First of all, I would like to thank Royal Bank, in particular Mr. Guy Belisle for inviting me to today's luncheon. I would also like to thank Max for making all the arrangements with Royal Bank. I hope what I tell you today will give you a better understanding of the latest development of Hong Kong including our problems and solutions, and our blueprints as we move into the 21st Century.

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 even predicted that Hong Kong would begin to lose its glamour as an international finance, aviation and business centre and would disappear from the map or be swallowed up by the Mainland.

Fifteen months on from the handover, the people of Hong Kong have been proved to be right and the doom-merchants wrong. Hong Kong remains one of the most vibrant, successful cities in the world. We have demonstrated to the world that 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, that the concept of "One country, two systems" is truly being implemented and realized in Hong Kong. Opinion surveys also indicated that the Hong Kong community is increasingly confident about Beijing's ability and willingness to leave us alone, and to allow Hong Kong people ruling Hong Kong.

In 1997, Hong Kong's per capita GDP was more than C$38,000 which was even higher than some industrialized economies. 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, I should mention that all the teething problems associated with the opening of our new airport in July have 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 and is consistently rated as one of the top three "least-corrupt" places in Asia. We have more than US$92 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.

In the past 15 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. 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 stock market and property prices and rentals have dropped by around 50%. Our economy contracted by about 4% in the first half of the year and is expected to shrink by at least 4% for the year as a whole. Our unemployment has gone up to 5%, already at a 15 year high, may continue to rise. Wages have moderated. 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.

We expect the economy will continue to adjust in the rest of the year and 1999 will continue to be a difficult year. 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 been introducing several immediate measures over the past few months to provide some degree of relief to the Hong Kong community and to facilitate economic recovery.

These include fiscal measures in February, a market stimulation package in June and measures for the currency and financial markets in August and September. We gave huge tax breaks ever for individuals and business. 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. We know that 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. We also established a new credit guarantee scheme to help small and medium enterprises obtain loans from lending institutions. New measures were put in place to boost our tourism industry and we recently started seeing an increase in the number of tourists visiting Hong Kong. To co-ordinate and promote development of tourism industry, we will soon appoint a Commissioner for Tourism.

In addition, we have been investing C$47 billion over the next five years between now and 2002 in our infrastructure projects e.g. railroads, highways, schools, and residential developments. These will cater for the long-term need of the community and create as many as 100,000 jobs for Hong Kong people before end of next year. One of the projects which will start in the next few months is the C$13 billion West Rail which will provide a high speed railway on the western side of Hong Kong. A total of 14 contracts will be awarded alone for this project by the middle of next year. These would not just be business opportunities for Hong Kong companies but also for overseas firms including those from Canada. We practise level-playing field and do not show favoritism towards any firms including those from Hong Kong or China.

Moreover, we are working 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 recently announced a package of proposals to further open up the telecommunications market including external telecommunications services and facilities in Hong Kong. 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. We are also working on electronic commerce and plan to take the lead to deliver government services on-line or what we called Electronic Service Delivery Scheme.

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.

Starting in late July, we had clear evidence, suggesting that speculators had been engaging in manipulative play simultaneously in the currency market and the stock and futures markets. They shorted the Hong Kong dollar, aiming to sharply driving up interest rates under our currency board linked exchange rate system. The manipulators at the same time shorted stocks and futures so that they could reap the profits of the securities market that was bound to dive in response to high interest rate. Meanwhile, these manipulators also spread rumours about imminent devaluation of China's Renminbi, the de-linking of the Hong Kong dollar, and the impending collapse of Hong Kong local property and stock markets to create panic conditions in our stock and futures markets. If left unchecked, such manipulative ploys would have resulted in panic selling in the stock market, driving interest rates to extreme levels, while the Hang Seng Index could have plunged by several thousand points. This artificial manipulation threatened to bring down our economy with total disregard for the adjustments that were, and still are, taking place through the normal mechanisms of our free market society. It could shatter public confidence in the Hong Kong dollar while the high interest rate would jeopardize the economic recovery of Hong Kong.

By mid-August, we were faced with just two options. Option one was to step in and be accused of ignoring free market principles. Option two was to sit idly by in the name of non-intervention, allow such serious market manipulation and disruption to continue, and witness a rapid collapse of our monetary and financial systems. It was a tough call but like all other responsible governments, we acted in a way which was in the best interest of the Hong Kong community i.e. market intervention. And we did this in a totally transparent manner, we announced to the world when we entered the market and did the same when we left the market.

Apart from stopping the manipulation, our actions in August also gave us time to move on the regulatory front to make it much more difficult for such an attack in the future. Immediately after the manipulative attack, we brought a wide range of measures to bolster our currency board and to increase the transparency of our Exchange Fund. We have further strengthened the linked exchange rate by increasing liquidity in the banking system and making it less susceptible to manipulation. We have tightened stock market rules and regulations, especially in regards to short selling and borrowing shares, and the settling of positions. We are confident that these measures, which were warmly welcomed in Hong Kong, will restore a level playing field for our investors. And despite the introduction of these measures, our current regulatory framework is no more stringent than that which 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 in October. It appeared to us that the Finance Ministers and the international financial community now had a better understanding and acceptance of our incursion.

Our market intervention clearly demonstrated our solid commitment to protect 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 that have chosen to devalue their currencies, I am not too sure whether you will find sufficient evidence to argue for dropping the peg.

Some might think that the linked exchange rate has hurt our competitiveness. Yes, we may be as expansive 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. We offer them good value for money - our communications, our infrastructure, our location, our educated manpower and most importantly, our connections to China, are unrivalled in Asia. These are the reasons why you see thousands of overseas companies have chosen to base 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. Some businessmen indeed already saw a silver lining in the dark cloud and have been taking advantage of the moderated 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 emerge 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.

Our Chief Executive, Mr. Tung Chee-hwa just delivered his Policy Address (equivalent to Premier Chretien's Speech from the Throne) on 7 October. Mr. Tung said in the Policy Address that full recovery of Hong Kong depends on four major factors: improvement in the external economic environment; moderation of interest rates, stabilization of property prices, and increased public confidence. While the external environment is not something which we can change or control, there are positive signs e.g. downward trend in the US interests and the softening of the US dollar. Recent measures introduced in Hong Kong have succeeded to a certain extent in stabilizing interest rates and the property market in Hong Kong, thereby help reinforcing public confidence. Hence, we continue to hold a positive long-term view of the future of Hong Kong.

Mr. Tung certainly considers it very important to address the current problems, but he has also mapped out a long-term strategy to maintain the competitiveness of Hong Kong. He promised to continue to bolster the established pillars of our economy such as the financial services sector, small and medium enterprises, tourism and import and export. However, he will also increase the diversify of our economy by creating conditions for growth in sectors with a high value-added element, in particular in those industries which place importance on high technology and multi-media applications. We will strengthen our support for technological development, build a critical mass of fine scientists, engineers, skilled technicians and venture capitalists and encourage the development of a significant cluster of technology-based business. To achieve these, we will establish, among other things, an Applied Science and Technology Research Institute, specializing in mid-stream research, and an Innovation and Technology Fund to stimulate collaboration of academic institutions and industry in research and development. We will also tap the resources/professionals from China and elsewhere in the world to build a critical mass of the necessary expertise. Through innovation and technology, we will improve our competitiveness in the field of information technology, telecommunication, entertainment and Chinese medicine.

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 through the storm this time.

Of course, as the gateway to and the largest foreign investor in China, Hong Kong will continue to benefit significantly from its close ties with China - an economy which is expected to grow by 8% this year. As our new post-unification relationship grows and continues, you will find that there is no better place than Hong Kong to tap into the huge potential of what one day will be the world's largest market. 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.