Mr Chairman, ladies and gentlemen,

I am very grateful to you for that kind introduction, and to the American Chamber of Commerce for the platform you have offered for my first major speech since the transition. I feel that the timing is particularly fortuitous with the Chief Executive having just returned from his first important official visit to the United States.

There are one or two points arising from that visit which I would like to follow up later, but I wish to begin with something I said - a forecast I made - in a speech in Manila last May. On that occasion, just six weeks before June 30, I was able to tell my audience of international businessmen attending the Pacific Basin Economic Co-operation conference that some 8,000 journalists had already registered to cover the transition. They would all be looking for a juicy story. But, I insisted, the headline I would be searching for on July 1 would proclaim: "Hong Kong Goes Back to China : Nothing Happens."

Mr Chairman, we all know how risky the political forecasting business can be, but this was one prediction I thought I could rely on. Most of you here today, as familiar as you are and were with the vicissitudes of the transition, would probably have placed the same bet.

But given some of the more dire forecasts made before June 30, it might be worthwhile for me today to attempt to nail down some of the things that have not taken place since July 1.

Firstly, democracy in Hong Kong has not been throttled. We do, of course have a provisional legislature which will undertake tasks deemed to be indispensable to the normal and effective running of government and public services until fresh elections are held. We have already drawn up a framework and timetable for those elections in

May next year. I am confident they will be free, fair, open and governed by rules that are transparent. But I see them first and foremost as a stepping stone that will set Hong Kong firmly on the road to the universal suffrage that is envisaged in the Basic Law.

Secondly, the rule of law remains resolutely and independently at the heart of Hong Kong's way of life. We have already seen a legal challenge to the legitimacy of the Provisional Legislature and indeed the very legitimacy of laws themselves. The government won that landmark case, but we expect further challenges which we will meet in accordance with the law. I repeat what I have said before : the rule of law is the very essence of Hong Kong's success and must be protected and preserved by all of us. I think we can all agree that the Chief Justice is playing his part. The agreement he reached last week with the Lord Chancellor to make available two of Britain's Law Lords to serve on the Court of Final Appeal was universally applauded for the signal it sent about the independence of our judiciary and the quality of justice we can expect in the SAR Government.

Thirdly, civil liberties have not been curbed or stifled. Hong Kong people continue to demonstrate, dissent, disagree, debate and argue about the issues that effect them. You will have seen the evidence of that on your television screens and in the columns of your newspapers on a daily basis. In fact, since the handover, there have been some 150 demonstrations, and not a single arrest.

Fourthly, we have continued to exercise autonomy in running our economy. The way we have dealt with speculative attacks on our currency, and our close involvement with and support for our regional partners during the so-called South-east Asian currency crisis - in particular our US$1 billion contribution to the rescue package for the baht - is ample demonstration of who is calling the shots in the management of Hong Kong's financial affairs.

A far cry, then, from that famous Fortune headline that so gloomily and categorically declared the "Death of Hong Kong". Eighty days after the handover, I think the

headline today would read: Hong Kong goes back to China: Business as Usual".

I am the first to appreciate, however, that life is not that simple. The satisfactorily pragmatic and positive way in which Hong Kong people have taken the transition in their stride doesn't make much of a sound bite, and perceptions of life after July 1 to an extent will continue to focus on some of the political issues that have followed us from the closing of one era to the opening of the next. I do not shy away from those issues. I simply ask that they be seen in the wider context of our unique historical transformation from British colony to Special Administrative Region of the People's Republic of China.

It's easy to forget that starting point, that is the unique and untried concept of One Country, Two Systems. Hong Kong people running Hong Kong under the high degree of autonomy guaranteed by the Joint Declaration and the Basic Law.

The most skeptical observer would have to admit that the SAR hit the ground running, in true Hong Kong style. You want to do something they said couldn't be done? In front of 8,000 journalists? Can do. The handover and inauguration ceremonies showed the world through a vast media audience how well we do things in Hong Kong. And we surely demonstrated the determination of Hong Kong people to make the SAR work. Crucially, the ceremonies showed the full and firm support of the leadership in Beijing to its Hong Kong policy. Nobody listening to the speeches of President JIANG Zemin could have been left in any doubt about that.

That has been underlined in the clearest terms and in the most sophisticated manner by the Chinese diplomats who have taken up key posts in Hong Kong since July 1. They have been at pains to draw a distinction between their responsibilities for Foreign Affairs and defence and our rights to exercise a high degree of autonomy in running the affairs of the Special Administration Region Government. This has been well received not only by all of us in the local community, but by the diplomatic and international business communities resident here as well.

I am pleased to say that we have got off to a very good start with Commissioner MA Yuzhen and his team at the Ministry of Foreign Affairs Office in Hong Kong. We have developed a constructive working relationship with them in handling the external affairs of the HKSAR. Many Bureaux and Departments of the HKSARG now have frequent, direct and effective communication with the Commissioner's Office.

Essentially, Commissioner MA's Office handles foreign affairs such as the establishment of consular missions in the HKSAR and approval for access of state aircraft and foreign warships. They seek the views of the HKSARG as appropriate. On the other hand, the HKSARG is responsible for the conduct of Hong Kong's external affairs, including the day-to-day dealings with the consular corps and the negotiation and conclusion of international agreements and

participation in international organisations and conferences on matters within our high degree of autonomy.

I have no doubt, given the goodwill and professionalism on both sides, that we can further develop this relationship for the benefit of the community and the central government.

This brings me naturally to the civil service which I have the honour to lead. There is no doubt that the change of sovereignty was one of the biggest challenges the civil service has ever faced. Apart from the high standards we set ourselves the community has over the years come to rely on a politically neutral professional civil service as the backbone of our system of government.

I believe the civil service has responded magnificently, straddling June 30 almost seamlessly. It was not as easy as it looked: a huge amount of work, much of it accomplished without headline or fanfare, went into it.

The result is that the civil service has made the transition with the maximum continuity; with its integrity intact; and operationally unchanged. This augurs very well for the future of the SARG.

One Country, Two Systems and Hong Kong people running Hong Kong with a high degree of autonomy. Mr Chairman, these are themes that I have repeated like a mantra since I became Chief Secretary, indeed even before then. I have stressed their importance in public speeches; at meetings with government, political and business leaders at home and abroad; to my colleagues in the civil service; in countless media interviews and briefings; and to the fellow members of my community in Hong Kong. I have constantly underlined as well that no matter what promises and guarantees have been laid down for us on paper, they will not materialise as if by magic. All the parties involved, and especially the people of Hong Kong themselves, will have to work hard and be ever vigilant to ensure that they are indeed delivered.

I think it is only natural for the emphasis on those foundation-stones to grow rather than diminish in importance. The rule of law is central to Hong Kong's economic and social success. We in the Administration, from the Chief Executive downwards, have no higher priority than the maintenance of the rule of law. We reject absolutely as misinformed and groundless claims that somehow the Special Administrative Region Government is conniving in an underhand way behind the scenes to subvert the rule of law in Hong Kong and replace it with "rule by law". We have publicly rebutted and disproved every allegation made to support this ill-conceived notion.

Let me be plain: I have grown up in this free society knowing that it is the rule of law which protects our social and economic framework. The rule of law is this community's most prized possession. So many of us are in Hong Kong today because of it. Nobody must be allowed to take it away, for it is the rule of law which promises a safe and secure environment for the individual, for families and for business to flourish. It is the best safeguard against arbitrary and overbearing government. After 35 years in the civil service, I have learned at least that much.

Mr Chairman, this brings me to our democratic institutions, so inextricably linked as they are to the rule of law. Questions about the electoral arrangements for next May have been raised with Mr TUNG during his US visit in the media and elsewhere. The questions were expected. So were the doubts and criticisms expressed.

Mr TUNG dealt with them firmly, patiently and with conviction. Let me just reinforce some of the points that he made.

Firstly, the structure of our electoral process has been known since the Basic Law was promulgated in 1990. So, immediately after the transition we were always going to have 20 seats returned through geographical constituencies, 30 through functional constituencies and 10 through an election committee, just as we did in 1995. The mix changes step-by-step until we reach a half-and-half situation geographical and functional constituencies in 2004 - and the opportunity after that in 2007 for the community to take a decision on universal suffrage for the election of the legislature and the Chief Executive.

In the meantime, I do not intend to rehash events of recent years. Suffice to say that we moved as quickly as possible legally and administratively to hold new elections. Set against the controversy over democratic reform in Hong Kong since the signing of the Joint Declaration in 1984, it is hardly surprising that there should have been vigorous debate about the arrangements which were announced and are now being discussed throughout the community. This debate was not only expected; I believe it is perfectly healthy.

The fact of the matter is, however, that there would have been a lively debate no matter what arrangements were proposed. Various groups in Hong Kong have different views as to whether our proposals for a combination of proportional representation for geographical constituencies; corporate voting in our functional constituencies; and block voting in the election committee is more or less democratic than other forms of election.

We all of us know that there is no universal truth about the perfect election. The textbooks vary from country to country, from region to region. The US system is different to that practised in many countries of Europe. In Europe itself, there is a wide variation in the way particular countries conduct their elections. Australia and New Zealand have different systems. Closer to home, there is a variety of systems used in Asia. Some of them are still evolving.

We may prefer one system against the other, or advocate a patchwork thereof. What we surely agree about is that each society should be allowed to develop its own process, based on its own particular social, historical, political and cultural conditions.

I think we could all agree that Hong Kong's social, cultural, political and historical conditions are different to most, if not all. That a degree of care and attention is required, particularly in relation to the unique situation embodied in One Country, Two Systems, and the specific intent and spirit of our constitutional imperatives, i.e. the requirements of the Basic Law.

The overall intention of the Basic Law is very clear. Let me once again quote President JIANG Zemin at the inauguration of the Special Administrative Region. He said: "A gradually improved democratic system suited to Hong Kong's reality is an important guarantee for its social and political stability". At the same ceremony, Mr TUNG pledged to Hong Kong people, and to the leaders in China, that "democracy is the hallmark of a new era for Hong Kong".

But, as I have already said, I accept that whatever arrangements we had put forward for next May would have

been subject to criticism and debate. That is a natural part of the political process.

What I do not accept is the charge that our arrangements will set back the cause of democracy in Hong Kong, or that they have been deliberately designed to include or exclude one or another particular party, group or individuals, in particular the democrats. Many people forget that the much-criticised functional constituencies introduced such political heavyweights as Martin LEE, SZETO Wah and CHEUNG Man-kwong to the legislature.

There is no conspiracy to design a system that is hostile to democratic political forces and heavily weighted in favour of China's capitalist communists, as has been claimed. That kind of comments only underestimates the role of the democrats in Hong Kong's body politic, and impugns the integrity of those who take a different view of how best to enhance Hong Kong's prosperity and stability and preserve our way of life.

Furthermore, the government has already announced that we will launch an unprecedented effort to enrol a far greater number of eligible electors, and then do all that we can to ensure that many more people get out and vote. We will go all out to try and break previous records. I believe Hong Kong people will respond to the opportunity - the historic opportunity - to take part in its first democratic election as part of China.

Finally, the elections will be overseen by an independent electoral commission. This will be an impartial and apolitical body whose job will be to ensure that the election is not only conducted openly and fairly, but is also seen to be so.

The overall result, I am sure, will be a balanced legislature representative of the multi-coloured spectrum of opinion and aspirations of the community. It will produce a legislature to which the executive will be fully and conscientiously accountable. I believe we were so in the past and we will be so in the future.

If we don't live up to that, you will soon hear about it. For one of the other heartening facts about post-transition Hong Kong has been the continuing good health of the press. It remains as free and robust today as it was before June 30. Probably some say more so.

Certainly, the Hong Kong Journalists' Association is publicly on record as seeing no change, and one of our leading journalism professors - a man normally quick to spot any media backsliding - told a seminar recently that he detected less, rather than more self-censorship after the handover.

My views on this subject are well known and I will not repeat them here. The fact that the free and unfettered flow of information is vital to the health of society and the strength of a service-based economy such as we have in Hong Kong. One of the priorities of the Special Administrative Region Government is the development of information technology. You will note that the profession has been allocated a functional constituency. It is self-evident that the development of sophisticated information technology hardware would be meaningless without the software.

Mr Chairman, I could not let today's opportunity pass without paying tribute to the role played by the international community in shaping Hong Kong's past successes, and to assure you that your continued presence here is not only welcomed, but very much encouraged.

I know that Hong Kong's small but very significant international community welcomed the birth of the SAR. I am sure that they particularly appreciated President JIANG's undertaking that they could continue to make Hong Kong their home where, to quote his words, "they can live and work in peace and contentment". He went on to say that everyone in the SAR "will be entitled to the rights and freedoms as protected by law, regardless of race and colour".

Hong Kong's diversity has always been one of its greatest strengths. Ours is very much a Chinese city, with a strong attachment to Chinese values and traditions, but we have always embraced people from elsewhere and their ideas. Americans, for example, have cultural, commercial, family and personal ties in Hong Kong stretching back over more than 150 years. I look forward to the further enhancement and development of those links.

There are 1,200 US companies, many of them among the 2,000 multi-nationals with regional headquarters, and 50,000 Americans living in Hong Kong. US investment in Hong Kong is now estimated at US$16 billion, and growing. I have no doubt that those numbers will increase in direct proportion to the economic development and commercial opportunities in Hong Kong, China and in the region.

As we saw at the handover, there is extraordinary international goodwill and support for Hong Kong and China as we undertake our historic task. I am conscious of the need to maintain the momentum of support from our friends and to keep them fully abreast of developments in the SAR.

The world wants Hong Kong to succeed, because a successful Hong Kong is good for the world. We are an important player in the global village, and I can assure you that we will continue to play a vigorous and constructive role in the myriad of international organisations such as the WTO and APEC of which we are members in our own right: that's what a high degree of autonomy means in practice.

We are aware that the eyes of the world are upon us. That does not worry me. We can hardly expect to pitch our tent and lay out our stall in the global village otherwise.

What does worry me is the level of understanding and perception of the arrangements that have been made for our continuation as a vibrant international business centre and free and plural society. It is not fashionable, I know, in the age of the 15-second sound bite to disclaim that the world is not black and white, good or bad, right or wrong. But one of the messages we need to get across, as painful as it sometimes may be, is that Hong Kong is part of a unique historical process that will not always fit neatly into a network news bulletin or an 800-word op-ed piece.

We cannot conduct our affairs in a vacuum; we all have to take account of the realities which surround us. The simple fact of life is that we are now part of China - albeit with our distinct system - and we must take account of that in dealing with sensitive issues.

Mr Chairman, let me finish on this note. The whole world has seen the space shuttle SAR placed on the launch pad, the blue touch paper lit - and blasted into orbit, its umbilical chord transferred with great dexterity to the birth mothership.

Like the first sputnik, we have embarked on a unique, untried venture. But we are off to a smooth start. We all know that the potential and possibilities for the SAR are, like the universe itself, boundless. I am confident of a rewarding journey though it may not always be completely smooth. With the Chief Executive's leadership, the firm

support of the central government, the commitment and growing confidence of the Hong Kong community, the goodwill of our friends in the international community and the support of our trading partners, I am confident that Hong Kong people will run Hong Kong wisely and well.

I believe the best way to do this is to maintain Hong Kong's cosmopolitan international character and outlook, adherence to free market philosophies, the rule of law, respect for individual rights and democratic institutions. In short, adherence to the Basic Law.

We are a very proud community. Proud to be Chinese and once again a part of China. I have just returned from a short visit to Shanghai, where I was honoured to receive a professorship from one of China's foremost universities, Jiao Tung University. I have not been back to my birthplace for fifty years. Today's Shanghai bears no resemblance to the Shanghai I knew in the 40s, hazy though my childhood recollections may be. No one who has seen the huge physical and human progress that is evident

everywhere you go in Shanghai can doubt that China is truly moving with the times. Change has a momentum of its own and I believe it is irreversible.

We look forward to being part of an increasingly open, prosperous and powerful China that will play an increasingly prominent role on the world stage to the benefit of China, and the rest of the international community. The US-China relationship is crucially important for the entire world and Hong Kong's well being will be an important aspect of that relationship.

Thank you very much, ladies and gentlemen.