism has hurt retailers and the hospitality industry; a mysterious new 'flu strain, the avian 'flu, led to the slaughter of more than one million chickens to contain the outbreak; and the introduction of mother tongue teaching in Hong Kong was wrongly seen as a sign that we are placing less importance on English proficiency.

But as we approach the first birthday of the SAR, I think we can regard these trials and tribulations not as setbacks but as opportunities. I am sure some of you know that the Chinese character for "crisis" is a combination of the characters for "danger" and for "opportunity".

Before I move on to deal with the Asian financial turmoil and its consequences for Hong Kong, I would like to say a few words about the elections to our first legislature, which were held on 24 May. These elections were the most successful one ever held in Hong Kong and the first conducted on Chinese soil. 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. The Administration that I serve will be wholly accountable to the legislature. And whilst I do not for a moment expect that the executive and the legislature will see eye to eye on everything, I take comfort knowing that we will share the same basic goal :and that is the continuing stability and prosperity of Hong Kong.

The elections showed beyond doubt that our community wants to have a say in the running of its affairs. It also reflects I think an increasing confidence on the part of the community in Beijing's promises to allow Hong Kong people to run Hong Kong.

It has been suggested that the election result showed that Hong Kong people wanted more, not less democracy and that is precisely what will happen. The Basic Law provides a very clear road map for the development of our democratic institutions. The number of directly elected seats in our legislature will increase gradually in the year 2007 the people of Hong Kong can decide how to proceed to universal suffrage for our legislature.

I would now like to talk about the Asian financial crisis, because how it has been played out in Hong Kong illustrates perfectly what I have just been saying. I would add, though, that throughout the crisis leaders in Beijing has been extremely supportive in two, main ways: Firstly, the Central Government was quick to express its full confidence in the way in which Hong Kong was handling the issue. Secondly, when the Hong Kong Dollar was under speculative attack, the Central Government not only stated its unequivocal support for the Hong Kong-US Dollar link, but also pledged to back it to the hilt with its own foreign exchange reserves, which is the world's second largest such holdings, should they be required. They weren't, but we were extremely grateful for the offer.

The speed at which the so-called "Asian Contagion" spread throughout the region has made it abundantly clear that we are now all part of a sophisticated network of markets developing, expanding and changing at great pace and regional problems now require global solutions.

The financial crisis exposed some fundamental weaknesses in the East Asian economies, chiefly a lack of regulation and transparency and a propensity to borrow short for long-term projects.

But for all our difficulties, it also showed up the fundamental strengths of Hong Kong, and why we are different from other Asian economies. Amongst other things:

It showed that we have mature and well-regulated banking and stock market sectors. The "battle conditions" of the financial turmoil uncovered several areas in which we can fine tune our systems to make them function better, and so we benefit as a result. Nonetheless our banking and financial markets remain robust and are functioning smoothly and normally.

It showed that we have, for many years, practised prudent fiscal management which has eliminated the need for Government borrowing and allowed us to accumulate sizeable fiscal and foreign reserves. We not only have the resolve, but the means to press ahead with massive spending on road and rail projects as well as increase spending on such important areas as education, housing and information technology. Our past and present fiscal discipline of limiting spending increases to within the trend growth rate of our GDP over time has in the past been criticised as too rigid or restrictive. In fact it has now given us flexibility and room to manoeuvre when most other parts of the region are in austerity mode.

It showed that our fixed exchange rate and currency board system can withstand the enormous pressure of a regional financial meltdown. The Hong Kong Dollar is backed not once, not twice, or even three times but a full eight times by our Exchange Fund assets. Our foreign currency holdings of more than US$96 billion are the world's third largest. Our Exchange Fund - which was used to defend the Hong Kong Dollar against speculative attacks - actually grew by more than US$13 billion in 1997, which represents a 19 per cent increase over 1996.

It showed that a stable Hong Kong Dollar is an advantage during such volatile times. Business needs currency stability, and they have it in the Hong Kong Dollar. Yes, asset prices have suffered as a result of higher interest rates, but the correction in property prices and lower rentals will make us more competitive. Prices will come back, but at a more sustainable and gradual rate. And it is important to note that the adjustment has been driven by market forces and is not the result of currency depreciation.

Hong Kong will emerge from the financial turmoil I believe stronger and with a better insight into how to deal with the massive amounts of money which can be moved by fund managers or speculators within a matter of seconds. Hong Kong is riding out this storm but it will be painful whilst it lasts.

Before I move away from the economic scene, let me say a few more words about our link with the US Dollar. The continuing weakening of the Japanese Yen is worrying to all of us as it will exert further pressure on Asian currencies and is potentially very destabilising for the entire world. It will also revive speculation that the US-Hong Kong dollar link will not survive. Let me state firmly and unequivocally that our link with the US Dollar is here to stay - because it is in our interest to do so. Since its introduction in 1983, the link has cushioned the Hong Kong economy against several external shocks, including the stock market crash in 1987, the June 4 incident event in 1989, and the Gulf war in 1990. It is the cornerstone of our monetary and financial stability. The Hong Kong Dollar is the only Asian currency that has survived unscathed in the current Asian financial crisis, which is now almost a year old.

We believe that fixed exchange rate is a discipline on both private and public sectors: the economy has to be flexible in order to adjust to the exchange rate, not the other way round. That flexibility is provided by our high savings rate, our entrepreneurial spirit, high labour productivity, free flow of capital and our free trade policy.

I believe it is ironic that the current financial crisis should prompt questions about the wisdom of free flow of capital and free trade policy. Some point to the havoc purportedly wreaked on regional financial markets by overseas investors as proof that investment and liberalisation bring with them disbenefits. Others fear that economies which have seen their currencies de-valued will try to export their way out of the doldrums. Based on historical trade figures, a recent report by the World Trade Organisation has refuted fears that the crisis would trigger a flood of exports to damage domestic industries in importing countries.

Hong Kong has a story to tell whichever side of the coin you may be looking at. We have been ranked the freest economy for the fourth year in a row by the Heritage Foundation. On investment, Hong Kong has one of the most liberal investment regimes in the world - we have no special approval procedure for foreign investments; we impose no conditions for admission; and we do not interfere with management. The results - we are home to over 2,500 regional headquarters and regional offices of foreign companies. We are the largest external investor in the Mainland of China, accounting for more than half of its foreign direct investment. We are also the fourth largest outward investor in the world, with US$27 billion invested in 1996.

On the trade side, we impose no tariffs on our imports and our doors are kept open for foreign goods and services. Small though we are, Hong Kong is the 8th largest trading entity in the world (5th counting the 15 member countries of the EU as one). We are one of the world's leading financial, business and transportation centres. Overall, over the last three and a half decades the per capita GDP in Hong Kong has increased from US$360 to US$26,000 in 1996, and our GDP surpassed that of Canada, Australia, the UK and many other OECD countries.

It is our strong belief that protectionism restricts economic growth on both sides of a trade barrier. It shields ineffective industries and business from improving themselves to face competition, denies consumers of choices and frustrates legitimate trade. We have been playing an active role in the World Trade Organisation and Asia Pacific Economic Co-operation in advancing the goal of free flow of global trade and investment. We have always found many American allies in the free trade cause and the resistance to protectionism. 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. The Uruguay Round, the recent agreements on information technology, basic telecommunications and financial services are shining examples of what we can achieve together.

In this connection, we very warmly welcome President Clinton's recent decision to renew MFN status for China. The Congressional vote this year is more important than ever. The vote carries with it implications beyond the bilateral trade relationship between China and the US. It is a vote on whether US would like to see prolonged 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 suffer as a direct result of the reduction in trade flows. There would be a loss of income of around US$3.2-4.5 billion and around 61,000 to 87,000 jobs. Our GDP growth rate would be curtailed by over 2 percentage point at a time when we are already suffering from negative growth. And, less quantifiable, but even more important, business confidence in Hong Kong could be knocked and our role as a firewall in the Asian financial crisis will be undermined. Eventually, non-renewal of China's MFN status will 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 the recent events. None of us, including the US, can afford another wave of uncertainty.

On the other hand, we are confident that if the US maintains MFN status for the Mainland of China, Hong Kong can continue to be a stabilising force in the region. We will have a solid basis from which to do this. We have a strong financial infrastructure and we will make it even stronger. We will, for example, further enhance the resilience of our banking system against both internal and external shocks, increase the transparency of our stock market, and continue to improve our market rules to maintain an effective regulatory regime in our futures and derivatives markets.

Complementing our financial strength is the vital role that Hong Kong plays as the world's gateway to the Mainland of China. We provide the technology, services, and transport links to the outside world that China needs to fulfil its role as an increasingly major economic force. With continued economic growth and reforms to China's state owned enterprises, we have added opportunities to act as a banker and provider of services and expertise in the process. Already, Hong Kong is unique in Asia for the cluster of services on offer, for example, the breadth and depth of our financial services, as well as our engineering, design, marketing and transportation capacities. Hong Kong has a critical mass of business-to-business services unequalled anywhere else in the world. The reform of the state owned enterprises in the Mainland further enhance our role as a service hub and as the unrivalled gateway to China.

Government investment in Hong Kong will be supporting a massive expansion of Hong Kong's domestic and cross-border rail networks that together will exceed the scale of our US$20 billion investment in the new airport . The new airport will open on July 6 this year. And these projects will generate employment for several years to come, add greatly to Hong Kong's economic efficiency early in the century, and provide ample business opportunities to our trading partners as well as investors.

I look forward to seeing even closer economic relations between the US and Hong Kong in the coming years. US investment in Hong Kong has reached an impressive US$16 billion. There are some 1,200 US companies, with over 400 of them operating as regional headquarters, and over 30,000 Americans doing business in Hong Kong with the entire Asia-Pacific region. But our ties are not only limited to trade and investment. We also co-operate in international law enforcement whether it is in narcotics, alien smuggling or in combating illegal trans-shipments of strategic commodities and textiles, and protecting intellectual property rights. It is in our own interests to maintain the integrity of our trade control systems and we will continue to exercise the highest degree of vigilance to eradicate irregularities and malpractices.

Despite a smooth political transition, this past year has been in many ways one of tremendous change for Hong Kong. We now have a better understanding of our role and importance in world markets. We have a clearer understanding and appreciation of the practical reality of "one country, two systems". We have a better understanding of our role and importance in the continuing economic development of our sovereign, China. And we have a better understanding of the Mainland's role and importance in the preservation of our systems, and our way of life.

One of Hong Kong's greatest strengths is its ability to cope with change, to adapt, to move on, to improve. This will to succeed has not waned, even during the economic turmoil of the past year. If anything it has made us even more determined to once again prove our mettle, that the flame of Hong Kong's legendary "Can Do" attitude and spirit still burns bright. The New York Times once remarked that nobody has ever made any money betting against Hong Kong. If I were a betting person, I would say that it remains a good bet to put your money on Hong Kong.

Thank you.

Photo: The Chief Secretary for Administration, Mrs Anson Chan, meeting with the Mayor of Seattle, Mr Paul Schell.

End/ Tuesday, June 16, 1998

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