HKSAR Chief Executive, Tung Chee-hwa, delivered his highly anticipated Post-Policy Address to the Hong Kong business community at a joint luncheon on January 10 at which he elaborated on the contents of his sixth Policy Address. Following is Mr Tung's entire speech.

The government has thought long and hard, about what it is that makes Hong Kong tick, and what it must do to make Hong Kong prosper, how the SAR should respond to rapid changes that are taking place around us and what can be done to move Hong Kong ahead and come out once again a winner by a mile.

I dare say, and say confidently, that we now have the right answers, and they are contained in this Policy Address which, although written and delivered by me, is in fact a document of collective wisdom, a manifesto of the mainstream vision and will of the people of Hong Kong.

Accordingly, this year's address has a format that befitted its weight. You don't see many policy details there; gone are the annual "goodies" that the media loves so much to report on. These are put inside the accompanying document called the Policy Agenda Booklet, a joint product of the principal officials and me. You also don't see in this year's address the policy contents belonging to individual bureaux. They are taken care of during the respective policy secretaries' appearance in front of the LegCo next week. Instead, this year's Policy Address is about the core policy directions of the second administration of the SAR Government and the reasons why we pursue them as such. As a result, this year's address is shorter, more precise and more tightly structured. If the five preceding Policy Addresses of mine represented our government's attempts to blaze new trails for Hong Kong to realise its world city dream upon re-unification with the motherland, then this one is the culmination and crystallisation of those attempts. The trails have been marked, the path now lies clearly ahead. So, this year's Policy Address has a special place in my heart. Those of you who noticed that I delivered it two days ago with a certain visible pride now know the full reason why.

The most important achievements of the first administration of the SAR Government under me were two. Politically, it was the successful implementation of the "One Country, Two Systems" concept. Economically, it was the soft landing of our economy after weathering the Asian financial crisis. Elsewhere, political transitions of even relatively minor significance have often led to serious civil strife. In Hong Kong, re-unification with China, our great motherland, was achieved with not even one single glitch. Patriotism is on the rise. The proportion of Hong Kong people identifying themselves with being Chinese is also on the rise. More and more people realise that our destiny lies with China and is bright. While we scored those political victories, we also worked hard on the economic front. We busily laid the foundations for Hong Kong's future development even while we steered Hong Kong safely out of its darkest difficulties triggered during the crisis, which elsewhere had sent economies crashing. We do not gloat over our successes today, because we know that there are greater challenges ahead.

For a number of reasons, some extremely deep-seated, we are still beset with grave economic problems. For the second administration of the SAR Government, the most important task is to lead Hong Kong out of the present economic difficulties. The severity of our current problems is well known, so I need not review it for you here. Instead, I will say a few words to summarise for you the causes of those woes.

On the cyclical side, we had 10 years of asset hyper-inflation followed by a prolonged period of deflation after the bubbles burst. The hangover is painful and fraught with severe loss of real wealth, jobs and confidence, as people abstain from spending money and businesses hesitate to invest as they do not expect demand coming back soon.

It so happened that these structural factors had been at work while we were blindsided by the excitement of the expanding asset bubbles, so that we had failed, in the '80s and the '90s through the middle of 1997, to learn enough new skills, invest enough in new technologies and make enough improvements in our economic, social and governance systems to cope with the structural changes. While we danced with false hopes, opportunity sadly slipped out from the door.

When I first became Chief Executive of the SAR Government I warned the community of the need to be alert to impending dangers even while we were enjoying prosperity. Unfortunately, it has taken four years of deflation, five years of receding real estate prices, record-high unemployment, a deficit that has become on order of magnitude larger, and clear warnings of possible credit rating downgrade to drive that message home. Well, so be it. Let 2003 be the year that all of us finally take this challenge on.

It is late, but fortunately, not too late because we still have irreplaceable competitive advantages.

I noted in this year's Policy Address that despite the dramatic changes to our external environment, we have not lost our fundamental strengths, and I want to reiterate the point here, lest familiarity breeds contempt, and we fail to see what treasures we have when it is only too apparent to an outsider. As the most cosmopolitan and modernised city of China, the world's number one growth economy, we enjoy a strong and unique halo effect. We are also the most important international financial, logistics, tourism and business support service centre in the Asia-Pacific region. In short, we are still what we are -- the Pearl of the Orient!

Then we must not overlook our opportunities. China is widely recognised as having one of the world's most dynamic economies with great potential. Its development strategies aim at quadrupling output by 2020, when its GDP may well rank near the top in the world. The Mainland's rapid economic development, plus its further opening up, will provide historic, unprecedented opportunities for Hong Kong. This may sound like a mantra on everybody's lips nowadays, but not everyone understands it. Let me show you the true significance.

We have identified for Hong Kong four "pillar industries" -- finance, tourism, logistics, and business support services. Just think: in finance, if we didn't have China, a number of relatively sophisticated cities in Asia could well be our effective competitors; if on the other hand we became one of the financial centres of China, then our position would be so much strengthened that no other city in the region that aspires to become Asia's financial centre could even come close. Think: The Mainland authorities have encouraged and facilitated a freer flow of tourists to Hong Kong recently and our tourism industry is already enjoying a significant upswing. Imagine what it would be like in a few more years' time. Think: China is fast becoming the "processing centre of the world", and the nearby Pearl River Delta is one of the top exporting bases in China. How can our logistics industries, already among the most advanced in the world, not benefit from that trend? And think: Following the footsteps of the world's major corporations, which have already established their presence in China, countless number of small and medium-sized companies in the world would want to do the same thing. But China is not an easy market to work, so they all need intermediary and support services, and we have been doing that better and for longer than anyone else. Also, as China's countless companies mature and ready themselves for reaching out actively into the world market, we can provide for them intermediary and support services in the other direction. So, of our four pillar industries, none could grow much beyond their current levels if there weren't the China factor, but all could see limitless opportunities if the China factor is fully exploited. Indeed, without exaggerating a bit, China is not only our Motherland, but also, for business people and professionals alike, the mother of our opportunities!

Yet we must not foolishly think that such opportunities can be taken for granted. We may have a significant headstart and certain proximity advantages, but in a world of eager competitors and an age of shrinking space-time thanks to advances in information technology, any advantage in the hands of the unworthy may prove to be fool's gold. So all of us, whether working in the government, or as employers or employees in the private sector, must do some serious soul searching followed by honest hard work to upgrade ourselves in the most useful and productive ways, in order to exploit those opportunities. We in the government, I am glad to report, have done our homework, and I want to tell you briefly about it.

For the past five years, the SAR Government has marshalled efforts in the following areas:

We have taken steps to cut red tape, de-regulate, streamline business-government interfaces and enhance government efficiency. To ensure even better results, I have planned to set up a high-level task force to examine these issues.

We have identified, based on wide consensus, Hong Kong's four pillar industries -- financial services, logistics, tourism, and business support services -- which urgently need enhancing.

Aside from the four existing pillar industries, we will also seek to promote the creative industries, in which Hong Kong has a huge potential. At present quite insignificant in volume, we hope to expand their output to a good proportion of our GDP, which is possible as shown by other advanced economies.

Aside from the bigger industries, traditional industries, the local community economy and the many small and medium enterprises that together employ a significant proportion of our workforce have received firm government support and will continue to receive more.

Because the success of all our efforts depends critically on human capital, we have done an enormous amount of work in education to expand the quantity and raise the quality of our human capital pool. We have also done a lot to attract foreign and Mainland talent. We plan to do more in these two areas, namely, by continuing to fund useful educational reforms and by reforming our immigration laws. Last, but of first-order importance among the things that the SAR Government has done is the forceful promotion of our economic relationship with the Mainland. In the Policy Address I dwelled extensively on the additional measures that we would take to promote economic co-operation with the Mainland, such as establishing a Closer Economic Partnership Arrangement (CEPA), speeding up and improving boundary crossings, expediting economic integration with the Pearl River Delta, etc. I know that many of you are aware of these and have already responded enthusiastically.

In sum, the way forward is to capitalise on our advantages and strengthen our four pillar industries. We will also foster the development of creative industries, promote innovation and technological progress, and support the development of small and medium enterprises into new business areas. We will speed up economic integration with the PRD to facilitate economic restructuring and create jobs. I believe we are on the right track.

I have spoken extensively on the need for Hong Kong people to remember our own strengths and advantages, the need to understand the times, discern Mainland and global trends and opportunities, and to prepare ourselves in different ways to adapt to the changing circumstances. However, we really must pay attention to the issue of worsening government deficit.

The fiscal deficit problem has reached a critical stage. When the current financial year closes at the end of March, the deficit will have hit a record high of over $70 billion, representing more than 5 per cent of our GDP. This is simply not acceptable. Some prolonged and severe belt-tightening is necessary, if we want to stave off the downgrading of credit rating, possible speculative attacks on our linked exchange rate and other dire consequences, any of which could threaten to delay our economic revival indefinitely.

I believe that all sectors of the community have come to realise the gravity of the deficit situation and many people have come forward with good ideas to solve the problem. I therefore have the responsibility, confidence and determination to take all necessary and prudent steps to restore fiscal balance within the next five years.

We will adopt a three-pronged approach. First, we will boost economic growth. Then we will vigorously cut public expenditure and carefully raise revenue. Our target is to reduce, in an orderly manner, the government's projected spending of $220 billion in the operating accounts in 2006-2007 by $20 billion through various means. We also intend to introduce appropriate tax increases and government fees and charges to help firm up revenue.

I would like to quickly stress that civil servants are not a major cause of our fiscal deficit. In fact, during the last several years they have made solid contributions to cutting government expenditure by doing more with less while maintaining the quantity and quality of public services. I am glad to report that, in our discussions with the civil service unions, they have responded positively and indicated their readiness to participate in achieving the target expenditure cuts of $20 billion by 2006-2007. They are prepared to ride out the present difficulties with the rest of the community and accept a pay cut, if circumstances so require.

Further, we plan to set an overall goal of cutting the civil service establishment by 10 per cent by 2006-2007. That means the size of the civil service will drop from the current level of 178,000 to about 160,000. From April 1 this year, we will freeze civil service recruitment across the board. Also, we will launch the second Voluntary Retirement Scheme. Let me emphasise that this exercise we are going to undertake will not be a mere shrinkage in numbers. Together with the size reduction will be steps to economise, to enhance efficiency, to dispense with redundant services, to re-deploy our resources, to take practical measures to prevent any erosion in the quality of public services and to ensure the continuation of the necessary ones.

To demonstrate our readiness to share the pain, 14 principal officials, two most senior appointed staff, members and I myself will first take a pay cut of 10 per cent, effective April 1. I believe that by joining hands with the community, the government can solve the deficit problem.

During the consultation exercise conducted over the past three months, the community held animated and extensive discussions on the legislative proposal. I consider this kind of dialogue proper and normal. The SAR Government has noted that the community at large generally realises the need to legislate under Article 23 of the Basic Law, while some citizens have expressed their doubts and worries about certain aspects of the legislative proposal. We value citizens' views and suggestions very highly, and will study these issues in depth. We will exchange further views with the citizens concerned over the next few weeks. I firmly believe that, when the SAR Government presents the Bill, all will be able to see that many of their views will have been accepted.

My friends, I have spoken at length, and much of it is negative and sometimes aggravating. Actually we are not that bad right now. While all of us are working hard to adapt to and facilitate the structural changes going on around us, external developments seem to be giving us a lift. This year, we have resumed positive growth. Exports and re-exports are shooting up markedly. The depreciation of the US dollar has helped us to become more competitive in our exports. Unemployment has nudged just a bit downwards. Tourism has seen significant recovery.

Now these may or may not be the first whiffs that presage the coming of the long-awaited monsoon. If they are, it will mean we will have less impediments and less pain on our way to eventually accomplishing economic restructuring. If they are not, we'll keep our composure and continue to fight hard and prepare ourselves for a better day. While life has its imponderables, working hard will certainly bear fruit, if not today then tomorrow. It is one constancy that will never fail a person, an honest man's option for which he will always be in the money.