Mr Saeki, Distinguished guests, Ladies and Gentlemen.

I am honoured to be in Nagoya today to speak to you on the latest developments in Hong Kong following its reunification with the motherland on July 1 last year. I am pleased to say the transition has been so seamless that to many people in Hong Kong and for those coming back to visit, there simply hasn't been any tangible change to the lifestyle, or in the way in which Hong Kong operates in its new role as a Special Administrative Region.

What is new then? The only visible difference is the new Hong Kong Special Administrative Region (HKSAR) flag and having a Chief Executive, not a Governor, heading the administration. The key ingredients of our success story remain firmly rooted in Hong Kong. The rule of law continues to prevail and is being upheld. We have an independent judiciary and our own Court of Final Appeal. We continue to enjoy the freedoms and rights guaranteed by the Sino-British Joint Declaration and the Basic Law, our mini-constitution. Political debates remain lively, public protests and demonstrations continue to be a natural part of everyday life. Elections to the Legislative Council are coming up in May and political parties across the spectrum are already gearing up with the usual fanfare.

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. Co-operation with our 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 Thai baht during the Asian currency crisis, and in the APEC Economic Leaders Meeting in Vancouver a few months ago.

Business is continuing as usual but that does not mean that we have been problem free since the handover. Apart from a slump in our tourist industry and a frightening episode of the avian flu, we were swept up in the Asian financial turmoil as well, resulting in pressure on the Hong Kong Dollar, volatility in the stock market and softening in the property sector.

The sceptics were quick to grasp these events as signs that Hong Kong was going down the drain. They were wrong. In fact, Hong Kong weathered the financial storm in a much better shape than our regional neighbours. It would not have escaped your notice that even at the height of volatility, market operations had been orderly. This compares well with the situation ten years ago. As currencies in the region depreciate by outrageous magnitudes Hong Kong dollar banking assets have maintained their value. Our economic fundamentals remain very strong. Our foreign exchange reserves, at US$98.1 billion at the end of January, is the third largest in the world

representing over seven times the value of our total currency in circulation. We have no public sector debt. Our banking system remains very well-capitalised. Growth rate for 1998-99 will show a dip for obvious reasons, and our forecast is 3.5 per cent. But our trend growth rate remains at 5 per cent for the near term. These are enviable figures to any developed economy.

Some may wonder whether we need the linked exchange rate when the political uncertainties surrounding the handover have evaporated. These doubters have lost sight of the fact that we are committed to the US dollar peg on sound economic grounds, and not for political reasons. Hong Kong is a small externally oriented economy. External trade accounts for almost three times our GDP. Given our exposure to external costs, exchange rate stability ranks highest in our many economic considerations. Indeed, the International Monetary Fund has on numerous occasions lent its unequivocal support to our linked exchange rate system.

There are those who suspect that Hong Kong has lost its competitiveness because other Asian countries have devalued their currencies. You will agree that devaluation is not the most elegant way of maintaining one's competitiveness, and the adverse impact can be quite dramatic as demonstrated by the magnified volatility in the markets of those economies which have done so earlier. Moreover, Hong Kong nowadays is no longer a manufacturing centre which relies on price-cutting on our widgets as the key to survival. Less than 10 per cent of our GDP is now derived from the manufacturing sector. In the short-run, higher interest rates may cause temporary pain for some. But to the extent that they increase incentives to save and moderate property prices, they will help bring down inflation and costs of doing business in Hong Kong, contributing in the longer run to an increase in our competitiveness.

We should also remember that when it comes to competitiveness, cost is only one factor - and not necessarily the most important one. As we all learned in our Introductory Economics classes the ultimate business objective is to maximise profit and not to minimise expense. Yes, our prices are a bit higher than those offered by our neighbors but the overall package of what Hong Kong has to offer still remains very attractive and Hong Kong is still recognised as the best place for profitable opportunities in the region.

Hong Kong already has the world's most business-friendly tax regime. We have no value added or sales taxes. There are no capital gains tax and no withholding taxes on dividends or interest. Only income sourced in Hong Kong is taxable and individuals pay no more than 15 per cent in salaries tax. Our Financial Secretary, Mr Donald Tsang, in his budget delivered on February 18, has made our tax system even more business friendly. I would like to give you some details:

* Standard rate of corporate profits tax reduced to

16 per cent from 16.5 per cent.

* 100 per cent write off for expenditure on

manufacturing plant and machinery owned by end

users.

* Similar 100 per cent write off for computer

hardware and software.

* Depreciation allowance for commercial buildings

increased from 2 per cent to 4 per cent.

* Write off for refurbishment costs extended from

hotels to all other business sectors.

* Widening the scope for tax deduction of expenditure

on research and development.

* Widening network of agreements to avoid double

taxation, including arrangements on shipping,

aviation, other business areas and personal

taxation with Mainland of China.

Outlined in Mr Tsang's budget speech are also measures which will increase our competitiveness at a time of economic uncertainty faced by our community in the wake of the recent Asian financial turmoil. There will be increased expenditure to meet our strategic policy objectives in respect of housing, care for the elderly, education and economic development. These include major investment in road, railway and port infrastructure will amount to HK$80B over the next five years and capital spending on education which will increase by 52.4 per cent to HK$10.2B.

Ladies and gentlemen, our optimism in Hong Kong's future is based not on blind faith, but on a reasonable assessment of our opportunities and the trust we have in our free market system: trust that is grounded in long experience. And our reasoned optimism is shared by others. A short while ago we received two rather impressive report cards from influential third parties. The US Heritage Foundation Index of Economic Freedom for 1998 found Hong Kong, for the fourth consecutive year, to be the freest economy in the world. And the American Chamber of Commerce in Hong Kong, - one of the city's top business groupings, has given the thumbs up for the SAR's medium term outlook in a recent survey of its members.

Looking ahead our political stability, sound economy and dependable currency will continue to provide a measure of certainty in a region now beset by uncertainties. And this is bolstered by the fact that we have the mainland of China as our economic hinterland indisputably the largest market in the world and one of Hong Kong's biggest competitive advantages. Over the current five year period, China has set herself a growth rate of 8 per cent per annum. Inflation has been successfully kept low and domestic savings rates are exceptionally high. These are some of the factors which have attracted overseas firms to use Hong Kong as a platform to penetrate the China market.

Today Hong Kong-based firms employ over five million workers in southern China, about twice the working population in Hong Kong. This ability to tap the enormous pool of inexpensive labour in China gives Hong Kong companies a powerful cost advantage, one that is holding up very well despite the devaluation in the region. Recent data suggest that as of November last year, labour costs on the Chinese mainland are still less than half of those in Thailand, and one-fifth of those in Malaysia.

Hong Kong is the largest external investor in Mainland China, accounting for some 60 per cent of all external investments. With our reunification, we are taking an even more encompassing and ambitious view of business developments in the mainland. In September last year, the 15th Party Congress confirmed the Chinese Government's determination to privatise its 350,000 state-owned enterprises. Hong Kong-based companies are uniquely well-placed to lead this historical endeavour, and Hong Kong's capital markets will be the main external source of funding for these enterprises.

And what about our own attributes? The attributes that have put Hong Kong at the top of the East Asian region remain:

* our geographical location, on China's doorstep and

midway between Tokyo and Singapore;

* our hard-working, flexible and well-educated work-

force, combined with our enterprising and

resourceful entrepreneurs;

* our simple and low tax system which I have already

mentioned;

* our transport and communications infrastructure,

which makes it easy to travel to and communicate

with almost anywhere in the world. This will be

further enhanced by the opening of our new airport

on July 6 this year.

* our accessible and predictable legal and judicial

system, which ensures that the rule of law is

upheld and that no one is above the law; and

* Hong Kong's resilience and "can do" attitude, which

has enabled us to overcome so many apparently

crippling political and economic problems in the

past.

Finally, allow me to say a few words on Japan and Hong Kong. Hong Kong has always enjoyed a very close relationship with Japan, who is now Hong Kong's No. 1 foreign investor in manufacturing industries, No. 3 in foreign investments overall and also our No. 3 largest trading partner. But the partnership spans more than trade and economics. Cultural and social exchanges between the two places have been growing all the time. Some 25,000 Japanese citizens are now resident in Hong Kong and we are the one of the top destinations for Japanese tourists.

Nagoya, located in the heart of Japan, is very well known to Hong Kong people. Its role as the leading manufacturing centre of Japan is well recognized by businessmen in the Asia Pacific region and other overseas countries. I am confident that the business and economic ties between Nagoya and Hong Kong would continue to flourish in future and I would like to extend a warm invitation to you all to visit Hong Kong to see first hand the life in the HKSAR.

I would be happy to answer any question you may have during the question and answer session.

Thank you very much.