Sir Donald Tsang said the threats posed by the vast unregulated flows of capital into and out of countries "hangs like the sword of Damocles over all but the biggest economies".

Speaking at the Confederation of British Industry's annual conference he said: "In the past few months you can almost hear the sighs of relief across the East Asian region.

"For the first time since the last quarter of 1997 GDP in all the East Asian economies is in positive territory. Investment is starting to flow back into the region as confidence levels also edge upward.

"But the real danger that confronts us now is that with all the good news, after such a long period of bad news, there will be a temptation to be content with what has already been achieved."

Threat to recovery

He went on to say that if this turns out to be the case, recovery in East Asia will surely be transient, whether it be three, five or ten years down the track, and the events of the past two years will come back to haunt the region.

"It is important to understand that what happened in East Asia is not just an Asian problem ... adequate and prudent risk assessment by lenders, open, efficient and well regulated financial markets, a clean and accountable government are benchmarks that are equally important in any economy," he said.

Some of these pre-requisites were lacking in some of the Asian economies worst hit by the economic crisis which had acted as a wake up call to many.

But he pointed to the threat to the US banking system from the vast $100bn exposure by hedge fund Long Term Capital Management, which had an asset base of $4bn.

He said that one of the key problems was that many people did not know where the money was coming from or going to, residing in many cases in offshore havens.

Capital controls were not the answer he said, but gaining more information about capital flows was vital.

Hong Kong was one of the few Asian economies to see off the speculators. Last year, the government bought a huge state in the stock market in order to stop currency traders forcing up interest rates. It is now in the process of selling that stake.