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Follows is a transcript of remarks and a question and answer session by the Chief Executive, Mr Tung Chee Hwa, at an APEC CEO Summit breakfast session 'A Conversation with Tigers' in Los Cabos, Mexico today (October 25 Mexico time):

Mr Tung: Good morning friends, ladies and gentlemen. I am delighted to be here today to be speaking in front of such a distinguished audience. The subject of this CEO Summit is the challenges for development in a world of uncertainties. The fact is, that in the world we live, the only thing that is certain is uncertainty itself; the only thing that is constant is that there will be changes. So we do live in a very challenging world.

And I want to take some time to explain to you what we are doing in Hong Kong, because what we are doing is really managing some momentous changes. On July 1 1997 Hong Kong became once again part of China, China resumed sovereignty over Hong Kong. This was after 156 years of colonial rule. Hong Kong, under the 'One Country, Two Systems' concept became once again part of China. The question is, Chief Executive, all of you in Hong Kong, how have you managed this change? Because it was a tremendous change, if you can imagine.

Before July 1 1997 there was a great deal of skepticism whether 'One Country, Two Systems' would actually work. And my responsibility, and the responsibility of my colleagues, is to make sure that 'One Country, Two Systems', hitherto untested, a concept at best, is implemented successfully in Hong Kong. Now five years have gone by. For those of you who have visited Hong Kong I think you will agree with me that 'One Country, Two Systems' has been very successfully implemented. For those of you who follow the stories of Hong Kong I think you will agree with that too.

And the best way for me to prove 'One Country, Two Systems' is successful is today looking, not at all the other arguments, but really looking at, one, looking at the capital flows and the other is looking at the flow of people; those people who have left Hong Kong before 1997, they have been returning to Hong Kong. The capital inflow has been very strong, because people vote with their money, with their pocket. And these facts speak for themselves that 'One Country, Two Systems' has been very successful. For those of you who have not visited Hong Kong, I urge you to come and visit us and to see how this novel concept has now become a reality and I hope one day will become instrumental in the ultimate reunification of our entire country.

Now let me tell you the second challenge we are facing today, or the second change we are trying to manage in Hong Kong. And again it is a momentous change. In Hong Kong we are faced with, as everybody else, with globalisation, with the challenges of the new economy. And we are also faced with both enormous opportunity and many new challenges given to us by the rapid development, and very successful development, on the Mainland of China.

These new opportunities, because of the way the Chinese economy has been expanding, Hong Kong is able to take many, many new opportunities, whether it is for our business, for our professionals. But on the other hand, really many new challenges because just across the border, services can be rendered at a fraction of our costs and the products can be produced at a fraction of our costs. These are new challenges we face.

And all at the same time, in 1998, the property bubble burst. Property prices have fallen some 60-odd percent, which itself is deflationary, which itself is very damaging to the economy as such.

So we at this moment we are faced with the need to manage all these very rapid changes that are with us. Let me tell you though we are facing our future with a great deal of confidence. Not that these challenges are easy to overcome; no, on the contrary these challenges are very difficult indeed. But we are confident because we really do have a lot of competitive advantages.

One of our competitive advantages is of course our geographical location. We are right there on the doorstep of Mainland China, the fastest growing economy in the world. We have an enormous cluster of talents internationally, whether they be lawyers, accountants, financial specialists, traders - all the best are clustered in Hong Kong to provide services. We have very, very sophisticated hardware infrastructure - airport, roads, railway, ports, telecommunications. And we have very good software - the rule of law in Hong Kong is very strong. There is a level playing field for all comers, whether you are American, British, Latino, Chinese, you are all welcome. We have a government which is small, efficient and a very clean government.

So we have some really excellent competitive advantages and only because we have these competitive advantages we can face the challenges that are there, manage the challenges, and move forward.

You may ask me, well how are you going to do it? Let me tell you this.

First of all, because we have these competitive advantages, we ask ourselves where are the areas of our own excellence. You know, for instance, we are a very successful financial centre and we want to be sure we will continue to be the premier financial centre in Asia, and George [George Yeo, Singapore's Minister of Trade and Industry] sorry about, but we really want to continue to be the premier financial centre in Asia. And nine out of the 10 most successful Chinese enterprises listed around the world actually are listed in Hong Kong. Of the US$40-$50 billion of foreign direct investment into China, about 55 per cent is actually funded through or by Hong Kong. These are all enormous numbers. This year alone there will be 100 companies listed in Hong Kong, in a market environment which is not really very favourable, we all know that.

We are very strong as a logistics centre. Our airport is one of the busiest anywhere. Our port continues to enjoy leading status, handling 18 million TEUs of containers each year. And as China develops in manufacturing, Hong Kong's position as a logistics centre will only strengthen as we move forward. One other thing you may be interested to know is that there are over 3200 countries from all over the world who use Hong Kong as their Asia-Pacific headquarters. Why Hong Kong? Well it's because of geography, it's because of the predictability that the way government will respond to all sorts of challenges. And also it's because, you know, we are just on the doorstep of the fastest growing economy. Last year we had 13.5 million visitors, this year it will go up to about 15 million visitors. Hong Kong is the largest destination, city destination, for tourism in Asia. It's an attractive place.

And in all these areas where we have competitive advantages, we continue to aim, we want to aim to build on it, to make them better still, so that our position will remain unchallenged. A simple strategy - you in business do this, we in government do that too.

And one other thing that I want to tell you is that, it's seldom spoken, but it's our relationship not just with the whole of the Mainland of China but particularly with the Pearl River Delta. The Pearl River Delta, with 40-odd million people, has the fastest rising GDP and GDP per capita as a region in the whole of China. It is now recognised around the world as really the most important production and manufacturing base anywhere you can find in the world. And the Pearl River Delta and Hong Kong, we grew together, we are part of the same team. Hong Kong with our competitive advantage in logistics, in port and airport facilities, in financial facilities, in the availability of professionals, whether they be accountants, lawyers and what have you; and the Pearl River Delta, a good consumer market but most importantly where there is a quality labour force, as well as very inexpensive land. And we find so many companies, thousands and thousands of companies from around the world, now are establishing manufacturing of production bases in the Pearl River Delta, using the Pearl River Delta's competitive advantages and Hong Kong's competitive advantages all at the same time.

So, if an international company who wishes to tap into the huge consumer market of the Mainland, or of Guangdong Province, or the Pearl River Delta, or if you want to be producing in an area where the cost is low, the quality is good, where the infrastructure is there for transportation and for delivery of your goods all around the world, or if you are looking at the Chinese domestic market, you know it is a combination of Hong Kong and the Pearl River Delta. So these are some of the competitive advantages we have, we are excited about what we are trying to do.

But let me tell you this: in Hong Kong we are very conscious about some of the areas where we are not very competitive. Our costs remain high. And we are doing all we can to bring costs down. I was a businessman before and I know only by bringing costs down can we compete in this world that is full of competition.

We are investing a great deal more in education because what Hong Kong is doing is we are moving up the value chain as some of the jobs migrate inevitably across to the Pearl River Delta. So we are investing a lot more in education to make sure that the population will be ready to take on this new responsibility or new challenge as we move up the value chain in the services we try to provide in Hong Kong. We are conscious that Hong Kong can only succeed if the quality of life around us in Hong Kong is good, not just for the 6.8 million people, the local residents of Hong Kong, but also the international community who live and work in Hong Kong.

So our direction is set, we are very focused in moving forward. We are at the same time having to tackle these challenges, also looking at deflation which we are facing. In our economy, our prices have deflated some 13% over the last four years. It's a huge challenge for us, to face deflation, to overcome the Budget deficit. But all I can tell you is that we are going to make it.

I think I share this with you because many of the Asian economies, or economies around the world are facing similar problems, or if not they will be facing similar problems in the future. I thought it would be helpful. So it's not just about propaganda for Hong Kong.

Ladies and gentlemen, I think I have spoken long enough. I will now sit down and later on I will be happy to answer any questions you might have. Thank you very much.

Q: Mr Tung, what you described as your problem is almost exactly our problem in connection with competing with the People's Republic of China. Would you expand a little bit more on how you're going to reduce your costs in Hong Kong?

Mr Tung: First of all, let me say this, that I think in Hong Kong we look at what's happening in the Mainland of China as both opportunities and as challenges. And I certainly look at it more as an opportunity and I would urge the rest of the world to do the same thing. The Chinese economy is now the sixth largest in the world and if you look forward 10 years, 20 years certainly it will be one of the largest economies in the world. The ability for China to trade with the rest of the world, to consume products will be enormous. If you look at, everyone is talking about, the rising middle class in China and nobody quite knows how to put a handle on the number. Some say it's 100 million, some say it's less, some say it's more. But if you use cell phones as a guide, if you assume every cell phone holder is middle class, there are 180 million of these holders. So it's an area of tremendous opportunity for the rest of the world and the only other point I want to make is that, especially for medium-sized businesses, if you want to participate in the economy of China in one form or another, whether for production purposes for the Mainland market or for the rest of the world, or to go into the market to sell your goods, I just want to tell you Hong Kong is there to work with you because Hong Kong has really proved over the years that we can do that. The General Motors of the world do not need Hong Kong but the medium-sized companies in the world I think should come to Hong Kong, find themselves a partner, work together to get into the Chinese market in the Mainland. Many have done that and I hope continuously there will be more.

Now, what do we do about costs? I think the thing about Hong Kong is that we let the market do the adjustment, and the market is doing the adjustment. Our economy is, we do have a deflation. Our prices have adjusted about 13 or 14 per cent. So the best thing is to let the market do the adjustment. And the important thing is for those who are unfortunately left out in this competition, there are many in Hong Kong, we have to be sure there is a good, solid safety net that protects them, and while protecting them at the same time making sure they are given the opportunity to participate again through training and retraining. So these are the things we try to do. But we let the market adjust itself.

And of course from a government's point of view we try to do a number of things: make government policy very friendly to business, try to move away all the obstacles that can bring costs down. For instance, we recently reached agreement with the United States of America to greatly liberalise our air cargo market, our air passenger service market. And these will introduce more competition and bring costs down. So as a government we try to do as much as we can to make sure that those obstacles in bringing costs down, introduce more competition, are being strictly observed and pushed forward. Come to Hong Kong and see for yourself.

Q: Good morning Chief Executive, delighted to see you again. I remember well when we had you to the first of the APEC CEO Meeting in Vancouver 1997. My question really pertains to an issue that is of growing importance, not just to Hong Kong but very much to Singapore and any of the economies engaged heavily in international commerce, and particularly container traffic. Could you provide for us some of your insights on what additional steps are being taken from a security point of view to handle what in fact is a formidable challenge and that is security in the movement of container traffic in and out of Hong Kong and in and out of Singapore.

Mr Tung: I will say a few words, and I claim expertise because I was in that business for a long time as you probably know. But I think Singapore is also at the forefront of working together on container security, so maybe George [George Yeo, Singapore's Minister for Trade and Industry] can help me with a few points.

What I can tell you is that we are mindful of the serious threat imposed by the movement of containers to the security of territories or nations and ports or cities. Because really, if you close you eyes, you can imagine it is not difficult to put an explosive into a container and that container can move across from country to country, port to port, until reaching its final destination very often without being ever examined. In Hong Kong, one of the largest container ports in the world, we are very mindful of our duties. And we are working very closely, basically, with the American Customs. We have recently initiated what is called the Container Security Initiative agreement. Hong Kong participating fully in this initiative, working together, because we need to all work together because it's not just one port, not just one city, not just one terminal but all of us working together to overcome this challenge. So we have signed onto this initiative. We are working closely with the United States, with the international community in a joint effort to make sure that the minimum of terrorist risks in that area is really reduced to a very, very minimum.

Q: Ted Lee from Texas United States. My question is to the Chief Executive. As a businessman who travels through many countries, China, US, Mexico, we have seen a lot of changes over the last five or six years. My questions really is regarding Hong Kong versus Shanghai, Guangzhou and Shenzhen. How in your view can Hong Kong still be competitive and yet complement the development of these cities, financial centre in Shanghai and logistics port and also as a gateway for Pearl River Delta area versus Guangzhou and Shenzhen.

Mr Tung: Before 1978 China's economy was closed. Hong Kong was the only bridge between, on the one hand Mainland China, on the other hand the rest of the world. After 1978 China began to open up. Hong Kong's role changed. Our manufacturing moved across the border to the Pearl River Delta and we became a very successful services centre. Financial services, logistics services etc. So in those two phases of development of Hong Kong we created a lot of wealth for ourselves because of the way we positioned ourselves, and at the same time we contributed to the success of Mainland China's development. Now in the 21st century our role is going to be different because there are many, many bridges between the rest of the world, on the one hand, and Mainland China on the other. Shanghai is a bridge, Tianjin is a bridge, Guangzhou is a bridge, Beijing is a bridge, Shenzhen is a bridge, and Hong Kong continues to be a bridge. But our role is going to be different. And we have to recognise this and we have to position ourselves differently to meet the challenges of the future.

The Chinese economy is now so much bigger than 1978, than 1990 and if you look forward, the Chinese economy will be even bigger in 10 years, 20 years hence. So Hong Kong's role is going to continue to be very important, one of the bridges to the Mainland of China, to the huge economic hinterland. We have our uniqueness in Hong Kong, our uniqueness under 'One Country, Two Systems' and I think we will take full advantage of this to continue make Hong Kong a very, very important place. If a big economy, the United States, has New York, Chicago, Los Angeles etc etc, and you are from Texas so probably Houston I'll add in. But you know China will need many, many major cities as its economy moves forward. But Hong Kong will always be unique under 'One Country, Two Systems'. Hong Kong will always be there. And as a financial centre, as I said earlier on, China will be a very important financial centre for domestic financing etc, but Hong Kong will continue to be a very important international financial centre for the whole of China. And we are very clear in the way we go forward, as I tried to explain earlier on to you. And we are confident that our role will be differentiated. And similarly, as George was saying earlier on that Singapore's role in the future, Hong Kong's role in the future we compete sometimes. You know, Prime Minister Goh Chok Tong has been a lifelong friend of mine and we always talk about our competition. We always talk about how we can co-operate with each other to create more win-win situations, and I know we are doing this with Singapore and we will do it with other cities in China. We compete sometimes but we work even more closely than before because through co-operation we all get our maximum advantages.

Q: I'm chair of the Asian Corporate Governance Association and a former US Executive director of Asian Development Bank. I consider myself a friend of Hong Kong, a friend because my family lives in Hong Kong and of course the Asian Corporate Governance Association has an office in Hong Kong. I also consider myself a friend of Singapore because my daughter-in-law is a Singaporean. My son has to relocate and live in Singapore. I am very delighted that Chief Executive Tung that you mentioned about increasing investment in education because any world-class centre not only requires labour and capital but very importantly, brainpower, intellectual capital. And I would like to ask a question of both of you as to what kind of leadership the government may be doing to enrich and to allow the local talent to flourish in building up intellectual capital as well as to attract foreign intellectual capital. And, also in you assessment, what the leadership in a business community is doing to make Hong Kong and Singapore a truly leading centre of intellectual capital in Southeast Asia.

Mr Tung: Without education, without excellence in education, no community will succeed today. When I became the Chief Executive of Hong Kong, the first country I visited, amongst the first I visited, was in fact Singapore. One of the things I did was to talk to the Prime Minister about the Singaporean education system to understand what they do and how they do things. Over the last five years we have, in Hong Kong, increased our budget on education by 50%. It is an enormous amount of investment into our future. In four areas we are really working very hard. One is to improve the quality of education in primary and secondary schools. Second is to improve the quality of our universities, and in Hong Kong we have been trying to attract all the best professors and lecturers from all around the world to come and teach in Hong Kong. And we will continue this policy because only in such a way can you attain excellence. Thirdly, of course, as Hong Kong's economy is changing so rapidly, we are now relooking at vocational training to make sure the vocational training we are providing really fits into the needs of our future. And finally, very much like Singapore, our emphasis is that everyone of us should excel both in English and Chinese, and speaking Mandarin, Cantonese and English. So these are some of the major thrusts and initiatives as we move forward.

We will further liberalise our policies to attract the best talents from all around the world to come. There are already many, many. In Hong Kong, truly an international city, about 50,000 Americans live in Hong Kong; maybe 25,000 Japanese; maybe 35,000 British; Canadians, Australians, people from all over the world living in Hong Kong, making Hong Kong really an international city of business and culture. So it is very important for Hong Kong's success that we keep moving in this direction, and this is our aim to continue to move in this direction.

And finally, you cannot attract the best of talents to come and work and live with you because we all recognise today the best brain can demand to live anywhere in the world and probably command any price. The important thing is the quality of the living environment, not just about clean air and water and everything else which we need to do, but also the fulfillment from a cultural aspect, and so on and so forth, to make Hong Kong a truly international city where East meets West. So these are some of the efforts that we are driving very, very hard. Thank you.

Ends/Saturday, October 26, 2002

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