Following is the transcript of Q & A by the Chief Executive, Mr Tung Chee Hwa, after speaking at the Royal Institute of International Affairs in London on Wednesday, October 22, 1997 (London time).

Sir Timothy Garden (Chairman): Mr Tung, thank you very much indeed. You kept to your promise to leave plenty of time for questions. I would ask the audience to keep to a similar discipline.

Question: Mr Tung, you mentioned a growth forecast of 5.4 per cent. Do you not feel the need to revise that downwards in the light of the interest rates required to defend the Hong Kong dollar in the currency turmoil that you also mentioned?

Mr Tung: May I first answer the question of the currency turmoil. We have been doing very well in the last four months, but currency turmoil was not something we anticipated. It has come. In fact we are experiencing the second wave this week. It is a tremendous challenge for us, but let me emphasise that the currency link has served us very well in the last 14 years. We have absolutely no intention of any kind to change the currency link.

The financial fundamentals in Hong Kong are very good. We have a huge fiscal reserve, a huge foreign exchange reserve. Nine out of the past ten years we ran budget surpluses, tremendously conservative management of our finance, and that will continue in the future.

We believe in small government. Total expenditure as a percentage of GDP of only 18 per cent is something we treasure and value very much and we will maintain that. We believe we have the fundamentals and there is no reason for our currency to devalue.

The other point I would like to make is that other countries have chosen to devalue - some had to devalue because of their own basic financial problems, others have chosen to devalue somewhat to remain competitive. We are not going to go down the path of trying to become competitive through devaluation. Eighty-three per cent of our economy is in the service sector; nine per cent of our economy is in the manufacturing sector, and we have no reason to be competitive through devaluation.

We are conscious that the cost of doing business in Hong Kong is high, and we are approaching it differently. We identified the source of our problem which is in the supply of housing, and we are making more and more land available to make sure that that side of the costs will reasonably contained.

In the process of having to defend the dollar, interest rates may have to go [sic]. We recognise this, but we believe that we have had a very good first half of the year and we believe that we will be able to maintain the GDP growth rate forecast of around 5.5 per cent. It could be slightly less, it could be slightly more, but we are quite confident on that.

Question: Regarding the legislature, I know there was a problem between Beijing and Great Britain concerning the expansion of the franchise, but purely from a perspective of Hong Kong people, what were the problems within Hong Kong as you saw them between 1995 and 1997 as a result of the expansion of the franchise at the beginning of the respective functional constituencies, and did the primary impetus for the substantial restriction of the functional constituencies, this time in May, come from Beijing or from the broader spectrum of Hong Kong people?

Mr Tung: I would say this. The broadening of the functional constituencies during the 1995 electoral arrangements is quite an issue of contention within Hong Kong. The point I made earlier is that the functional constituency was never intended to be a structure for universal suffrage elections. It was intended to give those functional constituencies or constituencies who have made major contributions to Hong Kong, who were important to Hong Kong, a greater voice. This is what we have always done. It was changed in 1995. What we have done is to change it back, more or less, in the elections for 1998.

We are moving forward in so far as the direct elections are concerned. Twenty will be directly elected through universal suffrage, and then it will go to 24, and 30 by 2004. That side is moving forward anyway. What we have done is to restore what was originally intended for the functional constituencies. It was an issue which was greatly debated in Hong Kong in those days.

Question: Under the Basic Law, the International Covenant for Civil and Political Rights will continue to apply in Hong Kong. That covenant puts an obligation for reports to be submitted to the Human Rights Committee. There is a problem at the moment, as I understand it, that the Chinese Government does not accept that it has to submit these reports itself, nor has it so far authorised your own administration to do so. What progress, if any, has been made to solve that problem and make it possible to submit reports?

Mr Tung: You quite correctly pointed out the problems. The important thing at this moment is to look at whether human rights are being protected in Hong Kong. The important thing is to look at that, and I think you will agree with me when I tell you that human rights is very much being protected in Hong Kong. It is alive and well, and that is the most important part.

In so far as reporting is concerned, we still have to sort it out. The more important thing is to make sure that what is promised in the Basic Law is being totally and completely observed, and that is what is happening in Hong Kong.

Question: Reports are reaching this country of a serious slump in Hong Kong's tourism, giving rise the perception, rightly or wrongly, that despite your assurances of business as usual, in the words of Lionel Bart, 'things ain't what they used to be'.

Although you dismiss the idea of self-censorship, there is an impression in some quarters that some of the press in Hong Kong are unwilling to criticise ministers in Beijing the way the press here is ready to criticise the British Foreign Secretary for his diplomacy (or lack of it).

I wonder how you intend to go about eradicating this perception which exists here.

Mr Tung: First of all, I do not want to get into the row about what Mr Cook did in India. The downturn in the tourist industry is a serious concern to us in Hong Kong. There are many reasons for it. Have our costs gone too high? There is still some perception out there that somehow Hong Kong is different. This is why I am here, to assure people that Hong Kong is not different.

Also, in terms of what else we can offer in Hong Kong, the tourist attractions also need to be looked at very carefully. Tourism is a very important part of our activities. It needs the utmost attention of our administration. I am confident that in time we will get it right.

In so far as your other point is concerned, I do not know whether you read all the newspapers in Hong Kong or not. I was recently asked by the press whether I thought there was self-censorship by the press. I said, 'two people can answer that. One is as a reader of the newspaper, and the other is yourself. I don't see any self-censorship, what about you? What do you think?' They just laughed. The good thing is that the Journalists' Association Chairman said that there was no evidence of self-censorship.

I hope you subscribe to all the Hong Kong newspapers here and find out what they are saying about us.

Sir Timothy Garden: I have to say that having taken a long weekend break in August in Hong Kong, you can negotiate some very good deals with the hotels there.

Question: The smoothness of the transition to SAR has been extremely impressive. Can you say a little more about the positive role that Hong Kong is playing in modernising China? Also, do you see this in any way in historical terms akin to the kind of prosperity that was generated in the days of the old Silk Route?

Mr Tung: As China moves forward in its modernisation, there is a need for capital, there is a need for more contact with the outside world, and a need for expertise. Hong Kong is, of course, uniquely positioned to do all these things.

The 15th Party Congress, recently concluded, made some really epic decisions: the reform of the state enterprises of which there are about 350,000, and the corporatisation of these state enterprises is a major undertaking for the country.

Given Hong Kong's culture, given the knowledge we have about mainland China, and given our access to capital markets and our expertise, we can play a very important manufacturing role, and in this respect, I welcome British entrepreneurs and British companies to work together with us in Hong Kong because there are real opportunities.

Of course, you can chose to go in directly, but you might find it much better working with us in Hong Kong.

Question: Mr Tung, you mentioned that the successful implementation of the 'one country, two systems' concept was very important for China and Hong Kong. It is also understood that you are aware of and have a knowledge of the thinking of Confucius. I would like to ask you a question about the compatibility of a capitalist system with an authoritarian Communist system, albeit with Chinese characteristics, and its long term prospects. To what extent, referring to the concept of rectification, will China rectify towards Hong Kong and its system of democratic values with the goal of universal suffrage, or, to what extent will Hong Kong with rectified towards China which has a quite different system.

Sir Timothy Garden: We would like an explanation of 'rectify' in this sense.

Question: The Confucian system of rectification - I assume you are familiar with it, Mr Tung?

Mr Tung: Let me try to understand it first. China is moving forward on its own. As I said earlier on, 1.2 billion people is a tremendous undertaking in reform. There is a need for social stability. The priority therefore is very different from those, for example, in the United Kingdom and Hong Kong. In Hong Kong, our community is pluralistic, we have a very mature economy, and our needs are different.We will go forward in Hong Kong on our own under two systems, and China will develop on its own. As she moves forward, she will change and move forward on her own. China's needs are very different from those of Hong Kong from that point of view.

The one point I want to emphasise to all my friends in the west and when I was in America a month ago, I kept on emphasising this point that many people in the west, out of the goodness of your hearts, want others to have the same system and way of life as yours. The point is that each country is at a different stage of economic development; the national priorities are very different; the level of education is very different; the culture is very different. I do not believe it is right to expect other people to do the same as you do.We must all search for our own way forward, and find what is best for each of our own communities.

Question: Taking up that point, you spoke very briefly about the human rights question for China. I can understand why that was. What would your advice be for somebody who has moved in both traditions, with long experience in Britain and the west, but also with the Chinese? What would your advice be to people in the west in their attitude and their publicly expressed positions about human rights policy in China which are quite profound and highly publicised. Should governments remain silent or should they in fact make their opinions known, knowing that they will be criticised by some people because they do not understand the different problems.

Mr Tung: I would say this. As I said, the culture is different, we are all at different stages of development. It is all right to speak out on these issues. The thing to remember is that human rights is not a monopoly of the west. Everybody cares about human rights. Let me give you an example.

How many nations in Asia 50 years ago were not colonies? If you think about it, India, Pakistan, Malaysia, Singapore, Indonesia - the list goes on and on. China was mostly under foreign domination on the coastal areas for much of the century. The point is that many of these nations today have achieved a standard of living, prosperity and human dignity they never dreamed of a generation ago. Many of them are very proud of what they have achieved.

All right. It is different from the way it is in the UK. All I am saying is that we have to be sensitive about the other side of the world, where they come from, and if we are sensitive to each other's feelings, to each other's history, the world would be a better place. This is something which, having lived in America, having lived in the UK, and having spent most of my life in Hong Kong, I begin to appreciate a great deal.

Question: You have given us a very impressive overview of your confidence in Hong Kong's future. You also referred to some of the concerns which other people elsewhere have about that future, but nevertheless, as someone in your position of responsibility, you yourself must have your own worries and concerns when thinking about Hong Kong's future. I would like to ask you of that long list which you undoubtedly must have, what are the issues at the top of that list which keep you awake at night?

Mr Tung: You are absolutely right. We have had a good beginning, but the challenges are ahead. We have had a good beginning and a good foundation on which to build our future.

The challenges are many, and I highlighted some in my speech. But one of the things, for instance, which was totally unexpected is the currency turmoil in south east Asia at present. I do not actually wake up at night, but it is something we are very concerned about and something I stay in touch very closely with.

The thing I have learned in my short time in politics, is that you may have your own list, but it is what comes unexpectedly which hits you suddenly somewhere entirely different! This is what I learn every day.

Question: Two weeks ago, a minister told us that English was now the world language, but you describe the efforts the Chinese Government is making to discredit teaching it in Chinese schools. In recent weeks, we have been reading reports about the downgrading the teaching of English in Hong Kong schools. It is likely to be language that all Chinese can communicate with. I wonder if you you tell us what the policy of the SAR is?

Mr Tung: I am glad you asked this question because it needs clarification. Like many issues on Hong Kong, there is a great deal of misunderstanding.

What happened is this. There is a recognition within the entire community of Hong Kong that our language skill, both in Chinese and English, has been declining, and that we really need to get it right. The Education Condition Report No. 6 which was issued last year, before the 1 July SAR Government, recommended - and in my view rightly so - to go to mother-tongue teaching. It was felt that with mother-tongue teaching, a child's English and Chinese would both improve, and that all the other subjects that he or she would be studying would also be easier. In many of the subjects, we have a text book in English and the students are being taught in Cantonese in the classes. It was a recommendation at that time, and the recommendation was accepted before 1 July, and we are continuing with that recommendation.

The objective is to make sure that our English and Chinese will become better, not worse.

I would also like to tell you that in order to highlight the importance of this issue, the SAR Government is planning to invite 700 native English-speaking teachers to come to Hong Kong to teach English. As you can imagine, if the quality of the teachers is not good enough, you will not get good students anyway.

We are very determined to ensure that our English will be a lot better ten years from now than it is today.

Question: What type of measures are being taken by the Government of Hong Kong in order to try to alleviate the housing problem and the widening gap between the very rich of Hong Kong and the very poor which I have seen myself, particularly in the Kowloon area which is supposed to be the richest. There were some scenes of very bad poverty there.

Mr Tung: In so far as housing is concerned, we are very determined to provide more land to build units of housing. As I announced in the policy speech and before that, the Government's aim is to produce 85,000 units of apartments every year. Given the fact that there is a lead time needed for this to be achieved, in 1998, we will achieve 70,000, and from 1999 onwards, we will be able to achieve 85,000.

This is important because we are trying to manage the prices through a supply side effort to provide more and more housing of different types in order to stabilise the pricing of houses, to create a soft landing. This is important to Hong Kong, not only from a social stability point of view, but also from a competitiveness point of view. It is a top priority for us in Hong Kong.

There has been some scepticism whether we can actually make it. I want to tell you that there is every determination and every confidence in the Government that we will make it. What we have done is to announce a detailed programme for land supply over the next five years. Detailing where the plot is, what the size of the plot is, has been identified and published. Our plan is that every year that goes by, we will roll this forward by five years. The consumers, the people who want to buy the apartment units and those who are investing in this business can then understand where the supply side is coming from. It is a mechanism of free market, but at the same time, we are trying to make more and more units available.

The poverty situation in Hong Kong is obviously a concern for the Government. The situation is exasperated because of the legal immigrants coming from China and also, the very rapid move of our industry base up north to the Pearl River Delta basically.

What we are trying to do in the longer term is to improve our levels of education so that people in the future as we pursue higher value-added will have a better opportunity to participate in the society because of the quality of the education they receive.

I believe that in the long term this is the best way to give people the opportunity to participate in the prosperity. In the short term, there is a problem there, and we are trying to work through training and re-training and trying to ensure that all the people who have lost their jobs go through re-training programmes and we try to find new jobs for them to help them to get out of the poverty situation.

There is no easy answer to this, but we are trying very hard.

Question: Do you see Shanghai as an unwelcome competitor?

Mr Tung: I was in Shanghai two Sundays ago and had breakfast with the mayor. I have to say that Shanghai is moving forward with a great deal of vision, determination and undoubtedly in the years ahead, Shanghai will be very successful. The economy in Asia is a very big economy, the Chinese economy will be a very big economy. Certainly there is room for Shanghai, Hong Kong, Singapore, etc. Hong Kong thrives on competition. We do not mind that at all.

Very specifically, given our advantage in Hong Kong, given our access to the foreign capital markets, given the transparency of our regulatory authorities and given the Rule of Law that we have, in terms of raising foreign capital, Hong Kong will have the edge for a long time to come. Shanghai will be a very formidable competitor; it will be a financial centre for China, but there is room for both of us.

Question: I worked as a lawyer in Hong Kong for four years, and I am delighted to hear you say that good lawyers are defending the common law. Many of the streets in Hong Kong are named after former governors. Are there any plans to change this?

Mr Tung: The answer is no!

Question: There is a saying amongst British lawyers that when they negotiate an agreement with someone in China, the British lawyers will sit around for several hours, at great expense to their client, suggesting minor changes to the English text of a contract. Having made those changes, they will then pass the text over to the Chinese side who will look at it and say, 'no need to change the Chinese text'!

You have mentioned common law which is marvellous and the English language is known for its ability to be precise. That has all now been translated into Chinese. Does that not mean that there is a danger that the Chinese version can be ambiguously interpreted, especially perhaps at middle level bureaucracy?

Mr Tung: The common law is very important to Hong Kong. On the other hand, we would very much like our courts to be bilingual so that those Chinese people who do not understand English can express themselves and read what is all about.

The way I understand the judiciary is moving - and I have no right to interfere in the situation - is that that they are moving towards bi-lingualism very slowly, very carefully. The important thing is to get it right. It is the right approach for precisely the type of problems you mentioned.

It needs to move slowly, deliberately slowly, to make sure that as much as possible, this will not happen.

Sir Timothy Garden: I am afraid we have run out of time. Mr Tung has to be with the Foreign Secretary, where he may or may not discuss India!

Mr Tung, thank you so much for sparing us an hour in your incredibly busy schedule. Most of all, thank you for leaving us so much time to ask questions and for answering them so frankly and with such good humour.

We at Chatham House watch what goes on in Hong Kong with great interest. We have great affection for it. We wish the people there every success for the future, and we are glad it has made such a good start.

Thank you very much indeed.