Honoured guests, Ladies and Gentlemen,

Thank you very much for giving me this opportunity to speak at this summit. Today's theme, "Hong Kong : 156 Years and 156 Days", is a thought-provoking one and is capable of many different interpretations. Should we, for example, compare the differences between the 156 years of British administration which ended on June 30, 1997 on the one hand and the 156 days which started on July 1 on the other ? Should we attempt to review developments in Hong Kong for the past 156 years and five months as a continuous stretch? Or should we simply forget the past and look into the future? I think we need to do a bit of all three.

No one present here this morning, I hope, will disagree with me that the transition of Hong Kong has gone well - that was not the view held by many people six months ago.

The gloomy predictions about the "death of Hong Kong" have not come true. The facts are that the key ingredients of our success story remains firmly rooted in Hong Kong. The rule of law continues to prevail. We have an independent judiciary and our own Court of Final Appeal. Hong Kong people's way of life is largely unchanged and we continue to enjoy the freedoms and rights guaranteed by the Joint Declaration and the Basic Law. Hong Kong will submit reports, through China's Permanent Representative in the United Nations, to the relevant treaty monitoring bodies on the implementation of the International Covenant on Civil and Political Rights and the International Covenant on Economic, Social and Cultural Rights. Political debates remain lively and people have no hesitation in expressing their views through demonstrations, petitions and protests. The media is as critical as ever, particularly of the Government.

The Civil Service remains apolitical, clean, and efficient. The Hong Kong Special Administrative Region Government runs its own affairs, and maintains a level playing field for businesses to compete without any interference from Beijing. Our cooperation with other global and regional partners continues to develop and strengthen, as can be seen by our active participation in the World Trade Organisation, in our contribution to the rescue package for the baht, in the APEC Economic Leaders Meeting in Vancouver, and in this week's Finance Ministers Meeting in Kuala Lumpur.

Just three days ago, the HKSAR received an impressive report card from an influential third party. The 1998 Heritage Foundation Index of Economic Freedom has found Hong Kong, for the fourth consecutive year, to be the freest economy in the world, getting top scores in all 10 key areas under assessment, including trade policy, tax policy, government intervention, monetary policy, foreign investment, banking, wages and price controls, property rights, regulation, and the size of the black market. The study found "little evidence that becoming part of China will alter Hong Kong's economic structure significantly. There continues to be little government interference in the market place; taxes remain low and predictable; increases in government spending are linked closely with economic growth; foreign trade still is free; and regulations, in addition to being transparent, continue to be applied both uniformly and consistently."

Over the past few months, we have experienced turmoil in the regional financial markets. There has also been a wave of speculative attacks on the Hong Kong dollar. In an era of ever-increasing integration of financial markets of the world, our economy cannot be immune from external shocks. The Hang Seng Index dropped from a peak of 16,673 points in August to the 10,000 level today. Interest rates rose and property prices fell. So will these events cast doubt on our economic forecasts? Are we now on a path of recession and decline? The short answer is "No".

Our optimism in Hong Kong's future is not based on blind faith, but on objective facts. Although our currency came under speculative attack, the fundamentals of our economy are exceptionally strong. We are confident of reaching an economic growth of 5.5 per cent for the current year, as forecast earlier. Our projection for the medium term remains at five per cent per annum. The Government's fiscal position is the strongest in years. The size of the Exchange Fund amounts to HK$569 billion and that of the Land Fund HK$199.5 billion. Our foreign exchange reserves reached US$91.8 billion at the end of October; giving us third largest foreign exchange reserves in the world.

Our banking sector is healthy and robust. The Heritage Foundation study confirmed that Hong Kong has "one of the world's most stable banking environments". Operating profits of the local banks grew by about 18 per cent in the first half of the year. Locally incorporated banks in Hong Kong have capital adequacy ratios in excess of 17 per cent, one of the highest in the world.

Of course, this is an unsettling period for us all. We've seen asset values depreciated. And for those who are doing business or have a mortgage to repay, they will have to bear higher interest costs. Consumption and the retail sector are sluggish. But I put it to you that these are inevitable consequences in the adjustment process of our economy. And if you look round elsewhere in the region, I think Hong Kong is in better shape than most.

Our free markets and open economy make it possible for us to adjust much faster than others. A high degree of economic freedom does not just allow us to get top marks in the Heritage Foundation scoreboard but it gives us a remarkable ability to survive in tough conditions. As Dr Kim Holmes, Vice President of the Heritage Foundation, put it during the launch of the 1998 Index of Economic Freedom, "Hong Kong is the model for all countries to watch and to follow. It proves that a free economy can withstand the crises better than those which are controlled by government or not free market oriented".

The Hong Kong/US dollar link ensures stability and we remain firmly wedded to the link. This is supported by the IMF and confirmed by the Heritage Foundation as another factor that is highly favourable to Hong Kong. The short-term pain caused by higher interest rates is we believe the lesser of the two evils. It is certainly preferable to uncertainty, volatility, fluctuations and loss of confidence, as was clearly demonstrated between 1974 and 1983 when the Hong Kong dollar floated. We need to put the interest rate increases in perspective. We have seen the effects of higher interest rates before. In the 1994/95 economic cycle, the Basic Lending Rate went up by 250 basis points. The increase this year in the BLR is 100 basis points. Higher interest rates will cool the overheated property market, make residential flats more affordable to home buyers, reduce the cost of doing business in Hong Kong, bring down inflation, and encourage savings. In the longer term, it will make Hong Kong more competitive.

So in a nutshell, we know where we are and what we would like to achieve. But whether we succeed depends on the readiness of the community, including the business sector, to support us all the way through. "Partnership" is the key word. And this is the message that I hope you will all log in your work programme. I will elaborate on this in a minute.

Looking back over our past history and records, let me try to assess the factors that have transformed Hong Kong from "a barren island with barely a house upon it" to an international service-based business centre. And in the process, to give some pointers to the way ahead. My assessment criteria fall into four broad categories :

First, economic fundamentals. Hong Kong fares well on this front on account of its low tax regime, minimal restrictions on banking, well regulated and highly accessible capital markets, minimal barriers to foreign investment, and an efficient legal system to protect private property rights. However, our rental and cost comparisons tend to be less attractive. We should also note that other economies in the Asia Pacific region are advancing very quickly, with Malaysia, for instance, jumping from a 23rd to a 17th ranking, and Japan from a 9th to 4th ranking in the Swiss-based International Institute of Management Development's (IMD for short) assessment of overall world competitiveness scoreboard for 1997. So Hong Kong must still work very hard if we wish to retain our status as a leading financial and business centre in the region and the world.

Secondly, our infrastructure. Most studies recognise the immense business potential offered by our mega-scale infrastructure programme, including the construction of the new airport, new container terminals and new rail systems. However, the IMD study shows that Hong Kong's investment in telecommunications as a percentage of GDP tends to be conspicuously behind Taiwan, Korea, India and the Philippines in the region. In terms of computers per capita, Hong Kong is slightly behind Singapore. Surveys also suggest that Singapore, Japan, and Taiwan are perceived to be outpacing Hong Kong in that they have more opportunities for technological co-operation between companies and, research co-operation between companies and universities. Financial resources are also perceived to be less of a constraint to technological development in these places. Energizing our industrial support programmes to align with the high technology based requirements for world business is therefore a priority for Hong Kong.

When it comes to soft infrastructure, our managers are second best in the world in terms of entrepreneurship according to the IMD study. Our economic literacy is fourth highest, and the educational achievement of our students fifth highest in the world. But international surveys suggest that the educational system in Hong Kong does not meet the needs of a competitive economy as much as those systems in Singapore, Malaysia, Taiwan and the Philippines in the region. In-company or on the job training is also perceived to be relatively inadequate. We need to catch up on these important aspects.

A third group of commonly-used assessment criteria on the economic freedom or competitiveness scoreboards relates to government involvement and trade policy. Most of the international studies give due credit to the very low level of government intervention in Hong Kong. Indeed, the Heritage Foundation quoted the absence of anti-trust and anti-dumping laws as a factor prompting more competition from both the domestic and foreign firms. Also relevant to this group of criteria are the Government's efficiency, transparency, credibility and efforts to uphold justice and maintain public order.

Research institutes also accord high ratings to our open trade policy characterized by a very low level of protectionism. To quote again from the 1998 Heritage Foundation report, "There are, in fact, very few barriers to imports to Hong Kong, which is one of the world's most accessible" and our government is "one of the most receptive to investment in the world".

An environment that offers a high degree of economic freedom tends to attract business, promote competitiveness and foster economic development. This brings me to the fourth group of the commonly-adopted criteria — economic performance. The IMD study gives us a number one world rating for our real growth in services, the absence of government debt, the high level of tax revenues as a percentage of GDP (11 per cent in 1995), the high degree of accessibility to local capital markets, the extent to which our stock markets provide adequate financing to companies, the speed with which new products can be launched in the market and, clearly a compliment to our hard working labour force, the longest average number of working hours per year (2500 hours).

However, our economic performance in some other areas is less impressive. These include cost of living comparisons, balance of trade, and export market diversification.

I mention all this not just to pay tribute to those who have contributed to our past achievement, much as such tribute is very well deserved. Rather, I would like to remind ourselves what our perceived strengths and weaknesses are. As the Chinese saying "知己知彼，百戰百勝" goes, we can only expect to fight and win a hundred battles if we know ourselves as well as we know our competitors.

So what is the role of the business sector in all this? I think it's a simple question which begs a simple answer. The Chief Executive has already outlined the Government's mission in enhancing the competitiveness of Hong Kong. And at the risk of preaching to the converted, let me share with you my thoughts.

First, I suggest that business should be alert to global business opportunities. As technology develops and trade is liberalized, the world gets smaller and business gets bigger. Companies that fail to look beyond the horizons of Hong Kong will soon find their competitiveness fast dwindling in the long run because of fierce competition. On the other hand, firms that keep their eye on the ball and are nimble on their feet stand a much greater chance of surviving and staying strong in the market. "Globalization" is not synonymous to "gobblelization" by investors across borders.

I must add that also with the Mainland serving as our hinterland, the business opportunities open to us are enormous. China's economy continues to grow strongly, at around nine per cent, while inflation has fallen to a very low level, at just over one per cent. The recently concluded 15th Party Congress points to further reforms and opening up, particularly for the state-owned enterprises and the regions further inland. Hong Kong's entrepreneurs and financiers are well placed to tap the opportunities that lie ahead. We possess distinct comparative advantage in our financial sector and service capability. Our contribution to economic growth in the Mainland will in turn benefit our own economy and those companies which can seize these opportunities.

Secondly, the private sector should gear up to the challenges of competition. As most of you are aware, the Government has recently responded to the Consumer Council's report on the overall competition environment in Hong Kong. We fully share the Consumer Council's objective of promoting competition. Competition is not an end in itself but a means to attain economic efficiency. We are already working on a policy statement to clarify our policy intentions and to provide pointers for policy bureaux and departments to follow. We would like our competition policy to be more comprehensive, more transparent and more consistently applied. We have also formed an advisory group to consider, inter alia, how best the Government can minimize anti-competitive practices within the bureaucracy. We would like to play an exemplary role as a clean and pro-competition authority.

But, we do not intend to go down the route of adopting a comprehensive competition law as the Consumer Council has proposed. The rationale behind and effects of business decisions cannot always be pre-judged; it would not be fair to rule out certain types of business behaviour indiscriminately. An all embracing law would also fail to address the special needs of different business sectors.

The alternative we have chosen is to focus on individual sectors, and to develop codes of conduct or administrative measures for them to promote competition or minimise restrictive practices. We have already requested the Consumer Council to continue playing its very successful watchdog role and to assist sectors to draw up pro-competition codes of practice. We hope that you all present today as well as the Hong Kong General Chamber of Commerce can give the Consumer Council the fullest possible support. Success achieved through fair play is more sustainable in the longer run than one achieved through restrictive or unfair practices.

The Government has no intention to discriminate against or to favour big businesses. Nor are we going to bend over backward to artificially breed new comers or competitors. Our key concern is to preserve the process of competition and this means preserving market accessibility and contestability. We would leave the free forces of the market to determine who is the fittest to survive.

In the face of the liberalisation and globalisation of world trade, exposure to the free forces of the market and the challenges of competition is the only route to long term survival. It is also the essential means to help sustain the longer term competitiveness of Hong Kong's economy. Accordingly, I would appeal to the private sector to critically review your existing practices and remove any tendency for restrictive practices such as collusive agreements or abuse of dominance position. Such practices breed inefficiency and hamper the viability of businesses in the long run.

Thirdly, companies should seek to invest in training and research and development. With our economic structure being increasingly service-oriented, our workforce must be highly versatile and able to keep pace with changes. On our part, the Chief Executive has, in his policy address, introduced a number of initiatives geared to providing quality education to our younger generations, to enhance language skills, to better equip our teachers, and to improve our training and retraining programmes. We also encourage the private sector to invest in human resources and to provide more innovative training opportunities for our workforce.

The Government also attaches great importance to the development of high value-added technologies. For instance, we stand ready to make an additional grant of $500 million to the Applied Research Fund, to support the commercialisation of research in high technology fields. We will also allocate an additional $50 million to the Services Support Fund to finance initiatives which help sustain and improve the competitiveness of the service sector. We will ensure the timely provision of new industrial and technological infrastructure and consider allocating $500 million to set up a pilot Credit Guarantee Scheme to facilitate small and medium enterprises to obtain from authorized lending institutions the necessary financing for their pre-export expenses.

Whilst we can play a catalyst and facilitating role in developing our physical and human infrastructure, our efforts must be complemented with contribution and support from the business sector. So I would urge distinguished guests not just to support our schemes but to come forth anytime with ideas on how better to shape the future of Hong Kong's economy. The Business and Services Promotion Unit under the Financial Secretary's Office is charged with helping the business sector to further their opportunities in Hong Kong. The Government as a whole will be pleased to consider initiatives and suggestions for improvements and for making our economy more competitive.

So to conclude, it has been suggested to us by many people that with several countries in South East Asia devaluating their currencies, Hong Kong's competitiveness will be adversely affected and we should follow suit or seriously consider delinking the HK-US dollar peg. I wish to make it very very clear that we do not agree with this view. Delinking is simply not an option for us. As our economic fundamentals remain strong and the services sector accounts for over 80 per cent of Hong Kong's GDP, we do not believe that devaluation will give us any significant advantage. Delinking will bring great uncertainty and instability to our economy. Confidence will suffer and everyone will feel the pinch, as can be seen during the currency crisis in 1983. We will not allow that to happen again.

I have said a great deal about what the private sector can do to maintain the long term competitiveness of Hong Kong. It takes decades to build up a good reputation for Hong Kong; but as we all know it takes no time to undo this. We have sailed through and survived many stormy waters in the past 156 years and 156 days, and have emerged stronger each and every time. I believe that with greater partnership between the Government and the business sector, we will and can further enhance our competitiveness in the global market.

For those future generations who will be around 156 years from today, I hope that they can look back to this part of Hong Kong's history not so much as the pinnacle of Hong Kong's success story but as the platform from which we can scale new heights.

Thank you all very much.