Good evening, ladies and gentlemen,

Sir Elden, thank you very much for that kind introduction. I would like to say emphatically that I do not run the show in Hong Kong. I am the deputy to the Chief Executive Mr Tung and contrary to media speculation from time to time, we work extremely well together as a team, together with all my senior colleagues, who like myself, have transited and remain in post past first of July 1997. Before I start on my talk, I'd like to thank you for inviting me to speak to you as I know that this organisation has hosted many distinguished speakers in the past, and I feel privileged to be included among their number.

I believe Christ Patten, the last British Governor spoke to the Council in November, 1994 - well over three years ago. A great deal has happened since then. Most importantly, the change of sovereignty. The immediate challenge that historic change presented to China, Britain and the people of Hong Kong over a long transition period is now to a great extent behind us. The natural tension and anxiety which understandably grew as the final months and weeks rolled by, have now largely evaporated.

The transition has successfully taken place, and Hong Kong, after 156 years of colonial rule, has settled down to forge its own future under the guarantees given by China which allow Hong Kong people to run Hong Kong under an ingenious formula engineered by the late Deng Xiaoping which we know as One Country Two Systems.

As if this unique, completely untested arrangement was not enough for a tiny community of 6.5 million people to handle, we were thrust into, US Sir Elden said, the epicentre of a financial and currency crisis in Asia, the likes of which the region has not witnessed in its post-war march to the front line of world economies. We have also been buffeted by a post-Handover downturn in tourism; and more recently by a bird 'flu scare which has attracted banner headlines here and throughout the world.

How has Hong Kong come out of all of that? How are we managing the transition from British to Chinese sovereignty? Has it all changed? Are we still in one piece? And the regional financial and currency turmoil? How did we fare? And, more importantly, how will those dramatic recent events, which dealt savage blows to some of our neighbouring economies, affect Hong Kong's future prospects? And with them, the billions of dollars which Americans have invested in Hong Kong?

These are the questions I wish to address tonight because Americans have a huge stake in us getting the answers right. And I refer not just to the interests of American investors, but the wider international interests of the US, its interface with Asia in general, and its relationship with China in particular.

Let me begin with the most topical news - the bird 'flu. I know that this issue has created enormous attention here and elsewhere. Not surprising when you think of the worst case scenario. Mercifully that has not come to pass, but it is worthwhile remembering precisely what it is that we are dealing with.

Firstly, it is not an epidemic as repeatedly stressed by the World Health Organisation. There have been 17 cases, of which 4 were fatal since the first case was discovered in August last year. Secondly, there is no concrete evidence yet so far that the 'flu was transmittable from human to human and according to the lastest Centers for Disease Control statement, even if it were so transferrable, it is a very inefficient transmission. Thirdly, in recognising the potentially serious nature of the problem, our health authorities were extremely vigilant, and quick to call in the experts from the World Health Organisation and the Centers for Disease Control in Atlanta, Georgia, to work alongside them in taking all the necessary measures. Some of these - like the culling of our entire chicken population - were quite unpleasant, but we believe necessary. These measures, along with cooperation from the Mainland on chicken imports from China, stringent new checks and controls on poultry imports, and complete overhaul of our own farm and market hygiene arrangements, have been taken to protect the health of the community and to restore consumer confidence.

Before I move onto the first question I raised at the beginning of this address - how are we managing the change? - let me recall the message that Chris Patten delivered to this audience back in November 1994. It was that so long as Hong Kong's fundamentals, those core values which underpinned our success, were not changed, then he was optimistic about Hong Kong's future after 30 June 1997. He singled out:-

* The rule of law

* An independent judiciary

* A level playing field for business

* A clean government which plays by the rules, under the rules

And those other freedoms we all hold dear:-

* A free press

* Freedom of worship

* Freedom of assembly.

I am sure you will all agree with me that these are key ingredients in maintaining a free, plural society; where the institutions of civil society are embedded into the fabric of the community which, in turn, understands their importance; and where the citizens cherish and protect them, not just for their own sake, but for the sake of their children.

I believe I can put my hand on my heart and say that the Hong Kong Special Administrative Region of the People's Republic of China continues to enjoy those essential freedoms; and that we have an administration that is wholly committed to ensuring that we continue to do so. We are doing so under the provisions of the Basic Law, China's mini-constitution for the Hong Kong SAR. This document lays out in considerable detail the framework of a free market, capitalist economy underpinned by the rule of law, and with all of those freedoms I have already detailed. In short, it is a constitution which guarantees the kind of Hong Kong which the rest of the world has come to know and admire, for the strength of its institutions and the vision and vitality of its people.

That there has been so little change in Hong Kong since 1 July last year is the best answer we can possibly offer to those critics who simply could not believe that Hong Kong would be able to hang on to its freedoms after the Handover; that once we had again become part of China, the whole fabric of our society would be changed and diminished. Those of us who had been intimately involved during 12-and-a-half years of transition in the negotiations between Britain and China knew that the self-interest of all of those concerned, and the determination of Hong Kong people to make the transition work, would at the end of the day prevail. With the Handover now just over 6 months behind us, that is indeed how it has worked out.

I am not the only one to say so. Let me refer to the first quarterly report of the Congressional Task Force which is tracking the progress of the transition in Hong Kong for Speaker Newt Gingrich. Noting the high level of public confidence following the Handover, the report went on to say that:-

* The press continues to be open, free and full of criticism and analysis of both the Hong Kong and Beijing governments. Citing coverage of the recent 15th Chinese Communist Party Congress, it emphasised that journalists displayed no hesitancy in voicing views not welcome in Beijing.

* Demonstrations representing all shades of political opinion continued without interference or restriction. Indeed, there have been 150 demonstrations since the Handover.

* NGOs, including those harshly critical of China, continue to operate freely.

The report noted evidence of self-censorship in the press - but this is not something that is encouraged by the Special Administration Region Government: indeed, I have made it plain to everyone, including editors and journalists - that the free and unfettered flow of information is vital to Hong Kong's social and economic success.

The report also quoted fears expressed by democrats that the threat to Hong Kong would come with a very slow erosion of the rule of law, not a sudden crackdown on civil liberties or freedom of speech. I believe such fears are unfounded.

The rule of law is at the very heart of Hong Kong's success. It is regarded by people at all levels of our society as the most important safeguard for our way of life, the very essence of our system as enshrined in the concept of One Country Two Systems. But Hong Kong people know that the rule of law cannot be taken for granted, that they must protect it themselves. Believe me, the rule of law is not something that Hong Kong people will allow to be taken away from them, by stealth or otherwise.

The Congressional Task Force report summed up that it was "so far so good" in Hong Kong. Given the size of the task we faced, I think that's a pretty encouraging report card - certainly enough to give us confidence for the next semester!

But I do not pretend that life is problem-free in Hong Kong - that is not the way of a dynamic society such as ours. For example that report did raise other concerns, chief among them the worries that have been expressed about the abolition of the last legislature, its replacement by an appointed provisional legislature, and by what critics see as more restrictive arrangements for the first SAR Legislative Council election which are to be held on May 24.

Having been closely involved in this issue both before and after the transition, I understand the arguments on both sides of the debate, and I appreciate the depth of feelings and sincerity behind them. Allow me to offer some background so that you can see the issue in context. You may recall that the arrangements for Hong Kong's last legislative elections which took place in 1995 were the subject of lengthy negotiations and considerable controversy between the British and Chinese governments, and among Hong Kong people themselves. The negotiations unfortunately failed, and the elections went ahead with the Chinese government making it plain that in the absence of their agreement to these arrangements the resultant legislature would be replaced immediately after the transition.

I know that both sides, wish that none of this had ever happened; that agreement could have been reached. But it wasn't, and the SAR must now put in place arrangements for new elections. It has been a very difficult issue for all of those concerned. From my own perspective as the head of Hong Kong's civil service before and after the Handover, I can only say that to recognise the future is not necessarily to repudiate the past. Our collective responsibility as civil servants is to put into place the new arrangements in a way that will be seen by the community - and by fair-minded international opinion - as being free, fair and open. The aim of the arrangements are to provide a balance of interests in the legislature to which the administration must be accountable, and will be accountable.

The legislature to be elected in May will retain the same profile as its predecessor elected in 1995: 20 geographical constituencies; 30 functional constituencies; and 10 members elected by an 800-member Election Committee drawn from four broad cross-sections of the community. The main areas of contention have been the introduction of proportional representation for the geographical constituencies and a reduction of the size of the electorate in 9 of the 30 functional constituencies.

A proportional representation system has been adopted to provide a broader representation of the diversity of voting for a range of parties and candidates; and the 9 new functional constituency seats have reverted to their traditional role of representing particular representative groups varying from business, industries, professions and trade unions. As Hong Kong's representative institutions began to develop from the colonial appointment system, these functional constituencies were always regarded as stepping stones towards universal suffrage, and that remains their role today.

I think it is important to stress, too, that the elections will be keenly and competitively fought. We are no strangers to elections in Hong Kong, and if the last two elections are any guide, our political parties, community organisations and independents running for office will present the voters with some interesting choices and challenges. Our Chief Executive, Mr Tung Chee Hwa, has made it very clear that everybody in Hong Kong is welcome to run in the elections, no matter what their political views. All of our established political groupings are doing so, including those who have been most critical of the electoral arrangements.

The administration's view is that the test of the new arrangements should be left to Hong Kong people themselves, and they can best do that at the ballot box. That is why we have conducted a massive campaign to enrol more voters; and why we will continue that campaign to ensure the highest possible voter turnout on polling day. I am sure Hong Kong people will want to take the opportunity to vote in large numbers in the first elections to be held in the SAR.

I myself feel the May 24 elections will produce a lively legislature in the recent Hong Kong tradition, and that all sectors of the community will have their voices heard through it. The elections will also, in a very real sense, put a final and important seal on the transition, and provide a bridge for us to move forward in evolving the democratic society envisaged in the Basic Law. There will be further elections in the years 2000 and 2004, by which time our constitution provides for the electorate to choose half of the candidates through geographical constituencies and the other half through functional constituencies. By the year 2007, we will have an opportunity to decide on a legislature elected wholly through universal suffrage, this being the ultimate aim of our constitution.

Mr Chairman, I have dwelt at some length on this issue, but I know how important democratic values are to Americans, and I wanted to do my best to assure you that they are important to us in Hong Kong also. The future that has been charted for us in the Basic Law is a democratic one, and the administration I serve will be ever mindful of that.

We are fortunate that as we make our move step by step along this path, we can rely on a strong economy, and a business community of legendary resourcefulness, imagination and entrepreneurial flair, supported by a work force of equal legend for its adaptability, resilience and ambition for self and family.

Let me assure you that we husband our resources very carefully in Hong Kong. For all our daring and vitality in the market place, the community knows that its administration takes a very prudent and responsible attitude towards managing public finances. We do not allow spending to exceed the trend growth rate of the economy. Deficit budgets are virtually unheard of (we have had only one in the last 10 years). Yet taxes are low and simple. The maximum salaries tax is 15%; corporate taxes cannot exceed 16.5%. As an administration, our view is that business decisions are best taken by businessmen, not bureaucrats. But we don't pick winners or losers. We respect a businessman's right to profit, just as much as we respect his right to go bust.

What we ensure in Hong Kong is a level playing field for both local and overseas players in the market place; an economy that operates within the framework of the rule of law and an independent judiciary which enjoys the confidence of the community and commerce; and a clean, politically-neutral civil service which believes it has a duty to maintain law and order and which regulates with a light but reassuring touch. We would like to keep the Government lean and small.

The result is that we have an open, transparent and accountable system of government; a well-managed and well-regulated financial sector; and a reputation for playing by the rules. I believe these fundamentals were pivotal to the way we handled the Asian currency and financial crisis in Hong Kong. And these structural differences in comparison to some others were magnified and recognised during that time.

It is interesting to note that the regional financial turmoil did not impact on Wall Street, London or Europe until the Hong Kong market came under attack in October. World headlines proclaimed that Hong Kong had led a world-wide stock market tumble. Whatever the truth of that, it was certainly a tribute to Hong Kong that Wall Street caught a cold only when Hong Kong sneezed.

I would not in any way try to minimise the pain we have suffered as a result of events last fall. Our stock and property markets, so closely intertwined, took a hammering as interest rates rose as we came resolutely to the defence of our linked exchange rate with the US dollar. This mechanism, operated under a currency board system, and backed by the world's third largest foreign exchange reserves, has provided Hong Kong with monetary and financial stability since it was introduced 14 years ago at a time of great political uncertainty in the early part of the then-to-be resolved Sino-British negotiations on Hong Kong's future.

Since then, the link has provided the basis on which we have come through many international crises: the 1987 stock market crash; the 1989 June 4 incident; the 1992 Exchange Rate Mechanism (ERM) turmoil; the 1995 Mexican peso crisis; and now the latest regional currency crisis crunch.

In the wake of a wave of devaluations in the region, our link came under strong speculative attack. Hong Kong and its currency came through this intact. Indeed, in successfully defending the currency, our foreign exchange reserves - now standing at US$96 billion - actually increased as speculators had their fingers burnt. As a commentary in the November 17 issue of Forbes said : "In attacking the Hong Kong dollar the speculators tried to mug the wrong guy. Turns out he had a gun."

So what are our prospects? The first point to be made is that our linked exchange rate is here to stay. It has proved its value to us time and time again. It will not change. I emphasised, it will not change.

Secondly, the events of last October in particular will mean that our growth this year will be well below that of last year's, which was a healthy 5.5%, despite the worries of some that the change of sovereignty, and the currency and stock market turmoil, would see it slashed. But slower growth obviously has its implications for the economy and the community but it will be our intention to manage that pain in both a sensible and compassionate manner.

We will have a solid base from which to do this. The realignment of the property sector in some ways has been a blessing in disguise. Unlike some other economies in the region, we do not have a high property overhang, and there is a continuing demand for high quality business accommodation. The lower prices and rentals will be good for our competitive position, and will dovetail with the medium and longer term housing strategy announced by the Chief Executive in October designed to bring about a levelling out of property prices which were seen as a threat to our competitiveness at the former high levels.

In addition, inflation is falling; and the reform of China's state owned enterprises provides a perfect opportunity for Hong Kong to act as a banker and provider of services and expertise in this latest bold chapter in the opening of the Mainland economy. This will further enhance our role as the unrivalled gateway to the China market.

And finally, government investment will be supporting a massive expansion of Hong Kong's domestic and cross-border rail networks that together will exceed the scale of our US$20 billion new airport program which will be completed later in the year. These projects will generate employment for several years to come and add greatly to Hong Kong's economic efficiency early in the next century. The problems of the region are serious, but the resources and the determination are there to overcome them, and I am confident that will happen. Certainly, I have no doubt that Hong Kong will be among the first - if not the first - to rebound.

I am hopeful, too, about the medium and longer-term future of our tourism industry. We were hit particularly badly after the Handover by a big fall in the number of tourists from Japan, following a huge increase in 1996 and the first half of last year by Japanese tourists who had come to see Hong Kong "before it went back to China". Indeed, an overall post-1997 "fatigue" factor, and worries about the price structure in Hong Kong which in turn was exacerbated by devaluations in the region that have contributed to our current problems.

The government and our tourist industry, in particular the Hong Kong Tourist Association, have been working closely together to address the problems exposed by the turndown, and to come up with some positive ideas and plans to solve them.

I can assure you that Hong Kong remains the exciting, dynamic, cosmopolitan city that is as stimulating and as much fun to visit as ever it was. And I am happy to report that the US represented our only growth market for tourists in 1997. While the number of visitors overall dropped 10%, the number of Americans was up 6%. Thank you all for coming - and keep coming. You will always be welcome.

I expect Americans to share in the prosperity and opportunities offered by the developments I mentioned earlier, and in the whole range of economic activities in Hong Kong. Americans have cultural, commercial, family and personal ties stretching back more than 150 years to Hong Kong's early beginnings.

There are 1,200 US companies, many of them among the 2,000 multi-nationals with regional headquarters in Hong Kong. There are now 40,000 Americans living in Hong Kong, and US investment is estimated at US$16 billion. I have no doubt that those numbers will increase in direct proportion to the economic development and commercial opportunities in Hong Kong, China and - notwithstanding the current difficulties - the Asian region as a whole.

These US-Hong Kong links are important in the overall context of US-Sino relations. For the last 6-7 years, the Hong Kong factor has been an integral part of the annual debate on MFN renewal for China. This year, the first since the Handover, will probably be no exception. As Washington has set itself on a course of constructive engagement with Beijing, I feel that the close, long-standing and continuing fruitful ties between Hong Kong and America can play a useful role in developing greater mutual understanding between the US and the Mainland.

Mr Chairman, ladies and gentlemen, if I may return briefly to my opening theme, I believe we have made a good start as an SAR enjoying a high degree of autonomy under the guarantees of One Country Two Systems. I believe the Chinese leadership is committed to these guarantees. They have proved their commitment to JD & BL by word and deed. Since the Handover, they have been scrupulous in leaving us alone to run our own affairs. I am sure they intend to continue to do so. The current financial turmoil and our continuing ability to handle this crisis entirely on our own with no interference from Beijing is the best demonstration of central Government's commitment to the "One Country two systems" concept and a high degree of autonomy for the SAR. I was in Beijing only 5 days ago meeting with Chinese leaders and officials, and that message came over loud and clear.

With these guarantees being honoured, there is no reason to think that Hong Kong cannot go on to greater things, expanding on our role as a major international financial and trading centre. That's good news for all of us in Hong Kong. And it's good news for all of those Americans who have already recognised the many opportunities offered by our city across the Pacific, and for the countless Americans who I know will continue to be attracted in the years and decades to come.

Mr Chairman, ladies and gentlemen, thank you very much.