I am delighted to be back in the States, particularly here in California at a time which coincides with the 150th anniversary of the event that started the California Gold Rush in 1848. Whilst the Gold Rush ended a few years later, it could be argued that the sentiment expressed by the wave of migrants who descended on California continues today. The lure of the U.S. has not lost its luster for people seeking fortune and fame. Whilst I certainly do not count myself as a gold-digger, with my frequent visits in the past few years, I am beginning to feel this is my second home. What nicer place could one have? A vibrant, dynamic center that in some ways reminds me of Hong Kong. I am sure that it would come as no surprise to learn that matters in Hong Kong have prevented me from visiting this great city of Los Angeles during the past eighteen months or so. But we are making up for the lapse by launching the first-ever overseas promotion under our new name in the City of Angels. I think this demonstrates the importance we place on our close ties with the United States, and California in particular. Not only is it the state where many Hong Kong people have settled, but Los Angeles is one of our major trading partners and our Pacific gateway to the U.S.

To give you some idea of the extent of our two-way trade dealings, the U.S. as a whole is our second-largest trading partner, our second-largest market, and our fourth-largest source of imports. In the first nine months of 1997, the value of trade between Hong Kong and the U.S. totaled US$41.5 billion. That is 14.5% of our overall trade and an increase of almost 4.5% over the same period in 1996. To break that down still further, Hong Kong is California's ninth- largest export market. In 1996, your exports to us were valued at over US$3.6 billion, and in the first quarter of 1997, they were just under US$1 billion—a rise of some twenty percent on the first quarter of 1996.

Having gotten those statistics off my chest, I wish to turn to the main theme of my luncheon address, and that is the first six months of Hong Kong as a Special Administrative Region of China, a milestone reached just a fortnight ago, on January 1st—a milestone that did not attract the current of attention the world's media gave to the six-month lead-up to the handover back at the start of 1997. It has not attracted attention because the transition has proved not to be a headline-grabbing discontinuity, but a heartening continuity. So seamless has the transition been that to many people in Hong Kong and to those coming back to visit, there simply has not been any tangible change to the lifestyle or in the way that Hong Kong operates in this new role as a Special Administrative Region. What is new? The only visible difference is the flag, and having a Chief Executive, not a governor, heading the administration. What has changed for me? I am still the Chief Secretary and, with only one exception, the senior policy secretaries are the same as those working for the former governor. My duties and my daily routine remain the same. I chair the same government and business committee meetings, attend the weekly cabinet meetings chaired by the Chief Executive. Then there is the usual pressure of day-to-day issues that any principal government official has to deal with.

I think the first six months could be summarized this way: the key ingredients of our success story remain firmly rooted in Hong Kong. The rule of law continues to prevail and is being upheld. We have an independent judiciary, and our own court of final appeal. We continue to enjoy the freedoms and rights guaranteed by the Sino-British Declaration and the basic law—our mini-constitution. Political debate remains lively, demonstrations continue to be a natural part of everyday life. If we, as a government, do not perform to expectations, then we certainly hear or read about it through the media, which remains as free and robust today as it did before 30 June 1997, perhaps even more so. The civil service remains apolitical, clean, and efficient. The Hong Kong Special Administrative Region government runs its own affairs and maintains a level playing field for businesses to compete without any interference from Beijing. Cooperation with our global and regional partners continues to develop and strengthen, as can be seen by the launch of our Hong Kong-USA 1998 promotion, our active participation in the World Trade Organization, in our contribution to the rescue package of the Thai BACKT, in the APEC economic leaders meeting in Vancouver two months ago, and in the Asian finance ministers meeting in Kuala Lumpur last month.

One very welcome development has come with regard to human rights. Many, both inside and outside Hong Kong, were concerned about the protection of these rights in the long term. I am very pleased that, although China is not a signatory to the human rights covenant itself, the central government has agreed that reports on human rights on Hong Kong will continue to be submitted to the monitoring bodies. Through this regular review and monitoring, we can give assurance that our well-developed systems for upholding human rights are being maintained in the years to come. So, as you can see, it really is business as usual in Hong Kong, a city that means business.

But to underscore our high degree of autonomy as a Special Administrative Region of China, I would like to expand a little on the way in which we have been able to handle the financial turmoil sweeping Asia. Any lingering doubts people might have had about China's commitment to allow Hong Kong to look after its own affairs, apart from defense and foreign relations, would have been dispelled by the events of the past few months. China's leaders pledged full support to Hong Kong, but only if we ask for it. They demonstrated their faith and trust in our ability to cope. China has shown understanding that maintaining the position of the Hong Kong dollar is the expression, in economic terms, of the substance of "one country-two systems." Equally, there is an understanding that for the Hong Kong dollar to keep its position, it is vital that it continues to be supported not by political intervention, but by the sound fiscal and economic policies that are practiced in Hong Kong.

You might have read or heard different analysts calling for the end to the link of Hong Kong and U.S. dollars. It is a debate that, almost like clockwork, is dusted off whenever there is the hint of financial problems or an attack on our currency. But I can give you this assurance: the Hong Kong dollar will not be de-linked. We believe that de-linking would damage Hong Kong and do further damage to the regional economy. It has been the stability of Hong Kong's currency since 1983, coupled with our greatly improved market regulation and supervision, that has enabled us to develop into one of the world's leading financial centers. Financial services have increased their contribution to our GDP by over 500% in the last decade and we are now the world's fourth-largest banking center and sixth-largest securities center. Most of the cross- border loans and deals in the world are made in U.S. dollars. The stability of our currency against the dollar protects our businesses and financiers from exchange rate risks on those transactions.

As for our exporters, the idea that they can gain sustained advantage from competitive devaluation is misjudged. We first must import all of our materials before we can export. Devalue and we will soon import deflation that will wipe out the hope of gain from lower export prices. Any devaluation would have serious consequences from our stock, financial, and property markets. It would do lasting damage to our economic prospects. There is no question of Hong Kong's ability to maintain the value of its currency. The currency board system under which the link operates is an automatic market mechanism, not a construct of political will. It has imposed sound financial discipline on the government. We run budget surpluses, not deficits, and have reserves that are sufficient not just to back up our currency seven times over, but allow us to maintain substantial levels of investment in infrastructure, education, and other programs that will strengthen our economy in the years ahead. We have sound regulation of our banks, including high capital adequacy ratios which place them in a very strong position to cope with any difficulties caused by current problems in the region and in Hong Kong. Above all, we have credibility, credibility that comes from our record of prudent fiscal policies, sound financial regulation, open and transparent systems, a clean and efficient administration, and from the underlying strength of our economy.

These are the major differences between the way Hong Kong operates and those economies in the Asian regions that are feeling the full impact of the current financial turmoil. Of course, this is an unsettling period for all. The higher interest rates that are needed to fend off attacks on the currency do have an adverse impact on the stock and property markets and affect those doing business or have a mortgage to repay. But it enables the real economy to adjust through lower property prices and rental levels. This is putting home ownership back within reach of the people and is restoring competitiveness in our business costs. The nature of these market-driven adjustments to the Hong Kong economy brings short-term trauma, but not long- term chronic illness. If you look around elsewhere in the region, I think you must agree that Hong Kong is in better shape than most. In short, the recent volatility in the market has not changed our policy of maintaining a free, open, and transparent economy with sound regulatory controls underpinned by the rule of law. And it has not shifted our determination to further enhance Hong Kong's role as a leading international finance center.

It is said that imitation is the sincerest form of flattery, and in this context, it is interesting to note that Singapore, which is so often held up as a great rival of ours, is looking at the Hong Kong model as a way of deregulating its domestic financial industry in an effort to position itself as a top financial center in the Asian time zone. Its banking sector has also been urged to follow Hong Kong's example, which, in recent reports, was singled out for its impressive records in banking disclosure statements. I wish them well, but I can assure that Hong Kong will not be standing still.

So whilst we are not immune from the economic meltdown in the region, our economy has continued to perform well. In the first six months of 1997, GDP grew by 6.3% in real terms. It slowed in the third quarter to an estimated 5%. But despite this decline, and the obvious impact of the currency and market turmoil of the past few months, we are sticking to our original budget forecast for real economic growth of 5.5% for 1997 as a whole. So even with the domino effect on the economies of a number of East Asian countries, Hong Kong has been able to withstand most of the pressures. We should be well-positioned to ride out the storm, emerging at the other end faster than most because of our free markets and open economy.

Our optimism in Hong Kong's future is based not on blind faith, but on the reasonable assessment of our opportunities and the trust we have in our free market system—trust that is grounded in long experience. And our reason for optimism is shared by others. Last month we received two rather impressive report cards from influential third parties. The U.S. Heritage Foundation Index of Economic Freedom for 1998 found Hong Kong, for the fourth consecutive year, to be the most free economy in the world. And the American Chamber of Commerce (AMCHAM), one of the city's top business groupings, has given the thumbs up for the SAR's medium term outlook. The Heritage Foundation Index gave Hong Kong top scores in all ten key areas under assessment: trade policy, tax policy, government intervention, monetary policy, foreign investment, banking, wages and price controls, property rights, regulation, and the size of the black market. The study found that there is "little evidence that becoming part of China will alter Hong Kong's economy structure significantly. There continues to be little government interference in the market place, taxes remain low and predictable, increases in government spending are linked closely with economic growth, foreign trade still is free, and regulations in addition to be transparent, continue to be applied both uniformly and consistently."

The results of AMCHAM's survey are just as encouraging. They reflect a positive medium-term outlook for Hong Kong's business environment, even against the backdrop of recent economic turbulence in the region. The summary results noted the high level of confidence is directly related to the smooth transition and political stability, sound economic fundamentals, and an overall improvement in Sino-American relations. Over 96% of the survey respondents expressed very favorable or favorable views of Hong Kong's business environment in the next five years. The maintenance of the rule of law and free flow of information ranked as the most important factors in assessing the SAR's future as a center for international business and finance. The latest figures we have show the total American investment in Hong Kong were US$16 billion, making us the second largest destination for U.S. investment in Asia, after Japan. There are some 1200 American companies operating out of Hong Kong, more than 400 of them with regional headquarters or offices there. Despite the present turmoil, Hong Kong's position as the key international financial trading and business center of East Asia has been strengthened. Our political stability, sound economy and dependable currency, which is freely convertible, have provided a measure of certainty in a region now beset by uncertainties.

This is bolstered by the fact that we have mainland China as our economic hinterland, an economy that grew by about 9% in real terms in 1997, and with little spillover effect from the regional crisis, growth in the mainland is expected to continue at around 8% per annum up to the year 2000. The attributes that have put us at the top of the East Asian region remain our geographical location on China's doorstep and midway between Tokyo and Singapore, our hardworking, flexible and well-educated workforce combined with our enterprising and resourceful entrepreneurs, our simple and low-tech system where no individual pays more than 15% on their salary and no company more than 16.5% on its profits, our transport and communications infrastructure, which makes it easy to travel to and communicate from almost anywhere in the world, our accessible and predictable legal and judicial system which ensures that the rule of law is upheld, that no one is above the law, and Hong Kong's resilience and can- do attitude which has enabled us to overcome so many apparently crippling political and economic problems in the past. And we are continuously improving on those attributes. We have just announced that our new, state-of-the-art airport will open 6 July 1998 to carry us through well into the next millennium, perhaps continuing as the world's busiest for freight and third busiest for international passengers. Further expansion of our container port, already the world's busiest, is underway and we have just announced major expansions for our mass-transit railway and conventional rail systems. As one of the world's great cosmopolitan cities, a meeting place for east and west, and where English remains the language of business, we are also upgrading our teaching methods to ensure our graduates have an even better command of both English and Chinese. This is essential if we are to maintain our competitive edge in the world. As part of this program, we will be providing more than 700 additional native English-speaking teachers in secondary schools from this year.

But I do not deny that we have had difficulties—and not simply on the economic front or, for that matter, with the recent outbreak of bird flu, which has been the subject of intense medical research and study from experts in Hong Kong and the world. Political issues have also tested the administration, specifically, the legality of the provisional Legislative Council and other decisions of the administration have been subject to legal challenges. But the important thing is that all of these challenges have been dealt with by Hong Kong courts, under the rule of law, using the same legal precedents and processes that have been long-established in Hong Kong with their roots in the English common law system.

On the legislative front, our overriding objective now is to act as quickly as possible to put in place arrangements for elections for the first SAR legislative council, in accordance with the basic law and to elect a legislature that is genuinely representative of the whole spectrum of public opinion, through a voting system that is fair, open, and acceptable to the people of Hong Kong. These elections will be held on 24 May 1998. The structure of the New Legislative Council will be the same as that of the 1995 legislature, that is, twenty directly elected members from geographical constituencies, thirty indirectly elected from functional constituencies, and ten from an election committee. The indirect elections in functional constituencies are pretty well unique to Hong Kong. They have drawn criticism from the time they were introduced under the British administration in 1985. They remain, as then, a transitional arrangement. The basic law sets out a timetable for electoral development in Hong Kong that will see the number of directly elected seats steadily increased to 50% of the total by 2007. After that, it will be up to us to decide for ourselves how to take the electoral development forward to full universal suffrage.

I know that the question of human rights around the world will continue to be a central pillar of United States foreign policy. In our own way, we are ensuring that it continues to be nurtured and strengthened in Hong Kong. As I mentioned earlier, we will be writing reports on the implementation of two important U.N. covenants on civil and political rights and on economic, social, and cultural rights. We will be seeking the views of Hong Kong people in the preparation of these reports and they will then be submitted through China's permanent representatives in the U.N. to the relevant treaty-monitoring bodies.

There is one other matter that needs to be clarified: time and again, we are asked by people from overseas, what is the effect of so many soldiers from the People's Liberation Army stationed in Hong Kong? Such a situation could not be farther from reality. Less than two months ago, Hong Kong's respected English language daily, The South China Morning Post, commenting editorially on the changing of garrison personnel (something which occurred without fanfare), said, "the ultra-low profile adopted by the People's Liberation Army since its arrival has exceeded all expectations." In fact, the paper went on to say that it would be in everyone's interest if the soldiers were allowed to see more of Hong Kong, provided they remained a background presence. For most people in Hong Kong, the only visible presence of the PLA are two guards standing to attention at the entrance to the garrison's headquarters, the Prince of Wales Building (yes, the name has not been changed yet) on the central waterfront.

The Hong Kong Police continues its most effective role in maintaining law and order in the streets, as well as insuring the integrity of our border with the mainland. This is also a fact that is sometimes overlooked. The border remains intact, just as it was before the handover. The same immigration and customs law apply. There has not been and there will not be any sudden influx of people from the mainland coming to Hong Kong. As we saw at the handover, there is a great deal of international goodwill and support for Hong Kong and China as we undertake our historic task of "one country-two systems."

I am very conscious of the need to maintain the momentum of support from our friends and to keep them fully abreast of developments of the SAR. I know we have many friends here in the United States and this is the principal reason that we have chosen the United States for our first post-handover promotion. I believe that the world wants Hong Kong to succeed because a successful Hong Kong is good for the world. We are an important player in the global village and I can assure you that we will continue to play a vigorous and constructive role in the myriad of international organizations of which we are members in our own right. That is what a high degree of autonomy means in practice.

With the Chief Executive's leadership, the firm support of central government, the commitment and growing confidence of the Hong Kong community, the goodwill of our friends in the international community, and the support of our trading partners, I am very confident that the Hong Kong people will run Hong Kong wisely. We will maintain our cosmopolitan, international character and outlook, our free market philosophy, the rule of law, respect for individual rights and democratic institutions—in short, adherence to the basic law. We are a very proud community. We are proud to be Chinese and once again a part of China, albeit with our distinct system. A good Sino-U.S. relationship is crucially important for the entire world. We welcome your administration's decision to forge a constructive relationship with China, and I am sure that Hong Kong's continuing well-being will be an important aspect of that relationship.