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Following is the full text of a speech by the Chief Secretary for Administration, Mrs Anson Chan, at a luncheon organised by the Hong Kong Economic and Trade Office in Singapore and the Singapore International Chamber of Commerce today (Friday):

Minister Mah Bow Tan, Excellencies, Mr Overmyer, distinguished guests, ladies and gentlemen,

Thank you for that kind introduction. I am delighted to be back in Singapore. It is hard to believe that, despite our close ties, it's nearly three years since my last visit. Singapore and Hong Kong have much in common - we have both developed from small fishing communities to glistening metropolises with economies built largely from magnificent natural harbours. We share a colonial heritage and have both had the self confidence to retain the best of that heritage - the rule of law, clean and efficient administrations and meritocratic civil service. And yet we each retain our own distinctive characteristics. In Hong Kong's case, some might say a little more free-wheeling and frenetic.

Our similarities have also sparked much discussion over the relative merits of one city over the other. The comparisons are made at regular intervals. Indeed, we continually promote ourselves as having the world's freest economy, according to the US-based Heritage Foundation. And I'm sure you take advantage of the World Economic Forum's survey that rates Singapore as the world's most competitive economy. In trade, you're our 5th largest trading partner, while we are your 4th largest. And there was even a hint of similarity in the package of measures we both introduced to help minimise the impact of the Asian financial crisis. I believe our announcement came out about a week ahead of yours!

This healthy respect and friendly rivalry - although I'm not for one minute saying our economic stimulus measures could be seen in that light - is a trade mark of the long-standing relationship between Singapore and Hong Kong. And is best summed up in the words of William Shakespeare: "Do as adversaries do in law. Strive mightily, but eat and drink as friends". And I firmly believe this is the case.

Unfortunately, we also find ourselves adversely affected by the continuing economic crisis in East Asia. The speed with which the economies in our region were hit by the "Asian contagion" caught most of us off-guard. We in Hong Kong were just emerging from the euphoria of the handover when the initial alarm bells sounded. But at that stage, it appeared to be a problem confined to Thailand and with the prompt action of the International Monetary Fund, the likelihood of further significant fallout seemed to have been removed.

However, as we all now know, the domino effect kicked in - plunging what had been the world's fastest growing region for much of the 1990s into economic turmoil. What we are seeing now is a correction, albeit a severe one, as a number of problems has come to the fore which were previously hidden by the rapid growth across the region.

Between 1980 and 1995, Asia grew at a rate of 7.4 per cent a year. And this rate of growth created, and to some extent hid, some major problems in the countries most severely affected. Inefficient allocation of capital; over lending, often in foreign currencies; underdeveloped institutions and regulatory frameworks; and a lack of transparency have all contributed to the problem in differing degrees.

Countries sucked in huge sums of money, and much of this went into real estate projects and industrial investment far in excess of actual needs. A painful but necessary restructuring is now taking place.

Many currencies were seen to be tied to the US dollar and, as a result, people borrowed US dollars because US interest rates were lower than those of local currencies. But with the subsequent devaluation of these currencies and with little or no hedging in place, borrowers found themselves unable to repay their foreign currency borrowings.

Certainly, the governments involved did not have sufficient sound macro-economic policies that took into account the new global, economic, financial and competitive environment. They have since learnt that the enormous benefits from financial liberalisation need to be built on soundly based systems in order to cope with the associated volatility in the markets.

But I must emphasise that Asian economies are not all the same. Those with free markets, strong regulations, the rule of law and stringent fiscal discipline, such as Hong Kong and Singapore, will weather the storm in better shape. But the question being asked is when will the Asian financial crisis end? Recovery, which we had hoped would come sooner, now appears to be further on the horizon - perhaps two to three years away, particularly as some of the stronger regional economies, such as ours are slipping into recession.

While, I am not here to paint a gloomy picture -- I am by nature and training an optimist -- we must recognise the challenges we face and the obstacles we need to overcome before we return to normal. And by normal, I mean a stronger, wiser, more mature and more transparent Asia. One that can turn adversity into opportunity as it has done in the past.

In overcoming the crisis in an increasingly interlinked regional economy, governments must take adequate and strong measures to achieve the next level of mature growth. That is -

* Tight fiscal and monetary policies

* Manageable current account deficits

* International standards of financial supervision

* A rigorous approach to corporate and government transparency, and

* The liberalisation and promotion of open markets.

Perhaps the most crucial aspect of a recovery for the region, is for Japan, the largest economy in Asia, and the second largest in the world, to take further steps to stabilise the yen and to revitalise its economy. Otherwise, a deflating Japan could not only lengthen recovery in Asia, but derail it altogether. In addition, the stability of the renminbi and the Hong Kong dollar must be maintained as the anchors of currency strength in Asia.

While the economic storm may continue to blow in the short to medium term, I have no doubt that Asia will rebound with a return to the solid growth figures that have been a hallmark of the four "tigers" over the past decade or so.

Why do I say that? I could be glib and say that history has a habit of repeating itself. But, of course, it goes much deeper than that; and I would like to use Hong Kong as an example of just how resilient the people and countries in the region are. As you know, Hong Kong like Singapore may be a tiny spot on the global map with a population of six-and-a-half million people. But within less than a generation we have been able to turn ourselves into the world's 8th largest trading entity. How? By sheer hard work, determination, a strong will to succeed and our strategic location.

The present economic crisis, while proving to be much deeper than anyone had foreseen, is not new. In this respect, we need to put the current events into some kind of context. It is all too easy to look at the day-to-day problems and lose sight of the longer-term picture.

Having lived in Hong Kong through five decades, I have seen the community suffer through recession, market crashes, rioting, bank failures and political turmoil. And Hong Kong has always bounced back - growing, thriving - providing the conditions for people to make a better life for themselves and for their children. It is against this backdrop that we should look at the present position.

At the end of the 1940s when I arrived in Hong Kong as a very young girl with my parents, we were among a wave of people leaving China to establish a new home outside the constraints of the new communist regime. By mid-1950, and with the Korean War raging, Hong Kong was almost on its knees under the weight of one and a half million refugees, mostly living in shanty towns which had sprung up in some of the most unlikely locations.

But by the mid-50s, we were beginning to get back on our feet. Industry was starting to grow, first cotton spinning and weaving; then into the 60s with man-made fibres, made-up garments, the wig boom, shipping, the plastics industry, and electronics, watches and clocks. But in some ways, a question mark seemed to hover over Hong Kong's future.

Those of you in the audience old enough to remember the turbulence of the mid-1960s in Hong Kong may recall it being described as a borrowed place living on borrowed time. The Cultural Revolution was in full swing along with the attendant turmoil it created. But, in the end, cooler heads prevailed and Hong Kong entered a new phase of development. Once again, Chinese entrepreneurs were driving the process of industrialisation, and the government resumed its massive housing and schools programme to cope with the ever-growing population.

Our fortunes continued on a roller-coaster ride, reaching a trough in 1983 when our dollar, which had been allowed to float, suffered a 100% devaluation falling to almost ten Hong Kong dollars to one US dollar in the space of just two years. We were forced to take drastic action and linked our currency to the American dollar at the rate of HK$7.8 to US$1. The link has been in place ever since. And events during the past 15 years have demonstrated how Hong Kong and the dollar link have survived.

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 Hong Kong's banking system lost none of its value.

In the face of the regional currency devaluations, many have questioned whether we can maintain the Hong Kong-US dollar link. Our argument remains - we cannot afford to lose the link. It is certainly not in Hong Kong's interests to do so. And cutting the link would be like cutting the life-line, not only to Hong Kong, but the region as a whole, and it would set off another wave of destabilisation. Like Singapore, Hong Kong's economy is externally driven. In fact, the total value of our trade in goods and services in a year is equal to well over 250% of our GDP. Businesses engaged in those externally-oriented economic activities need certainty in exchange rates.

There was renewed pressure on the Hong Kong dollar last week but there is no change in our policy and commitment to maintain the linked exchange rate. As in the past, speculators had their fingers burnt. Rumours about possible devaluation of the Renminbi also emerged. But the Governor of the People's Bank of China was quick to reiterate that there was no intention and no necessity whatsoever to devalue the Renminbi. Similar assurances were given by the Foreign Minister and President Jiang Zemin himself last week.

We fully appreciate the fact that costs represent one of the most important factors in competitiveness. But there are other significant elements as well, such as adherence to the rule of law, the need for a corruption-free society, predictable government policies, and the free flow of information and capital. These ingredients are all aimed at putting local and overseas investors at ease.

These are the areas where we have performed well in the past and will continue to do so in the future. However, where Hong Kong had become uncompetitive was in relation to property prices. The years of high prices, high inflation and negative interest rates had created a bubble economy that needed to be corrected if we wanted to retain our commercial and economic vibrance.

The Asian financial turmoil has hastened the pace of this correction. We are now in the midst of a major economic adjustment - property prices have fallen, in some cases by as much as 40%, stock market capitalisation is down by over 40%, tourism is down by about 20% so far this year, unemployment has risen to a 15-year high of 4.5% and we experienced negative growth in the first quarter of the year. As you can see, the process of adjustment is painful and I feel deeply for those whose livelihood is affected. But, we are doing all we can to help them. What we are seeing is the reaction of a free market at work, which will ultimately lead to the emergence of a much leaner and more competitive Hong Kong.

Already our competitive edge is improving with lower property prices; which is reducing the cost of doing business; inflation is down to 4%; our hinterland, the mainland of China, is continuing to grow - although not at the 8% forecast at the beginning of the year, it is still a very healthy 7% for the first half; our foreign currency reserves, at US$96.5 billion, are the third largest in the world after Japan and China; and we are embarking on a US$30 billion infrastructure programme to build for the future. The programme includes investment in railways, roads, housing, schools, new technology - the kind of projects that will make us more competitive as we move into the 21st Century.

So you can see, while the Asian financial turmoil is hurting, our longer-term goals have not been de-railed. We are looking beyond surviving today's events and are turning the key to unlock the great store of potential wealth from knowledge-based industries. And to position ourselves for this, we have established two advisory bodies. The Commission on Strategic Development, is analysing world trends and their effects on Hong Kong's economy, human resources, education, housing, the environment and on our relations with the mainland of China, as a means of maintaining the vitality of our economic development. And the Commission on Innovation and Technology, is advising us on the measures needed to make Hong Kong a centre of innovation where technological developments are turned into commercial products. We have also set up a multi-billion dollar Quality Education Fund to encourage innovation, competition and self-motivation reforms in our primary and secondary schools. It is part of our plan to inspire commitment to excellence in education for our future development.

Hong Kong has also learned from past experiences. From the adoption of the currency board system in 1983 to the tough regulatory controls on our banking and financial sectors that we pushed through following the 1987 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.

As I mentioned earlier, I am not by nature a pessimist, and I would like to quote from a recent editorial appearing in the Asian Wall Street Journal, which also puts the problem into its proper context : "As the Asian doom and gloom spreads, it is important to remember that Hong Kong is a thriving financial centre, not a domino. Its physical and human infrastructure makes it one of the world's premier places to conduct business. The banking sector is fundamentally sound and the currency stable. On top of that, there's Hong Kong's role and potential as banker to the juggernaut next door : China."

I know the journal won't like me adding this, but the writer has echoed, in a more succinct way, the message that the Hong Kong SAR government has been disseminating for some time. But it is always so much better when it comes from a third person - and, to some, more believable. The editorial continued at length to explain the present situation and concluded that ".......Hong Kong will not be the next Asian centre to fall, unless everyone panics and makes the prediction self-fulfilling."

I realise there is a message in that for the government, or more particularly senior officials, including myself, and it has already been taken on board. To a certain extent, it has been reinforced by your Senior Minister, Mr Lee Kuan Yew, who was quoted in a regional magazine (Asiaweek) last month (July 10) urging Singaporeans not to 'over-save', otherwise, as he put it, 'we will have a recession through our pessimism'.

It is true, when people encounter situations that are not familiar, there is a natural tendency to become anxious, to act compulsively, rather than to be more analytical. With the first anniversary of the Hong Kong Special Administrative Region six weeks ago, I was reminded only too well, of the anxieties expressed by many people about Hong Kong's future after the Handover.

They were anticipating the worst, that Hong Kong would lose its freedoms, its way of life, its identity. The unique concept of 'One Country, Two Systems' would somehow become 'One Country, One System'. As we all know, the anxieties were without foundation. And, I think, you would agree that the Hong Kong SAR has been left very much alone to get on with running its own affairs. In fact, the leaders in Beijing have gone out of their way to see this is scrupulously observed in compliance with provisions in the Basic Law.

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.

Perhaps the most recent example of this was the public outcry over the problems surrounding the opening of our new airport. The media was quick to reflect the mood of the public. And, equally, the government was quick to respond to find solutions. It was a classic case of when the going got tough, the tough got going. Fortunately, I can say that as far as passengers are concerned, the airport is operating in the manner for which it was designed - fast, efficient, comfortable and in surroundings that are quite breathtaking. And this was achieved within a matter of days of the opening. More than 80,000 travellers now pass through the new airport each day, at roughly the same level handled by Kai Tak. While we all have fond memories of Kai Tak and the nerve-tingling descent into Hong Kong, the old airport has been totally eclipsed by the facilities and services at Chek Lap Kok. As for the cargo side, all earlier restrictions imposed by the Hong Kong Air Cargo Terminals Ltd. were lifted midnight yesterday, two days ahead of schedule. HACTL expects to resume normal operation at the new airport by the end of this month.

In late May, we held our first election for the Special Administrative Region Legislative Council. It attracted a record 166 candidates representing all political persuasions, groups and parties Despite the terrible weather, the election was the most successful we've ever held with a record 1.49 million people - or 53% of the registered voters - casting their ballots in the five geographical constituencies. Although there has been some criticism levelled at the pace of democratic reform, the polls were the first step towards the ultimate goal of election of all LegCo members by full universal suffrage as envisaged in the Basic Law.

Having dealt at length with how Hong Kong has handled the current crisis and is looking to the future, I would like to touch briefly on the role being played by our sovereign power, China, in the context of the Asian turmoil.

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. While there continues to be speculation that the mainland will devalue its currency, the Renminbi, this has been officially ruled out by the Chinese leaders, who see such a move as only adding to economic de-stabilisation of the region. 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.

For Hong Kong, as a Special Administrative Region of China, we have been handed unique opportunities to work with Mainland authorities and to derive mutual advantages from cross-boundary development as we move into the next century. Our management skills, entrepreneurial drive, greater access to capital markets can be harnessed to develop value-added business services and upgrade the industrial base in the Mainland, particularly in the Pearl River Delta. By combining our international business know-how with our access to lower cost resources in the delta region and beyond, we can further expand on our role as a middle-man for new venture capital.

Today, Hong Kong and China serve as an anchor for stability in Asia. There is no doubt, a prosperous China is critical to long term stability in the region. Greater prosperity leads to greater stability. It goes without saying that a rejuvenated Japanese economy would provide the necessary leadership and momentum to help other Asian countries out of the current financial turmoil.

In closing, I would like to leave you, not with my words, but those of President Bill Clinton who came to Hong Kong early last month at the end of a successful visit to China - Hong Kong continues to serve as a force for stability. With strong policies to address the crisis, a healthy respect for the rule of law, a strong system of financial regulation and supervision, a commitment to working with all nations, Hong Kong can help to lead Asia out of turbulent times as it contributes to China's astonishing transformation by providing investment capital and expertise in privatising state enterprises and sharing legal and regulatory experience.

Thank you.

End/Friday, August 14, 1998

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