Mr Chairman, ladies and gentlemen,

Thank you very much for that kind introduction. I must say that I am developing a certain "second home" feeling about this platform, as this is the third time in less than two years that I have been your guest speaker. It also happens to be the last public speaking engagement in a North American tour which began in Los Angeles just under 2 weeks ago. My mother once told me I should always try to save the best for last.

Mr Chairman, I last spoke at this forum some 12 months ago. At that stage there was less than 150 days to go before the Handover in Hong Kong, and the interest was intense. Was it going to work? Would Hong Kong get through unscathed? Would the resumption of sovereignty by China inevitably alter the fundamental nature of the place? Those were of course very legitimate questions which, despite the reassurances I and my colleagues gave at the time, could only be answered by events.

Well, I am glad to tell you that events have shown that the reassurances I gave were indeed well-founded. We have come through the Handover in pretty much the same way as it was before July 1. We now have a local Chief Executive in place of a British Governor. But otherwise the people in the Administration who were running Hong Kong before the Handover continue to do so now, most of them still in the same posts.

That's what the Chinese leaders meant when they talked about Hong Kong people running Hong Kong under the concept of One Country Two Systems. And there is no doubt that the Beijing leadership since July 1 has been scrupulous in honouring those commitments. They have left us completely alone to run our own affairs. And, having been in Beijing only two weeks ago myself, meeting with Chinese leaders and officials, I am very comfortable about their intentions to continue to do so.

After nearly seven months as a Special Administrative Region of the People's Republic of China the report card reads: "So far, so good".

More specifically, the rule of law is intact; the judiciary continues to function as independently as ever; political debate continues to be robust; we have legislative elections coming up in May which will be keenly and competitively fought; our press remains free and reports and comments on issues relating not just to the SAR, but to events on the Mainland, including those relating to dissidents, Taiwan and Tibet.

As for other pre-Handover concerns about civil liberties and human rights, life goes on as usual. Public protests and demonstrations on all kinds of issues - from democracy in China to complaints about public housing - are staple diet for our body politic. There have been legal challenges to the provisional legislature and to government decisions on child immigrants from the Mainland, and on matters relating to the residual Vietnamese population. In short, life has gone on pretty much as before.

We have also had a very welcome and reassuring decision announced from Beijing that China will arrange to transmit on our behalf reports to the United Nations on the application of the two international covenants on civil and political and economic, social and cultural rights in Hong Kong. These reports will be compiled by the SAR government and if necessary we will appear before the monitoring bodies to answer questions.

Of course, all of this is not to say that Hong Kong has been problem free since the Handover. Far from it. We were swept up in the Asian currency and financial turmoil; our tourist industry has been hit by a slump; the bird 'flu scare caused great concern at home and abroad; and there's been continuing criticism over the electoral arrangements for next May.

Let me deal briefly with these events. Firstly, the bird 'flu.

I know that this issue has created 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. There have been 18 cases, of which 6 were fatal. The World Health Organisation did not even classify it as an outbreak, but rather as a cluster of cases. Secondly, we could not definitively establish that the 'flu was transmittable from human to human. 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 and Prevention 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 necessary. These measures, along with co-operation with the Mainland on chicken imports from China, stringent new checks and controls on poultry imports, and an overhaul of our own farm and market hygiene conditions, have been taken to restore public confidence. We believe we have the situation under control. And indeed no new cases have been detected since we killed our entire chicken stock late last year.

Let me now turn to the economic situation, I think the entire international community was taken by surprise by the breadth and depth of the Asian economic meltdown. But does this signal the beginning of the end and is Hong Kong being carried down the plughole?

I personally feel that the earlier "miracle" headlines reflected perhaps undue exuberance on the part of speech writers and analysts - and, to be fair, on the part of political leaders too. The troubles now being faced are serious but they are not grounds for irrational despondence. What was happening in Asia was simply what happened in Europe and America years ago, the establishment of patterns of trade, of investment and industrialisation that brought growing wealth to fuel further development. What has happened in the latter half of 1997 demonstrated that where markets are not free, where market regulation is poor, where special interest gets protected, distortion of the market takes place and growth cannot be sustained. Financial practices built on false assumptions have come unstuck.

Sorting out the mess will be a painful process. But, just as Asian economies were able to benefit from the technology and trade of America and Europe, and so industrialise much faster than those who had only their own trial and error to draw on, so too in the current financial crisis. Asian countries don't just have their own experiences to draw on, but they have a wealth of ideas and examples of what works around the world to draw upon and help them sort things out. And behind all the financial problems of today remains the fact that most of the Asian economies are rich in resources and human capital, and the fact that slowly increasing wealth and access to world markets among hundreds of millions of people across Asia will remain a key component in world-wide economic growth.

So I don't see the new millennium as heralding the end of Asia's economic hopes. I don't underestimate the difficulties that those whose finances are in difficulties will have in getting restarted along the right tracks. But I am quietly confident that the current crisis will act as the catalyst for much needed reform of practices and liberalisation of markets, and will accelerate the pace towards them. Openness and accountability of companies, financial institutions and finance ministries; better information about markets, allowing better monitoring by regulators and stock holders; replacement of political intervention with market disciplines - all these processes will help to establish a more stable Asia of sustainable prosperity in the next century.

Where does Hong Kong stand in all this? We stand in the heart of it. We are in Asia. But we are Asia with a difference. The model of economic management that Hong Kong represents is the one that more and more in Asia are realising that they need to try to follow: a free market under the rule of law; a Government that is clean and believes in prudential supervision not directing the economy; openness and accountability. We have been buffeted by the storms around us, but our system has shown that it is built on firm foundations. We are sticking with it.

Our stock market has been battered. The Hang Seng Index is currently about 7,000 points below its peak of 16,673 in August last year. Our property market has fallen back by about 30% from its highest level in October last year. Overall economic growth will be lower in 1998 than the 5.5% we anticipate as the final outcome for 1997, and while we expect to see a modest recovery in domestic exports following substantial investments and improvements in productivity recently, overall our trade figures are unlikely to show the strong percentage growth that we had become accustomed to in the 70's, 80's and early 90's. Unemployment is likely to increase from its present level of 2.5%.

But as currencies have tumbled around the region, the 1,600 billion Hong Kong dollars in the banking system have not lost their value. When fund managers burned in South East Asia were desperate for cash, they could turn to Hong Kong's market, which had assets of real value. When New York's stock exchange shut down, Hong Kong stayed open. When pressure built up against our currency, everybody learned the lesson that the parity between the Hong Kong and the US dollar is not kept by an artificial peg, susceptible to political pressure, but by a sensibly based currency board system. Under that system, all Hong Kong dollars issued are backed by US dollar deposits, and an automatic adjustment mechanism, driven by supply and demand, not by central bank intervention, maintains the balance. We have no external debt and we have reserves that are sufficient to back up our currency 7 times over. Everyone has seen that the system works. The Government is not going to create uncertainty and risk undermining public confidence by fiddling with it. The link is here to stay.

The stability of the Hong Kong dollar since the currency board was established in 1983, coupled with our sound market regulation and high quality supervision, has helped us weather many storms and has transformed Hong Kong into the world's 5th largest banking centre and the 6th largest securities centre. There would be no competitive edge for Hong Kong if, as some have suggested, we delink our currency and devalue. Unlike the United States, we do not produce raw materials. We would simply import inflation and undermine the reputation that we have deservedly earned as a bastion of stability in Asia's markets. That could have damaging consequences for the region and for the long term health of our own economy.

Our banking system is sound and very well capitalised - we have much higher capital adequacy ratios than elsewhere - and mortgages lending has been controlled. So while the decline in property values is painful, it is not a threat to the integrity of the system. We don't have huge stocks of unused property. Our problem is not one of overbuilding - despite the frenetic construction everyone who comes to Hong Kong sees - but it is a problem of trying to find enough land to meet demand for decent homes and high quality office space. The recent drop in property prices and rents, whilst depressing sentiment for now, will in the longer term help our competitiveness by keeping the cost of doing business down. More importantly, it will make decent housing once again affordable by our people, which is an important social objective. The Government is ever mindful of public confidence in the property sector and we will be keeping a close watch over the supply and demand situation.

The next couple of years may well be a difficult time for us as economies in our region try to find their feet again and we in Hong Kong have to adjust to the new conditions around us. But those of you who know Hong Kong will know that our entire history of the last fifty years has been one of adapting and responding creatively to change and difficulty. The spirit of entrepreneurial initiative and willingness to work hard that created our past successes remains undiminished today. To that power of private initiative we can now add the assurance of constant public investment and the support and goodwill of our sovereign power, China. In the past, when faced with lower economic performance, we had to scale back public spending. But for many years now we have been practising the virtues of prudent fiscal management, keeping down rises in Government expenditure in years of high performance to no more than the medium term trend rate of growth in our economy. As a consequence, we have been able to put aside large fiscal reserves - on top of our foreign exchange reserves which is now the world's third largest.

So for us, economic downturn now does not mean cutting back on expenditure or increasing taxes, but a continued steady pace of investment and continued low taxes. Our new state of the art airport will open on 6 July this year. But even as we complete one massive project, we are embarking on an equally ambitious programme of railway development to improve commuting within Hong Kong and aid the movement of goods and people between Hong Kong and our economic hinterland in China. We are spending massively on bottom up improvement in our education system. We are extending mother-tongue teaching to improve overall standards of teaching while also recruiting 700 more native English speakers this year to improve English language teaching. Our aim is to promote bilingualism. There is much more, but those examples alone illustrate how, in the midst of today's troubles, we are carrying on improving Hong Kong's prospects for the future, improving and carrying on investing in our ability to work well with the mainland, and to thrive in the international business world.

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 as it were "before it went back to China". Indeed, it is 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 which 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 resolve them.

I can assure you all that Hong Kong remains the exciting, dynamic, cosmopolitan yet surprising 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, Americans - and I hope you will keep coming.

Let me now say a few words about our elections.

I know that worries 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 am in a good position to understand the arguments on both sides of the debate, and to appreciate the depth of feelings and sincerity behind them.

It has been a very difficult issue for all of those concerned. From my own perspective, I can only say that to recognise the present and the future is not necessarily to repudiate the past.

Our collective responsibility as civil servants is to put into place new arrangements for election 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 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 individuals running for office will present the voters with some interesting choices and challenges. Our Chief Executive, Mr Tung Chee Hwa, has made it 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 critical of the electoral arrangements.

The Administration's view is that the test of the new arrangements should be left to Hong Kong people, and they can best do that at the ballot box. That is why we have conducted a massive campaign to enrol more voters; we have now registered 70% of all potentially eligible voters. We will spare no efforts to encourage those who have registered to turn up on polling day.

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 the electorate will choose half of the candidates through geographical constituencies and the other half through functional constituencies. By the year 2007, the Basic Law provides us with the opportunity of deciding on a legislature elected wholly through universal suffrage, this being the ultimate aim of our constitution.

Mr Chairman, ladies and gentlemen, I am sorry if I have dwelt at some length on this issue on election, 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.

To sum up, that pattern of personal and economic liberty that we enjoyed before 30 June 1997 continues today. It is the pattern that our constitution and our hearts commit us to for tomorrow as firmly as for today. It has created a city in which many thousands of Americans, along with British, Canadians, Australians, Indians, Japanese and Koreans, have been happy to make their homes alongside our indigenous mix of Cantonese, Shanghainese, Chiu Chow and Hakka, and that is how Hong Kong will continue.

Time has reunited Hong Kong with China and time, I feel, will refine us both. Hong Kong people are proud to be Chinese and once again a part of China. A China that is increasingly open and prosperous, able and willing to play its part on the world stage. China's economy continues to grow strongly with little spill over effect from the regional crisis. Hong Kong will benefit from that growth just as we will continue to be China's window on the rest of the world, providing the necessary investments, expertise, managerial know-how, financing and the access to world markets that will help China modernise. Notwithstanding current difficulties, we remain confident about our future, and we invite all Americans to share in that future.

Thank you.