First of all, I would like to thank Hong Kong Canada Business Association (Calgary) for inviting me to speak today. I hope what I tell you today will give you a better understanding of the latest developments in Hong Kong, particularly the impact of the financial turmoil on Hong Kong and our responses. And by the end of the seminar, you would be able to see the silver lining in the dark cloud and convinced that Hong Kong remains a place full of golden business opportunities.

But first of all, let me give you a general update on Hong Kong. Before July 1997, some people had grave doubts on how the "One country, two systems" concept would actually work in Hong Kong and whether China would allow Hong Kong people to run Hong Kong. Some of our friends overseas predicted that after the handover, Hong Kong would begin to lose its glamour as an international business centre and would disappear from the map or be swallowed up by the Mainland.

Now, 16 months after the handover, the optimists have been proved to be right and the doom-merchants wrong. Hong Kong remains one of the most vibrant, successful cities in the world. It is business as usual in Hong Kong, even though the economic climate has made business much more difficult - I will come to that later. There is now recognition from around the world, including UK Prime Minister Tony Blair and the US Government, that the concept of "One country, two systems" is truly being implemented and realized in Hong Kong.

In 1997, Hong Kong's per capita GDP was more than C$41,000, about the 15th highest in the world. Hong Kong is the world's 8th largest trading economy. It has the busiest container port in the world. Our airport is the busiest in terms of international cargo throughput and fifth largest in terms of the number of international passengers handled. By the way, you might have learnt from the media that we have had some teething problems when we opened the new airport in July. I am glad to tell you that all these problems have now been resolved. The services at the new airport have now exceeded the efficiency of the former Kai Tak Airport in many respects such as waiting time for luggage, and immigration clearance time, etc. And of course, our new airport offers you a 30,000-square metres Skymall with merchandize sold at downtown prices.

We are also one of the world's leading financial centres - 7th largest in terms of foreign exchange trading and 10th largest in terms of stock market capitalization. Hong Kong remains one of the safest cities in the world (indeed in 1997, we had the lowest crime rate in the past 24 years) and is consistently rated as one of the top three "least-corrupt" places in Asia. We have more than US$88 billion foreign exchange reserves - the third largest in the world. We have no government debt. Every Hong Kong dollar currency note is 8 times backed by foreign exchange reserves. And despite the financial turmoil, we achieved 5.3% real growth in 1997. We continue to practise Adam Smith's theory of the invisible hand of the free market. Business decisions continue to be made by businessmen not bureaucrats whose key responsibility is to maintain a level playing field for all. We continue to run a small, competent and clean administration. We maintain a low tax rate with no valued-added or sales tax, no capital gains tax, no tax on interest and no global taxation. Indeed, your Fraser Institute together with independent institutes in 53 other countries just concluded in early November that out of 119 economies, Hong Kong remains the freest economy in the world in both 1990 and 1997.

In the past 16 months, the institutions of civil society, i.e. the rule of law, an independent judiciary, an elected legislature, a free press, churches, non- government institutions - remain not just intact but vibrant. Human rights in Hong Kong are also well protected. Political protests which are now an integral part of Hong Kong people's way of expressing their views, are alive and well. Tens of thousands of people continued to commemorate the June 4 incident in June this year just like before 1997. Movies touching on sensitive subjects like Tibet were shown in Hong Kong without censorship. Magazines and newspapers continued to criticize the authorities in Hong Kong and China on various issues, perhaps even more so than before mid-1997. During the handover, you might have seen on TV People's Liberation Army crossing the border at midnight and thought that they were now patrolling our streets. But those who have visited Hong Kong recently will tell you that they can hardly be seen in Hong Kong.

As with the other international commercial and financial centres, the threat to Hong Kong now comes not from political instability but from the financial turmoil. Like all the economies in Asia, Hong Kong is undergoing quite a difficult time right now.

Our property prices and rentals have dropped by around 50% and our stock market has lost around 40% compared with their peaks last year. Our economy contracted by about 4% in the first half of the year and is expected to shrink by 4% for the year as a whole. Inflation rate has come down to a low of 2.5% in September, the lowest since 1981. Our unemployment has gone up to 5% which is at a 15 year high. Wages and salaries are softening. So Hong Kong is hurting badly. But we understand that these economic adjustments are inevitable given the asset price inflation up to 1997. Our economy needed the adjustments anyway if we are to remain competitive in the long-run. From this perspective, the Asian financial turmoil has merely hastened the pace of these adjustments. But, we are confident that these difficult but necessary economic adjustments will ultimately lead to the emergence of a much leaner and more competitive Hong Kong.

There is no quick fix to the economy of Hong Kong, especially when the turmoil that we are facing is a regional one rather than just a local problem. However, we have introduced several immediate measures over the past few months to provide some degree of relief to the Hong Kong community and to facilitate economic recovery.

We introduced very generous tax breaks ever for individuals and businesses in February. These initiatives have put more money back into the hands of 99% of taxpayers and, we hope, in due course will boost consumer spending and investment. The profits tax was lowered further from 16.5% to 16%. We have also introduced measures to reduce cost of doing business in Hong Kong e.g. 100% depreciation for investment in IT software and hardware. These have certainly made Hong Kong much more attractive to those Canadian companies which previously had avoided Hong Kong because of the high cost involved.

We know that the liquidity crunch is the major factor leading to economic contraction. To address this issue, we exempted interest income earned locally from profits tax, resulting in substantive repatriation of savings from overseas by companies in Hong Kong. More than 90% companies in Hong Kong are small and medium enterprises. To help them ride out this financial turmoil, the Government has established a new credit guarantee scheme to help small and medium enterprises obtain commercial loans. New measures were put in place to boost our tourism industry and we recently started seeing an increase in the number of tourists, particularly from the Mainland, Japan and Taiwan, visiting Hong Kong.

In addition, I would like to highlight two particular areas that I believe would be of great interest to Canadians. These are infrastructure developments in Hong Kong and our priority accorded to innovation and technology.

We are investing C$47 billion over the next five years between now and 2002/2003 in our infrastructure projects e.g. railways, highways, schools, and residential developments to keep pace with our projected population growth and economic development, particularly the projected increase in the cross boundary flow of people and goods. These projects together with other Government initiatives would create 100,000 new jobs for Hong Kong people by the end of next year. Some of the projects, have already started while others will commence soon. Going beyond the next five years, there will be other projects e.g. the Garden City project at the Kai Tak Airport site which will accommodate 320,000 people by 2016, new highways linking Lantau and the New Territories, etc. These projects would not just be business opportunities for Hong Kong companies but also for overseas firms including those from Canada. We welcome foreign participation in public projects whether they be consultants, planners, contractors, investors, and suppliers. We practise level-playing field and do not show favoritism towards any firms including those from Hong Kong or China. This is the best way to tap the resources and talent of the people and gives Hong Kong the best value for money for our investment.

While it remains very important for us to focus on the current problems, our Chief Executive - Mr. Tung Chee Hwa - has not lost sight of his vision for Hong Kong's future. In his Policy Address (equivalent to Canada's Speech from the Throne) released in early October, he emphasized that we would build on our assets while fashioning a new niche for ourselves; taking full advantage of our unique role in the development of China; strengthening our position as the most cosmopolitan city in Asia. We aim to become a centre of excellence for fashion, film, and Chinese medicine. We intend to finesse our position as a financial services centre, both in the provision of services and the effectiveness and sophistication of our regulation.

Central to our strategy for the future is the recognition that innovation and technology are the driving force of a modern economy. We will implement without delay our ambitious plans to drive forward innovation and technology upgrading in industry and business in Hong Kong. Our Government will invest more in innovation and technology so as to enhance our competitiveness.

To achieve this, we will establish an Innovation and Technology Fund to foster innovation and technology improvement in business, and promote technological entrepreneurship. We will set up an Applied Science and Technology Research Institute to strengthen Hong Kong's capability in commercial research development. We will take steps to promote university-business collaboration and Hong Kong-Mainland collaboration and build up a cluster of expertise in Hong Kong to undertake innovation and technology. These measures will seek to supplement our current initiatives such as our first Science Park and a second centre for incubation services to technology-based start-up companies - both are under construction. We believe these would create a favourable environment for the private sector to capitalize on new business opportunities.

We would put particular emphasis on the development of high value-added industry, in particular information technology and telecommunications. To maintain Hong Kong's position as the pre-eminent telecommunications centre in Asia, we have decided to further open up the external telecommunications services market in January 1999. Canadian companies are welcomed to invest in Hong Kong and provide IDD services. In addition, we have proposed to liberalize Hong Kong's external telecommunications facilities from January 2000. A decision will be made by end of this year. We plan to construct a world-class teleport to provide the best possible global satellite communication links. We have also announced a range of proposals to liberalize the TV market in Hong Kong, including network sharing between existing cable TV network and telecommunications network, and opening up of the pay TV market.

Hong Kong is a heavy IT user. Spending on IT in Hong Kong was worth more than C$3.5 billion in 1997 and is expected to grow by 14% this year. This is certainly a sector which Canada has a cutting edge. Indeed Hong Kong imported from Canada about C$250 million of IT and related products in 1997. We also plan to take the lead to deliver government services on-line or what we called Electronic Service Delivery Scheme within year 2000. This scheme will enable the community to transact business with Government on-line through the use of information kiosks installed in convenient public locations, personal computers at home or in the office, telephone through interactive voice response system or interactive television round the clock. We will be putting out our tenders by the end of this year.

Let me say a few words on the US-HK dollar peg. The pegged exchange rate has served Hong Kong well since its introduction in 1983. In a highly-externally-oriented economy such as ours - with a trade to GDP ratio of more than 250% - currency stability is of utmost importance, and indeed a necessity. The link MUST stay. Indeed with all currency and financial markets now globally connected to one another, dropping the peg is most likely to trigger another round of currency devaluation in Asia with serious economic and political ramifications worldwide. And if you look at the economies in Asia that have chosen to devalue their currencies, I am not too sure whether you can conclude that devaluation is the solution to ending the turmoil and to spurring growth. If devaluation is not a win-win formula, why should we take the risk by dropping the peg?

Some might worry about the devaluation of Renminbi and its impact on the Hong Kong dollar. But senior leaders of China have given repeated assurance not to devalue Renminbi. China also fully understands that devaluation of Renminbi is likely to bring serious global economic consequence, which is likely to wipe out any hopes of gain in increased exports. Let's not forget that China also has the second largest foreign reserve in the world - US$141 billion. Chinese products remain very competitive as cost of production in China is still way below that of its neighboring economies which have devalued their currencies. That's one of the reasons why China still has a trade surplus of over US$30 billion in the first half of this year. Under these circumstances, we do not see any economic or political reasons for China to devaluate Renminbi.

Some might think that the linked exchange rate has hurt Hong Kong's competitiveness. Yes, we may be as expensive as say New York, Paris, London, Tokyo but big business doesn't look at how much it cost to rent a house or office. Big business looks at the bottom line- is there a reasonable return on investment for me. Hong Kong offers them very good value for money - our communications, our infrastructure, our location, our educated manpower and most importantly, our connections to China, which are extremely competitive in the global market. These are the reasons why you see thousands of overseas companies, including more than 500 Canadian companies, have chosen to establish a presence in Hong Kong.

Several recent surveys also concluded that overseas businessmen including the American, British, Canadian, German, and Japanese in Hong Kong remained optimistic about the medium- and long-term future of Hong Kong and the majority have decided to stay rather than leave Hong Kong. These businessmen saw the silver lining in the dark cloud. They know that the solid economic fundamentals will help Hong Kong bounce back. Some Canadian businessmen indeed have been taking advantage of the moderating cost of doing business in Hong Kong to establish a foothold or expand their operations in Hong Kong. Within a few years, we will have a new Asia emerging from this financial turmoil and those companies and enterprises that are now or will soon be in Hong Kong will have a significant head start on the competition. I hope you will also be able to capitalize on such opportunities to invest in or build up ties with Hong Kong.

You are possibly aware that our Government intervened in the stock and futures markets in August. There has been considerable misunderstanding of our objectives. Claims that we intervened because we wanted to prop up the stock market at a pre-determined level or that we could not stand the pain of economic adjustment are simply not true. We intervened because we wanted to stop the manipulative attacks of our currency and financial markets by speculators, to maintain the integrity of our linked exchange rate and to restore order to the markets. Our action has not altered in any way Hong Kong's absolute commitment to our long-standing philosophy of free and open markets and non-intervention. And, please remember this, Hong Kong has a constitutional duty under the Basic Law - our mini-constitution - to develop its role as an international financial centre. In Hong Kong, a free market is not just policy - it is the law. You can't get better guarantee than this.

After the market incursion in August, we also brought in place a wide range of measures to reinforce our financial and monetary systems, making them less susceptible to manipulation. For example, we have expanded the monetary base and tightened stock market rules and regulations, especially in regards to short selling and borrowing shares, and the settling of positions. These measures, which were warmly welcomed in Hong Kong, have restored a level playing field for our investors. And despite the introduction of these measures, our current regulatory framework is no more stringent than that what you have here in North America, and in many cases less stringent.

Our Financial Secretary had just completed a G-22 meeting and the IMF/World Bank meeting in Washington last month. It appeared to us that the Finance Ministers and the international financial community now had a better understanding and acceptance of our incursion. We are also very encouraged that most industrialized economies now acknowledged the need to take necessary measures to stabilize the economy and to monitor the international flow of private capital and the loans by financial institutions to the hedge funds.

One should not lose sight of Hong Kong's significant role as a gateway to China. Since China opened up to the outside world in 1978, the economy has grown at a remarkable rate, averaging close to 10% per annum. China is expected to grow by 8% this year. A World Bank study projected that by the end of this year, China would become the world's sixth largest economy. Hong Kong will undoubtedly be the chief beneficiary of China's growth and prosperity.

Since our reunification with China, we have been stepping up our ties with China on more fronts including infrastructure development, electronic link, and industrial development. As a bilingual city, Hong Kong is well placed to provide services for businessmen to explore the market in China. For example, Hong Kong can give Chinese language support for the development of Chinese Internet content and related applications for use in China. We can also serve as an information gateway to the Mainland of China and help overseas suppliers market their products in the Mainland through the Internet.

Hong Kong has excellent experience in and a lengthy history of doing businesses with China. We share the same language and culture and now we are part of China. China is our largest trading partner. Hong Kong has more than C$180 billion investment in China and is the biggest external investor in the Mainland, accounting for about 55% of all external investments. Our manufacturers employed about 5 million workforce in China. Our businessmen have also recently extended their investments to other sectors like hotels, tourist related activities, real estate, retail trade, restaurants, and infrastructure facilities (e.g. ports, highways, power plants).

On the other hand, Chinese enterprises invested nearly C$22 billion in Hong Kong and are amongst the top three largest external investors in Hong Kong. We are also the major services centre for China, providing supporting infrastructure facilities and institutional services like banking, insurance, financing, etc. By establishing regional headquarters or offices in Hong Kong, overseas firms can use Hong Kong as a lunching pad for their investment and trade drives in China.

Hong Kong's economy will continue to adjust in the rest of the year and we expect 1999 will continue to be a difficult year. It is, however, interesting to note that the International Monetary Fund just recently predicted that our economy would start picking up towards the last two quarters next year. While it is too early to conclude that we are out of the trouble, there are indications that the situation in Hong Kong, including the interest rate, the unemployment rate, the property and stock markets, has all begun to stabilize. We are hopeful that our measures implemented in the past few months will continue to work and facilitate our economic recovery. The financial turmoil has brought pain to everyone in Hong Kong but we understand that this economic adjustment is necessary if Hong Kong is to remain competitive in the long-run. Hong Kong people are known for their resilience and this quality has taken Hong Kong time and again out of its economic crisis. We have absolute confidence that this quality of Hong Kong people together with a stable currency and sound banking and financial systems will help us ride out the storm this time.

Of course, as the gateway to and the largest external investor in China, Hong Kong will continue to benefit significantly from its close ties with China. A successful China and Hong Kong will no doubt contribute to the well-being of the Asian and global economy. Hong Kong is and will remain a place full of golden business opportunities. Therefore, don't be misled by this short-term turbulence and shut Hong Kong out of your radar screen.

I urge all of you to visit Hong Kong to see for yourselves the reality in this "Pearl of the East". I am sure that you will find the visit very rewarding.