Following is the transcript of a question-and-answer session by the Chief Executive, Mr Tung Chee Hwa, today (Thursday) at the Hong Kong Exporters' Association Christmas Luncheon 97:

Mr Tung: Jeffrey, you didn't make it quite clear; it was my daughter who gave birth. I am a very proud grandfather of three new arrivals since yesterday, one healthy grand-daughter and two healthy grandsons, so wonderful Christmas present. I was discussing with Jeffrey about the lunch time speech and I thought because I gave so many speeches every week and many of you hear me so often, the risk is that I will be on a subject which you heard a number of times already. So I thought the best thing to do, instead of making a speech again, is really to answer any questions you might have. I will be open to any questions if you would like to ask me, and through that probably some of the issues can be discussed and highlighted. Who would like to go ahead?

Question : Mr Tung, I believe the government has approved the importation of labour for the construction industry. Would the government be considering importation of labour for other areas such as office staff?

Mr Tung: This is a very important subject for Hong Kong, the subject of importation of labour, and coming especially at this time when the economy is slowing down, when unemployment rate is steadily but slowly going up. Let me first say that we are obviously very sensitive to those people who are jobless. We are sensitive about this and the question was raised that is it the right time to talk about the importation of labour. Why talk about it now ? Wait for better times to introduce these measures. I think first of all let us ask ourselves: do we have confidence in our future economic development? Many have given forecast that the next year's economy will be growing at about 4%. I share that particular view. I also believe that when Asian countries rebound, this community, Hong Kong, will rebound faster than anywhere else. And that by 1999, there is a great hope that we will be well on our way back again to a more normal growth. So 1998 is a period of adjustment, (a) as a result of the financial turmoil that is in this area which has resulted in pushing up interest rate and the other is really a period of adjustment. Our fundamentals are good with good financial resources and that economy on the mainland continues to expand in a very orderly manner. So certainly I feel that after the adjustment next year, economy will start to grow well. And secondly, the demand for housing is very solid. Our population is increasing fast: in 1997, population increasing at about the rate of 3% which has been higher than most recently years. So the need for housing is there and the need to build railways, roads to improve our competitiveness, to create more land available. They are all the things we need to do. So if we do have confidence in our future which I do and which I hope you will share, then we must move ahead with what needs to be done, including such things as importation of labour, because we are not just talking about tomorrow, we are not talking about January or February. We are talking about five years, all the way through five years down the road where we are going to be. And it is better to start preparing for these things, getting them ready, so when the need arises, we can push ahead right away. Let me also emphasis the purpose is not to -- and I must repeat this -- is not to deprive of Hong Kong people the right to work, and they will always be given the priority and we will strengthen retraining and training for the construction workers to make sure that they are not deprived. They would be given the first priority. But we do forecast a need for importation of labour, we do forecast there is a shortage. With regard to the importation of professionals and more senior people, these are also things we need to be looking at very seriously and the important thing is to make sure that in all these arrangements, the important thing is to make sure that Hong Kong can continue to sustain on long term basis steady economic growth and that we would not be stifled either by the lack of supply of land or lack of adequate labour force. Thank you.

Question: Mr Tung, as you know we are all exporters here and as such as you also may know exports are very sensitive to exchange rates. Could you please perhaps talk again about the peg and Hong Kong's competitiveness in that respect?

Mr Tung: William, thank you very much for your question. For those who really want to know should read his brother's paper. Victor sent me a paper recently expounding how confident he is that Hong Kong will continue to remain competitive and that the peg must stay. I would say this that the peg will stay, the linked exchange rate will stay. It is absolutely vital for Hong Kong. It is in Hong Kong's interest this linked exchange rate stays. The alternatives you don't even want to think about. What's happening in Indonesia, Thailand and Korea. These are some of the alternatives where when people start losing confidence in your own currency, then the issue is a lot more serious than the debate on whether to link or delink. In any case, our fundamentals are very strong. We have huge fiscal reserve, very strong financial reserve. We are a service-centre; 84 per cent of our GDP is coming from our service sector. So we are very strong and we should be all right. This is not to say we are insensitive about our cost. This is why the importance of creating more housing to bring down the property prices to a reasonable level and because of the high interest rate, this adjustment is now already taking place. And the other is of course the availability of labour also. These are the areas where as a government we must do to maintain our competitiveness. I feel comfortable this is the good way to go ahead. Jeffrey gave me the other Christmas present today when he told me that he felt that the toy industries activities in China on the mainland will not become less competitive because of the devaluation of other currencies: a) the labour force is more disciplined; b) the labour force cost is in any case rather low already. And thirdly that labour content is only about 20 per cent of the total cost. There was a good Christmas present for me because I know that at least one sector, very important sector, the toy sector, will be all right. This is not to say that there will not be more competition. Obviously there will be, there will be squeeze on the margin all over the place. But William, I think yes, we need to work harder. We need to squeeze our margin more. But I think we are on the right track. We are doing the right thing. And it is the way forward.

Question: English proficiency is something that is very important for us in the trading and import/export industry. Needless to say that these decisions on schooling worry us a little bit. So maybe you could expand on this for us. Thank you.

Mr Tung: I think what we as parents, or as members of our community, or as government, have been very concerned. It is the deteriorating standard of both our Chinese and English over the last tens of years. And the question one asks is why has this happened. Why is our English and Chinese continue to deteriorate? The educators I talked to and most of my colleagues talked to came to the conclusion that the best way to move forward to improve both our English and Chinese is go through mother-tongue teaching. This has been a subject which has been debated for a long, long time and it was in fact before July 1 that decision was made to go to mother-tongue teaching. But the objective of mother-tongue teaching is to improve both our English and Chinese. We call it in Chinese "leung man sam yu" (Cantonese phonetic spelling). You've got to be good in both English and Chinese. "Sam yu" means Cantonese, Putonghua as well as English. The objective is to do this and the means is to go through mother-tongue teaching. Also the other thing is that we have to understand that our primary school teaching is basically mother-tongue teaching already. We are talking really about the high school sector. This is where the debate has been: to what extent mother-tongue teaching and so on and so forth. But I think the government is pursuing the right policy; that mother-tongue teaching will be implemented and that there will be a three-year period in which for the schools and for the parents to adjust. And as I emphasise again we are an international community. The important thing though, is for both English and Chinese to be good and that is the objective. And I hope through this mother-tongue teaching we will be able to achieve the objective.

Question: Mr Tung, I am a toy manufacturer. As you said toy is a rapid industry of Hong Kong. We use all different carriers to ship to Europe, to US including OOCL. However, before we put our merchandise on the vessels, do you know that we are so miserable to pay ......, trucking fees which is more than half of the ocean fee. But today if we go to Shenzhen, which is only half of Hong Kong's expenses and you are telling me our future is good. Can you tell me where is the future? I feel one day we are all going to Shenzhen or Shanghai and we are going to listen to the speech from the mayor of Shenzhen or Shanghai. Would you please tell us how to resolve this problem. Thank you.

Mr Tung: As the chairman of a shipping company, I share with you many of your frustrations and concerns. It is a big challenge for Hong Kong. But it is really a supply and demand issue. Hong Kong has been very successful. The demand has been very strong to use Hong Kong's facilities. Therefore you are able to charge a lot more than people would like to pay. But I think now all the neighbouring markets are opened up. Both Yantian and Shekou is increasing in volume. Xiamen is going directly to Kaohsiung. There are lot of direct trade now going to start between mainland China to Taiwan. I would imagine that the market forces will adjust itself. Hong Kong is very good at it. The success or the profitability or the high cost you referred to was as a result of tremendous demand and not sufficient supply. And I imagine that over the next few years, this will be adjusted because there will be a lot of supply coming on stream, either through the ports nearby Hong Kong or through more direct trade between mainland China to America, to Europe, to Japan, all over the place. I would think, I am a great believer in market forces. I think this will do the trick. I am sorry I cannot give you any immediate relief.