First of all, I would like to thank the Renison College for inviting me to take part in today's business seminar. This is my first visit to Waterloo University but I must say I am deeply impressed by the beautiful scenery here. Waterloo University is certainly very well known in Hong Kong for you have supplied us with a constant stream of graduates, in particular IT professionals, who contribute significantly to our economy. 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, thereby enabling you to make a wise decision to invest in 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 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.

Now 15 months have come and gone. The pessimists and skeptics in Hong Kong and around the world have been proved to be wrong. 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 the United Kingdom and the US, that the concept of "One country, two systems" is truly being implemented and realized in Hong Kong. A number of local opinion surveys in Hong Kong 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 all 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 (PLA) 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.

This very smooth transition, however, had been marred by the Asian financial turmoil. Like all the economies in Asia, Hong Kong is undergoing quite a difficult time right now.

The stock market and property prices and rentals have dropped by around 50%. Our GDP contracted by about 4% in the first half of the year. Our unemployment has gone up to 5% which is at a 15 year high. 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. In fact, the speed at which Hong Kong economy has adjusted actaully reflects its flexibility, efficiency, and robustness.

We expect the economy will continue to adjust in the rest of the year and perhaps early next year. However, this will ultimately lead to the emergence of a much leaner and more competitive Hong Kong. Several surveys also revealed that overseas businessmen in Hong Kong including the American, Canadian, German, and Japanese 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 which are now or will soon be in Asia will have a significant head-start on the competition. I hope you will also be able to capitalize on such opportunities to invest in Hong Kong.

To maintain our competitiveness and facilitate the economic recovery, our Government has undertaken some new initiatives.

Firstly, our Government gave huge tax breaks ever for individuals and business. These initiatives will put more money back into the hands of 99% of taxpayers and, we hope, will boost consumer spending and investment. The profits tax was lowered further from 16.5% to 16%. We have also introduced measures to ease the liquidity crunch and various measures to reduce cost of doing business in Hong Kong e.g. 100% depreciation for investment in IT software and hardware. 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.

Secondly, we are investing C$47 billion over the next five years between now and 2002 in our infrastructure projects e.g. railroads, highways, schools, 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$12.4 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. I would not be able to give you all the details due to the limited time today. But please note that these would not just be business opportunities for Hong Kong companies but also for overseas firms including those from Canada. I can assure you that we practise level-playing field in Hong Kong and will not show favoritism towards any firms including those from Hong Kong or China.

We are also 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 in Hong Kong. Of particular interest to you is our proposals to have free competition for external telecommunications services from January 1999 and free competition for external telecommunications facilities from January 2000.

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.

Canada is very strong in IT and telecommunications and recently signed a Memorandum of Understanding on Information Technology with Hong Kong. Our Minister for Information Technology and Broadcasting completed a successful visit to Canada last month, and met with Minister John Manley and IT bodies like ITAC, CANARIE, and visited several IT and telecommunications companies. We had made useful exchanges and Canada is now planning an IT delegation to visit Hong Kong next year. We expect this will further promote exchange and business ties between the IT sectors and governments in the two places.

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.

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 speculators 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 speculators 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 of our markets by speculators 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. (I know some of you might think foreign exchange control is an option but this is indeed a non-starter since it goes totally against our free market principle. In addition, our constitutional document, the Basic Law, clearly safeguards the free movement of goods, intangible assets and capital, thereby ruling out the introduction of foreign exchange controls.)

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. This was not a rash but a very careful decision.

We are fully aware that our Government should not be a long-term player in the market or short-term for that matter. Hence at the same time that we intervened in the markets in August, we had been devising regulatory and legislative steps to strengthen our ability to defend future attacks in the long run so that we could avoid market incursion in future.

We have achieved this. Our government has generally not been active in the market since August 28. In early September, we announced a number of measures to strengthen the currency board arrangements, to provide certainty to the banking sector, boost liquidity in the interbank market, and dampen excessive interest volatility. There will also be even greater transparency in the system. As for securities and futures trading, we have put forward a programme to tighten up the discipline and stock market rules and regulations, especially in regards to short selling and borrowing shares, and the settling of positions. The programme, which was warmly welcomed in Hong Kong, should enable us to better withstand cross-market manipulation and help restore a level playing field for our investors. Following the introduction of these measures, we are still ahead of other international financial centres in terms of market freedom. We are confident that the new measures would reduce the possibility of manipulation by speculators, making our stock and futures markets more attractive to genuine investors.

Our market intervention clearly demonstrated our solid commitment to 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 the 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 devaluations in Asia with serious economic and political ramifications worldwide. If you look at the economic performance of those economies that have chosen to devalue their currencies, I am not too sure whether you will find sufficient supporting evidence to argue for dropping the peg.

I would conclude by saying that as far as the political transition is concerned, Hong Kong has gone much better than most people expected. 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.