The Financial Secretary, Mr Donald Tsang, said in Oxford today (Tuesday, Hong Kong time) that Hong Kong's economy had become deeply intertwined with mainland China's and would become even more deeply involved in the financing and development of its economy in the years to come.

He also said that mainland China was going to remain one of the major generators of economic growth in the world as its internal market's scale and very high domestic savings rate gave it huge strengths.

On the recent currency crisis, Mr Tsang said Hong Kong's currency and economy were once again proving their metal. He said that provided Hong Kong stick firmly to its key policies, he was confident it would continue to be a free, internationally oriented economy, and would be a lively and dynamic contributor to China.

Mr Tsang said the above in a speech at a seminar at St. Anthony's College, Oxford University. The full text of the speech (English only) is as follows:

Ladies and gentlemen,

One of the most important British exports of the last few decades has been your marvellous television adaptations of your literary classics. They have helped to share with millions the ideas, the humour and the culture that nurture and support concepts like the rule of law, public and private probity, toleration of public debate and difference. But television struggles to capture all the nuances of a book. How, for instance, how do a few seconds of film convey all the revelations about the inconstancy and opportunism of Mr Collin's character that a reader of Pride and Prejudice gets from a few words like this : "Mr Collins had only to change from Jane to Elizabeth - and it was soon done - done while Mrs Bennet was stirring the fire."? And there we come to the question about Hong Kong : what has our change - our change from Elizabeth to Jiang, if I may put it so - shown about the character and prospects for our city?

From what you have seen and read over the past few months you will already have some feel that Hong Kong has not fallen, not changed in any material way. We have shown, yet again, our capacity to respond quickly and constructively to change. And unwelcome though it has been in many ways, the storms that have assailed us on the financial markets have served to demonstrate clearly two truths. First, that the strength of our famous flexibility comes from its being firmly rooted in sound laws and prudent fiscal and economic policies. Second, that the high degree of autonomy promised to the Hong Kong SAR has real substance.

What I would like to do is to share with you what I have seen of the life, the challenges and the opportunities in Hong Kong over the last few months, to help to flesh out your perceptions and assessment of our prospects.

What has changed for me? I'm still the Financial Secretary. I have a nice new office, but my duties and my daily routine remain the same : the same committees, Executive Council business, media pressure, social life. The big change has been the absence of daily telegraphic traffic between Hong Kong and the capital, no faxes or phone calls, no instructions or advice to be ignored or argued over in order to preserve autonomy. Just autonomy, pure and simple. The hands off reassurances emphasised by our President Jiang Zemin during the handover ceremonies on July 1, repeated by our Premier, Mr Li Peng, and Vice Premier, Mr Zhu Rongji, during their visits to Hong Kong for the IMF and World Bank Annual Meetings in September, reinforced that sense of autonomy. To anyone still sceptical, the events of the last few weeks must surely have discredited their doubts. China pledged its full support, but only if we asked for it : they demonstrated their faith and trust in Hong Kong's ability to cope with the effects of the regional financial crisis by letting us cope. In some ways it was a lonely position to be in. But it was a position of responsibility. And that is as vital for governments when responding to difficulty as it is for businesses. That is why Hong Kong is firmly of the view that any Asian arrangement to help Asian economies upset in the recent turmoil must be subject to full IMF disciplines, not some more relaxed system that insulates governments from the sensible, though painful, economic and management decisions they may have to take. There is moral hazard as much for governments as for companies in the idea of a bail-out.

But that is moving away rather from Hong Kong. Nobody needs to think of bailing us out.

Just as Hong Kong's economy remains strong despite the financial gales, so too the life of Hong Kong remains vibrant and stimulating. There are colourful demonstrations in the streets - even in the public gallery of the Legislature. There are law suits against the Government. Newspapers that are critical of the establishment thrive, as do a variety of TV and radio programmes whose comments make the pages of 'Private Eye' seem mild and well mannered. The political parties both inside and outside the Provisional Legislature are alive and kicking, gearing up for next May's elections and keeping Government officials on their toes.

Some have said that in politics, it is business as usual in Hong Kong, but that would overlook one important difference. Before July, the tensions between the outgoing and incoming sovereigns provided the backdrop, if not the agenda, for almost every debate. Now local issues and concerns, and the practical business of Hong Kong people ruling Hong Kong set the agenda. There has been intense debate on electoral arrangements, on our mandatory provident fund, on education and on care for the elderly. The media and the population at large have shown great sensitivity to any suggestion of importing mainland practices. They have shown that they cherish traditional Hong Kong virtues of openness, fair play and impeccable public service.

There has not been any upsurge in crime or corruption since 1 July : indeed, the downward trend in both appears to be continuing and we are determined that this should remain so. We are working hard to further improve crime prevention and anti-corruption measures both within Hong Kong and in co-operation with mainland and international law enforcement agencies. Safety and integrity remain vital assets for us.

The Asian currency crisis has put the integrity of our financial system to a great test in recent weeks. There is a saying in Cantonese 'Jan Gam Bat Pa Hung Low Foh (meaning: "True gold doesn't fear fire"). While the refining fires are not over yet - the situation in South Korea gives cause for concern; Japan is not in robust health with Yamaichi in difficulty; and the inflationary and other consequences of the devaluation of South East Asian currencies are yet to surface in full - but our currency and economy are once again proving their metal. I am confident that provided we stick firmly to our key policies, we will cope with whatever other challenges the markets throw at us.

Those key policies are the link to the US dollar through a currency board mechanism; prudent fiscal management; non intervention by the Government in the markets, coupled with sound regulation; steady investment in education and infrastructure; maintenance of sound laws; and improvement in the efficiency of Government services. All those contribute to the quality and flexibility of our economy.

The currency board has proved its worth through testing times before now. Its establishment in 1983 stabilised our currency after a couple of years in which it had halved in value against the US dollar. It has carried us steadily through a stock market collapse in 1987; the turbulent events of 1989 in Mainland China; the Gulf War; the ERM crisis; Mexico's peso crisis and through all that we have seen so far this year. I'm sure that it can continue to sustain our stability, and we are not going to drop it or modify it.

Some people suggest that we are wedded to the dollar link for reasons of politics rather than economic sense. I freely acknowledge that there is an important political consideration : the health and independence of the Hong Kong dollar is the expression, in the economic field, of the reality of 'One country, two systems' and of Hong Kong's high degree of autonomy. But anybody who thinks that you can maintain a currency today by an effort of political will does not understand the nature of the international financial environment. Liberalisation of finance and trade, and the spread of free market practices are the most powerful mechanism there is for raising living standards in every country through efficient economic growth. But the free market also provides a powerful corrective to imprudent policies. Unless political aspirations are firmly grounded in sensible economic policies and sound financial management, aspirations will not sustain you : nor will aspirations bring markets back on side when they have tripped you up.

In Hong Kong, our currency board works not because it is a political construct, but because it is a mechanism attuned to the market and serving a beneficial economic purpose. It is a mechanism that gets its credibility not simply because of the size of our financial reserves - though the fact that these are sufficient to back our currency seven times over does give a little margin of comfort - but credibility comes chiefly from our record of prudent fiscal policies, sound financial regulation and from the underlying strength of our economy. What pushed up interest rates in Hong Kong was not panic intervention by a Central Bank, but the automatic adjustment process of the currency board as the banks had to compete for the local currency they needed to cover short positions. Those interest rates have had a heavy impact on our property market and on the stock market, but they are impacts that are entirely manageable and which will have positive effects.

Our banks, like banks in other developed economies, are exposed to the property market, but the regulatory authorities have exercised close prudential supervision over the extent of lending and the capital adequacy ratios needed to back it. The latter stand at around 17% on average : significantly higher than international norms. And the other side of the picture is that Hong Kong does not have a huge overhang of empty office capacity or vacant flats. It is not overcapacity that is our problem, but how to meet the rising demand for home ownership from a growing, prospering population, and rising demand for high class office space from our increasingly sophisticated service economy. This demand, coupled with low real interest rates in the past, had fuelled a spectacular appreciation in asset values that was putting home ownership out of reach and driving up the costs of doing business in Hong Kong to uncompetitive levels. The high interest rates needed to sustain the currency in the present atmosphere of uncertainty are requiring the real economy to adjust through lower property prices and rental levels. That is putting home ownership back within reach and is restoring competitiveness in business costs.

Even in normal times, the discipline of currency stability is good, making business concentrate on strengthening competitiveness through good management, innovation and productivity increases. The openness of our economy, and the extremely low distortion of pure markets mechanisms caused by Government activities lets Hong Kong adjust very quickly to market pressures and opportunities. It has led us to move manufacturing pressures off shore, so that we can focus on the services, services that now contribute over 80% of our GDP. The concentration of skills, communications, financial resources, legal services and transport capacity in Hong Kong gives us unparalleled flexibility and strength as a hub for managing and developing business in the Asian Region.

We are not going to make the mistake of changing course, targeting certain industries, or making other market interventions that have contributed to the difficulties now felt by so many of our regional partners. The Hong Kong Government is going to be active, but in the areas that benefit the whole economy - by investing heavily in education, especially language training, information technology skills and in excellence of university research; by sustaining high levels of investment in transport infrastructure; by improving the openness and strength of financial markets and supervisory mechanisms; by reducing the costs the Government imposes on business and improving the quality and efficiency of our services.

The extraordinary growth of Hong Kong as a financial centre since the reforms of the 1980s has demonstrated the value of good regulation in financial markets. We now stand as the 5th largest international banking centre in the world, the second in Asia after Japan. Ten years ago, in the face of market problems, our stock market closed its doors. This year Hong Kong stayed open even when New York suspended trading. When one of our banks faced a rumour inspired run, it could respond with the assurance that the regulators could testify that it was in good shape. People know they can trust the regulators : the run ended quickly. By opening up our system within a framework of strong prudential supervision, we have built up trust and certainty that helps us to deal with fear in the markets.

I do not think that it is far fetched to see Hong Kong's financial markets emerging strengthened from the current difficulties and, as we continue to liberalise and improve the efficiency of those markets - a process that much of the rest of the region is only just beginning - to see Hong Kong emerging as the leading financial centre in Asia.

The stability of the currency and of policies within Hong Kong is crucial to achieving that hope, but there is another powerful factor at work as well : our motherland Mainland China.

At this time of uncertainty and doubt about Asia, inevitably the difficulties that mainland China faces with reform of state enterprises, unemployment, the environment, legal safeguards and inequalities of income, all tend to get emphasised. I do not doubt or discount those difficulties. But whatever difficulties there may be, the growing purchasing power of ordinary men and women in mainland China is going to remain one of the major generators of economic growth in the world. The scale of mainland China's internal market and its very high domestic savings rate give it huge strengths, and the administrative skill that has developed over nineteen years of consistent economic reform is another great advantage.

Our leaders have not run away from these challenges. The commitment of the Chinese Government to deepening of market based reform has been demonstrated by the plans set out at the 15th Party Congress. Gone is the old focus on physical and numerical targets. In their place are policies and strategies to tackle the real problems of the state owned enterprises - social security, housing and health care; ownership; profitability. Growth is to be sought through upgrading of technology, skills training and productivity increases, not by increasing inputs. Opening up to international markets is to be extended by reducing import tariffs, expanding foreign trading rights of enterprises, gradual opening of the services sector and through strengthening of legal processes. This portrays a powerful and confident nation on the move to modernity while focusing on the well-being of her people. In this process, the Hong Kong SAR will play its part.

Whether it is through management of investment flows - and Hong Kong already accounts for 70% of the external investment in mainland China - or providing the entrepreneurial and management skills to take over old SOEs; or providing the accounting and legal services needed for mainland companies to secure listing on our stock market, or providing models for legal and regulatory frameworks, Hong Kong has a great deal to contribute to the nation as a whole, and in return it enjoys a lasting source of opportunity.

Our ability to make use of that opportunity depends in large measure on Hong Kong continuing to be open to the international economy. The nearly 9,000 overseas companies that have offices in Hong Kong add greatly to the strength of the services that we can offer, but they are not attracted simply by the lure of the China market. The fact that Hong Kong is fully integrated with the world trading economy; the fact that we are constantly developing our standards to match the best that are available internationally; the fact that we operate under the rule of law, have a public and open process of administration, the free flow of information : all those qualities contribute to our attraction.

During the run up to the change of sovereignty, some of those qualities became the focus of political argument and controversy. Those controversies are now behind us. China's resumption of sovereignty is a successfully accomplished fact, but the value of our free and open markets, the value our free and open life in all its particulars, the value of our rule based system, remains. It has underpinned us during the current crisis in Asia. It is the foundation on which we continue to build for the future.

Over the past two decades, Hong Kong's economy has become deeply intertwined with mainland China's. Our entrepreneurs now employ over five million people across the border, almost double Hong Kong's own labour force. In years to come, we will become even more deeply involved in the financing and development of mainland China's economy : but it will be as a distinct economy, making its own rational decisions freely in the market. It is only by doing that that we can be of real help to the nation, and recent weeks have seen the clearest demonstration of the Chinese leadership's understanding of that fact. And I am confident that as the Hong Kong SAR continues to be a free, internationally oriented economy, it will be a lively and dynamic contributor to a China that is steadily moving along the track to partnership in the international market economy.

Thank you.

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