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The following is the transcript of the Chief Executive, Mr Tung Chee Hwa's speech at the Fortune CEO Round Table luncheon followed by a question and answer session this (Friday) afternoon:

Mr Tung: Peter, thank you very much for those words. Now you know what our good neighbours and friends are for. Many of you are very distinguished business personalities from all around the world. Let me give you a piece of advice: please don't do what I have done. Your hair and your eyebrows turn grey - in just fifteen months.

Let me begin by saying how delighted I am to be standing here to welcome so many visitors from overseas. It is a very opportune time for you to be gathered here. We can, together, take stock as to what has happened here in Hong Kong. And in fact what I would like to do is really to talk about two issues. The first issue is about the causes and the consequences of the Asian financial turmoil, which in fact has now taken on international dimensions. The other is to talk about the challenges that Hong Kong has faced over the last seventeen months. The impact of the global financial turmoil on Hong Kong, the ending of a colonial era and the beginning of a new era under a very high degree of autonomy. And also, when the storm blows over, when the dust eventually settles down, what is our vision for the future.

The origin and the causes and effects of the Asian financial turmoil is really a very complex one. But the broad problems are fairly well known. In those countries which have been badly affected, it was a combination of private sector over-borrowing, inadequate bank regulations or mismanagement, and tragic policy errors at both the corporate and banking levels, as well as corruption and crony capitalism. The growth of derivatives and modern information technology also contributed to the speed of the contagion.

But let us ask ourselves, are these really the only reasons? Are these the only reasons? I think no one can deny the impressive records of strong growth, general price stability, high domestic savings, an educated and highly flexible labour force, an openness to trade and investment, that were the hallmarks of any of these very Asian economies. And, in fact, for Asia as a whole for more than a decade. Furthermore, by promoting intra-Asian investment and trade, the region enjoyed unprecedented growth and prosperity during this long period. Even authorities such as the IMF and the World Bank, not too long before the turmoil began, testified to the strengths and the success of these economies. And so did some very well known rating agencies around the world.

So, what did happen? Something else must have happened. And the fact is that this problem is not unique for Asia and it is indeed international. Many, in fact, now believe the problem is in fact systemic. It has been pointed out that in the late 80's and early 90's the capacity and willingness of Western financial institutions to reach out for more exotic high-yielding investments made the private sectors of major emerging economies with strong growth potential, their prime targets. These economies which have become converts to the basic philosophy of open markets for goods and capital, welcomed these fundings. These funds come to Asia, some in the form of loans, some in the form of portfolio capital, and others in the form of direct investment. But much of these funds can be moved out at short notice.

On the other hand, the herd instincts of the management of these financial institutions are strong. What began as a small amount of fund flow to these Asian emerging markets grew very rapidly. For the recipient countries, few paid attention to the fact that this money could leave at very short notice. The Bank of International Settlement's Annual Report shows that it was a combination of mutual and hedge funds that pulled out of Asia, as well as a sharp reversal of bank lending, that did the true damage. The private capital flow to Asia, excluding the People's Republic of China and Japan, reversed from $108 billion in the second half of 1997 alone, compared with the inflow of roughly the same order in the previous twelve months.

So, in other words, in the latter half of 1996 and in early 1997, there was an inflow of capital into Asia of over $100 billion, and that excludes China and Japan. But in the second half of 1997 there was an outflow of in excess of $100 billion.

Paul Volcker said to me that as far as he knew, the IMF or World Bank or anybody else, has not advised any developing nations or economies to reasonably expect to introduce measures which are necessary for these kind of stresses.

The turmoils experienced by countries in Asia were compounded by the activities of the international hedge funds. Indeed, in most cases they were in the forefront in creating havoc in the market places.

Let me emphasise one thing. I do not object to the existence of hedge funds. Far from it. They are an essential part of a global investment fabric. We have to understand that. Indeed, there were inherent weaknesses in many of the economies in Asia, and including Hong Kong, that created opportunities for these hedge funds. But the fact is that they can create this herd instinct mentally and that that herd instinct, and the activities of hedge funds, do give lead to many, many other international financial institutions to follow, to act together, and they together create havoc in many financial markets around the world, including Hong Kong.

I am glad, now, there is growing recognition in the international financial circles that such funds, and the banks which provide their working capital at often abnormally high gearing levels, should be required to exercise a greater degree of responsibility in their activities than at present.

We, in Hong Kong, have ourselves already spoken out on several occasions on the need to tighten controls in the interest of protecting the integrity of the global markets. These controls must be vigorous, applicable without favour, and capable of promoting - and here I want to emphasise - capable of promoting, not restricting, free market based financial activity. We look to the international community to work decisively to shore up our global financial structure. Hong Kong, will play a full part in this process. We look, particularly, towards the improvements in the transparency of hedge fund operations, and to the better supervision of these funds and their backers. At the same time we remain committed to free and fair market activity and a level playing-field, and we are not in favour of capital controls, and there will not be capital controls here in Hong Kong.

I am particularly pleased that over the last few months I have had opportunities to talk to the President of the United States, the Prime Minister of Britain, and the Prime Minister of France, and also had the opportunity, recently, in my visit to Beijing, to talk about this particular issue. I am very glad that there is now a general political will that something needs to be done. And I really, now, look forward to many people working very hard to come up with better international financial architecture so that market stability can be restored, not just in Hong Kong but all around the world. So much for the financial markets.

Let me talk a little bit about Hong Kong. The past eighteen months has been a period of historic significance on the political and economical fronts. That particular eighteen months has also been a period of great change. Whether we are successful as an administration will be assessed, in my view, by the way we manage these enormous changes. On the political front, a colonial era has ended. A new era with a high degree of autonomy has begun. And I feel that we have been reasonably successful in achieving this particular transaction.

It is, in fact, an enormous change. It is really an enormous change. But we worked very hard, six and a half million people worked very hard. We in Hong Kong all believe one country, two systems will work and it is now working. The Central Government has been unreserved in the support for Hong Kong, in making sure one country, two systems does work. And I think more and more, the international community now sees that, yes, one country, two systems, which was original in concept, is now really working and practised here in Hong Kong. I think we are indeed very fortunate that we have been able to manage this change well.

Another change which I wanted to particularly mention in this forum is the change we will be facing, as Hong Kong, as China, moves on along its modernisation programme. Hong Kong had a very special role to play before 1978, before China embarked on the reform programme, we were the bridge of China to the rest of the world. After 1978, China began its reform programme, Hong Kong had an additional role to play. Not a different role but an additional role to play. Hong Kong entrepreneurs invested in China's infrastructural development, our industrialists moved north to the Pearl River Delta, taking advantage of cheaper land and lower labour costs, and many enterprises in China used Hong Kong to raise foreign capital in the form of equity or debt. And we have played that role, in my view, very successfully.

But if you look forward, in the 21st century, China, I am sure, will be a successful economic power. The World Bank, in their book 2020, has talked about China being one of the largest economies in the world. And then in Hong Kong we are faced with a China which has opened up. For a long time, many multinationals chose to have their "Greater China" headquarters in Hong Kong but some now have moved their "Greater China" headquarters to Beijing, because it is liveable, the costs are lower and access to government is much more convenient. And the trained manpower in China is getting better and better all the time. Whereas multinationals used to send expatriates from Hong Kong, there may not be a need for this any more because there are equally qualified persons, if not better, in China.

We face a new China which is growing in its economy, growing in confidence, and rightly taking her place in the international community. What is Hong Kong's role in the future, we ask ourselves? As a government, how can we help, how can we manage this change, to make sure Hong Kong can take full advantage of China's continued march towards prosperity? And I believe the opportunities are really abundant, whether it is in the area of retail sales, investment in infrastructure projects, in areas of finance, in areas of construction, in areas of trade, it is all out there and it is up to us in Hong Kong to understand this, how we can participate in this growing success of China's economy as China moves into the 21st century. And we have a unique opportunity to do this because we can do this under the one country, two systems concept which is so successfully being practised here. I think, as a government, we have a role to articulate this issue and then to see what we can do to reduce the road-block to enable the private sector to get on with participating in the growth of that economy.

And the third change I want to mention which we are trying to manage, is the change created by the financial turmoil and this change has been an enormous one. Our property market has fallen maybe 50 - maybe more than that - maybe 55 per cent. Unemployment has gone up, the economy has contracted and it is a change which came so rapidly that we had to manage to make sure that there is stability, there is confidence as we move forward. Now, as a government, we really have tried very hard to do a great deal without changing the fundamentals of our success. In the February Budget which was presented by our Financial Secretary, we reduced taxes to the extent of one per cent of GDP. We increased investment expenditure - roads, railways, schools and some other expenditure - equal to three per cent of the GDP. And the whole purpose of that was, having anticipated the problems, to see what we can do to cushion the sharp contraction of our economy.

Of course we all know that these measures will not take effect immediately. It will take time. For instance, the tax concession will take effect in the first quarter of next year. Infrastructure projects - railways and highways designing - need to be prepared and then they are in effect now just beginning at this moment to become effective.

In June, we also stopped selling land because we were concerned that falling property prices may have an impact on our banking system, which up to now I have to assure you remains in a very sound and very good condition. In August we did what we did, we had to come into the market. It was highly controversial but I just want to assure you it was a deliberate, a well thought out effort. It was something which we'd been talking about for some time and it was taken really only as a last resort defensive measure to ensure that there is market stability and that our market is not being manipulated, that our market is truly free to act.

But throughout all this, as a government we never lose focus on our long term objective: where is Hong Kong going to be in the 21st century from an economic point of view. And it is important for us to shore-up the existing pillars of our economy. We are determined to maintain Hong Kong as the financial centre in Asia. We visibly believe in a free market economy. And let me say this, and I am willing to challenge anybody, that our economy is the freest and our market transparency is better than anywhere else in Asia. Whatever others may say, don't you believe it. Come and check with us.

We want to build up other pillars of the economy - tourism. At the peak of our tourism, at the peak of the business, we attracted 11.7 million tourists per year. This year we will be approaching about 10 million. Still the largest of any destination in Asia, but I think we can do better. We will do better. What made us attractive previously, does not guarantee our future success, and we will be doing a lot in this industry. As you probably know, I have appointed a Commissioner of Tourism with specific responsibility to reinvigorate this industry.

We are going to do a lot more for medium/small size businesses which in the past few months - in the past six months or so - have faced a tremendous credit crunch because of the downturn of the economy, and the credit crunch as a whole in Hong Kong. Two-thirds of the work force in Hong Kong are actually employed by the medium/small size businesses, so we need to be very mindful, and to the extent it is possible we will try to help out.

We have a very successful manufacturing and manufacturing service sector which now not only employs a few hundred thousand people in Hong Kong, but employs millions of workers across the border, and we intend to continue to make sure this sector of our economy continues to be strong and vibrant. This sector is not only important from an employment point of view, from a wealth-creating point of view, but also it makes us the largest container port in the world; and also provides other work for our financial services sector in terms of trading, bills of lading negotiations, etc, etc.

And one other pillar of our economy is this, that we have always been a centre for international business. And we will keep it that way. We want to maintain Hong Kong's international character and we will work very hard to ensure that Hong Kong's international character is maintained. We want to make sure that - yes, there will be some who move up to Beijing or Shanghai for greater China operations - but we want to make sure Hong Kong continues to be the most interesting and attractive place for international businesses to be headquartered for Asian activities. And I can go on as to what we are trying to do but that will probably take some time.

But to do all this we need always to remember what has made Hong Kong successful in the past, what has anchored Hong Kong's success, and these same fundamentals will apply in the future. For instance, we will strongly continue to uphold the rule of law here, the independence of the Judiciary. Under one country, two systems, we have been able and we will continue to be able to maintain our way of life - easy access to information, all the sorts of freedoms we enjoy today will continue to be important for us in the future. We will continue to uphold our belief in a free market economy, in fiscal prudence and the international character of Hong Kong. And all this will be underpinned by one country, two systems. And this is not just a slogan. For those who have not read it, I invite you to read our Basic Law, which is basically our Constitution, which actually defines, it turns the concept into real workings, and that is our Basic Law. So we will keep all these fundamentals strong and vibrant because that, at the end of the day, is what anchors Hong Kong's success.

I also wanted just to mention that as we strengthen the pillars of our existing economy, what we will want to do also is to make sure that the new opportunities in China, as China becomes undoubtedly in the 21st century one of the economic giants, that we in Hong Kong can fully participate in this. We have also set our goal in making Hong Kong a centre for innovation and technology. We are not going to take business away from Taiwan, but we want to make Hong Kong a different centre for innovation and technology. Not copying what Taiwan and Singapore are doing, but we think that there is a unique role for us to play. And under the advice of Professor C.L. Tien we have now mapped out a direction for us to go in, and I think this will give us enormous benefits in the many years in the future.

Of course Hong Kong today faces many problems, but we must not really sell-short ourselves or lose confidence in ourselves. Actually, we should recognise that Hong Kong still enjoys a position which is the envy of many. Our society is free and fair and stable, and we steadfastly uphold the rule of law.

Our currency will be stable as the measures which we have introduced to improve market regulation take effect. We have no external debt. We have sufficient reserves and a very sound banking system. Our user-friendly and up-to-the-second communication networks are efficient and reliable, helping to make Hong Kong the first-choice destination for many companies which invest and set up here in Asia.

Our strategic location, our heritage and cultural background, together with our extensive experience in working with the Mainland, place us in an unmatched position compared with anyone else. Political stability and rapid development in China give Hong Kong a strong hand in furthering our own development. Above all, ladies and gentlemen, for those from overseas I would like to remind you that Hong Kong people remain resourceful, hardworking, forward-looking and dynamic. And I really believe that as the storm blows over - and it will be taking some time for this to happen - I believe Hong Kong, really, will have a good future. We will resume the path of growth when the dust settles down. Thank you very much.

Question: Mr Tung, you mentioned in your speech to take advantage of the developing economy in China, but in your Policy Speech I didn't see too much things about the connection or co-operation between China and Hong Kong specifically. I don't know whether this SAR Government is talking to China on specific issues, like besides all these tourists, on specific issues like opening the banking service in China to Hong Kong investors, or tele-communications or any other manufacturing things could be sold in China without being treated as foreign investment.

Mr Tung: I did mention some of my thoughts in the Policy Speech. It is obviously not at the stage where we can be very specific. There are already areas of co-operation, such as co-operation between our tourist industry and those of Guangdong Province where we are talking about how we can work together to jointly promote tourism. There are other areas of co-operation, such as to extend the border opening times between Shenzhen and Hong Kong, and areas such as building a spur-line from us to Huanggang to link up with the subway system in Shenzhen. So there are whole areas of discussion already, but there are other areas which need to be further pursued and this is one area which, at this moment, I think it would be premature for me to go into details. But what I did say was that as a government, our responsibility is to try to remove as much road-block as possible, so you can get on with it. That will be our work.

Question: Mr Tung, you started out, half-jokingly, advising businessmen not to do what you have done and take a job leading a government. In fact, I think you are one of the few government leaders in Asia who comes from a business background. And I wondered what the differences that you've found are, aside from having to worry about your standing in the opinion polls and cartoons in the newspapers, and demonstrations. But what else? What is the difference between being the Chief Executive of a company and the Chief Executive of a SAR?

Mr Tung: First of all, let me tell you I enjoy reading all the cartoons and the funny bits and pieces in newspapers about me. Secondly, polls are something we have to pay attention to but it is never something which would guide you in decision-making, because polls come and go, decisions will be made for the longer term.

I think the difference is probably this, that as a businessman one has to be very bottom-line oriented. So I go into this office very bottom-line oriented. And I felt that if I deliver the bottom-line, never mind what happens in-between. Of course, in the political life this does not work because your bottom-line or your direction may be very clear - you must bring the people along with you. And I think this government has very sound policies as a whole, and I have a bunch of really good people working with me. What we have not done as well is to articulate that message to the people. And I have said many times that is something that I have learnt and that I will do better in the future in this respect.

End/Friday, October 30, 1998

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