, including the southeast asian economies, were manipulating their exchange rates to gain trade competitiveness. as a result, american goods were having a hard time selling overseas because they were too expensive. i told him that, while it may or may not be true that some countries were deliberately keeping their exchange rates low, the apparent difficulty experienced by us manufacturers to penetrate the asian markets was not caused by pricing alone. for example, how could the americans expect to sell their refrigerators to hong kong households if most of the refrigerators they tried to sell were almost as big as the kitchen of an average flat here in hong kong? how could the us car manufacturers expect to compete in the motor car market in hong kong if the us cars were oversized and, more importantly, had virtually no post - sale service in hong kong, which is so crucial in the motor car market? of course, since then the us manufacturers have gone a long way in improving the product types and quality, and have now become much more competitive than they used to be. 7. for hong kong to remain competitive under the linked exchange rate system, prices, including land costs and wages, will need to adjust. this adjustment process is already taking place, as we have seen in the correction in property prices and, in due course, rentals. with the slowdown in consumer spending and easing of the demand for labour, the pressure on wage increases for next year should also reduce. i am confident that the flexibility of hong kong ’ s economy will enable us to cope with external shocks effectively and to regain competitiveness. in the last 13 years, hong kong ’ s manufacturers have managed to keep the unit value rise of hong kong ’ s exports to 3 % per annum, which is marginally much lower than the inflation rate of 3. 5 % in industrial countries, and well below the domestic inflation rate in terms of cpi of 8 %. this is achieved through the hard work, dedication and ingenuity of our manufacturers, who have seized the opportunity to exploit the synergy between hong kong and the mainland china by relocating the land - and labour - intensive processes north of hong kong while retaining the servicing and supporting base in hong kong. 8. finally, i would like to close by echoing what mr. c. h. tung said in vancouver during the apec meeting. hong kong, given its sound fundamentals, robust monetary and banking systems, huge foreign reserves, flexibility and resilience in coping with external shocks, would be the

in early july. in the case of hong kong, the one month rate rose also by around 5 times from 6 % in early july to a high of 30 % on 23 october. at present the one month rate in hong kong is around 7. 5 %. again i quote these figures to illustrate the point that even under a floating rate regime, as in the case of singapore, domestic interest rates can still go up sharply in the event of external shocks. it will be wrong to assume that interest rates will remain stable if hong kong were under a floating rate regime when external shocks occur. 5. while a floating rate regime will not insulate hong kong from possible interest rate hikes and asset market corrections when external shocks occur, to abandon the link now will have even more devastating results. according to the analysis conducted by one of the major banks in hong kong, a switch to a floating rate regime would lead to a sharp rise in inflation, to a double digit figure, and a sharp fall in gdp growth for 1998. moreover, the uncertainty and disturbance caused by the change will undermine public confidence in hong kong ’ s monetary system, which may bring irreparable damage to hong kong ’ s position as the leading international financial centre in the region. in short, the price and pain for switching to a floating rate regime will be even higher. 6. clearly i appreciate that hong kong ’ s manufacturers will be facing strong competition from our neighboring economies whose currencies have depreciated sharply in recent months. however, competitive devaluation is not and cannot be our answer to the problem. while attractive superficially, competitive devaluation is a risky and counterproductive approach. as hong kong has to import almost all the raw materials and equipment, devaluation of the currency does not mean that the export prices would necessarily be lowered by the same extent of the devaluation. as you know better than i do, although price is always important, competitiveness does not depend on price alone, whether or not you are talking about manufactured goods or services. competitiveness depends on a host of factors, including better cost control, innovation, entrepreneurship, marketing and constant striving to achieve productivity gains. in this context, i cannot help tell an old, but true, story involving a conversation with an american friend 6 or 7 years ago, when the us $ was depreciating and the dm and the yen surging to new highs. he was complaining that many countries