**********************************************

Following is a speech (English only) by the Chief Secretary for Administration, Mr Donald Tsang, at the Hong Kong Trade Development Council's Annual Dinner in London today (UK time November 19):

Mr Chairman, Lord Woolf, My Lords, distinguished guests, ladies and gentlemen,

Thank you, Peter, for that very kind introduction and for your exuberant remarks about Hong Kong. You know you have the right man to lead the Trade Development Council when he gives an interview to the Financial Times, as he did just a week or so ago, that produced a headline which boldly proclaimed: "Hong Kong forecast to become world business leader with US".

As it turned out Peter had been misquoted. He had actually predicted that China would join the US as the world's business leader.

Having spent 34 years in public life, I have occasionally been misquoted. But I've never had the pleasure of being misquoted in quite such a friendly way.

As you have just heard, Peter is indeed a man who takes a positive view of things. Like all of us in Hong Kong, he likes to tell it like it is. So with your permission, Mr Chairman, I'd like to do something similar. I could not think of a more appropriate audience or a more fitting occasion to do so.

This annual dinner has, I believe, become a landmark event in London. It is certainly a landmark event for Hong Kong. It is like a clan gathering. It provides that special once-a-year opportunity when all of us who are involved in Hong Kong in one way or another - in business, government, through family or cultural ties or just straight out emotional involvement - get together to talk over old times and turn over the tea leaves to see what the future holds. It is a time to renew friendships, reaffirm the faith and toast the good health and prosperity of the tiny place 7,000 miles away that is my home.

The good news I bring to this year's gathering is that despite the changed world in which we now live, Hong Kong remains in robust good health. We have, of course, been affected like everyone else by the cloudy global economic climate and the uncertainties created in the aftermath of September 11.

I'd like to say just a few words about this. I was on my first official visit to the US as Chief Secretary on September 11. I left New York about an hour before the attack on the twin towers. From my hotel in Washington DC I saw the smoke rising from the Pentagon. I know from first hand the emotions which have gripped Americans and the international community as a result of this outrage.

As an SAR, Hong Kong is not responsible for foreign policy. That is for the Central Government in Beijing. But as a community, we have played our part in the global response to terrorism. Specifically, Hong Kong is this year's chairman of the Financial Action Task Force on Money Laundering. Our representative - who happens to be Hong Kong's Commissioner for Narcotics - convened a special meeting of this powerful group in Washington at the end of October to map out the strategy for cutting off the source of money supply to terrorist groups. This pivotal position underlined not just our role as a major international financial centre, but demonstrates our commitment to act as a responsible global citizen.

Mr Chairman, we have lived in interesting times in Hong Kong since the historic transfer of sovereignty on that rainy night on 1 July 1997. The most interesting part to me has been the way in which Hong Kong has held firm to its values in the face of many difficulties, both economic and political.

Those values will be familiar to all in this room, because they are based on the British tradition: the rule of law underpinned by an independent judiciary, whose members, incidentally, include three Law Lords. A clean, apolitical civil service. The free flow of information and ideas. A level playing field for all. I believe that the many Britons still closely and actively involved with Hong Kong will testify to this. It is certainly true in business. We've had 15 British trade missions to Hong Kong this year, nine of them since September 11, to quote but one example.

Total trade between Hong Kong and the UK has grown at more than 4% a year over the past 5 years. Britain remains Hong Kong's largest trading partner in Europe, and 7th overall. And - this is germaine to an issue I will come to later on - Hong Kong is an important entrepot for trade between the UK and the Mainland of China. Last year, HK$56 billion, or nearly half of the total trade between the two countries, was routed through Hong Kong.

There are over 1,000 British companies in Hong Kong employing more than a quarter of a million people - around 7 percent of our total workforce. The largest single employer outside of the government itself is the Jardine's Group. HSBC, born and bred in our part of the world, but now UK-domiciled, is the biggest stock on our stock market, representing about 23% of total market capitalisation.

Tourism continues to be a major asset to Hong Kong, and last year we had over 13 million visitors. British tourists continue to arrive in good numbers and we'd like to welcome more of them. Last year, visitors from the UK spent around *140 million sampling the delights we have to offer, no doubt including the odd pint of Tetleys, or Rudddle's or Webster's which are on tap in the many watering holes that attract tourists and locals alike. And all of you have who taken your wives on business trips to Hong Kong will no doubt know that Hong Kong remains a marvellous place to enjoy some retail therapy, these days at pretty competitive prices thanks to local deflation and a strong British pound.

Mr Chairman, I'm not trying to pretend that we haven't had problems these past four and a half years. As a small, externally-oriented and trade-driven economy we could not avoid the fallout from the Asian financial crisis. Fortunately, our own solid institutions, the strength and prudence of our banking and financial services sectors and our well-modulated regulatory regime protected us from the damage inflicted on some of our neighbours. We took the opportunity of the downturn to reform and consolidate our stock and futures exchanges; further liberalise the banking sector; tighten the administrative mechanisms which protect our currency; and opened up our telecommunications sector to the point where it is now the freest in the world.

Hong Kong has moved on in many other ways. Our economy has shifted from an over-dependence on property to a more sustainable base underpinned by innovation and technology. Radical reforms of our education system will produce ever-brighter and more sophisticated young Hong Kong people to keep us ahead of the game in a global economy dominated by knowledge industries.

We know we need to upgrade our language skills, in both Mandarin and English, to keep our competitive edge as Asia's world city. We have hundreds of teachers from the UK, Australia, New Zealand and Canada teaching English as a second language in our secondary schools. We have just announced plans to put hundreds more in our primary schools.

We are working assiduously to be ready for the global economic upturn when it comes, as inevitably it will. I would certainly advise all our friends in this country not to be blind-sided by the smoke and mirrors of animated public debate which arises from time to time in Hong Kong. You mustn't forget that we remain very much a free society under the rule of law. Like yourselves, we have a very rumbustious press and noisy politicians. But Hong Kong's powerful fundamentals are rock solid. You'll still feel the buzz when the plane touches down at our marvellous international airport. By the way, that gives me a chance to say thank you to Sir Norman Foster for designing such a spectacular airport terminal for us.

On the economic front, we are looking at the prospect of contracting growth. Frankly, we expect the domestic economy to get worse before it gets better. We have to expect this because, as I said, we are one of the world's most externally-oriented economies. And what happens in the US and Europe, not to mention Japan, will inevitably affect us. This is not a cause for alarm. As The Economist once said, a recession in Hong Kong is a bit like a boom in most other cities.

The medium and longer-term outlook is good. Recent figures tell a story. Emigration from Hong Kong is at a 20-year low. International companies are coming to the SAR in record numbers. Our latest survey shows that 3,200 overseas corporations have a regional headquarters in Hong Kong. That's the most in Asia. More than 250 of them are British. In the past two years alone, almost 750 international companies have established regional operations in Hong Kong.

Hong Kong continues to be a major financial intermediary for the entire region. Last year more than US$125 billion in external direct investment flowed in and out of Hong Kong, which highlights the strength of, and confidence in, our financial system to handle such large fund flows. And the influential Heritage Foundation - for the 8th year running - has once again rated Hong Kong as the world's freest economy. We regard all of these developments as a vote of confidence in Hong Kong's future.

There are many good reasons why so many are pitching their tents in Hong Kong. China's accession to the WTO in Doha last week is, to my mind, a decision of great magnitude with far reaching implications for the world economy. It is the natural extension of the process started by Deng Xiaoping nearly a quarter of a century ago when he took the momentous step of opening China's economy to the world. We have all benefited mightily from that, especially in Hong Kong. It enabled us to switch seamlessly from a manufacturing economy to a services economy.

China's entry into the WTO will bring dramatic structural changes to the Mainland as it adapts to a rules-based system that binds us all. It is undoubtedly a huge challenge and a golden opportunity for all the people of China, including, and perhaps especially us, in the Special Administrative Region of Hong Kong.

For all the talk one hears of Hong Kong losing its special gateway niche, I believe we are uniquely placed to take advantage of and contribute to the great changes and progress we will undoubtedly witness in the Mainland in the years and decades to come.

The whole of China is our backyard. But in particular, an important asset - and one which we are doing more to nurture - is the strong links with our immediate hinterland, the Pearl River Delta. This is one of the most affluent and fastest growing regions in China, with a combined population of 47 million. It is within a 100 mile radius of Hong Kong. It is an enormously attractive market, with average growth of 13.5% over the past five years. Last year, the Pearl River Delta, netted off the GDP of Hong Kong and Macau SARs, still accounted for more than 95% of Guangdong's GDP of US$271 billion. The GDP of PRD is 40% larger than the Yantze River Delta with Shanghai as its leading city and is growing just as fast.

Over the past two decades, our economies have become ever more complementary. Together we have developed into a highly productive economic region bound by ties of geography, family, culture, language and a common goal of achieving greater prosperity. Hong Kong enterprises have invested more than US$70 billion in Guangdong, about three-quarters of all investment in the province. Our entrepreneurs and manufacturers have an extremely strong presence there - about 5 million people are employed by more than 40,000 companies wholly or partly owned by Hong Kong concerns.

China's recent accession to the World Trade Organisation means that we must further strengthen this co-operation to achieve a 'win-win' situation for both Hong Kong and the Pearl River Delta. This is a key aspect of consolidating and enhancing Hong Kong's position as an international centre for finance, trade, transport and logistics, as well as a premier tourist destination. We are providing a range of special service infrastructure and a fully convertible currency. No other city on the Mainland will be able to overtake this position for many years to come. In short, we are developing the transport, economic and political infrastructure to consolidate Hong Kong's strengths.

This not only involves encouraging and facilitating closer business links between private sector partners. It also involves working closely with our government counterparts in Guangdong Province to map out strategies dealing with cross-boundary flows of people, cargo and vehicles.

The task we face is to establish a framework of arrangements that facilitates seamless interaction within One Country while not in any way compromising the high degree of autonomy we enjoy under Two Systems. For example, while we must maintain separate immigration and customs controls, advances in technology can make the process quicker. The Hong Kong and Guangdong governments are also working hand-in-hand to tackle air pollution problems. These efforts will have a positive, long-term impact on the quality of life in both Hong Kong and the Pearl River Delta.

At the risk of being accused of being gung ho -a charge I wear as a badge of honour - I believe that as long as we play our cards right, Hong Kong stands on the threshold of another great opportunity in its remarkable history. I fully accept that there will be people who will go directly to post-WTO China. But the fact is that Hong Kong businessmen and women, with their long experience of doing business in the Mainland, will continue to hold the key to the China market, especially in the Pearl River Delta region.

I hasten to add that not all of our eggs are in the South China basket. Hong Kong is the largest external investor in of the Mainland. Indeed, the largest investor in every single province and region of the country. Earlier this year, at the invitation of the leadership in Beijing, I led a delegation of over 200 Hong Kong businessmen to the western region of China, a priority development target for the Central Government. You all know Hong Kong well enough to know that where there is opportunity, you will find a Hong Kong entrepreneur.

Now, on a night that is dedicated to the celebration of Hong Kong, it may be infra dig to mention another city. But I have to confess that there is a lot of talk about Shanghai these days, and suggestions that it may somehow supplant Hong Kong as a business and transportation hub. Let me say immediately that it won't. There are many good reasons for this, the most important of which is that there is ample room for Shanghai and Hong Kong, and indeed other cities, to play complementary roles in the development of the Mainland economy. There is also the question of software - our legal system, being the obvious example - and the issue of currency convertibility.

But even on a practical note, as a recent TDC study showed, Hong Kong has another major advantage as a global trading hub: some 100,000 trading firms on whom overseas customers rely to source their products from China. And not just southern China. The study showed that 40 to 50 percent of buying offices in Hong Kong source products from eastern and northern China. Yet another study showed that Hong Kong is easily the first choice for regional headquarters, especially for those with responsibilities for co-ordinating marketing and finance extending from Sydney to Seoul. Hong Kong has all this, and much more, going for it.

Mr Chairman, on that note, I would like to close my remarks. It is always a joy for me to come to London, and it is a special privilege to address this distinguished group of friends for the first time as Chief Secretary. I know Hong Kong can continue to rely on your interest and support and your involvement - not just in business but in the life of our community.

We welcome visitors and residents from all over the world. Our energetic expatriate community gives Hong Kong its special flavour as an international city. Because of its role in our history, Britain and Britons have played a unique part in that. I am glad to say that this role continues as vibrant as ever today, albeit in a different context. Mr Chairman, long may that continue.

Thank you.

End/Tuesday, November 20, 2001

NNNN

1