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Following is the statement by the Chief Executive, Mr Tung Chee Hwa, at the Central Government Offices lobby late this (Friday) afternoon:

The Financial Secretary has just announced the second quarter GDP figure and the forecast for the rest of the year in term of economic data. The figures suggested that Hong Kong's economy has been adjusting speedily, indeed very speedily. We know we had a bubble economy where asset prices were too high and where our economy was losing increasingly our competitiveness. In the past nine months, asset prices have adjusted substantially downward, unemployment has been rising sharply and, unfortunately, will continue to rise. Economy has contracted for two quarters and this difficulty will continue for some time to come. Inflation has declined rapidly while interest rate remains high.

Our adjustment process is painful but is necessary. And I know, we in Hong Kong can take the pain. What we need is a period of stable interest rate environment to continue our orderly adjustment and to ensure the recovery of our economy as soon as possible. The speculative activities against the Hong Kong dollar and the stock and futures markets have kept our interest rate high and also unstable. This will make the orderly adjustment very difficult.

The Asian financial turmoil which indeed has become increasingly global has given us additional degree of instability. Nevertheless we are determined to go on with the adjustment process to ensure an early recovery and an economy which is competitive, no matter how painful it might be.

When we entered the stock and futures markets some two weeks ago, we did it because there was strong evidence of linkage in the speculative activities between stock and futures markets on the one hand and the currency market on the other. These had created distortion in the stock and futures markets. These markets must be allowed to operate freely without such distortion.

Our efforts in the past two weeks have been specifically directed at this phenomenon and I believe we have achieved our objective.

Let me emphasize that we are not participating in the market to support the stock at any particular level. But if we see speculative activities with clear linkage in the stock and futures markets on the one hand and the currency market on the other, we will continue to do what is necessary.

We will do whatever we can to reduce the opportunities to speculate in the stock and futures markets. The Financial Secretary and other colleagues have been reviewing different aspects of our rules and regulations as a matter of urgency to enhance our resilience to manipulative attacks. Additionally, the Hong Kong Monetary Authority is developing a number of proposals to further strengthen our existing currency board arrangements to make it less susceptible to currency manipulation.

Thank you very much.

End/Friday, August 28, 1998

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