Ladies and gentlemen, good morning.

First of all I would like to extend a most hearty welcome to all the visitors from Shanghai and Osaka.

This is a very important gathering, happening in a very historic year for us in Hong Kong. And I am sure your deliberations will be very helpful in improving mutual understanding and collaboration amongst three of the most important cities in Asia.

1997 is truly a very important and historic year for us - it marks the return of Hong Kong to China - and we are indeed moving forward, in Hong Kong, with confidence and with pride. Pride that we are at last reunited with China and confident that our future will be better.

The fact is that Asia is becoming increasingly interdependent. The trade relationship between Hong Kong and Japan is a very important one to us - you are one of our largest investors in Hong Kong, you are one of our largest trading partners. The relationship between Japan and China also is very important - Japan already is China's largest trading partner. And the relationship, of course, between Hong Kong and the mainland of China is so close that, as I have always said, the more Hong Kong is successful, the better it is for our entire country; and the better our country moves forward, the more prosperous we can even become. So the triangular relationship is a very important one and I am sure in your deliberation you will move this relationship a step further.

People have often asked me: Well, this is really wonderful that the return of Hong Kong has been so smooth; how can this be? I think you really need to look at the fundamentals. The fundamentals are that our economy is going well and that the 19 years of unprecedented economic expansion on the mainland of China at close to 10 per cent per annum, has really given Hong Kong a tremendous lift in our economic activities.

We have been also successful because of Hong Kong people being very hard-working, very entrepreneurial, and very quick in responding to challenging circumstances. So these are some of the reasons why we are successful.

Additionally, the rule of law in Hong Kong is very strong. We have very good and prudent financial management. So nine out of the past ten years, the government has run budget surpluses and this year's budget surplus will be over 2 per cent per annum. And we are moving forward based on what we have always been very successful on.

In fact, all these very important aspects guaranteeing Hong Kong's success are all part of the Basic Law. The Basic Law guarantees Hong Kong a different social, economic and political system; guarantees Hong Kong an independent judiciary; and the separate management of monetary affairs. The Basic Law provides the constitutional framework for us to move forward, and we are moving forward with a great deal of confidence.

People also ask: How can you be so sure this all is going to work out? Let me remind everyone, a successful Hong Kong, after 1997, is in the basic interest of China as a whole. The more prosperous Hong Kong is, we can contribute to our country's continued economic development and modernisation. And a successful and prosperous Hong Kong can help towards the ultimate reunification of our country. I refer specifically to the issue of Taiwan.

So it is in the fundamental national interests of China as a country, that Hong Kong be successful as we move forward. And because of all these reasons, Hong Kong is really moving forward very well, very proud, very confident in our future.

Ladies and gentlemen, I prepared a speech to talk about the industrial development of Hong Kong but I have decided that in view of all the interest everybody might have on the financial turmoil in Asia, I will specifically talk about this particular subject, and particularly in reference to Hong Kong itself.

The currency crisis and financial turmoil is now affecting almost every country in Asia, and this obviously has an impact in Hong Kong. There has been some talk that should Hong Kong currency be de-linked with the US dollar; should we continue to link the US dollar with the Hong Kong dollar? Let me be very specific on this issue. Hong Kong dollar must be and will continue to be linked with the US dollar. There is absolutely no reason for the de-linkage. Our economic fundamentals are very strong, our economy continues to expand at about five per cent per annum, unemployment continues to be very low at about 2.5 per cent per annum. We have the fourth largest foreign exchange reserve in the world - US$88 billion. Our financial management has been conservative. This year's budget surplus will be over two per cent of our GDP. And in fact, if you look at all these, this sets us apart from all the other nations around this part of the world.

The fact is that it was 13, 14 years ago we decided to do the link. And the link has served us well. And before the link, I think you might still remember the volatility and the fluctuation and the uncertainty that has caused us.

And the fact also is that 83 per cent of our GDP is in the service sector - 83 per cent of our GDP is in the service sector - and that competitive devaluation will not make us more competitive from an overall economic point of view. There are, of course, people who say that: Well, really, you should really devalue because by devaluing we will become more competitive. I don't really share this fundamental argument because devaluation creates uncertainty, creates further financial uncertainty for our market as a whole. It doesn't bring us stability. Whereas a strong link with the US dollar, people feel more confident in investing in Hong Kong in knowing exactly where they stand. And as I say, 83 per cent of our GDP is in the service sector.

And the fact is that today, Manila, Thailand, many of the countries are already much cheaper than Hong Kong. Why is it that people still rely on Hong Kong as a service centre? Because our rule of law is very clear, our regulations are clear, the transparency of our stock market activities are very clear, regulation is very strong. And the fact that because of our proximity with our own country, with China, and our ability to provide that bridge between the outside world and the mainland of China, gives us a very unique position which other cities cannot match.

So it is my belief that by linking the US dollar with the Hong Kong dollar, it is the only way forward and it is good in the interests of Hong Kong.

And this is not to say I am not insensitive about competitiveness. Obviously, I am. Because if we are uncompetitive, we will lose our position. And this is why, in the policy speech - we look at why are we uncompetitive and the reason is because of housing, because our housing cost is too high, our land cost is too high - so in the policy speech, I made a point of making a whole lot of land available to ensure that on the housing side we achieve a soft-landing to make us more competitive.

There is also a need to look at our manpower situation to make us more competitive, and I mentioned that also in the policy speech. The right way to address the competitive issue is to look at where the bottlenecks are. And the bottlenecks are in housing and in the manpower supply.

So in my view, we must resolutely defend the link and continue the way we are. Improve our competitiveness by managing better the supply side of both land and people.

Now, in defending the link, obviously the interest rate has gone up. And the interest rate has gone up because of uncertainty in the market place that the government may give up the link. So the sooner the market is convinced that we are not going to give up the link, the better chance there is for the interest rate to stabilise.

I know that the increase in interest rate is painful to many people in Hong Kong. To those people who have bought their homes they have to service a mortgage, it is painful. To businesses who have borrowed based on HK dollar loans, it is painful. To those people who have invested in the stock market, it is painful. But I will say that these are short term pains. The sooner we can get over this, the better it will be. These are short term pains. And that as soon as we get over this, I want to tell you that our recovery will be faster than all the other nations around us. Why? Because we have all the right fundamentals. We have all the right fundamentals. And the fact is that the high interest rate today is already reducing the cost of housing and that it therefore will help us to achieve our original objective of making us more competitive more quickly.

I would like to emphasise that I am sensitive, the government is sensitive, towards the pain many people would suffer today because of high interest rate on personal mortgages, because of investment losses in the stock market, and because of higher interest costs for the business. But I would like to emphasise that in my view these are short term and that it is important that the market understands that we are not going to change from our linked exchange rate policy. We are not going to change from that policy. The sooner the market understands that, the better, and the sooner the interest rate will start to soften, I hope.

Of course, the uncertainty is also created by what might happen in Korea this week, and obviously we are watching the situation very, very carefully. But I am confident, if I may repeat again, that of all the nations, I believe ours will be the first one to recover, will move up much faster, because all the fundamentals we have are good. And the fact that also we will benefit from China's continued expansion.

The 21st century is Asia's century. The events of the last couple of months may have created doubts in the minds of people that would the 21st century still be an Asia century. I am very confident the 21st century will still be an Asia century. The fact is, China is moving ahead very well in its economic development and that by 2020 it will become one of the largest economies in the world. The fact is that Japan, despite all the present difficulties, is still one of the wealthiest nations in the world. The fact is that all our savings rates are very, very high in Asia. And the fact is that Asian people are really hard-working, really diligent, moving ahead to build better communities for ourselves. So I believe that all the Asian nations will emerge from the recent uncertainties. Some may take a little bit longer. Others, like Hong Kong, will take a shorter period of time to recover.

And it is heartening to note that over the last decade, Asian economies have been collaborating very well. And I know in the years to come, Asian economies will also continue to collaborate well. And nothing is more important in close collaboration amongst Hong Kong - Hong Kong as part of China - China itself, and Japan. And in this regard, I hope this particular gathering symbolises that collaboration.

So in closing, I would like to wish this meeting every success. Thank you very much.