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Following is the speech by the Chief Executive, Mr Tung Chee Hwa, at the Asia 2000 Forum , Sheraton Towers, Auckland, New Zealand, today (Wednesday):

Distinguished guests, ladies and gentlemen

Thank you for that warm welcome. This is my first trip to New Zealand and the 'Land of the Long White Cloud', so I am really happy to be here, to meet your business and political leaders. It is an honour to be here for such an important forum, focusing as it does on the challenges and opportunities facing the Asia Pacific Region.

I shall take this opportunity to talk to you about what has happened since Hong Kong's return to China, about the Asian currency turmoil and its impact on Hong Kong, and about how closely Hong Kong and New Zealand can work together.

1997 was an extraordinary year for Hong Kong. July 1st saw the smooth and seamless return of Hong Kong to China, thereby ending 156 years of colonial rule. Indeed, the people of Hong Kong had looked forward to this great occasion with immense pride; pride in that we were at last reunited with our own country, and have become masters of our own destiny.

Hong Kong has indeed been moving forward with pride and confidence since the successful reunification, although the euphoria has been dented by the severe economic downturn as a result of the Asian financial turmoil. We are particularly pleased with the solid foundation now being laid for the concept of 'one country, two systems'. What is the basis of this particular confidence?

The ultimate source of our confidence in this respect is, of course, the solid promises of the constitutional document, our Basic Law. It is a comprehensive document drafted by the people of Hong Kong together with people from the mainland of China after some four years of consultation and discussion. The Basic Law provides a constitutional framework for the Hong Kong Special Administrative Region. It clearly prescribes that the social, economic and political systems in Hong Kong will be different from those on the mainland of China. It protects the rights, freedoms and lifestyle of Hong Kong people. It allows us complete financial autonomy and it establishes Hong Kong as a separate customs territory.

The Basic Law guarantees the independence of our judiciary. In fact, it guarantees that the power of final adjudication is kept in Hong Kong. We have our own Court of Final Appeal, which is now the ultimate arbiter of the common law in Hong Kong. We invite experienced judges from other common law jurisdictions to sit on the Full Court which consists of five judges. This is indeed a unique arrangement.

The current pool of overseas judges is quite an impressive line-up, including two distinguished New Zealand Judges - your retired President of the Court of Appeal and Privy Councillor Lord Cooke of Thorndon and former Court of Appeal Judge Sir Edward Somers. The involvement of these experienced overseas judges in the Court of Final Appeal helps Hong Kong to maintain its links with the rest of the common law world. It underlines the importance we place on the rule of law by an independent judiciary.

The establishment of the Court of Final Appeal, the successful election held on May 24 and our active participation in such forums as the WTO and APEC are all solid manifestations of the full implementation of the 'one country, two systems' concept in accordance with the Basic Law.

Eleven months had gone by since July 1st. The central leadership has shown great determination to implement the principle of 'one country, two systems'. We in Hong Kong are also determined to ensure the full implementation of the Basic Law. Indeed, the success is manifested everyday in Hong Kong and in every possible way. I invite you to come and see for yourselves and at the same time help our airline Cathay Pacific.

1997 was also an extraordinary year for Asia at large. Buoyed by years of continuous growth and prosperity, the region seemed ready to shrug off numerous structural weaknesses and continue its march into the next century. Some eleven months ago, structural weaknesses of some Asian nations triggered a financial crisis that reverberated around the world.

The origins, causes and effects of the Asian crisis are complex, but one area of commonality is fairly well known. In those countries which have been badly affected, it was a combination of private sector over-borrowing, inadequate bank regulation, poor risk management, excessive governmental subsidies, and tragic policy errors at the corporate and banking levels, both national and international. These are major areas of weakness that need to be addressed if they are to regain economic vitality.

But, are these the only reasons that has created the contagion in Asia which massive new IMF programs at times did not seem to be able to stem the tide? Immediately before the crisis surfaced, these same crisis countries in Asia had been characterised by many international rating agencies, the World Bank and IMF as countries with exceptionally good economic growth and progress towards price stability. Domestic savings were high, substantial progress had been made towards more open markets for both goods and capital, and investment had flourished.

It is not surprising to know that there is now increasing international voices saying that something else must have gone wrong and the problem is not regional, but international.

In the late '80s and early '90s, the capacity and willingness of western financial institutions to reach out for more exotic high-yielding investment made private sectors of major emerging economies with strong growth potential their prime target. These countries who have become converts to the basic philosophy of open markets for goods and capitals welcomed these funding. These funds come to Asia, some in the form of loans, some in the form of portfolio capital and others in direct investment. But, much of these funds can be moved out in short notice.

On the other hand, the herd instincts of the management of these financial institutions are strong. What began in small amounts of fund flow to these Asian emerging markets grew very rapidly. For the recipient countries, few paid the attention that these money can leave at short notice.

The BIS Annual Report showed that it was a combination of mutual and hedge funds that pulled out of Asia as well as the sharp reversal of bank lending that did the true damage. Net private capital flows to Other Asia Countries (excluding China and Japan) reversed by US$108 billion in the second half of 1997, compared with an inflow of roughly the same order in the previous 12 months. As far as I know, the IMF or World Bank has not advised any developing economy to expect to reasonably take this kind of stress.

As long as G-3 currencies can move as much as 75% form peak to trough, there is tremendous pressure put on the smaller trading economies. While everyone seems to think that flexible exchange rates are the answer to small volatilities, no one has been able to deal effectively with the problem of competing devaluations that are creating a huge deflationary cycle in Asia. As exchange risks rise, the adjusting economies in Asia with flexible exchange rates are experiencing higher inflation, higher interest rates and severe stresses on their banking systems. I therefore cannot agree more with many that new approaches are needed in the new international monetary order, although to define that specifically it is going to be a long-term process.

The financial crisis in Asia has been painful to us all. But the fundamentals in Asia haven't changed. We still have a young and flexible workforce, a very high savings rate, openness to trade and ideas and an indomitable spirit to improve ourselves. Some glaring uncertainties still need to be resolved, but I would expect the Asian financial crisis to bottom out in a number of years and we shall then witness a slow but sure road back to recovery.

We have the resources and capacity in the Asia Pacific Region to achieve this recovery. We in the Asia Pacific must work together more closely to rebuild our vision of shared growth and shared prosperity. What we need now is the confidence to do so.

The fact that Japan, the second largest economy in the world and the largest economy in Asia has also entered into a recession has demonstrated that no economy today is an island. We are all affected by global integration. We are obviously concerned over the weakening yen, but with the tremendous savings and external assets of Japan, the Japanese authorities with the right policy should be able to revive her economy in due course and help stabilise the Asian region. With the turmoil around us there is obviously a sense of urgency in this.

Now, let me talk about Hong Kong. Over the past decades, Hong Kong has achieved, in every respect, most enviable success. At US$25,000, our per capita GDP is the second highest in Asia. This has been achieved principally because of the hard work and entrepreneurial spirit of the people of Hong Kong. This has also been made possible because of the past 20 years of rapid and successful economic development on the mainland of China, which has given our economy boundless opportunities to move forward.

The success has also been made possible because we are committed strongly to prudent financial management. We have consistently been able to achieve budget surpluses averaging 2% of our GDP. For the past fiscal year which ended March 31, our budget surplus was at an astounding level of 5.8% of GDP.

Our robust financial system and monetary management mechanism, modern and prudent supervision as well as sophisticated financial infrastructure have laid a solid foundation for a stable exchange rate. Our banking system is strong, with capital adequacy ratios of locally incorporated banks averaging 17% and bad debt ratios of less than 2%.

Additionally, we have a low, consistent and simple tax structure, an open and accountable government, and a lean and corruption free civil service. Most importantly, we believe strongly in upholding the rule of law.

Since 1983, Hong Kong, in order to ensure currency stability, has been operating under a currency board system which provides full US Dollar backing for our currency. In the recent round of attacks on the Hong Kong dollar, the currency board system has proven to be most effective.

Thanks to our prudent fiscal management, at the end of April 1998, Hong Kong's foreign reserves, which include our 'fiscal reserve', stood at US$96.2 billion, the third largest in the world. These huge reserves provide not just 100%, not just 200%, but a full 800% backing for the currency in circulation. Therefore, if we want to we can fully defend the dollar

Many have questioned whether we need to devalue the Hong Kong dollar. Indeed, people ask how can we remain competitive with the rest of Asia when currencies there have depreciated so much. I do not believe we need to devalue the Hong Kong Dollar. It is not in the interest of Hong Kong to do so. The fact is that the total value of our trade in goods and services in a year is equal to well over 250% of our GDP. Businesses engaged in these externally orientated economic activities want certainty in exchange rates. I realise one of the most important factors of competitiveness is about cost, but there are other important factors too, especially in a strong service-based economy. We know strict adherence to the rule of law, the need for corruption free society, predictable government policies as well as free flow of information and capital and people are some of the other very important factors which will put investors, local and international alike, at ease. These are areas we have done well in the past and I want to assure you these are the areas we will work hard to preserve and enhance because we know these are important to Hong Kong.

Although we do not wish to become more competitive through devaluation, I want to assure you that we are conscious of our high costs. Indeed, we know runaway high costs will, in the long run, hurt and stifle our economic growth. In fact, over the past few years, consistently close to double-digit inflation, high salary increases, and unrealistic property values have begun to threaten our future economic vitality. The Hong Kong SAR Government is extremely mindful of this. To tackle these problems, we have planned a series of measures which were announced in my Policy Speech delivered on October 8, last year.

However, because of the financial crisis, and because of the sharp reversal of bank credit throughout Asia, interest rates in Hong Kong have also increased. Furthermore, as a result of the financial turmoil, it is natural there is a more cautious attitude by all the banks in Hong Kong towards lending. Therefore, unemployment has risen, stock prices have fallen and property market has declined very substantially from the peak. Tourism has also fallen off sharply, Hong Kong's economy recorded negative growth in the first quarter. The economy will continue to be difficult for a number of quarters to come.

The fact is, structural changes are now taking place in Hong Kong. This adjustment has been painful to many and indeed it may go on for some time. But from a cost point of view, Hong Kong will begin from a much lower base once recovery starts. This will help our long-term competitiveness. And this will help Hong Kong. Indeed, we are determined to stay on course for the 21st Century.

We are aware that competitiveness is also about the quality and creativity of the people. We have good people in Hong Kong. In preparing for the 21-st century, we are committed to direct the focus of our entire community onto education at all levels and are prepared to devote the necessary resources to ensure that we have the best brain power to meet the challenges for the future. Specifically, we are encouraging information technology effort on a community-wide basis, knowing fully well how important that it is to our future competitiveness.

For us to be a leading financial centre of the world, for us to attract the best people to live and work in Hong Kong, we have to ensure high quality of life in Hong Kong. In this respect, better planning, better urban renewal, cleaner and greener environment are the areas to which our effort will be directed.

As Chinese, we are proud of the return of Hong Kong to China. At the same time we want to ensure that Hong Kong's international and cosmopolitan outlook is maintained. While we preserve the virtues of Chinese culture, we will continue to assimilate the knowledge and experiences of the West. Combining the best of the East and the West make each and every one of us a better person and in turn make our society that much stronger.

Indeed, we are not allowing the Asia financial turmoil to derail our long-term focus of building a better Hong Kong for our next generation. Because of our very strong fiscal reserves of HK$450 billion - the Government has no debt - and with a budget surplus of 5.8% of our GDP in the past year, we are able to, through the budget announced in February this year, continue with our massive plan of investment in infrastructure and education which will make Hong Kong much more efficient and competitive in the 21-st Century. Indeed, with that in mind, and with the further objective of stimulating the economy, we have put in a total of $53 billion, or 4% of the GDP in the Budget that was announced in February. The tax cuts and investment increases in the budget were not able to allow us to continue our march towards a more competitive community but at the same time stimulate the economy. The fact is that over the next five years, we will be planning to spend $235 billion in building additional infrastructure projects in roads, railways, schools, information technology * projects that improve the environmental situation in Hong Kong and we will continue to build for our future. So despite the turmoil around us, ladies and gentlemen, we are very focused on the future and because of our financial strength, we have the means to do it, and we will do it without departing from our prudent fiscal management philosophy, which we have always had.

I would like to take a few moments just to talk about China. Let me first say that I have come here not as a spokesman for China. My task is to speak for Hong Kong. But I am Chinese, and like you, our patriotic feeling is something very natural to us. We were saddened by China's past humiliations, and rejoice now in her improving fortune. And also, more importantly, China is our sovereign power. Your perceptions of China, and New Zealand's relations with China, have a great impact on us.

Some in the West today tend to define China through specific human rights issues. Others feel a sense of threat in China's rising prosperity. We in Hong Kong feel differently. What is happening in China is not a change to a monolithic giant, but a transformation of the lives of millions of men and women. They are being lifted out of poverty, and given opportunities that they never had before. China's life expectancy rate, child mortality rate as well as adult literacy rate have improved significantly. The percentage of people living at or below subsistence level in China has decreased from 33% in 1979 to a single-digit level today. The scale of transformation surpasses anything that has ever happened to men and women like you and myself. It is a process that warms the heart of everyone concerned for basic human condition.

Yes, China has undergone dramatic changes since she opened up to the outside world in 1978. Her achievements are for everybody to see. This is a tribute to the vitality and energy of the Chinese people and the vision of the leaders, who have guided these developments.

The Ninth National People's Congress held in March this year, gave a very clear vision for the 21-st Century China has been clearly mapped out. The country is determined to continue the process of reform, particularly in banking sector and in the state enterprises. There is also commitment to reduce the size of the bureaucracy, to fight corruption and to continue the march towards a free market economy. In a book published by the World Bank entitled 'China 2020' it is projected that China may well become the second-largest economy in the world by that time.

The question has often been asked: "Will China need to depreciate its currency, the Renminbi?" In my view, the answer is no. China's leaders have committed not to devalue the RMB and China is acting responsibly as an important member of community of nations of the world. Indeed, another round of devaluation is not helpful to anybody. But let me give you some financial data which you may find interesting. In 1997, China's growth in exports was 20.9%, recording a trade surplus of US$40 billion. Its current account surplus was 3.3% of GDP and its foreign currency reserves stood at US$140 billion * the second largest in the world.

In 1997, China's GDP grew at 9% and its inflation grew at 2.8%. Its fiscal deficit was at 0.8% of GDP. Its total domestic debt was less than 20% of GDP. Indeed, if you look at these figures, China also meets all the Maastricht criteria which have been laid down for introduction of European Monetary Union.

With the devaluation in many Asian currencies, China's competitiveness will suffer somewhat. Trade surplus will decline but on the whole, I believe China will continue to be competitive. The competitiveness of China is based on broader structural factors including underlying factor costs, market leadership and the trade policies of major importers. Furthermore, the effect of devaluation on the manufacturing costs in the Asian economies is likely to lead to higher inflation, higher import costs and higher interest rates. China has established market leadership in a variety of products. It is difficult to see this dominant position being significantly eroded particularly with the existence of international trade barriers which limit the extent of the possible shift of export orders from China to other Asian economies. In fact, only in the last two weeks, many of the entrepreneurs in Hong Kong involved in manufacturing across the border - and please remember Hong Kong manufacturers employ more than 4,000,000 people across the border in the Pearl Rioer Delta - told me they remain very competitive in their costs.

Hong Kong and the mainland of China, today, serve as an anchor for stability in Asia. In the longer term, I know China will march from strength to strength. I am convinced that the region will emerge from the turmoil and become even more successful than before.

Most of the Asian countries are at a developing stage, but with its huge populations, high savings rate and thirst for infrastructure developments, once we begin our recovery over the next two or three years, Asia can become one of the world's largest capital providers, borrowers, as well as the largest consumer markets. The depth of economic opportunities in the coming decades in Asia in general, and China in particular.

It is therefore an enormous privilege for me to address this distinguished gathering this evening. Officially established in 1994, Asia 2000 is a visionary move of the New Zealand Government to reorientate New Zealanders towards Asia by the year 2000. Asia accounts for about 40% of New Zealand's total exports. And Hong Kong is, of course, an important gateway to the Asia Pacific region, and I am pleased to see increasing trade and investment activities between Hong Kong and New Zealand.

Indeed, Hong Kong and New Zealand have a good trading relationship. Around 3,000 New Zealanders are living in Hong Kong and I believe some 30,000 Hong Kong people have moved 'Down Under' to live in New Zealand over the past decade. The Hong Kong-New Zealand Business Association, which has its base here in Auckland, is also doing a lot of work to promote closer business and community ties.

In 1997, Hong Kong was your 7th largest export market, accounting for some 2.8% of all exports. We were your 11th largest trading partner overall and also an important import/export entrepot for New Zealand goods bound for China and Chinese goods bound for New Zealand. In Hong Kong, we are big importers of your seafood, machinery and electrical equipment, paper products, dairy products, hides and leather, fruit, wood, beef and vegetables and of course lamb and wool. I'm happy to say we are going to get some more oysters.

One of your greatest exports, though, will never show up on the trade books and that is, of course, the mighty All Blacks. Every year they come to Hong Kong for our Rugby 7s tournament and every year they are big favourites with the crowd. I know Fiji have taken the limelight over the past few years but I am sure it won't be too long before we see the Kiwis back on the winner's podium. Maybe 1999 will be your year.

This past year has indeed been very difficult for Hong Kong and the rest of the Asia-Pacific region. Tough times are still ahead and we must remain vigilant, flexible and resilient to any unexpected storms which may emerge in the short-term.

Hong Kong has been enriched over many decades by different ideas and cultures, blending the best of East and West. New Zealand has contributed to this process. People from all over the world feel at home in Hong Kong. It is more than the prospect of making money - the deeper attraction is Hong Kong, itself. In short, Hong Kong is poised to reach even greater heights as the new century unfolds. I am proud and privileged to lead it. And I invite even greater participation from New Zealand business in our continued success.

Thank you very much.

End/Wednesday, June 17, 1998

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