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Following is a speech (English only) by the Chief Secretary for Administration, Mrs Anson Chan, at the Trade Development Council Business Luncheon in Milan today (Friday):

Distinguished guests, ladies and gentlemen,

Thank you for those kind words. I'm delighted to be back here in Milan after an absence of some three years.

As we draw to the close of the 20th century, life, rather than being less complicated than it was 300 years ago, has assumed new dimensions that no one would have imagined possible even in the space of the past 30 years.

The term, globalisation, has almost become the mantra of modern day economists. And perhaps it is the underlying reason why we have chosen Italy as the latest country for our Hong Kong promotion. Money, trade, and information are switching or moving around the globe at speeds that are difficult to comprehend. And it is this wave of trade flows and investment that we wish to ride on as part of our continuing drive into Europe and North America.

Our free trade, free market philosophy is deeply ingrained in the psyche of every Hong Kong person. We live and breathe it every day and we certainly have no intention of abandoning it, despite the spread of the Asian financial turmoil.

As you know, what surfaced in Thailand in July 1997 and appeared, at the time, to be a very localised currency crisis, triggered a series of events, first in Asia and now in Russia and Latin America, that has the potential to plunge the world into a recession. It was only a month or so ago that economists and others were highlighting the inherent strengths of the US and European economies and the unlikely prospects of any grave fallout from the Asian contagion.

It is amazing just how quickly the landscape can, and has, changed. And it brings me back to the point about globalisation. Hong Kong has been an exceptional achiever as a member of the global village. Up until this year, our economy had grown, over the past decade, at an annual average rate of some 5% in real terms; our per capita GDP is estimated at US$26,600, about the 15th highest in the world; and we're the world's 8th largest trading entity despite our very limited geographical size.

But, the onset of the Asian financial turmoil showed a destabilising aspect of unchecked globalisation. A dark side that is now a focus of attention for the world's financial leaders - the dangers of unchecked, and virtually secretive, flows of large amounts of short-term capital across borders, almost at the click of a computer keyboard.

These flows into and out of mainly emerging markets and orchestrated by the operators of hedge funds who have access to vast sums of money, helped contribute to the collapse of four of the Asian economies. That's not to lay all the blame at the door of the hedge funds. It is true, there were inherent weaknesses in those economies and they were problems that needed to be addressed.

But the unprecedented attacks on the Hong Kong markets in July and August were a different ball game. The hedge funds used artificial and disruptive activities to manipulate the market and compromised the ability of our economy to continue adjusting in an orderly manner under normal trading conditions.

This forced us to take exceptional action - what we have described as a surgical incursion into the market - to deal with exceptional circumstances. Our decision to buy into the market was taken as a last resort and only after careful deliberation. We had three main objectives -

* first and foremost, to protect and reinforce the integrity of the Hong Kong dollar's linked exchange rate with the US dollar under our currency board system - a dollar link, I might add, that is an essential plank in our platform for growth and will remain so;

* to stop the manipulation of our stock and money markets by over-aggressive hedge fund managers; and

* to reintroduce stability and a level playing field into our markets which were in danger of collapsing.

But the bottom line, as far as we were concerned, was to protect the genuine interests of the people of Hong Kong. We could not have stood idly by and watched our currency and the economy being driven to the brink with the unbearable impact that would have had on our community. I don't believe any responsible government would be prepared to take that kind of risk. And I hope all of you here today understand what I mean.

Our incursion into the market was deliberate and short-lived. We have not been back in since that 10-day trading period between August 14 and 28, and we hope we won't be forced into that position again. The most important task now is for an overhaul of the international financial system to set down higher standards of transparency, disclosure and risk management. We can't have a situation where we have one set of rules for some and not for others; particularly in an age where governments, and public and private sector organisations are expected to be open and accountable to the people, or their shareholders.

I believe the discussions that were held in Washington earlier this month, in the context of the annual meetings of the International Monetary Fund and the World Bank, are a step in the right direction. With the backing of some of the key international players, such as the United States, Britain and France and with the right will and determination it is to be hoped new rules and regulations will be in place as soon as possible. Hong Kong certainly supports this and we have been among the most active players in pursuing the goal of greater transparency and disclosure rules for hedge fund operations.

There is no denying that through all the financial turmoil, the Hong Kong community and economy have been, and are, hurting. The adjustment process has seen our stock and property prices fall by more than 50%; rents are down by about the same percentage; our GDP is expected to contract by 4% this year; and unemployment is presently at a 15-year high of 5%. That may not sound high in Europe, but for us it is something of a watershed as the unemployment rate in Hong Kong is traditionally around 3% or below.

As you can see, the overall figures paint a rather gloomy picture. But what they don't say, when you look more closely at the scene, is that there are not too many economies in the world today that would still be functioning normally after such a dramatic turnaround in economic fortunes over such a short period of time.

I think the speed with which the economy has been able to adjust is a measure of Hong Kong's strong fundamentals. And, more importantly, despite all the pain we are presently going through, we are regaining our competitiveness. Rents are dropping, the cost of living is decreasing, we are encouraging greater productivity, and the value of the US dollar is declining. These and other factors are giving us back our competitive edge. No one can say for certain when Asia will recover from the impact of the crisis, but when we do we will all be leaner and fitter for it, and Hong Kong will be at the forefront.

Our successful reunification with China is also a positive factor in our overall strategic positioning. While the handover itself was an historic event, the smooth change of sovereignty would undoubtedly have to be the success story of the past 16 months. Despite the anxieties expressed prior to July 1, 1997, the people of Hong Kong have taken it in their stride. Unfortunately, the "events" that have occurred since then have been beyond our control and totally unrelated to the handover.

The 'one country, two systems' principle under which Hong Kong people run Hong Kong with a high degree of autonomy has been scrupulously honoured by China's leaders; and their hands-off approach has been exemplary.

Although we are a part of China - and proud to be - we retain our own distinct identity. The Basic Law, in addition to guaranteeing our existing structures and capitalist way of life for 50 years, also ensures the free movement of goods and capital and Hong Kong's status as a free port and separate customs territory. Yes. The boundary still separates Hong Kong from our neighbouring Province of Guangdong.

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; the right of free movement into and out of Hong Kong; and the right to conduct external commercial relations on our own are also guaranteed. Importantly, the right to demonstrate is alive and well in Hong Kong. Hardly a day goes by without some protest action in the streets or outside government offices. And the media is as free and robust as ever, perhaps even more outspoken than before.

But through all the problems of the past year or so, we have not lost sight of the big picture. The more-than-healthy state of our reserves is enabling us to press on with our plans to build for the future. Important infrastructure projects are beginning to take shape on the drawing boards and in final plans, not only to create jobs but to consolidate our position as the premier financial, transport and communications hub in Asia.

The plans include spending over the next five years some US$30 billion - that's 50% more than we spent on our new airport and related projects - on new railways, roads, land and housing. In other words, facilities that will improve the quality of life for the Hong Kong community and provide that little extra competitive edge so we can grasp the opportunities when the economic pendulum swings the other way.

Infrastructure development - important as it is - is just part of the equation for positioning Hong Kong to meet the challenges and opportunities in the 21st century. Only three weeks ago, the Chief Executive, Mr Tung Chee Hwa, expanded on his vision of Hong Kong's future in his second annual policy address - a vision focusing on increasing the diversity of the economy by building on the foundations that have made Hong Kong a leading international financial and trading centre; and by encouraging innovation and technology to put Hong Kong at the cutting edge of technological and knowledge-based advances.

As part of that central strategy, we're establishing an Applied Science and Technology Research Institute; setting up a US$640 million Innovation and Technology Fund; creating our first Science Park; and to further develop our role as the gateway to China, we plan to capitalise on that position by seeking to become its information gateway. We will improve our mutual Internet links to make it easier for Hong Kong companies to integrate their manufacturing and supply operations on the Mainland. By linking China, through Hong Kong, to the rest of the world we will also be able to act as the 'digital intermediary'. In this way, we will be positioning ourselves as an Internet hub for the Asia Pacific region and helping Hong Kong, mainland and overseas businesses to produce, distribute and market their goods more effectively both within the region and beyond.

We realise in today's business environment, it is essential that information is not only readily and reliably available, but can be transmitted to the four corners of the globe as quickly and efficiently as possible. We are, therefore, developing a world class teleport on the southern side of Hong Kong Island to provide the best possible satellite communications links to the world.

These are just some of the initiatives we are taking to help our economy respond to changes in the global business environment. They're not spurred on by the current economic crisis, but are long-term measures to strengthen the foundation for our future economic development and success.

So, when you're looking at Hong Kong - either in or outside the context of the Asian, or more precisely, the global financial crisis - there are a number of factors that need to be borne in mind about our ability to weather the storm, and remain as the premier city in Asia from which to do business:-

* firstly we remain one of the world's freest economies, possibly still the leader, with free and open markets; a free flow of capital, goods and services;

* a world class banking and financial system that continues to operate smoothly. Our banks are prudently managed and well-regulated, they have very good capital adequacy ratios and are not in any danger of being dragged under by mountains of bad debt;

* our currency, the Hong Kong dollar, is the only freely convertible currency in the region that has remained rock solid throughout the crisis, despite the massive speculative attacks last year and again in recent times. The Chinese currency, the renminbi, has also remained stable;

* our foreign exchange reserves are the world's third largest;

* we have no debt;

* we probably have the most business-friendly tax system of anywhere - 16% profits tax, 15% salaries tax as well as many other tax incentives; and we have China, whose economy is forecast to grow by a healthy 8% this year, as our economic hinterland.

All of this, I am pleased to say, is underpinned by the rule of law and upheld by an independent judiciary headed by our own Court of Final Appeal. Business disputes, should they arise, can be settled independently in Hong Kong. Our legal system remains rooted in the English common law and is now protected and guaranteed by our constitution, the Basic Law, which came into effect with reunification.

It is reassuring that despite the upheavals of the past year or so, we have maintained our strong trading relations with Europe as a whole, and Italy in particular. Two-way trade with Italy has been growing at an average of nearly 12 per cent a year over the past five years - it was worth almost US$6 billion in 1997 - and investment by Italian companies stands at more than US$440 million. There are now some 300 Italian companies operating in Hong Kong in just about every aspect of our economic activity, from banking and financial services to manufacturing and retail.

And contained in the latest trading figures is a trade balance of almost US$3.9 billion in Italy's favour. That is good news for Italian companies and it's good news for Hong Kong. When I met your new Prime Minister, Mr Massimo D'Alema, as his first international guest two days ago, he underlined Italy's keen interests in developing stronger ties with Hong Kong in economic co-operation, aviation links and in facilitating ease of travel between the two places. I have also signed an agreement on mutual legal assistance in criminal matters with Foreign Minister Dini to strength our co-operation in international law enforcement. Our level playing field ensures local and international businesses can compete on an equal footing.

While the Asian downturn has had an impact on consumer spending, Hong Kong's many fashion boutiques are still displaying the latest creations from Italian designers and most buildings still feature Italian marble on their lobby floors and walls. But while this trade may be slowing, in recent years there has been a growing trend for Hong Kong and Chinese clothing manufacturers to source raw materials, such as fibres, yarns and textiles, from Italy. Leather also continues to be a popular import.

In both cases, the raw materials are turned into finished products in establishments in Hong Kong and the Mainland and then exported to global markets. Italy is also a lucrative source of machinery and equipment for light industry in China, in many cases with Hong Kong as the middleman.

In this respect, our role in Asia has not changed. One of Hong Kong's strengths is its ability to efficiently, quickly and competitively source products through its dispersed production facilities and distribution network. No one knows the region, and particularly China, better. This role as a middleman in the trade process is likely to become even more important as the region begins to recover from the recession.

But it is just one side of the business equation. Taking our unique role in the development of China one step further, of particular significance, is our ability to act as 'broker' in helping to arrange the funds necessary for the continued reform of the Mainland.

Funding the restructuring of the state-owned sector in China is estimated to involve some 1,000 billion renminbi, that's about US$120 billion - a huge amount of money in anyone's language. Much of this is expected to be met by foreign funding, and financial institutions in Hong Kong are uniquely placed to play a key role in this. We see this aspect of Hong Kong's status in the provision of financial services as another building block in strengthening our position to be the most cosmopolitan city in Asia - perhaps Asia's first global city - enjoying a status similar to that of London in Europe and New York in North America.

So you can see, we are continually upgrading our services, our infrastructure and our store of knowledge. We know, as a Special Administrative Region of China, that there is no better place than Hong Kong for doing business with the Mainland, a market that has huge potential. The World Bank estimates that China will in the 21st century become one of the largest economic entities in the world. We have strong economic, social and human ties with the Mainland. We have a good understanding of the language, culture and people. Our entrepreneurs and companies were the first ones to go in to take advantage of the business opportunities created by the open door policies and they are well placed to benefit from the reforms and steady economic growth in China. But we offer a lot more than other Chinese cities. Hong Kong provides significant added values in terms of our sound management expertise, high-standard professional and financial services, strong logistical support, certainty of contract underpinned by the rule of law, world class infrastructure and telecommunication facilities, easy access to latest information on the world economy and international markets, and the flexibility and efficiency of our working population. Because of these qualities, we are also the launching pad for easy access to business opportunities in East Asia.

Believe me, there are opportunities for investment and trade and these will only multiply as the region slowly, but surely, recovers from the impact of the financial storm. Perhaps now is the right time for more Italian business news correspondents to be based in Hong Kong and in Asia so the unfolding story can be told directly to audiences back here.

We have set our sights high, but we believe our strategy can be achieved. Despite the present gloom, Hong Kong has its eyes set firmly on a bright future and, I believe, Italian businesses can help us in that endeavour and profit from it.

Thank you.

End/Friday, October 30, 1998

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