Following is the full text of the speech by the Chief Executive, Mr Tung Chee Hwa, at the luncheon by Institute of International Finance This (Sunday) afternoon:

We had a very important and historic event on July 1st where over 4,000 guests were gathered at the extension of the Convention Centre for the handover ceremony. It was a very important event here in Hong Kong. This week tens of thousands of some of the most important world citizens have gathered here in Hong Kong to attend the IMF and World Bank meetings and we are trying to make sure that you are all very welcome, very comfortable, and make sure everything works. I just want to assure you that that event on July 1st was really a dry-run for you guys.

Let me begin by welcoming members of the Institute to Hong Kong. I know that you face a very busy schedule over the whole week, but I hope that you will also be able to take some time off and enjoy your stay in this very wonderful city of ours.

Given the Institute's concern with issues of global finance, Hong Kong is clearly the right place for this very distinguished gathering. Hong Kong is truly one of the world's leading financial centres. Almost 500 banks from 40 different countries have some form of presence here. Hong Kong is also the host to many of the world's major securities, insurance and fund management companies. It is very much in Hong Kong's interests that these financial institutions should operate in a safe and sound manner. We welcome the role of the Institute in helping to promote prudent risk management amongst its members.

1997 has of course been a momentous year for us in Hong Kong. The First of July saw the resumption of the exercise of sovereignty over Hong Kong by China and the establishment of the Hong Kong Special Administrative Region under the "One Country, Two Systems" concept. This is a matter of deep pride for all Chinese people and for the citizens of Hong Kong who now have the responsibility of managing our own affairs.

Two and a half months have gone by since the First of July. All three branches of our political structure, the Executive, the Legislative, and the Judiciary, have all been functioning normally. Our economy continues to expand. There has been no change in the life style to which we are accustomed, and over the last two and a half months, over 150 demonstrations took place in Hong Kong freely and with total ability to express their own views. Indeed, for Hong Kong, it is very much "business as usual".

We, who live and work in Hong Kong, continue to work hard for an even more successful and prosperous future. Recent surveys by the Social Science Research Centre of the Hong Kong University have shown that 78% of Hong Kong people expressed full confidence over Hong Kong's future. What is the basis of this optimism?

The fundamental reason for our optimism lies in our trust in China. It should be remembered that the "one country, two systems" concept is not a concept originated from London or Hong Kong. It was a concept developed by China, taking into consideration the fundamental interests of China as a nation and Chinese as a people. The reason is simple: if Hong Kong succeeds in our effort, we can contribute towards the continued modernization 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 the re-unification of the entire country. These are major objectives for China.

Why else am I confident of Hong Kong's future? China has undergone dramatic changes since she opened up to the outside world in 1978. The economy has grown at a remarkable rate, averaging close to 10% per annum. This is a tribute to the vitality and energy of Chinese people and the quality of China's leadership. These leaders have the ability and the acumen to steer China successfully into the 21st century. It is this ability and acumen that will ensure the successful implementation of the "one country, two systems" concept as we move forward into the future.

China's leadership is fully committed to making "one country, two systems" a successful reality. They have complete faith in the ability of Hong Kong people to administer Hong Kong. I can testify to this commitment with my experience over the last nine and a half months. The Central Government is fully adhering to the Basic Law and has given us an entirely free hand to deal with our own affairs.

A further reason for my confidence lies in the solid foundation we have in Hong Kong in our finances, our civil service and, fundamentally, in the application of the rule of law. These, together with free market principles, improving physical infrastructure and vigorous and effective enforcement of law, especially against corruption, will ensure our success.

Additionally, my confidence in Hong Kong's future is grounded in the spirit of the people of Hong Kong. What we have achieved within our lifetime is staggering. What we still hope to achieve together is no less ambitious. Four days ago, I met approximately 150 members of the most outstanding high school students at a tea reception which I gave. I was most encouraged by their confidence in Hong Kong's future and their commitment and determination to make Hong Kong an even better place in the 21st century. I know we have the talent, the will and the spirit to keep on succeeding in whatever the world holds out for us out that.

Last but not least, my confidence is because of the solid promises embedded in our Basic Law. It is a comprehensive document that was drafted together by the people of 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 institutionalizes the ground-breaking concept of "one country, two systems". It clearly prescribes the social, economic and political systems in Hong Kong which, as you know, are different from those in Mainland China. It protects the rights 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 independence of our monetary system. It establishes the Hong Kong SAR as a separate customs' territory, and enables us to work directly with the international community to curb trade in strategic commodities, drugs, illegal trans-shipments, and infringement of intellectual property rights. It safeguards our freedom of speech, assembly, workshop, and other civil liberties.

The Basic Law has also established the framework for democratic evolution of our political structure over the next ten years. For the post of the first Chief Executive, I was elected by a 400-member Selection Committee representing a wide cross-section of interests in Hong Kong to serve for five year term. The 2nd Chief Executive will be elected in 2002 by an 800-member Election Committee to serve until 2007.

As for the Legislature, it will consist of 60 members, all elected directly or indirectly. The election for the first Legislature will be held in May 1998. The election for the second Legislature will be in the year 2000 and the third Legislature in the year 2004. In each of these elections, the proportion for directly elected seats will gradually increase from one-third to one-half by the time of 2004 election. For the direct election, there are approximately 2.5 million registered voters in Hong Kong and they all will have the right to vote.

Beyond a ten years' time frame, the Basic Law provides us great flexibility in that further evolution will depend on the views of the people of Hong Kong at that time with universal suffrage being the ultimate objective.

Some say the speed of democratic evolution is too slow. Others say it is too fast. I believe we have struck the right balance for the community as a whole. Given the fact that the democratic process for the Legislature only began in the early nineties, and for the post of Chief Executive only in 1996, I believe we need a suitable period for transition. In any case, throughout this period, the accountability of the Government to the people, the rule of law and he freedom we enjoy today, all of which are very important to the continued success of Hong Kong, and to the democratic evolution, will be maintained.

I would like now to discuss with you a subject of particular interest to you today. This is how we intend to maintain, and indeed enhance, Hong Kong's role as an international financial center. This will be central to Hong Kong's future economic success.

We in Hong Kong are proud of our success, but we cannot simply rest on past achievements. There are new challenges to face as recent currency and stock market turmoil in the region has demonstrated. Our economy and our financial systems must be resilient enough to withstand external shocks. We must continue to create an environment where business can flourish. In this respect, we must continue to enhance the commercial vitality by improving our competitiveness.

As with all aspects of Hong Kong's way of life, the starting point is the Basic Law, the bedrock on which we can build a better future.

The Basic Law imposes a very explicit obligation on the SAR Government to provide - and here I quote - "an appropriate economic and legal environment" for the maintenance of Hong Kong's status as an international financial center. This is not a pious aspiration. It is a legal requirement which we take very seriously, as we do all aspects of the Basic Law.

This broad objective is backed up by other articles of the Basic Law which provide, among other things, for: autonomy for the SAR Government in the formulation of monetary and financial policies and in the regulation of financial markets of Hong Kong; the free flow of capital into and out of Hong Kong; the continued circulation and free convertibility of the Hong Kong dollar; and the continued backing of the Hong Kong dollar by foreign currency assets of the Exchange Fund.

These are concepts which provide a solid underpinning for the future development of Hong Kong's financial system. They have been talked about for many years and now we finally have the opportunity to put them into practice. Let me outline briefly how we intend to do this - in particular, how we will provide the right environment for Hong Kong's continued development as an international financial center.

First, we shall continue to pursue sound and sustainable macro-economic policies which support the stability of our financial system. This means the continued pursuit of fiscal discipline which has been the hallmark of Hong Kong in the past. In nine out of the last ten years we have actually achieved a budget surplus. It shall remain our guideline that government expenditure over time shall grow at a rate no faster than the economy.

Fiscal prudence is a necessary precondition for exchange rate stability. It shall remain a central plank of our economic policy to maintain the link between the Hong Kong dollar and the US dollar. This gives confidence in the currency to the people of Hong Kong and those who do business and invest here. Despite one or two short-lived speculative attacks during the recent currency upheavals, the Hong Kong dollar has remained rock-solid. We aim to keep it that way. Our large stock of foreign exchange reserves of approximately $82 billion and the good economic fundamentals of Hong Kong give us the means to do so. I know that we can also rely on the unwavering support of Mainland China in this particular objective.

Confidence depends not only on a stable exchange rate. People who do business here want to be assured that they can safely enter into contracts and that they will get a fair hearing in court in the event of disputes. They also want to compete on a level playing field. We shall adhere to our present legal system and the rule of law to ensure that Hong Kong continues to provide an even-handed and secure business environment. We shall also continue to fight vigorously against corruption.

In addition to fiscal prudence, we need to continue our policy of a low and predictable tax structure. Additionally, we also need to know how to spend money wisely where it is necessary to invest for our future. Hong Kong's human resources are perhaps our major asset. This helps to explain why so many financial institutions have chosen to establish a presence here in Hong Kong. We must ensure that we can supply the manpower and the expertise to meet the sophisticated business and information technology needs of such companies. This is why investment in education will be one of the main priorities of my administration.

It is also essential that we raise the standard of language training. English is the lingua franca of global finance. Our students must therefore master both written and spoken English. Equally, growing links with the Mainland mean that they must also be fluent in Putonghua as well as Cantonese.

We must also make every effort to keep the cost of doing business in Hong Kong under control. In particular, housing costs in Hong Kong are among the highest in the world. This is bad for Hong Kong people who find it difficult to buy their own homes and bad for foreign companies which are faced with the cost of housing their expatriate staff. Hong Kong will not achieve its full economic potential unless we can solve this problem. Achieving this goal will be another one of my major priorities.

The backbone of a modern financial center is the infrastructure of clearing, settlement, communication and information systems. These are necessary to produce transparent and liquid markets in which payments and securities can change hands with confidence. We shall take positive measures to encourage the development of such systems as we did with the Real Time Gross Settlement system for interbank payments which started operation in December of last year.

Finally, we recognize the need to continue to develop and improve our system of financial regulation.

I shall elaborate a little bit more on this latter point because it is particularly topical and because I know that it is one of the major preoccupation of this particular Institute.

There is increasing recognition of the importance of sound financial regulation. As recent developments in Thailand have shown, weakness in the financial sector and instability in the wider economy feed on one another. Moreover, in today's global markets, problems in one financial system can quickly spill over into others. In this sense no financial center is an island - not even Hong Kong!

Regulation is not the whole answer in promoting financial stability. But all of us have an interest in ensuring that sound prudential standards are adopted internationally and that these are rigorously put in place by national authorities. International financial institutions such as the IMF and the World Bank have an important role in monitoring progress in this area and providing advice and support for financial sector reform.

This topic will be the subject of an important Conference on Financial Stability and Prudential Standards to be held tomorrow in Hong Kong by the Basle Committee and the IMF. This will be followed by the Roundtable Conference on Financial Stability and Supervision in Emerging Markets hosted by this Institute. I hope that both Conferences will be great successes.

The first of these Conferences will introduce the Basle Committee's Core Principles for Banking Supervision to senior officials from central banks and financial ministries around the world. The core Principles provide the foundation necessary to achieve a sound system for banking supervision. We are pleased to associate Hong Kong with this venture, both as host for unveiling the Core Principles, and as one of the supervisory authorities which participated in the development of the Principles. It will therefore not surprise you to know that Hong Kong subscribes to, and already complies with, the Core Principles. As an international financial center, we recognize that Hong Kong must follow international standards. Foreign financial institutions want to operate in markets where the rules of the game are familiar and credible.

In conclusion, Hong Kong has enjoyed enormous success as an international financial center in the past. Reunification with the Mainland of China and the fact that China will become one of the largest economies in the world in the 21st century opens up new opportunities for Hong Kong to develop her role and we are determined to take full advantage of this. I hope that my speech can convince you that we are moving forward in the right direction. Thank you very much.