This summit is indeed an occasion to reflect on where Hong Kong has been and to prepare for the challenges ahead.

When we look back on the past seven years, it's hard to believe what we've been through: the bursting of the asset bubble, the collapse of the property market, years of deflation, the erosion of personal wealth, high unemployment, consumer pessimism, reduced public revenue and SARS.

It was enough to cause anxiety in even the most confident of communities, and it certainly put a crimp in Hong Kong's style.

While the Asian financial turmoil and the bursting of our bubble economy were the immediate causes of Hong Kong's post-handover economic downturn, it is the long-term factors which should be attributed with equal if not greater causal significance.

The inexorable process of economic globalisation, the rapid rise of the knowledge-based economy driven by technological development, the successful pursuit of economic reform and opening by China since the late 1970s, the increasing competitiveness and openness of our other neighbours, and our weak technological base, our comparatively high costs of production and doing business and the growing mismatch in human resources are the underlying long-term factors which have brought about Hong Kong's prolonged economic downturn and made its course of economic adjustment and revival lengthy and painful.

HK aims to become more successful than ever

Throughout this difficult period, we were constantly evaluating what are our competitive advantages and disadvantages. How can we emerge from the economic restructuring and be more successful than at any time in our history?

We have charted out a clear direction. One thing was clear, our main thrust must be how to benefit from the Mainland's rapid and orderly development. China is by far the fastest-growing large economy in the world.

For three decades, until 1979, much of Hong Kong's prosperity was a result of the Mainland economy being closed. Today, Hong Kong's prosperity hinges on a Mainland economy that is open, prosperous and rapidly integrating into the world economy. Hong Kong's role is even more important now, as the world beats a path to China's market.

It was clear to us that Hong Kong's future depended on securing greater access to the Mainland market for our businesses and professionals, and on building on our expertise in servicing the Mainland's trade and investment needs.

It was also clear Hong Kong's future depended on ensuring two-way free flow of goods, people and when the time is ripe, capital flow between Hong Kong and the Mainland.

HK the offshore renminbi centre of the future

It was these thinkings that led to CEPA. It was these thinkings that led to our entering into greater co-operation with Guangdong Provincial Government on Pearl River Delta and on Pan-Pearl River Delta. And it was these thinkings that led to giving our banks the opportunity to do personal renminbi business. It was the first step in putting ourselves in a favourable position as the offshore renminbi centre in the future.

Therefore, throughout the last few years, we were exploring with the Central Government as to how Hong Kong's competitive advantages can best be leveraged and how Central Government can help us to eventually emerge from our economic restructuring. These discussions accelerated in 2002 and came into fruition during 2003 with the signing of CEPA on June 29, 2003, here in Hong Kong.

The economic difficulties that Hong Kong faced over the last several years were severe, but they did lead to the bursting of an unsustainable bubble. High costs and inefficiencies had crept into our economy during the long boom that we enjoyed. I believe that, over these last few years, a lot of excess fat has been burned, and we are today once again on our way to becoming an extremely competitive and dynamic economy.

HK reaps benefits of weaker US dollar

Deflation has been painful, but it has brought down the cost of doing business here. Our currency peg with the US dollar has proven to be a hard economic taskmaster. But with the US dollar weakening, we are reaping the benefits.

This was the course we charted, and now we are seeing results. With the end of SARS, the global economic recovery and the support of the Central Government, confidence has been returning and the Hong Kong economy is recovering quickly.

We posted 6.8% GDP growth in the first quarter of 2004, and growth in the second quarter is expected to be in double digits. Property prices have stabilised, unemployment has levelled off and been declining although very very slowly and deflation is disappearing. Prospects for Hong Kong, at least short-term prospecst for Hong Kong - despite the beginning of a new interest cycle, high oil prices and possibly uncertainty geo-politically - are encouraging.

But, where do we go from here? How can we sustain our economic recovery and how can we ensure success in our continued economic restructuring?

CEPA key to HK's ongoing recovery

CEPA is important to Hong Kong. What we need to do in the months and years ahead is to deepen and broaden CEPA in order to maximise its benefits although it needs to be done incrementally. As a further step in that direction, the Government has been actively involved in discussion with the Central Government since the beginning of the year. And I can tell you that we will have some good news soon.

We must also maintain our momentum in fostering greater co-operation with Guangdong Province on the Pearl River Delta, and the Pan-Pearl River Delta region. Let me give you two clear examples of our co-operation with Guangdong in the past years. One involves infectious diseases. Since last year's SARS outbreak, medical authorities in Hong Kong and Guangdong have worked tirelessly to share information to prevent the transmission of potentially deadly diseases like SARS and bird flu.

The other example is about our boundary crossing. Hong Kong has one of the world's busiest boundary crossings. Last year, about 115 million people and more than 13 million vehicles crossed the boundary. That was an average of 316,000 people and 36,000 vehicles a day.

As more and more Mainland tourists come to Hong Kong, and as cross-boundary commerce continues to grow, it's imperative that we smooth the flows and reduce the bottlenecks.

We made substantial progress in the last 12 months because of excellent co-operation and this progress will continue with the completion of the Western Corridor in 2006.

17 sub-committees work on cross-boundary co-operation

In our regional co-operation arrangement with Guangdong, we have 17 sub-committees that are working diligently at present on all sorts of different issues. Let me give two examples. We have an expert group on environmental protection that has devised a management plan for air quality in the Delta. We should have a regional air-quality monitoring network in operation by the end of this year, and we are exploring ways to co-operate in better prevention of vehicle emissions.

All of this will benefit Hong Kong as the Greater PRD region becomes more prosperous and influential. The other is the infrastructure subcommittee. That committee is working diligently on the HK-Zhuhai-Macau Bridge as well as the Guangzhou-Shenzhen-Hong Kong Express Rail Link. We expect to report more progress by the end of this year.

Cast your mind back to 1978 when Hong Kong began our investment in the PRD. The purpose was to use the PRD as a production base for lower labour cost and greater efficiency. After 25 or more years of co-operation, great wealth has been created in the PRD. PRD has become an important market focus and also a source of tourists visiting Hong Kong.

88% of individual travellers hail from Guangdong

Hong Kong has also been turned into a highly successful service centre, serving the needs of the PRD. In fact, much of the economic growth of the first half of this year is as a result of double digits growth in trade to and from the PRD. As a result of increased economic activities brought about by tourism, an astonishing 88% of individual travellers are actually from Guangdong Province, mostly from the PRD.

So you can see the benefit is now really mutual and the benefit flows both ways. I believe our relationship with the entire nine provinces of the Pan-PRD in the long run will be a mirror image of our relationship with the PRD today.

Furthermore, we must constantly keep a watchful eye on future involvement in renminbi business in order to ensure our continued position as a financial centre.

Some policy initiatives in the next few years are important to our economic restructuring. As we move up the value chain in the knowledge economy, another key Government policy initiative is to enhance our human capital.

Investment in education a top priority

Investment in education continues to be our top priority. But it is not just about money; it's about producing the right results. I'm happy to say that after years of effort, our education reform in primary and secondary education is bearing fruit, and this will become more obvious in months and years ahead.

I am also proud that we have some of the best universities in the region, here in Hong Kong and despite cutback in funding in the recent years, all our universities continue to strive for excellence.

Another crucial aspect of this policy is the training and retraining of our people, so that they can maintain competitiveness in the knowledge economy. Today, thanks to our efforts, school leavers have many more channels and opportunities for further education or job training. And we are helping those already in the workforce to upgrade their skills. We need to continue this effort in order to raise the standard of Hong Kong's labour force.

Enhancing our human capital is more than nurturing local talent. It also means attracting the best foreign and Mainland talent to Hong Kong. More often than not, they are highly motivated and have the skill and knowledge to enrich our society.

HK is Asia's world city

When I spoke to some of you on January 12, 2004, I spoke about Hong Kong being the world city of Asia. Here is what I have said, "For the last few years, we have been building on the theme of Hong Kong being the world city of Asia. The role that New York plays in North and South America and London plays for Europe.

"What is a world city? The world city is a city that has developed tremendous strengths in internationally oriented service industries and other high-level corporate service functions, which generate significant levels of added value as well as good employment opportunities.

"The most important of these include financial and business services, corporate and regional headquarters, news and information services, tourism and creative and cultural activities.

"The world city is a city that is typically characterised by an outstanding enabling infrastructure, in terms of both 'hard' infrastructure, for example, transportation and telecommunications, and 'soft' infrastructure, such as education, trading, research and development and urban planning.

"The world city is also a city which is underpinned by the rule of law, freedom of expression and association and free flow of information. By definition, a world city is cosmopolitan and outward looking. Another feature of a world city is its relationship with the hinterland. The world city typically enjoys strong links with its hinterland and is supported by a free flow of goods and services and people.

"The world city is where people from all over the world would want to visit for fun, for work, for their children to join schools and universities, and for medical treatment. The world city such as New York and London has per capita income which is higher than others within their country."

We will continue to push other policy initiatives which will enhance and enrich our position as the world city of Asia.

Favourable social, political environment required for growth

Hong Kong needs a favourable social and political environment to ensure successful restructuring of our economy and continuing progress of our society.

First, it is imperative that we continue to work to strengthen the relationship between Hong Kong and the Mainland, a relationship that is based on mutual trust and common interests.

We must faithfully turn the "One Country, Two Systems" concept into an everyday reality in full accordance with the Basic Law. And we must be sensitive to the needs and concerns of our country, and therefore actively promoting her national interests and well-being.

Our progress and prosperity also depend on good and constructive relationship between the government and the legislature. A strong executive and legislative relationship is essential to galvanise Hong Kong's energy and resources for the challenges ahead and to reach consensus as to how we need to move forward.

The direction that the government set out for our economic recovery is making good progress and I believe, is widely accepted by the community. I hope the new Legislative Council when elected will support and work closely with the government to ensure that progress will continue to be made for the common good.

Many challenges ahead still

The recent economic recovery was a result of the endeavour of our community as well as support by the Central Government. It did not come easily. Furthermore, in the longer term, our recovery is still facing many challenges.

Since 1978, Hong Kong has benefited enormously from the reform and opening of the Mainland economy. Indeed, it is generally recognised around the world that by 2020 China's economy will be quadruple as compared with 2000, reaching US$4 trillion at that time. This will make China one of the largest growing economies in the world.

As I pointed out many times, Hong Kong was fortunate to be returning to the motherland at a time when she was making tremendous economic progress.

In the next few years to come, no time should be lost and I want to emphasise, we should seize the time and moment by taking full advantage of the growth of the Chinese economy to ensure successful restructuring of our economy.

Let's join hands to achieve this important mission.