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The following is the transcript of the question and answer session following the speech given by the Chief Executive, Mr Tung Chee Hwa, at the luncheon of the Australian Chamber of Commerce today(Thursday):

Question: Chief Executive, I have two comments and a question. The first comment is that as an Australian who has been here in Hong Kong, I was privileged to hear your speech at the Australian Summit and I thought you represented the interests of Hong Kong incredibly well.

My second comment is that as a three time user of the Hong Kong Airport, I now believe it is the best airport in the world.

Mr Tung: Thank you very much.

Question: And my third comment, my question, is about the peg. I worked in the UK for two years in 1992-1993, and during that period, the Treasurer continuously said we must maintain the peg that existed, the UK pound versus in Europe at that time. The day they gave in was the beginning of prosperity for the UK, on 16 September 1992. Why is it so important to hang on to the peg? And is there not upside to Hong Kong if the peg were to be realigned at a different level?

Mr Tung: Thank you very much for a very important question. It gives me an opportunity to clarify this very important issue. But before that, thank you very much for your words of encouragement, particularly about the airport.

You know, Hong Kong is a very small economy, external trade is equal to 250 per cent of our GDP, and a very stable currency environment is important to a small economy like Hong Kong's. You can be - our Chief Executive of the Hong Kong Monetary Authority usually uses this way to explain it and I will use his words, or try to use his words - you can be a little ship, a little boat, in a very rough ocean and get battered about and may eventually sink; or you can attach yourself to a big ship - and this time, it is the USS United States of America; and that the sea may be very rough but since you are very firmly anchored to it, you go up and down with the swell, with the storm; at the end of the day - and there may be some cracks here and there - but at the end of the day, you will survive.

Now, if you look at our other aspects, Hong Kong people have a, very often, herd instinct. If there is a de-linkage, the first thing people will do is move out of Hong Kong dollars. It is not one person, it is not two persons, a whole lot of people would do it, and soon there would be a capital flight, soon interest rates would go up to levels we don't know. So we would be walking in uncharted waters, we would not know where we stand on all these issues. And it would be very wrong for us to embark on such uncharted waters.

But on the other hand, we would fix our course, we know where we are, we know that if we stick with the linked exchange rate, asset price will be corrected. Well, asset price needed correction anyway. It is being corrected. In fact, it has really gone a long way already.

We also know, in order to be competitive, other areas need to be adjusted also. And it is now being adjusted. So, yes, it is painful. But we know where we stand, we know what it is. What we really need now is this: as the adjustment is taking place - it will take place for some time, for many months into the future - what we need is really a breathing spell, where the interest rate may be high, a little bit high, but at least stable and predictable.

What has happened is that we have people working on our currency and then at the same time working on our stock market and creating an environment of instability. This is where we feel that something needed to be done. What we wanted is an environment in which we can recover, because our asset price is being adjusted. And I think it will come to a time when eventually all the people around the world will say: Well, look at this, they have really adjusted. And this will happen.

And let me say one more thing. Throughout the history of Hong Kong, if you look at it, we have borne a lot of pain before. There are people out there who say: Well, Hong Kong people will not be able to bear this pain. I beg to differ. Hong Kong people will bear this pain until we successfully readjust. I know that. I have been throughout these years in Hong Kong, worked in Hong Kong, feel Hong Kong's pulse. I know we will be able to bear this pain.

Do we have the means to do it? I think we have the means to do it too. We have a Currency Board with a huge foreign exchange reserve. So it is the right way to go forward and this policy will not change. I think our condition, compared with UK, is very different.

Question: Mr Tung, I note that you asked your audience not to be polite, but nevertheless I think that in the last 13 months, in the very difficult times, I would like to say you have my full support and I think you are doing a great job.

Now, if I may ask my question. In view of the indefinite - maybe it is the wrong word, it's a strong word - current financial crisis in Asia which we are now all part of it, and you also touched on the property prices crisis which has generally gone down 45 per cent, to maybe even 50 per cent. My question is, is it still appropriate for the Hong Kong Government to target 85,000 apartments per year; and if so, will you find enough buyers for it in the current financial crisis? So my question is, really, will the Hong Kong Government be reviewing its housing policy?

Mr Tung: Thank you very much, particularly your remarks at the beginning. I really know I am amongst friends here. You know, in 1999, next year, the government and the private sector altogether will be producing 98,000 units of apartments; in the year of 2000, the government and the private sector will be producing 130,000 units of apartments. Not 85,000 units. But these are really very high numbers. In the days of boom decisions were made, and in the days of huge demand decisions were made, to build all these units. They started in maybe '95, '94, '96, whatever dates they started, and these are now all coming on stream. So we have to bear these things in mind, that when we look at the market, supply and demand.

Many people have said: Well, it is because of the 85,000 units which is creating this difficulty. The fact is that there is an overwhelming supply which is coming on stream. But those people in the know, they know it.

What the government did in estimating 85,000 units, was really based on a long-term forecasting of the growth of our population. You know we have now 6.5 million people or so, and if the population grows at about 2.5 per cent per annum, by the year of 2023, I think, you will have 10 million people in Hong Kong. So what the government was doing was looking at the long term where what we are doing to produce enough units to look after the demand, to make sure that the prices do not go up ridiculously or come down ridiculously as it is now doing. So the 85,000 units was always the long term objective.

What we are now doing is that we have recently suspended the supply of land. The objective is really to make sure that our prices can achieve some stability because an unstable situation will really harm our banking system. We have done that and there are people who have said to me: Well, you have done that, you are interfering with the market and you shouldn't be interfering with the market. And I just want to remind everybody, Hong Kong has been the biggest landlord and historically, Hong Kong Government decides how much land needs to be sold every year. And that has not changed. The difference is that this time, because of the serious nature of the problem, we decided not to sell at all for nine months. So it is not as though it is the first time that this has happened. But we are conscious of this.

What we have done in the meantime is to let the production of land continue, so from having no land bank we will be building up a land bank for our future, for our future use.

You're right, certain aspects of this housing policy need to be looked at. And we will be looking at them very, very seriously, because the situation, since last year, has changed so completely and totally because of the turmoil that's been around us.

Question: Chief Executive, I would like to ask, I guess a macro economic question, as opposed to a micro question. And I understand that economics is not an exact science and it could have changed over the last few years. But when I was at university, I understood that the basic fundamental indicators in an economic environment were such things as unemployment, inflation, corporate profits and interest rates. And as I understand it, or as I remember it, they were very major key indicators as to the performance of an economy.

Now, your government is continually saying that the fundamentals of Hong Kong are sound. My question is, are your fundamentals different from those four, or do you see a soundness in those four that perhaps some of us are not quite seeing as clearly?

Mr Tung: Well, first of all, I have to tell you, you learned more from the university than I have done. I think, obviously, from the community's point of view, sound economic management must read out in full employment, healthy growth in the economy, good wages and an economy which grows steadily year after year without the threat of inflation, low interest rates. These are the objectives of any government. It is something which we all want to achieve. But on the other hand, there are conditions, which may be external, which may be internal. As in the case of Hong Kong, it is both external and internal

which has created a very difficult situation here in Hong Kong. As a result of that, we are going to go through a long, rather painful period.

But at the end of that, what we hope to achieve is what you were just saying: low interest rates, sustained growth, as much as possible full employment and continued creation of wealth for the people. But to get there, you have to go through this process of adjustment. And I think if you look back to what happened to the United Kingdom and what Mrs Thatcher had to do; to look back into the 80's in the United States when they had a five hundred billion dollar problem with the Savings and Loan Association, and it took a long time for that to be corrected, until probably 1992-1993 you begin to see the upswing. Japan is eight years now.

And so what I am saying is this, we all look for these ideal situations and we want to get there, and we want to get there as fast as we can. But each economy, for all sorts of reasons, in the past has gone through all these difficult periods and unfortunately, Hong Kong is now doing that. When I said our fundamentals are good, because there are other things we need to be doing. It is so much better if you have a full pocket of money, for you to take that next step forward. That's when I say, I mean when I say, our fundamentals are better.

If we know our community enjoys the protection of law, the freedom and so on, that is so much better as we move forward, to achieve our objective. These are the things which are important to Hong Kong, and these are the very foundations from which we can rebuild ourselves.

End/Thursday, August 20, 1998

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