Distinguished Guests, Ladies and Gentlemen:

It is my pleasure to be here in Vancouver this afternoon to address the distinguished business leaders of the 18 APEC member economies. As a member economy of APEC since 1991, Hong Kong has participated actively in a wide range of activities under APEC. Personally, I am particularly honoured, as this is my first time representing Hong Kong, China at the APEC Economic Leaders Meeting. I am confident that both this Summit and the Leaders Meeting will be a great success.

It is about five months since the reunification of Hong Kong with China. I am glad to tell you today that we continue to move forward in Hong Kong with pride and confidence. Pride in that we are now reunited with China, and have become masters of our destiny. Confidence in that we can and will make our city an even better place going forward.

During the handover ceremony, and on numerous subsequent occasions, the Chinese leadership has emphasised time and again that Hong Kong would continue to enjoy a high degree of autonomy under the "one country, two systems" concept as guaranteed by the Sino-British Joint Declaration and the Basic Law. I can tell you that this is a solid commitment. Five months after the establishment of the Hong Kong SAR, there is not a single suggestion that autonomy is being undermined.

The perpetual pessimists predicted that the rule of law would no longer prevail after June 30. They were wrong. The rule of law is the cornerstone of Hong Kong's success. The Basic Law guarantees that Hong Kong will keep the Common Law system and an independent judiciary with the power of final adjudication in Hong Kong. We pride ourselves on the rule of law and will do everything to preserve it.

Shortly after the handover, the legitimacy of the Provisional Legislature was challenged. This is not a sign that our legal system is flawed and crumbling. The contrary is indeed true, as rightly observed by Lord Irvine, the Lord Chancellor of the United Kingdom, during his visit to Hong Kong in September. Legal challenges are part and parcel of the Hong Kong system, an indispensable chain in the rule of law itself. The Government has been and will, no doubt, continue to be challenged in court. What is important is that legal challenges are, and will continue to be, dealt with by courts in Hong Kong. The Government will argue its case in court and abide by the rulings.

The Appeal Court's ruling on July 30 upheld the legitimacy of the Provisional Legislature and put the validity of all laws passed after June 30 firmly beyond any doubt.

This brings me to another dire prediction from the school of pessimists that the freedoms, democracy and civil liberties in the HKSAR will be severely curtailed. The Basic Law also ensures that the people of Hong Kong will continue to enjoy the freedom of speech, assembly, association, the press, as well as other freedoms guaranteed by the International Covenant on Civil and Political Rights and the International Covenant on Economic and Social and Cultural Rights. Since the establishment of the HKSAR, Hong Kong people have been exercising these rights of free speech, of demonstration, and of scrutinising government policies and decisions. We have some 20 demonstrations a week. People talked about self-censorship by the press before the handover. Let me tell you - it would be an extremely unusual day if I were not to hear or read some criticism or comment about myself or other senior officials in the media. Believe me, the Hong Kong media is as vibrant and demanding now as it always has been.

We have had a good beginning. Laying a solid foundation early on in the life of the SAR is very important. Indeed we are very confident of our future. What makes us so confident in managing our future? The fundamental reason for our confidence is, of course, the solid promises of our Basic Law. It is a comprehensive document that was drafted by people from both Hong Kong and 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 Mainland 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, gives us full responsibility to manage our own affairs. It allows us complete financial autonomy, and the independence of our 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.

It should be remembered that the "one country, two systems" concept did not originate in London or Hong Kong. It was a concept developed by China. The reason was simple: It is clearly in the fundamental national interests of China that the "one country, two systems" concept be successfully implemented. By preserving and further enhancing the success of Hong Kong, we can contribute to 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.

Indeed, China has undergone dramatic changes since it opened 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 vision of China's leaders, who have guided these developments. Indeed these leaders have the ability and the acumen to steer China successfully into the 21st century. It is this ability and acumen that, I believe, will ensure the successful implementation of "one country, two systems" as we move forward into the future.

I would like now to talk about the recent financial turbulences. In recent weeks, the financial turmoil in Asia has preoccupied the mind of many people. As an open and free economy, Hong Kong has not escaped the impact. Let me first emphasise that the Hong Kong Dollar/US Dollar linked exchange rate is here to stay. This policy will not, and let me repeat, will not change.

For 14 years, the link has provided the economic stability and contributed to the maintenance of confidence in Hong Kong's role as an international trading and financial centre.

Given the open nature of the Hong Kong economy, any fundamental change in policy as delinking would cause grave uncertainty and disturbance which would weaken investment sentiments. Interest rates and financial market volatility would remain high due to the market uncertainty.

Recently, one of the leading banks in Hong Kong reviewed this in its report and in their view, if the currency were delinked next year the growth rate in Hong Kong will come practically to nothing and inflation would be in double-digit numbers. These are obviously unacceptable to us.

But let us look at a few important facts.

The first fact is that our economic fundamentals are strong. The IMF mission had just testified to that a fortnight ago. The HKSAR Government's financial management continues to be prudent - our budget surplus for this year will exceed two per cent of our GDP. Our banking system is strong and highly capitalised. As IMF noted in its recent assessment, the banking system in Hong Kong will be able to withstand the effects of the recent financial market volatility. We have the third largest foreign exchange reserve in the world. Furthermore, China's economy which continues to expand in an orderly manner will have a major positive impact on us.

The second fact is that the success of our economy has been built upon free and open market forces. Economic adjustments must be allowed to run their course. Any short term intervention in changing the ground rules will impede the cycle of recovery. Indeed, through the short period of slower growth in Hong Kong in 1994-95 we witnessed the prompt recovery of the economy which was backed by the high degree of resilience of our economy and the vitality of our asset markets.

The third fact is we are acutely aware of the need to sustain and enhance our competitiveness and these efforts will contribute to a speedier recovery. I have outlined a number of major initiatives in this respect in my first policy address in October - by providing sufficient land to build 85,000 units of apartments per annum to enhance the competitiveness in the cost of our housing and by examining what needs to address the manpower shortage especially at the high end of the market, by enhancing the value-added in our manufacturing industry, by finding better ways to attract tourists back to Hong Kong despite the currency advantage in the neighbouring economies, and so on.

In defending the linked exchange rate, interest rates have gone up. Indeed, continued uncertainty surrounding the currency turmoil in the region tend to keep interest rates high.

Higher interest rate causes pain to many sectors of the community, but there are no alternatives. Of course, the sooner the regional turmoil settles down, the sooner the interest rates will begin to come down. So, let us take a look at the future.

* Because of higher interest rates, the level of Hong Kong's housing cost is already coming down which should greatly improve our overall competitiveness.

* China's economy will continue to do well as we move into the 21st century and Hong Kong is uniquely positioned to benefit from this development.

* When compared with other Asian markets, our highly liquid, well regulated and transparent stock market will be among the first to attract foreign investment back once the dust settles down.

* Our high foreign exchange reserves and fiscal reserves will provide an anchor for our future economic development.

Indeed, of all the countries and communities that have been affected by the financial turmoil, I know ours will be the first to rebound. I look forward to the future with confidence.

I want to spend a few minutes to talk about my Policy Address, which I mentioned earlier. We have had a good beginning. Laying a solid foundation for our future is very important. We have good reasons to be proud of our achievements in the past 30 years. But we have to be alert to the challenges which lie ahead. We face keen competition in trade and services, and our competitiveness is threatened by the soaring operation costs. Hong Kong's people are its greatest asset. We have to make sure that the next generation is equipped with all the necessary skills to help Hong Kong move forward in the value-added direction in both the services and industrial sectors, strengthening our role as an international city. We have to face challenges arising from a growing and aging population, meet the pressing demand for more and better housing, and deal with employment dislocation due to the restructuring of the economy. Only then can Hong Kong remain at the forefront of the new age with vigour and vibrancy.

The HKSAR Government's foremost task is to help to enhance Hong Kong's economic vitality and sustain economic growth. We aim to continue to create a good business environment and uphold the principles of free trade, fair competition and non-interference in the market-led economy. We are committed to small government with the share of public expenditure currently representing only 18 per cent of our GDP. We will continue with transparent and predictable government policies and a low and predictable tax structure. We will strive to affirm Hong Kong's position as an international financial centre and a cosmopolitan city. As we enter the information era, we will adopt positive measures to encourage investment, and nurture expertise, in information industry and infrastructure.

High property values have had a strong negative bearing on social stability and our economic vitality. The crux of the problem is supply. We have drawn up a 10-year housing plan to speed up reclamation, land formation and urban redevelopment and to extend the mass transit system and infrastructure development. We will increase overall housing supply with a view to achieving a home ownership rate of 70% in 10 years' time.

Education is the key to the future of Hong Kong. Good education provides every person in Hong Kong with equal opportunity to participate and enjoy the fruit of our economic progress. Good education is also essential to ensure that our economy will remain vibrant and competitive. We will ensure that our education system will cater for Hong Kong's long-term needs and will inject sufficient resources to achieve this goal.

In looking at Hong Kong's future, one must look at development in China. The fact is that our two economies are intertwined. Let us talk about the development in China. What has happened in China for the last twenty years is by any standard astounding. Lives of millions of men and women are being transformed. They are being lifted out of poverty, and given opportunities that they never had before. The percentage of people living at or below subsistence level in China has decreased from 33 per cent in 1979 to single-digit level today. Huge investments are being made in major infrastructure projects in roads, railways, ports, airports, telecommunication, power generation. Increasing investments are also being made in all levels of education. Reform of state enterprises and the banking sector is being undertaken. Indeed, all this will ensure China's continued rapid development in the 21st century. In fact, the World Bank in the recent publication titled "China 2020" has predicted China's economy will be one of the largest in the world by then.

For the rest of East Asia, despite recent financial turmoil, I believe we will continue to march forward strongly into the 21st century. My confidence is boosted by the successful meeting of finance and central bank officials held in Manila earlier this week. It reaffirmed the strong fundamentals of the region and expressed confidence that the region will return to robust growth rates. Yes, there are flaws that need to be addressed in many of the countries in East Asia. However, with strong savings and investments, wide open market and flexible and educated work force and willingness to adopt new technology in manufacturing, East Asia, with pride, will recover and move ahead. And where can world business community be best situated to participate in these new opportunities? Where else but Hong Kong, the natural gateway to China and the Asia Pacific Region.

Hong Kong has been enriched over many decades by different ideas and cultures, blending the best of East and West. People from all over the world feel at home in Hong Kong.

Hong Kong is in the midst of where many of the most important events of the 21st Century will take place.

This is when Hong Kong's unique strengths as a 'supercity' for international business will be most in demand, intermediating not just between the mainland of China and the world, but between Asia and the world.

In short, the Hong Kong SAR 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 world business in our continued success.

Thank you.