It is always a pleasure to back in Tokyo, especially in the autumn when your trees are at their most magnificent.

Just over 100 days ago Hong Kong entered a new era as a Special Administrative Region (SAR) of China. This is my first visit since being selected Chief Executive last December and since assuming office on July 1. I am most touched by the warmth of the welcome I have been given and by the depth of Japan's support for the new SAR.

Besides meeting with friends from the HKTDC, the HKTA and our ETO here in Tokyo, I am particularly pleased to have this opportunity to meet with members of the Japan/Hong Kong Society. I know I am among friends. This is an occasion not only to recognise your long contribution to the friendship and understanding between our two communities but to carry it forward.

Hong Kong has entered its new era stronger and more self-assured than at any other time in its history. Indeed, we are moving forward with pride and confidence. Pride in that we are at last reunited with China and confident that tomorrow will be even better. And, we are moving forward with a new sense of purpose, a sense that as part of China we are part of an even bigger destiny.

We are building a Hong Kong that will be even more prosperous and democratic in the 21st Century. A city filled with new vitality. An open, flexible and innovative economy which is poised for even greater achievements as the world moves towards free trade.

This is my key message. But it is only part of the message. For I believe the Japanese and Hong Kong economic partnership is on the threshold of a new era.

The Meaning of "One Country, Two Systems"

July 1st has come and gone. We, who live and work in Hong Kong, continue to strive for an even more successful and prosperous future. Our economy continues to grow, our financial foundation remains solid, our society remains pluralistic, and our politicians continue to debate openly on all the topical issues. And our many interest groups continue to express their views through demonstration. Indeed, recent surveys conducted by the Hong Kong University Social Research Centre showed that 85% of our population is confident about the future of Hong Kong. This is a historic high for Hong Kong under any administration.

What makes us so confident in managing our future? The fundamental reason for our confidence is, of course, the solid promises in our Basic Law. It is a comprehensive document that was drafted by people from both Hong Kong and 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 institutionalises the concept of "One Country, Two Systems". It clearly prescribes the social, economic and political systems in Hong Kong which are different from those in the mainland of China. It protects the rights, freedoms and lifestyle of Hong Kong people. The Basic Law guarantees the independence of our judiciary and, apart from foreign affairs and defence, it gives us full responsibility to manage our own affairs. It gives us complete financial autonomy and an independent monetary system. It establishes Hong Kong as a separate customs territory, and enables us to work directly with the international community to control trade in strategic commodities, drugs, illegal transhipments, and to protect intellectual property rights. The Basic Law has also established the framework for the democratic evolution of our political structure over the first 10 years of the Hong Kong SAR, including my election as Chief Executive in December 1996 and the election for the first legislature, to take place in May next year.

It should be remembered that the "one country, two systems" concept was not a concept that originated in London or Hong Kong. It was a concept developed by China. The reason is simple : it is clearly in the fundamental national interest of China, and to the Chinese as a people, that the "one country, two systems" concept be successfully implemented. By preserving and further enhancing the success of Hong Kong, we can contribute towards the continued modernisation of China. In addition, the feasibility of different social, economic, and political systems within one country is being tested. Success in Hong Kong can serve as a significant step towards the greater and final objective of re-unification of the entire nation. These are major objectives for China.

What else makes me so confident in Hong Kong's future? China has undergone dramatic changes since opening 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 successful implementation of the "one country, two systems" concept as we move forward into the future.

Since July 1, we in Hong Kong have been administering our own affairs. We are also carrying on with the development of democracy in Hong Kong. The Basic Law, requires us to develop democratic institutions: our commitment as a society is to do the same.

The Basic Law has given us a 10-year timetable for elections both for the Chief Executive and for the Legislature. I was chosen by a committee of 400 Hong Kong residents, drawn from all walks of life. My successor will be chosen in 2002 by an even more widely drawn body, increased in size to 800. Legislation is now being completed for elections in May next year to our first, full legislature. Of the total 60 seats together, 20 will be directly elected; 30 will come through a functional constituency arrangement and 10 through an Election Committee. Every adult permanent resident will have the right to vote for the 20 directly-elected seats. And we currently have 2.5 million registered voters in these geographical constituencies. Every party is welcome to contest the seats. Those elected will serve for two years, before a second legislature is elected for a four-year term in 2000. With the third Legislative Council election in 2004, the number of directly-elected seats will increase from the one third we will have next year, to one half of the total. After 2007, according to the Basic Law, it will be up to Hong Kong to decide when to introduce elections by universal suffrage for electing both the Chief Executive and the Legislature.

I know that there is concern 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 to represent economic, professional and grass-root sectors of importance to Hong Kong's community. They were not intended to be elections through universal suffrage. This was the case until changes were brought about in 1995. Indeed, the present arrangements revert to what we had before and is an interim arrangement under the Basic Law, designed to maintain balance and continuity while our democratic process continues to evolve over the next decade. In any case, I want to assure you that we are not turning back the clock back, not standing still, not shutting people out.

May I just point out what the landscape looks like on this side of the fence. Only in the last few years of colonial rule did we ever have the opportunity to elect anyone to the legislature. More so, we never had any say in the choice of the Governor, the one who held much of the power and responsibility. But now, for the first time in our history, we, the people of Hong Kong, have the responsibility for our own affairs. There is debate as to whether a period of 10 years is too long for this evolution process, a process that is critical to Hong Kong's future, a process for which we in Hong Kong, and nobody else, will bear the full consequences of its success, or failure. I appreciate that this is an issue of concern to some people. However, let me emphasise this: at the end of the day, we must move forward in what we, the people of Hong Kong, believe to be in the best long-term interest of the Hong Kong SAR. And, you would expect us to do no less.

As many people know, I am conservative. But conservatism - wanting to sustain things that you know and value - does not mean standing still or turning back the clock. Sustaining a wonderfully complex and exciting community like Hong Kong requires constant, judicious movement and sometimes pre-emptive adjustment. I am bound by conviction, and by oath, to uphold the Basic Law. I will assert and support key values and principles. I am fully aware that in moving forward we need the full support and acceptance of the community.

Life in the SAR

I would like to highlight a few features of life in the new SAR. All branches of government - judiciary, legislative and executive - are functioning normally. The rule of law prevails, along with our common law system.

The civil service is carrying on exactly as it always has, efficiently and productively under an experienced and greatly respected leadership.

Freedom of information and of the press - so vital to a healthy society and a competitive business hub - is unfettered. I have confirmation of this every morning when I pick up the Hong Kong newspapers.

Individual freedoms are as important and respected now as they were before the handover.

At the same time, we have strengthened our reputation as one of the safest cities not just in Asia, but in the world. Our crime rate remains low by any standard. And it is as easy for Japanese and other visitors to enter Hong Kong now as it was three months ago. We have full autonomy on immigration matters, as we do with Customs and law enforcement.

Free market principles, free trade and free enterprise continue to guide our economy, which is forecast to grow at 5.5 per cent this year and to achieve similar levels of growth over the next few years.

The number of multi-nationals and overseas firms setting up regional offices and headquarters in Hong Kong is increasing.

The SAR Government's fiscal policies are prudent and sound. Our taxes are low and predictable. Hong Kong's financial institutions are among the most open and transparent in the world, buttressed by effective regulation - with a light touch. The world's finance leaders were able to confirm all this for themselves last month during the World Bank/IMF annual meetings in Hong Kong .

The Hong Kong Dollar stood its ground robustly during the Southeast Asian currency crisis of the summer. It is backed by US$85 billion in foreign exchange reserves, per capita the second-largest reserves in the world.

As someone who, until a year ago, spent nearly a lifetime in international business, I understand the importance of all these factors to the continued success of the SAR. No one is more committed than I to preserving and, indeed, enhancing them.

The Challenge of Competitiveness

Last week I delivered my first annual policy address to the legislature, laying out a blueprint for Hong Kong in the 21st Century.

Among my highest priorities is to make the SAR more competitive. We have successfully transformed ourselves into one of the world's most services-oriented economy and are rated its second most competitive by the World Economic Forum. But there has been some erosion because of inflation and because of the rising cost of doing business in Hong Kong. These are issues of particular concern to Hong Kong.

We are tackling the problem of high property prices by significantly increasing housing and land supply, including luxury housing for executives of overseas firms. Progressively, they will feel some cost relief.

But holding down costs is only one side of the equation. Competitiveness in the 21st Century is about adding value. The invisible hand of the market has already pointed Hong Kong's economy in this direction. But we will do more to foster and facilitate the trend towards high value-added industries and services.

We are making more land available to high-technology industries, including manufacturing plants owned by Japanese investors, and we are providing more seed money for a new generation of sunrise industries. At the same time, we are accelerating Hong Kong's entry to the information age by speeding up the application of information technology to official business and commerce.

It takes new skills to make a new economy work. We are launching major initiatives in education and training to help our young people acquire the skills they need - especially IT and language skills - to succeed and prosper. At the same time, we are keen to attract even greater numbers of talented professionals from the Mainland and overseas.

Working with Japan

So we have much work to do. But what is Japan's stake in Hong Kong's future?

We are your third largest market in Asia and the third-largest destination for Japanese investment in the region. Some 3,000 Japanese companies have offices in Hong Kong and close to 25,000 Japanese executives and their families live there. Japanese products and department stores, like sushi and karaoke, are an integral part of Hong Kong's life.

Japan is a lead partner in major Hong Kong infrastructure projects, including our new airport, which will open next year. Japanese trading conglomerates are also very active in Hong Kong, which serves as their principal sourcing and marketing hub for southern China and, in many cases, Southeast Asia.

All this is reflected in the growth of trade between us, which more than doubled in the past decade, strongly boosted by re-exports of Japanese products to China and the rest of region. Similarly, about one-third of China's trade with Japan was handled by Hong Kong last year.

Last year, Hong Kong was the most popular tourist destination for outbound Japanese travellers. However, since the end of June this year, the number of Japanese arrivals into Hong Kong has dropped substantially. I am pleased to note that through the Hong Kong Tourist Association, our industry is working very closely with your tour operators to re-package Hong Kong and make sure that we are competitively priced in order to stimulate the market and attract increasing numbers of Japanese visitors back to Hong Kong in 1998. Hong Kong is still a very attractive place to visit.

A Broader Partnership

Hong Kong and Japan have a dynamic partnership. But, as I mentioned earlier, I believe Hong Kong and Japan are at the threshold of an even more significant economic relationship. There are many reasons, but I will touch on three.

First, I believe Japanese companies have a greater role to play in Hong Kong's economy as we accelerate our move towards higher value-added industries and services. These are technology and knowledge-based areas where Japan is already strong and has much to contribute to new partnerships in the SAR.

Second, at the recent 15th Party Congress the Chinese leadership clearly set out a path for the country's development into the 21st Century. Indeed, China will be more open and prosperous and it will become one of the world's leading nations. The 15th Party Congress also set out policies on economic reform on an epic scale - that is, the reform of state enterprises. In this respect, Hong Kong is primed to make a unique and mutually beneficial contribution in areas such as raising capital, new technologies, professional expertise and contacts in overseas markets, especially through our capital markets. But it is a huge challenge and one in which we would welcome Japanese partners.

Third, there are fresh opportunities for Hong Kong and Japan to work together in the wider region. Following the currency crisis, I envisage a return to sounder, export-led strategies for growth in Southeast Asia which will, in turn, create demand for more manufacturing investment, technology and infrastructure support. These are all areas where Japan and Hong Kong are strong. Working more closely together, we can be even stronger.

Into the 21st Century

Our strengths are different but complementary. If Japan is an industrial and technological powerhouse, Hong Kong is an entrepreneurial dynamo. We are the two most dynamic trading economies in Asia. We are the two biggest financial centres in Asia. And we are by far Asia's largest sources of foreign direct investment, with Hong Kong accounting for US$27 billion in FDI last year and Japan for US$23 billion.

With the indomitable spirit of the Hong Kong people, and a strong commitment from the leadership of the Central People's Government to the full implementation of the 'one country, two systems' concept, Hong Kong's future is assured, I feel it is time to rethink the scope of the Japan-Hong Kong partnership. To think bigger.

As Victor mentioned in his introduction, if there has been any change at all in Hong Kong since the handover, it is in the mindset of our people. Hong Kong is no longer an enclave economy with an artificial and psychological barrier created by the date of June 30, 1997 and the border between Hong Kong and the mainland of China. Tens of thousands of Hong Kong people who have previously migrated overseas are returning home each year. They feel the pride, they sense the opportunity and they want to participate in building a better tomorrow. They also bring new skills and experiences to enrich our economy. Yes, our people are thinking longer term. They are looking more at prospects and investments which may take years to bear fruit. They are looking at how to develop their businesses over time, how to broaden into higher value added activities - and at forming strategic partnerships to make this happen.

As these factors continue to evolve I believe they will draw our business communities closer together. It is a natural process and one I warmly welcome. For the broadening of the economic partnership between Japan and Hong Kong will benefit not just our own peoples. It will, in my view, be a powerful force for stability, prosperity and peaceful co-operation in the entire region as the new century unfolds.

Thank you very much.