I am happy to be back in the United States, where I lived and worked for ten years at an earlier stage of my career. Renewing friendship is one of life's most pleasant occupations.

I stand here with you today a friend, but also with the honour of being the first Chief Executive of Hong Kong Special Administrative Region.

July 1, 1997 was a day to which we in Hong Kong had looked forward with pride and confidence. Pride to at last be reunited with China, and to become masters of our own destiny. Confidence in that we can and will make our city an even better place for our children and grandchildren. Hong Kong is our home, and we treasure its distinctive character and system of government. China is our country, and that patriotism which is, in the words of Adlai Stevenson, "the tranquil and steady dedication of a lifetime" is a natural feeling for us to have.

I'm here to speak for Hong Kong, but how others perceive our country, China, has quite an impact on us. I don't think I'm exaggerating too much if I suggest that American attitudes to China's resumption of sovereignty had been reflected in two items of media coverage. I am referring to the shots used in the TV news reporting of the ceremony at midnight on July 1, and a recent headline in the one of your newspapers.

On July 1, after showing the official ceremony, the TV pictures switched to PLA soldiers entering Hong Kong. Not emphasis on the peaceful return of a territory taken years ago in war; not consideration of Hong Kong people being given full responsibility for their government for the first time in their history; not that but instead the PLA.

The newspaper headline appeared on August 11. It read "China launches review of Hong Kong's tax system". What the article actually said was that we had begun a review of the profits tax system. The sub-editor just assumed that because China is now the sovereign, China must have initiated the review.

Yes, PLA soldiers did come into Hong Kong on July 1. They moved into 14 of the 39 barracks formerly occupied by British soldiers. To us it was just a natural part of the resumption of sovereignty. As for the tax review, that was announced back in March, when Hong Kong was still under British rule. In carrying on with the review we are simply exercising the full autonomy given to Hong Kong under the Basic Law - our constitution - to manage our own finances.

The Basic Law gives us far more than financial autonomy. Apart from foreign affairs and defence, it gives to us full responsibility to maintain our own economic and social system; our own legal system; our own system of government; our religious freedoms, press freedom and civil liberties. Under the Basic Law, Hong Kong remains a separate customs territory, we protect intellectual property rights, and we uphold international controls on trade in strategic commodities. Under the Basic Law, it is me and my administration that is responsible for the good government of Hong Kong, and we are answerable to the people of Hong Kong for that. We are also responsible for upholding the commitments that we have been authorised to make with international partners, and we are answerable to them for doing so.

It is important to remember that the idea of "one country, two systems" was not the brainchild of Hong Kong or London, but of China. Today's Chinese leaders are committed to making the concept work. They have faith in the ability of Hong Kong people to administer Hong Kong; and have pledged their full support for us. I can testify to this commitment from my experience over the last few months. The Central Government has given us an entirely free hand in dealing with our own affairs and developing our economic, social and cultural relations.

Two months have gone by since July 1, the three branches of our political structure, the Executive, the Legislative, and the Judiciary have all been functioning normally. There has been no change in the life style to which we are accustomed. And our economy continues to expand.

It is deeply in China's interest that Hong Kong should continue to work well under the "one country, two systems" concept - a concept which was China's idea for solving the complex question of fully reuniting Hong Kong with China while maintaining our special systems and characteristics. China's leaders are committed to letting us shape our destiny under the high degree of autonomy that the Basic Law has given us. The fact is that the success of Hong Kong under "one country, two systems" will serve as a significant step towards the greater and final objective of reunification of the entire Chinese nation.

China has undergone dramatic changes since she opened up to the outside world in 1978. The economy has grown at a remarkable rate, averaging close to 10 per cent per annum. This is a tribute to the vitality and energy of the Chinese people and the quality of China's leaders. These leaders have the ability and the acumen to steer China successfully into the 21st century. It is this ability and acumen that will ensure the implementation of the "one country, two systems" concept as we move forward into the future.

We feel no sense of threat in China's rising prosperity. What is happening there is not the growth of some monolithic giant, but the transformation of the lives of millions of men and women. It is a process that should warm the heart. It is a process that needs peace and stability if it is to be seen through. And a point that everyone in Hong Kong profits from is the fact that the US and China make a good economic fit. What you produce, China needs. What China makes, you want. That makes for trade, and we in Hong Kong stand ready to service that trade.

We are well placed to develop our role, thanks to the solid foundation Hong Kong has in its finances, its civil service and, fundamentally, in the rule of law.

During the recent turbulence in other Southeast Asian financial markets you saw how solid our finances and fiscal policy are today. The fundamentals in Hong Kong remain extremely strong for the future. We expect GDP growth this year of around 5.5 per cent, up from 4.9 per cent last year. Inflation continues to decline, albeit slowly. Next year, our new airport opens, greatly improving our quality as an aviation and service hub, and we are following it up with a massive programme of rail and other infrastructure development to further improve our efficiency and productivity.

The efficiency and productivity of Hong Kong's civil service is respected by our community and by those who come to do business with us. Time and again I am complimented on their quality. Their enthusiasm and commitment to making Hong Kong an even better place in the next century is a great encouragement.

The rule of law underpins our free market, the work of our civil service and the quality of our community. We will maintain our legal system, grounded, like yours, in the common law. The rule of law has kept our society open, fair and law abiding. We will maintain effective enforcement of the law, especially against corruption, and will maintain the principle that everyone, Chief Executive included, is subject to the law.

Additionally, we will resolutely maintain our conservative and prudent fiscal management style, low and predictable tax structure as well as level playing field for all. We will continue to encourage the contribution of the foreign community and maintain the characteristics of a leading international city.

Alongside all specific reasons, my confidence in Hong Kong's future is grounded in the spirit of the people of Hong Kong. What they have achieved within my lifetime is staggering. What we still hope to achieve together is no less ambitious. Our experienced entrepreneurs and investors, and the high proportion of our children now going on to technical colleges and universities, give us the talent and the drive to keep on succeeding in whatever the world holds for us.

On October 8, I will be delivering my first policy address - our equivalent of your state of the nation address. I will be setting out a programme to tackle a wide range of matters close to the hearts of Hong Kong people. Hong Kong has reason to be proud of its achievement over the past 30 years, but we have to be alert to challenges which lie ahead. We face keen competition in trade and services, and our competitiveness is threatened by inflation. We have to meet the challenges arising from a growing and ageing population, satisfy demand for more and better housing, and deal with employment dislocation due to restructuring of the economy and rising level of population under the poverty line.

We will be sticking to the free market approach that has brought us prosperity in the past and aiming to improve the competitiveness of our business environment.

As the world moves rapidly into the information era, we will be investing heavily in our information infrastructure, our education and our expertise in this field. We aim to give every child in Hong Kong an education of the highest quality, to improve their language skills and ability to use new technologies.

We will be speeding up land formation, extending our mass transit system and other infrastructure and increasing the pace of home construction to 85,000 units per annum to achieve a home ownership rate of 70 per cent in the next 10 years.

We are setting up provident funds and extending care for the elderly in order that our old people are provided with a treasure sense of security, belonging, and worthiness.

Let me now turn to developments on the political front. Elections for first full Legislative Council will be held May next year. Members of all political parties and independent individuals are welcomed to take part. Every adult permanent resident is eligible to vote. This first full legislature will have 60 members all of whom will be elected directly or indirectly. More specifically, 20 will be directly elected, 30 indirectly elected through functional constituencies and the remaining 10 indirectly elected through an election committee. The second legislature will be elected for a four-year term in the year 2000 when the number of directly elected seats will increase to 24, and the third legislature in the year 2004 when 30 or 50 per cent of the seats will be directly elected. In seven years' time, we will have more democracy in the legislature than we ever have in 156 years of colonial rule.

As you all know, Hong Kong has never had a single voice in the selection of the Governor during 156 years of its colonial rule. Under the Basic law, Hong Kong people will have an increasingly larger voice in the selection of the Chief Executive. I myself was selected in December last year by a committee of 400 people, all of whom reside in Hong Kong. This committee represents the society of Hong Kong from different walks of life including businessmen, professionals such as doctors, lawyers, architects, labour unionists, social workers, politicians and religious leaders including representatives from the Protestants, Catholics, Buddhists and Muslims. The second Chief Executive, serving from 2002 to 2007 will be selected by a similar committee, except that the committee will be enlarged to 800.

In fact, the progress we will achieve in 10 years from 1997 in terms of democratic process will be far more comprehensive and far-reaching than what we received under 156 years of colonialism. There are those who believe that the pace of democratization in Hong Kong is too slow. Others believe that it is too fast. I believe we have struck the right balance. As far as constitutional issues are concerned, there will always be debates - in Hong Kong, America, or anywhere else. What about after 2007? The Basic Law provides that further democratic evolution will depend on the wish of Hong Kong people and the overall environment at that time with universal suffrage being the ultimate objective.

I know that there is criticism that the electoral arrangements for next year will reduce the franchise in some of the functional constituencies. This misses the point that these functional constituencies in their very original design were indirect elections and were intended to represent economic, professional and grass-root sectors, sectors of importance to the community of Hong Kong, and were not intended to compete with directly elected constituencies. Indeed, they are an interim arrangement, designed to maintain balance and continuity while our democratic process evolves over the next 10 years. Here, I note an interesting coincidence, that the timetable in the Basic Law covers a period as long as that between your 1776 Articles of Confederation and the 1787 Constitution, when you moved from a very loose system focused on state legislatures to a much more centralised federal system.

I appreciate that this is an issue of concern in the US. However, at the end of the day, we must move forward in what we think is in the best long term interest of Hong Kong people. In the meantime, we certainly have widely consulted the community, and believe that we have the support of the local community.

While we exercise that political responsibility, I can assure you that Hong Kong will continue to manage its economy with the lightest and most steady of hands, sticking firm to free markets, small government, low taxes and fiscal prudence. We will continue to uphold academic and media freedom. We want to remain your best partner for business in Asia, the best place to find out what is going on across Asia.

Like America, we haven't just practised free trade, we have endeavoured to promote it in the WTO and in APEC. Let me reminded you just how big a stake America has in Hong Kong. Fifty-thousand US nationals live and work in Hong Kong. There are six schools teaching with a US curriculum in Hong Kong. Four-hundred-and-fourteen US companies have regional headquarters or offices there. Twenty-nine US banks and financial services groups operate in Hong Kong, including eight of the top 10, managing over US$100 billion in loans, debt and assets.

Around 60% of US trade with China passes through Hong Kong, and we have US$22.4 billion worth of direct trade between us - you are the second largest market for our exports, we are your eleventh largest export market. Total US direct investment in Hong Kong is around US$13.8 billion, your third largest investment in the Asia Pacific region after Japan and Australia.

All that is not just a stake from the past, it is a stake for the future too, because Hong Kong is going to remain important to America for the next century.

Hong Kong is not just a gateway. We add value to your business through our skills in putting together partnerships, finance and marketing arrangements. We have unique combinations of infrastructure, skills and services that we are constantly building on. Companies operating in Asia today are crying out for management skills. While still behind US levels, Hong Kong is already way ahead of any other regional economy in providing trained managers, able to work well with multinational companies. We are improving our information technology and languages training to ensure that even more of the 24 per cent of our young people now going into tertiary education are able to work with confidence in the modern information and communication based economy.

The recent set backs in Asian markets are not going to stop the growth of Asia. Economic growth in China is going to be one of the most important contributors to overall world growth for years to come, and the East Asian region is already not far behind NAFTA and the European Union in terms of GDP. American business needs to be there, and Hong Kong will continue to provide the best base for entering and growing in those markets.

Deepening understanding between America and East Asia as a whole, with China in particular, is going to be essential for both regions to manage successfully the process of change that is going on. Hong Kong is already a great base for the exchange of information and understanding between Asia and America. Your universities are closely involved with ours. Our communications and media industries are flourishing and closely integrated with yours. We provide a meeting place for minds as well as markets.

You are used to seeing new things happening in Hong Kong - new towns, new airport, new business - and you know that there has been a process of political development going on. Hong Kong is going to go on happening, go on growing, and go on developing in the way you are used to. We are not stopping or changing course.

Confidence in Hong Kong has been growing steadily in the months before the transition. Confidence in Hong Kong since the transition has been even higher. The latest poll shows a confidence level of 78 per cent. Indeed over the last three years our population has been growing at two per cent per annum, higher than any metropolis in the world. Such growth is partly due to legal migration from China, and partly due to natural birth, but tens and thousands who have previously migrated overseas are returning to Hong Kong. They feel the pride of being Chinese, they sense the opportunity and they want to take part in making history.

When America was opening up, the word to everyone seeking to make a better life was "Go West". That is still the world I give to you today, but don't stop when you get to California, keep coming on to Hong Kong. We have a vision for our future. We are working to build a community confident in its Chinese identity but reaching out to the world; a competitive and successful economy; a society that uses its economic success to invest for the future and to exercise care and compassion for those in need; a city rich in culture, democratic in nature, tolerant and opening attitude. We welcome you to join us in achieving that vision.