Following is the speech by the Chief Executive, Mr Tung Chee Hwa, to the Royal Institute of International Affairs, 'Chatham House', in London today (Wednesday, London time):

Distinguished Guests, Ladies and Gentlemen:

I feel very pleased and honoured today to have the opportunity to address such a distinguished audience on my first visit to the United Kingdom since I became the Chief Executive of the Hong Kong Special Administrative Region.

Recently, I have been travelling to a number of places - Singapore, Malaysia, the United States and Japan. Two days ago, I was in Brussels. My mission is to give our friends overseas some first-hand information about Hong Kong. I am sure our friends in the UK, more than anywhere in the world, will be most keen to know what has been happening in Hong Kong since July 1. And I am glad to tell you today that we are moving forward in Hong Kong with pride and confidence. It is business as usual.

I would like to take this opportunity to share with you some real experiences since July 1. The Chinese leadership during the handover ceremony, and on subsequent numerous occasions, has emphasised that Hong Kong would continue to enjoy a high degree of autonomy under the 'one country, two systems' concept. I can tell you that this is a solid commitment. Four months after the establishment of the Hong Kong SAR, there is not a single suggestion that autonomy has been violated. It has been a total disappointment to the doomsayers whose predictions have been shattered to pieces.

The perpetual pessimists predicted that the rule of law would no longer prevail after June 30. They are wrong. The rule of law is the cornerstone of Hong Kong's success, and the Common Law is arguably the finest British legacy. The Basic Law guarantees that Hong Kong will keep the Common Law system and an independent judiciary with the power of final adjudication in Hong Kong. We pride ourselves on the rule of law and will do everything to preserve it.

Immediately after the handover, the legitimacy of the Provisional Legislature was challenged. This is not a sign that our legal system is flawed and crumbling. The contrary is indeed true, as rightly observed by Lord Irvine during his visit to Hong Kong in September. Legal challenges are part and parcel of the Hong Kong system, an indispensable chain in the rule of law itself. The Government has been and will, no doubt, continue to be challenged in court. What is important is that legal challenges are and will continue to be dealt with by courts in Hong Kong. The Government will argue its case in court and abide by the rulings.

The Appeal Court's ruling on July 30 upheld the legitimacy of the Provisional Legislature and put the validity of all laws passed after June 30 firmly beyond doubt. This brings me to another dire prediction from the school of pessimists that the freedoms, democracy and civil liberties in the HKSAR will be severely curtailed.

The Basic Law also ensures that the people of Hong Kong will continue to enjoy the freedoms of speech, assembly, association, the press, as well as other freedoms guaranteed by the International Covenant on Civil and Political Rights. Since the establishment of the HKSAR, Hong Kong people have been exercising these rights of free speech, of demonstration, and of scrutinising government policies and decisions. We have some 20 demonstrations a week. People talked about self- censorship by the press before the handover. Let me tell you: it will be an extremely unusual day if I were not to read in the press some criticism or comment about myself or other senior officials in the media. Believe me, the Hong Kong media is as vibrant and demanding now as they have ever been.

As for corruption, there is no indication at all that it has started to creep in to our society. Since the Independent Commission Against Corruption was set up in 1974, Hong Kong has gained the reputation as one of the cleanest places to do business in the world and business growth has soared. The correlation is clear. We have an entire generation that has grown up with the ICAC. Everyone sees the benefits. The anti- corruption culture is deeply embedded in the community. We will certainly not turn our backs because of the transfer of sovereignty. On the contrary, the ICAC has been liaising closely with the anti-graft bodies in the mainland of China, to pass to them our experience and to co- ordinate efforts in combating cross-border corrupt practices.

So much for the unfulfilled myths. The reality is that business continues as it has done before. The economy is growing at a healthy rate, with the GDP forecast for 1997 at 5.4%. The Hong Kong Dollar, backed by our huge foreign reserve and our sound economic and financial fundamentals, maintains its strength amidst the turmoil on Asian currencies. Hong Kong peoples' confidence towards the HKSAR Administration and the future is running high.

We have had a good beginning. Laying a solid foundation early on in the life of the SAR is very important. Indeed we are very confident of our future. What makes us so confident in managing our future? The fundamental reason for our confidence is, of course, the solid promises of our Basic Law. It is a comprehensive document that was drafted by people from both Hong Kong and China after some four years of consultation and discussion. The Basic Law provides a constitutional framework for the Hong Kong Special Administrative Region. It institutionalises the concept of "One Country, Two Systems". It clearly prescribes the social, economic and political systems in Hong Kong which are different from those in the mainland of China. It protects the rights, freedoms and lifestyle of Hong Kong people.

The Basic Law guarantees the independence of our judiciary and, apart from foreign affairs and defence, gives us full responsibility to manage our own affairs. It allows us complete financial autonomy, and the independence of our monetary system. It establishes Hong Kong as a separate customs territory, and enables us to work directly with the international community to control trade in strategic commodities, drugs, illegal transhipments, and to protect intellectual property rights. The Basic Law has also established the framework for the democratic evolution of our political structure over the first ten years, with my election as Chief Executive in December 1996 and the election for the first Legislature in May 1998.

It should be remembered that the "one country, two systems" concept did not originate in London or Hong Kong. It was a concept developed by China. The reason was simple: It is clearly in the fundamental national interests of China that the "one country, two systems" concept be successfully implemented. By preserving and further enhancing the success of Hong Kong, we can contribute to the continued modernisation of China. In addition, the feasibility of different social, economic, and political systems within one country is being tested. Success in Hong Kong can serve as a significant step towards the greater and final objective of re-unification of the entire nation. These are major objectives for China.

What else makes me so confident in Hong Kong's future? China has undergone dramatic changes since it opened to the outside world in 1978. The economy has grown at a remarkable rate, averaging close to 10 per cent per annum. This is a tribute to the vitality and energy of the Chinese people and the vision of China's leaders, who have guided these developments. Indeed these leaders have the ability and the acumen to steer China successfully into the 21st century. It is this ability and acumen that, I believe, will ensure the successful implementation of "one country, two systems" as we move forward into the future.

The full and successful implementation of "one country, two systems" is of great importance to all of us. The preservation of two systems will ensure Hong Kong's prosperity, our freedom and our way of life. But we are also mindful that for the two systems to be successfully implemented, we in Hong Kong must constantly remind ourselves we are one country, we are now part of China. Hong Kong cannot and should not do things which are not in the long-term interests of China. Certainly Hong Kong should not be permitted to be used as a base to destabilise China. Fortunately, the long-term interests of Hong Kong and China are the same. Indeed, if Hong Kong continues to prosper, we can contribute to the continued modernisation of China; if China becomes more open and prosperous, Hong Kong will benefit even more.

Since July 1, we in Hong Kong have been administering our own affairs. We are also carrying on with the development of democracy in Hong Kong. Our constitution, the Basic Law, requires us to develop democratic institutions: our commitment as a society is to do the same.

The Basic Law has set out a 10-year timetable for elections both for the Chief Executive and for the Legislature. In May next year, the elections for the first full Legislative Council will be held. Members of all political parties and independent individuals are welcome to take part. Every adult permanent resident will be eligible to vote and there are 2.5 million registered voters. This first full legislature will have 60 members, all of whom will be elected directly or indirectly. More specifically, 20 will be directly elected, 30 indirectly elected through functional constituencies and the remaining 10 indirectly elected through an election committee. The second legislature will be elected for a four-year term in the year 2000, when the number of directly elected seats will increase to 24. The third legislature will be elected in 2004 when 30, or 50% of the seats, will be directly elected.

As you all know, Hong Kong did not have a voice in the selection of the Governor. Under the Basic Law, Hong Kong people will have an increasingly larger voice in the selection of the Chief Executive. I myself was selected in December last year by a committee of 400 people, all of whom reside in Hong Kong. This committee represents many different walks of life in Hong Kong including businessmen; professionals such as doctors, lawyers and architects; labour unionists, social workers, politicians and religious leaders of the Protestant, Catholic, Buddhist and Muslim faiths. The second Chief Executive, serving from 2002 to 2007, will be selected by a similar committee, except it will be enlarged to 800 members.

In terms of the democratic process, the progress we will achieve in the next 10 years will be far more comprehensive and far-reaching than anything we ever had during colonial rule. What will happen after 2007? The Basic Law provides that further democratic evolution will depend on the wishes of Hong Kong people with universal suffrage being the ultimate objective.

I am aware of criticism that the electoral arrangements for next year will reduce the franchise in some functional constituencies. This misses the point that these functional constituencies, in their very original design, were indirect elections and were intended to represent economic, professional and grass-root sectors which are substantial and of importance to the community of Hong Kong. They were not intended to be elections through universal suffrage. Indeed, they are an interim arrangement under the Basic Law, designed to maintain balance and continuity while our democratic process continues to evolve of the next decade. Is a period of 10 years too long for this evolutionary process - a process that is critical to Hong Kong's future, a process the success or failure of which we in Hong Kong, and no one else, will bear the full consequence? I appreciate this may be an issue of concern to you. However, let me emphasise this point. At the end of the day, we must move forward in what we, the people of Hong Kong, think is in our best long-term interests. You would expect me to do no less.

As many people know, I am conservative. But conservatism - wanting to sustain things that you know and value - does not mean standing still or turning back the clock. Sustaining a wonderfully complex and exciting community like Hong Kong requires constant, judicious movement and sometimes pre-emptive adjustment. I am bound by conviction, and by oath, to uphold the Basic Law. I will assert and support key values and principles. I am fully aware that in moving forward we need the full support and acceptance of the community.

I would now like to speak briefly about China. Let me first say that I have not come to the UK as a spokesman for China. My task is to speak for Hong Kong. But the fact is that China is our sovereign. Your perceptions of China, and Sino-UK relations, has a great impact on us.

I spent much of my youth in the UK. Throughout those days I had the opportunity to live, work and mix with students from Britain, India, Pakistan and many other Commonwealth countries. It was also in those days where I began to learn and appreciate Britain's culture, history and way of life. But at heart, I am Chinese. I would like to give you a view of China through my eyes. I hope my unique background can help to provide a different perspective. After all, mutual trust, respect and understanding in Sino-UK relations is important to both the UK and China and, of course, Hong Kong.

More than 95 per cent of the people in Hong Kong are Chinese. We share a sense of dignity and pride that Hong Kong has returned to China. China is our sovereign, and naturally, like you, we have an affinity for our own fellow countrymen. And like you, our patriotic feeling is something very natural to us. We were saddened by China's past humiliations, and proud now in her improving fortune.

Many in the West today tend to define China through specific human rights issues. Others feel a sense of threat in China's rising prosperity. We in Hong Kong feel differently. What is happening in China is not a change to a monolithic giant, but the transformation of the lives of millions of men and women. They are being lifted out of poverty, given education and homes, and given opportunities that they never had before. China's life expectancy rate, child mortality rate as well as adult literacy rate have improved significantly. The percentage of people living at or below subsistence level in China decreased from 33% in 1979 to single digit figures today. The scale of transformation exceeds anything that has ever happened over so short a period, and it is happening to men and women like us. It is a process that warms the heart of everyone concerned for basic human condition. I know there are those in the UK who are concerned about human rights in China. I urge you to go and see for yourselves how much China has done in this respect. You will come away like many others, surprised and impressed.

From a practical point of view, with a population of 1.2 billion people and a commitment to vastly improve the standard of living of people through a market economy, China needs social stability. China also needs stability and peace in Asia and around the world. Like many other developing nations, the strengthening of the military is not a tool for expansion but a declaration of independence and a political statement to the international audience.

The recent 15th Party Congress has again reaffirmed the path of the nation's development. Indeed, we are confident that China will be more open and more prosperous as it enters the 21st century. In a recently released study by the World Bank, China 2020, it is projected that by early next century, China could become the second largest trading nation in the world. Hong Kong will undoubtedly be one of the chief beneficiaries of China's growth and prosperity. With our expertise and access to the world for capital and knowledge, Hong Kong will continue to play an important role in the development of the Mainland. Indeed, as China prospers, Hong Kong will benefit as well.

Coming to Great Britain as the first Chinese to have responsibility for leading Hong Kong, I feel, like all Chinese, a great burden of history hanging over me. The heaviest stones of the past were the events that led to Hong Kong becoming a colony 156 years ago. Debating these very events in the British Parliament in April 1840, William Gladstone said, and I quote: "I am not competent to judge how long this war will last, but I can say this, a war more unjust in its origin, a war more calculated to cover this country with permanent disgrace, I do not know and have not read." Unquote.

We should not forget history. Indeed, lessons of history are being learned as China marches proudly into the 21st century. At the same time, we should not be slaves of history. In Hong Kong we are fortunate to have much good material on which to build - the legacy that Britain has given us of the common law, good public administration, well planned infrastructure and well developed civic life. We will enjoy the fruit of those good works, and will strive to build on them.

We also enjoy the benefit of the way in which the colonial episode, which began so badly, was ended so well through the Sino-British Joint Declaration of 1984. Those who committed themselves then to peacefully resolve the Hong Kong question, and all those who worked tirelessly through all the difficulties of the transition, deserve much thanks and credit.

With the shedding of the baggage of history, the successful reunification of Hong Kong with China will, I hope, herald a new and significant chapter in the relationship between the UK and China. Hong Kong and the UK have had a special tie. We, in Hong Kong look forward to even closer ties with the UK as we enter into a new era.

Thank you.