Mr Ma, distinguished guests, Ladies and Gentlemen

1. I am most grateful for your kind invitation to be with you this evening.

2. To some it may seem odd at a ball, an occasion designed above all else for enjoyment and relaxation, to wheel out the Financial Secretary as part of the entertainment : a sign, some might say, of Hong Kong's pre-occupation with money. Well, I can't offer to entertain with magic tricks : I can't reach into a top hat and produce a sudden solution to the recent pain we have endured on the markets. I wouldn't dream of trying to teach you the shimmy or the tango.

3. But, like you, I know that while the business of Hong Kong is making money, the people of Hong Kong are not preoccupied with business. Everyone is happy to take time out to enjoy themselves, as we are all doing this evening. Friendship and fun help to put things in perspective. And that's what I can do tonight, help to put into perspective what has happened on our financial and stock markets in recent weeks, and where they leave you, the magnificent retailers of Hong Kong.

4. Two things have happened since mid-October, a powerful speculative attack on the Hong Kong dollar and a major correction on the stock market. While the two are related - sentiment about the one has fed into the other - it helps to keep things clear if we look at them separately.

5. The attacks on the dollar have come because people have been lured by their gains against the Baht, the Ringgit, the Rupiah and the Singapore and New Taiwan dollars into forgetting the basis and the reason for the Hong Kong dollar link to the US dollar. Many have imagined that they could play the market in such a way as to topple a currency board that automatically adjusts to market pressures, and a currency that is backed 700% by foreign currency holdings. They have made a mistake.

6. Let me just remind you how the dollar link works. Under the currency board, every Hong Kong dollar issued, and every Hong Kong dollar balance held by the banking system must be backed with at least the equivalent in US dollars. Coupled to that, whenever people sell Hong Kong dollars, the transactions have to be cleared through the banks, and consequently the Monetary Authority debits the clearing accounts of the banks for Hong Kong dollars in exchange for US dollars. So, the more Hong Kong dollars are sold, the more the overall clearing balance of the banking system is reduced, and the higher the banks have to bid up the interest rate to secure the dollars they need. If banks or speculators take short positions on the HK dollar, then, as interest rates go up, sooner rather than later they have to buy back Hong Kong dollars to cover their positions. Which is what happened again in the week before last. It was not the Government or the HKMA that pushed overnight interest rates up to 300% on 23 October, but the banks competing for the dollars they needed.

7. The currency board is not an artificial system, chosen for political reasons or held in place by political will, but a natural market mechanism that operates in response to market pressures.

8. Many of us should still remember vividly the trauma and panic Hong Kong had gone through until we abandoned a free floating currency and adopted the linked exchange rate with the US dollar in 1983. I do not suppose to rehearse those horrid scenes today, but let me remind you why the linked exchange rate regime will continue to serve our best interests.

9. Certainly, at the time, a political value was seen in providing stability for the currency in a time of uncertainty. But, as the markets have shown vigorously in recent months in South East Asia, political values cannot sustain currencies if they are not matched with sound economics and financial management.

10. Hong Kong has had extremely good financial management. We run surpluses, not deficits. I follow that wholesome tradition. We have a soundly based economy, because it is a market driven economy. We don't have huge stocks of under-used buildings, or industries propped up with Government subsidies or market distortions. Most important for the question of our currency, we are externally oriented. External trade accounts for 285% of our GDP. Compare that with Japan, a great trading nation, where external trade accounts for less than 20% of GDP. Given our exposure to external costs, a volatile exchange rate would impose huge uncertainties on our community, not just on our banks and traders, but on almost every company, every retailer, every service provider, even on everyone planning overseas holidays. A stable currency allows everyone to plan sensibly and long term, which helps to build up our fundamental competitiveness.

11. For those who say that our regional competitors have strengthened their positions by the devaluation of their currencies, I need say only this : their stock markets have plummeted sharply and just wait until you see the effect of inflation as they have to pay for the imports they need with devalued currencies.

12. Here in Hong Kong, higher interest rates may carry pain for some, but by increasing incentives to save, they will help bring down inflation, contributing to an increase in competitiveness. To the extent that they help to moderate flat prices, they also serve to make the prospect of owning a home more attainable for our citizens and help to bring down costs of doing business here for international firms.

13. Of course, worries about property values declining because of interest rates rising on account of selling pressures on the currency have fed across to the stock market. We all know how large a part of the market is made up by property companies and banks that lend heavily on property. Yes, we do know that, but we should also remember that our banks have much higher capital adequacy ratios than elsewhere, and overall, debt stands at only about 30% of equity, that is a tenth of the level in South Korea. The financial system is strong. It takes good account of risks, and is well able to bear the current pressures.

14. What the stock market has told us over the last couple of weeks is two things that no investor should forget. First, Hong Kong was becoming uncompetitive because of its costs, costs driven in large measure by property inflation. The market would not sustain that. Second, the true measure of the value of a business is the strength of its business, not hope and imagination. When expectation gets ahead of performance, disappointment is guaranteed.

15. I trust that the experience of these last few weeks will be good for all of us, helping to refocus attention on the qualities that create the real strength of our economy - good management and good ideas - the qualities that your association has done so much to promote.

16. Hong Kong isn't a great economy just because we have a good harbour or big financial reserves, but because you and your fellow citizens have worked hard, and with imagination, to make the most of your opportunities. Hong Kong hasn't been a great tourist centre just because it is picturesque, but because our citizens have made it an exciting place to be. Hong Kong hasn't been a shopper's paradise just because there is lots to buy, but because retailers have used their initiative and skills to provide diversity of goods and outlets, creative advertising and packaging, responsive services.

17. It is that creative power of talented people, competing within a free market, that gives real strength to our economy, gives us the flexibility to cope with knocks like those we have just had, and to treat the new situation as an opportunity. That power can be enhanced enormously through training, and I want to pay tribute to the work that your Association has done over the last 14 years to upgrade the service quality and professionalism of retailers through your training programmes.

18. Hong Kong has the second highest per capita expenditure on retail sales in Asia, at US$4,254 per head of population. In many ways you have it easy, since Hong Kong people love to shop. But you cannot take your market for granted, any more than Hong Kong as a whole can take it for granted that we will always be prosperous. In a competitive environment, constant attention to quality, to efficiency in management, to control of costs, and to sound business decisions, is crucial to safeguard our position.

19. Your Government will do all it can to help, by maintaining sound laws and even handed regulation; by cutting the costs we impose and improving the efficiency of our services; by improving education and training. Above all, we will help by maintaining a sound currency and open markets, giving you the basis to plan and do business in a rational, market focused manner. That has been the basis on which Hong Kong has prospered mightily in the past. That is the basis on which you, and with you, Hong Kong, will continue to flourish mightily in future.