Mr Eichel, Ms Roth, Victor, distinguished guests, ladies and gentlemen,

I am delighted to be here in Frankfurt. It is a great honour for me to be standing before such a distinguished gathering. I am most grateful to the Hong Kong Trade Development Council for organising this luncheon.

1997 was an extraordinary year for Hong Kong. July 1st saw the smooth and seamless return of Hong Kong to China, thereby ending 157 years of colonial rule. Indeed, the people of Hong Kong had looked forward to this great occasion with immense pride; pride in that we were at last reunited with our own country, and have become masters of our own destiny.

1997 was also an extraordinary year for Asia at large. Buoyed by years of continuous growth and prosperity, the region seemed ready to shrug off numerous structural weaknesses and continue its march into the next century. Six months ago, these structural weaknesses of selected Asian nations triggered a financial crisis that reverberated around the world.

I would like to take this opportunity today to tell you how well Hong Kong has done, as part of China and under the 'one country, two systems' concept. I will talk about the Asian financial turmoil and its impact on Hong Kong. In the process, I will also discuss the economic development in China. Finally, I want to talk about our bilateral relationship, and just how important Germany is to Hong Kong.

Hong Kong has indeed been moving forward with pride and confidence since the successful reunification. Even though the euphoria has been somewhat dented by the economic downturn as a result of the Asian financial turmoil, hope remains high in Hong Kong. It is not surprising that many of those who have visited Hong Kong since the Handover share our confidence and enthusiasm. Let me quote Mr James Wolfensohn, President of the World Bank, who said in his concluding remarks at the World Bank/IMF annual meetings held in Hong Kong last September: "Seeing this region and seeing Hong Kong, the 'one country, two systems' is certainly something that we can now believe and I think it served as a very reassuring message to all of us that Hong Kong will continue as it has before."

Furthermore, it is very encouraging to see the results of the latest survey by the German Industry and Commerce in Hong Kong, which showed that 83% of the German companies responding had not noticed any significant change in the investment climate since the Handover. It is particularly worth noting that the survey was conducted recently, at the height of the Asian financial turmoil.

What makes us so confident in managing our future? The ultimate source of 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 mainland 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 that the social, economic and political systems in Hong Kong will be 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, it 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.

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

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 constitutional document, the Basic Law, requires us to develop our 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. On May 24, 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 is eligible to vote and there are currently some 2.8 million registered voters. This first full legislature will have 60 elected members - 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, to be elected in 2004, will have 30, or 50% of the seats, directly elected. In seven years' time, we will have more democracy in the legislature than we ever had in 156 years of colonial rule.

As you may know, Hong Kong never had a single voice in the selection of the Governor during colonial rule. Under the Basic Law, Hong Kong people will have an increasingly larger voice in the selection of the Chief Executive. I myself was elected in December last year by a committee of 400 people from many walks of life, including businessmen; professionals such as doctors, lawyers and architects; labour unionists, social workers, politicians; and religious leaders of different beliefs. The second Chief Executive, serving from 2002 to 2007, will be selected by a similar committee, except that it will be enlarged to 800 people.

In fact, the process of democratic evolution in the next decade will be far more comprehensive and far- reaching than what we had under 156 years of colonialism. And what will happen after 2007? The Basic Law provides that further democratic evolution will depend on the wishes of Hong Kong people and the overall environment at that time, with universal suffrage being the ultimate objective.

Is a period of 10 years too long for this evolutionary process? Let me make a point of history about democratic development. In the US it took 182 years to achieve full, universal suffrage for everyone 18 and over. In Belgium it took 150 years and in France it took 126 years. So, is a period of 10 years too long for 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 that this may be an issue of concern here and elsewhere. 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 the best, long-term interest of the Hong Kong SAR. And I know you would expect me to do no less.

Let me now talk about the Asian financial turmoil, how and why it happened, and in my view, how it will eventually be played out. And, how has the turmoil affected Hong Kong. Let me paint you a broad perspective.

In July, Thailand abandoned its peg to the US Dollar and in less than eight months, three of the 'Asian Tigers' were brought under the care of the IMF, with more than US$100 billion mobilised for their rescues. The ferocity and speed of the contagion were unprecedented, unleashing what the Managing Director of IMF, Michel Camdessus, has called 'the first global financial crisis of the 21st Century'.

The origins, causes and effects of the Asian crisis are complex, but the broad problems are fairly well known. In those countries which have been badly affected, it was a combination of private sector over-borrowing, inadequate bank regulation, poor risk management and tragic policy errors at the corporate and banking levels, both national and international. The growth of derivatives and modern information technology also contributed to the speed of the contagion. Certainly, the governments involved did not have sufficient sound macro-economic policies which took into account the new global, economic, financial and competitive environment. Economies were overstretched in the pursuit of high growth, not totally aware of the pitfalls of global financial flows. The fact is, there are enormous benefits from financial liberalisation but such liberalisation must be built on a robust financial system in order to cope with associated volatility in the financial markets.

The tidal wave that swept Asia has been devastating, and has sent ripples across the globe. But I must emphasise that Asian economies are not all the same. Those economies that have sound fundamentals, credible policies and low leverage, such as China, have succeeded in weathering the storm. Those with free markets, strong regulations, rule of law and stringent fiscal discipline, such as Hong Kong and Singapore, have passed the test of fire.

When will the Asian financial crisis end? I see a number of key factors affecting the pace of recovery:

First, there are clear signs that the Asian economies are generating trade surpluses, instead of trade deficits.

Second, the financial situation in Korea has stabilised because the world finally realised that financial crises cannot be solved by official funds alone, but a combination of IMF funding and conditionality, plus voluntary rollovers provided by international banking institutions. This appears to be the right way forward.

Third, as the largest economy and financial powerhouse in Asia, Japan must maintain positive growth and stability in the yen.

Fourth, the international financial and economic environment must remain stable. Both American and European stock markets are now reaching record highs, and everyone hopes that there will not be further shocks emanating from the large markets on the smaller emerging markets.

Fifth, both mainland China and Hong Kong will maintain stability in the RMB and Hong Kong Dollar as the anchors of currency stability in Asia. I will address these two specific issues later on in my speech.

Finally, Asian economies must maintain their resolve and determination to restructure and reform with the help of the IMF and other multilateral agencies. Throughout the Asian financial turmoil, there is now greater recognition in Asia that global financial markets have changed the world, and that there is a need for more balanced growth, with better risk management. We need better banks, more efficient financial markets, and greater transparency and disclosure for markets to work efficiently. We particularly need social stability, strong and accountable governments with sound macroeconomic policies.

The financial crisis in Asia has been painful to us all. But the fundamentals of Asia have not changed. We still have the young and flexible workforce, the high savings rate, openness to trade and ideas and an indomitable will to improve ourselves. Some glaring uncertainties, particularly those in Indonesia, still need to be resolved, but I would expect the Asian crisis to bottom out in a year or two and we shall then witness a slow but sure road to recovery.

Let me also point out that the recent Asian financial crisis is a new phenomenon brought about by an increasingly open global financial market system. The existing international and multinational structure for international trade and finance designed some 50 years ago needs to be upgraded to suit the new environments of 21st Century. In this regard, Hong Kong fully supports calls for global efforts to design a new international financial architecture.

Now, let me say a few words on Hong Kong. Over the past decades, Hong Kong has achieved, in every respect, most enviable success. At US$25,000, our GDP per capita is the second highest in Asia. We have the busiest and most efficient container port in the world and also the third busiest passenger airport in the world. We are probably the most successful financial centre in Asia. All this has been achieved because of the hard work and entrepreneurial spirit of the people of Hong Kong. This has also been made possible because of the 20 years of rapid and successful economic development in the mainland of China, which has given our economy boundless opportunities to move forward.

What's more, we practise sound macro-economic policy of small government, with strong support for the free market. With our strong commitment to prudent financial management, we have consistently been able to achieve budget surpluses averaging 2% of GDP per annum. For the current fiscal year ending this month, our budget surplus is an astounding level of 5.8% of our GDP.

We have a flexible and efficient economy and nowhere is this better seen than in the labour market, which has faced massive changes over the past decade as manufacturing processes were relocated into the southern parts of China. Employment in the manufacturing industry declined from 870,000 in 1986 to 310,000 by September 1996 - a 65 per cent drop. Elsewhere this would have caused a jump in structural unemployment and calls for government intervention. But in Hong Kong, our flexible workforce has been so successfully relocated to service industries that our unemployment rate has remained at a low 2 to 3 per cent throughout.

Our robust financial system and monetary management mechanism, modern and prudent supervision as well as sophisticated financial infrastructure provide us with the foundations for a stable exchange rate. Our banking system is strong, with capital adequacy ratios of locally incorporated banks averaging 17% and bad debt ratios of less than 2%.

We have a low, consistent and simple tax structure, an open and accountable government, and a lean and corruption free civil service. Most importantly, we believe strongly in upholding the rule of law.

Many have questioned the need for us to maintain a fixed exchange rate policy. The fact is, Hong Kong is a highly externally-orientated economy. Almost all our daily needs are imported. Almost all our manufactured products are exported. Furthermore, we are very much an entrepot, handling a large volume of re-exports. Our service industries are also very externally orientated, providing financial and other services for the region, particularly China. The total value of our trade in goods and services in a year is equal to well over 250% of our GDP. Business engaged in these externally orientated economic activities want certainty in exchange rates.

Many have questioned whether we need to devalue the Hong Kong Dollar. Indeed, people ask how can we remain competitive with the rest of Asia where currencies have depreciated so much. I do not believe we need to devalue the Hong Kong Dollar. It is not in Hong Kong's interest to do so. The fact is that close to 85% of our GDP is generated by the services sector. In that, competitiveness is not just about the cost but about other important factors, such as the need for the rule of law, a corruption free society and predictable government policies which put investors, local and international alike, as ease. Competitiveness is also about the quality and creativity of the people. In these areas, what we have in Hong Kong, few others in Asia can match.

Indeed, since 1983, Hong Kong, in order to ensure currency stability, has been operating under a currency board system which provides full US Dollar backing for our currency. In the recent round of attacks on the Hong Kong Dollar, the currency board system has proven to be most effective.

Thanks to our prudent fiscal management, as the end of 1997, Hong Kong's foreign reserves, which includes our 'fiscal reserve', stood at US$92.8 billion -- the third largest in the world. These huge reserves provide not just 100%, not just 200%, but 800% backing for the currency in circulation.

The stability of the Hong Kong Dollar has been a pillar of strength in Asia and was described in the Wall Street Journal in January as ".. the dam that prevents Asia's crisis from inundating other emerging markets and possibly even the world's major ones". We perform this role not just for our neighbours, but because we believe it is the right thing to do for Hong Kong.

Although we do not wish to become more competitive through devaluation, I want to assure you that we are conscious of our high costs. Indeed, we know runaway high costs will, in the long run, hurt an stifle our economic growth. In fact, over the past few years, consistently close to double-digit inflation, high salary increases, and unrealistic property values have begun to threaten our future economic vitality. The SAR Government is extremely mindful of this. To tackle these problems, we have planned a series of measures which were announced in my Policy Address delivered on October 8, last year.

However, because of the currency board system we operate, interest rates will be pushed up automatically if the Hong Kong Dollar comes under attack. As a result of several attacks on the Hong Kong Dollar in the past four months, interest rates have gone up and have remained relatively high, even today. In this regard, the Asian financial turmoil has had some positive impacts on Hong Kong. Our economy has cooled down, our property and stock markets have softened very substantially from the peak. Although the markets have not totally settled down, and adjustment has been painful to many, I believe essential structural changes are taking place very rapidly. And from a cost point of view, Hong Kong will begin from a much lower base once recovery starts.

Indeed, we are not allowing the Asian financial turmoil to derail our long-term focus of building a Hong Kong which is fair, free, prosperous and economically competitive. Because of our very strong fiscal reserves of HK$450 billion (about DM107 billion) - there is no government debt - and with a budget surplus of 5.8% of our GDP in the current year, we are able to, through the budget just announced, continue with our massive plan of investment in infrastructure and education which will make Hong Kong much more efficient and competitive in the 21st Century. We can do all that, and still expect to achieve a budget surplus for the year. Indeed, despite the turmoil around us, we continue to build and invest for the future.

I would like now to speak briefly about China. Let me first say that I have come here not as a spokesman for China. My task is to speak for Hong Kong. But I am Chinese, and like you, our patriotic feeling is something very natural to us. We were saddened by China's past humiliations, and rejoice now in her improving fortune. And also importantly, China is our sovereign power. Your perceptions of China, and German's relations with China, have a great impact on us.

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 a transformation of the lives of millions of men and women. They are being lifted out of poverty, 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 has decreased from 33 per cent in 1979 to single-digit levels today. The scale of transformation surpasses anything that has ever happened to men and women like ourselves. It is a process that warms the heart of everyone concerned for basic human condition.

Yes, China has undergone dramatic changes since she opened up to the outside world in 1978. Her achievements are for everybody to see. 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.

At the 15th Party Congress held in September 1997 and the 9th People's Congress now being held in Beijing, the vision for the 21st Century China has been clearly mapped out. The country is determined to continue the process of reform, particularly in banking sector and in the state enterprises. There is also commitment to reduce the size of the bureaucracy , to fight corruption and to continue the march towards a free market economy. In a book published by the World Bank entitled "China 2020" it is projected that China may become the 2nd largest economy in the world by that time.

The question has often been asked: "Will China need to depreciate its currency, the Renminbi." Let me give you some financial data which you may find interesting. In 1997, China's growth in exports was 20.9%, recording a trade surplus of US$40 billion. Its current account surplus was 0.9% of GDP and its foreign currency reserves stood at US$140 billion.

In 1997, China's GDP grew at 9% and its inflation grew at 2.8%. Its fiscal deficit was at 0.8% of GDP. Its total domestic debt was less than 20% of GDP. Indeed, if you look at these figures, China also meets all the Maastricht criteria which have been laid down for the introduction of European monetary union.

I believe China will continue to be competitive. The competitiveness of China is based on broader structural factors including underlying factor costs, market leadership and the trade policies of major importers. Even after the marked depreciation of the Asian currencies, labour costs in the Mainland of China are still lower than most Asian economies. And in China there is continues access to a huge labour pool made up of redundant state sector workers and surplus labour in rural areas. The effect of devaluation on the manufacturing costs in the Asian economies is likely to lead to higher inflation, higher import costs and higher interest rates. China has established market leadership in a variety of products. It is difficult to see this dominant position being significantly eroded particularly with the existence of internationaltrade barriers which limit the extent of the possible shift of export orders from China to other Asian economies.

Hong Kong and mainland China, today, serve as a anchor for stability in Asia. In the longer term, I know China will march from strength to strength and I am convince that the region will emerge from the turmoil and become even more successful than before. Most of the Asian countries are at a developing stage and will remain so for some time, but with its huge population, high savings rate and thirst for infrastructure developments, Asia can become one of the world's largest capital providers, borrowers, as well as largest consumer markets. The depth of economic opportunities in the coming decades in Asia in general, and China in particular, for Germany and indeed the rest if the world, is staggering.

And where can the German business community best capitalise on such opportunities? Where else but Hong Kong, the natural gateway to China and the Asia Pacific Region.

Hong Kong and Germany have a very close relationship. This is symbolised every day on the street. Hong Kong has the second highest market share in the world with 12% of total number of private cars on the roads carrying the famous Mercedes Benz marque. At the same time, there is a growing number of BMWs on the roads, not simply because BMW has become the official car for most of our senior government officials.

Truly, the Hong Kong-Germany relationship is important. In 1997, Germany was our 6th largest trading partner in the world, and our biggest trading partner in the EU. In 1997, German-Hong Kong trade amounted to HK$95.2 billion (DM22.6 billion). Hong Kong is an important entrepot for trade between Germany and China, which last year totalled HK$98.1 billion (DM23.4 billion) and of which HK$56 billion (DM 13.3 billion) worth was routed through Hong Kong.

The German presence in the SAR is quite significant - some 460 companies - 130 of which have established their regional headquarters or offices in Hong Kong. They are active in every sector from manufacturing to services, particularly in banking where 10 licensed banks operating in the territory have German interests. Unfortunately, the number of German visitors to Hong Kong last year was down by 15% to 235,000. But with new competitive packages being offered by the tourism industry, and initiatives in our budget, we hope the figure will show positive growth in the years to come.

With the indomitable spirit of the Hong Kong people, and a strong commitment from the leadership of the Central People's Government to the full implementation of the 'one country, two systems' concept, Hong Kong's future is assured. I feel it is time to rethink the scope of the German-Hong Kong partnership. To think bigger.

At a time when Hong Kong is now part of China but moving forward under 'one country, two systems'. At a time when China is moving forward into the future with a clear vision to become an economic powerhouse. At a time when the 'Euro' is becoming a reality, when Europe is expanding eastward, when Germany surely will be playing a leading role, it will be very important for Hong Kong to be sure that our relationship with Germany is as strong as ever. And, of course, it is important to also notice that Frankfurt in the years ahead will, like Hong Kong, become a leading financial centre in Europe. With all that it is really necessary for us at Government level to rethink how much more we can do to encourage the private sector of both sides to come together at even greater speed to co- operate with each other.

If there has been any change at all in Hong Kong since the Handover, it is in the mindset of our people. Hong Kong is no longer an enclave economy with an artificial and psychological barrier created by the date of June 30, 1997 and the border between Hong Kong and the mainland of China. Tens of thousands of Hong Kong people who have previously migrated overseas are returning home each year. They feel the pride, they sense the opportunity and they want to participate in building a better tomorrow. They also bring new skills and experiences to enrich our economy. Yes, our people are thinking longer term at how to expand into higher value added activities - and at forming strategic partnerships to make this happen.

Hong Kong has been enriched over many decades by different ideas and cultures, blending the best of East and West. Germany has contributed greatly to this process. People from all over the world feel at home in Hong Kong. It is more than the prospect of making money. The deeper attraction is Hong Kong, itself.

In short, the Hong Kong SAR is poised to reach even greater heights as the new century unfolds. I am proud and privileged to lead it. And I invite even greater participation from German business in our continued success.

Thank you.