This Spring Festival has been particularly joyous. The local economy shows renewed buoyancy that we have not seen for some time. All the latest indicators are very uplifting and public sentiment is good. We have every reason to feel good about the results of the tremendous efforts of the community at large and the Government.

Over the past six years, the Hong Kong economy has been undergoing a difficult process of restructuring. This restructuring has been particularly painful and protracted for several important reasons.

First, we inherited serious and unresolved problems, including a bubble economy and a mismatch of human resources leading to an inability to move quickly towards a knowledge-based economy.

Second, the sudden onset of the Asian financial crisis pierced the bubble economy, which led to a sharp drop in property prices, the evaporation of considerable personal wealth and, for many people, the problem of negative equity. The serious adverse impact this has had on consumer spending has contributed to continued deflation.

Third, due to globalisation, neighbouring economies have been growing, and increasing their competitiveness. Higher production and operating costs in Hong Kong have seen our industries relocate elsewhere, leading to job losses and reduced incomes.

Fourth, the adverse economic situation has affected public finances, causing a serious fiscal deficit. If not dealt with properly, this will undermine our financial markets. However, dealing with it too hastily will seriously affect people's livelihood and the momentum of the economic recovery.

Falling property prices and household income, high unemployment, painful budgetary measures and the sudden outbreak of SARS all contributed to the difficult time faced by all of us.

Our gross domestic product deflator has fallen 21% in the past five and a half years. To find comparable figures, we will have to go back to the time of the Great Depression in the United States when the GDP deflator fell 26.7% in the four-year period between 1929 and 1933. You can imagine how difficult the process has been over these years in Hong Kong.

Society showing tremendous resilience

Notwithstanding all these challenges, our financial market and banking system have stood the test and have continued to operate smoothly. We have made steady social and economic advancements. Indeed, what has happened in Hong Kong speaks of the tremendous resilience and strength of our society and its institutions, the fruit of the concerted efforts of our citizens and the Government.

Throughout this period, in addition to dealing with the constant challenges facing us every day, we also carefully evaluated the challenges and opportunities posed by these changes, as well as examined our own strengths and weaknesses.

We established the strategic direction of "leveraging on the Mainland, engaging ourselves globally, capitalising on our advantages, strengthening our core industries, deploying new knowledge and new technologies and moving up the value chain".

We are promoting Hong Kong as Asia's world city. In order to achieve this objective, we have, from a macro-perspective, invested heavily in education to raise the quality of our manpower. We have attracted talented people to come here to work, and we are striving to improve the living environment.

We have embarked on the road to high added value by encouraging new technologies. We have promoted competition, lowered costs and supported innovation. We have worked hard to preserve the rule of law, the various freedoms we treasure, a level playing field, and the many other advantages we presently enjoy.

Vigorous co-operation with the Mainland

At the same time, seizing upon the historic event of the handover, we have vigorously promoted exchange and co-operation with the Mainland. In the process, we will not only boost Hong Kong's economic development, but also make a greater contribution to our country's modernisation.

Strengthening economic co-operation with the Mainland is obviously our key to success. CEPA, "individual visits" by Mainland residents and the establishment of the Greater Pearl River Delta Region with Guangdong Province are of prime importance to Hong Kong's future development.

Similarly, we realise that for Hong Kong to sustain its position as Asia's leading financial centre, we must, in the long run, become an offshore renminbi centre. Allowing our banks to do renminbi business would be a good start.

Therefore, throughout the past few years, we have been exploring with the Central Government how Hong Kong's competitive advantages can best be leveraged and how the Central Government can help us to emerge from our economic restructuring. We have received strong support from the Central Government.

With the signing of CEPA on June 29, 2003 here in Hong Kong, various agreements have come into effect to facilitate our restructuring and give a strong boost to our social confidence.

Many indicators point to a V-shaped rebound of our GDP after SARS. The unemployment rate has declined. Deflation is expected to disappear within the year. Our measures to stabilise the property market are gradually producing results. With deflation and a weaker US dollar, our competitiveness has risen significantly. As the world economy improves, we are optimistic about our own economic prospects.

In the medium and long term, China's GDP is expected to reach US$4,000 billion by 2020. Given our special position, Hong Kong will benefit from this rapid development. Over the past few years I have been saying, "When Hong Kong succeeds, China will benefit. When China succeeds, Hong Kong will prosper." It has now come true.

Putting the people's interests first

As regards to governance, I am fully aware of the keen public expectation for us to improve. We are determined to put the interests of people at the forefront of our administration. We will strengthen our leadership role, while working in accordance with established systems, procedures and the law.

We will enhance our policy-making capabilities. We will involve a broad spectrum of society in the formulation of policies. We firmly believe that the public will see further improvement in our governance in the days to come.

We understand the concern of the community over our future constitutional development. Therefore, we would seriously and properly handle the constitutional review for the comprehensive and steady progress of Hong Kong.

At the district level, we will better deploy the functions and resources of the Home Affairs Bureau to enable District Offices to solve problems and improve the quality of life in districts quickly and more effectively. We will strengthen our co-operation with District Councils and support their work. We will review their function and composition at a suitable time.

Never underestimate avian flu

Lately avian flu has been wreaking havoc among our neighbours. And the threat from SARS is still looming. The severity of the situation should never be underestimated. These diseases have previously rocked Hong Kong and cost us dearly. Drawing from this lesson, we are now well prepared to face up to any possible crisis in partnership with our citizens.

Lastly, let me stress that our achievements did not come as a windfall. They are the results of the persistent hard work of the people of Hong Kong. They are the results of the unswerving support of the Central Government.

The way forward is well paved. There will of course be obstacles ahead, but there will also be tremendous opportunities. Riding on these opportunities, Hong Kong is poised to flourish and create new wonders in the Year of the Monkey.

(This is the speech by the Chief Executive Tung Chee Hwa at the Secretary for Home Affairs' spring reception on February 6.)