Under the 'one country, two systems' principle, the HKSAR shall continue to adopt economic, social and political systems distinct from those in the Mainland following reunification in July 1997. The Basic Law, as the constitutional law of HKSAR, gives a firm protection to this principle. The HKSAR shall continue to uphold the rule of law, maintain an effective executive-led Government, sustain an efficient and clean Civil Service, foster free enterprise and free trade, render a sound financial system and a robust monetary regime, practise prudent public finance, and keep a simple and predictable tax system with a low tax rate. This serves to provide a favourable overall business environment and helps instil confidence for foreign investors coming to Hong Kong.

    The Government firmly believes that the market can allocate and utilise resources more effectively and has a greater capacity to foster creativity, provide economic impetus and create employment opportunities. It takes 'big market, small government' as the main underlying principle for public governance. Yet this does not mean that the Government would just adopt a passive attitude and distance itself from the economy. Rather, it should have a clear vision of the direction of economic development, be a proactive market enabler, and take care of those who are disadvantaged or in hardship. More specifically, the Government sees several primary roles. First, it has to maintain an institutional framework conducive to market development, including reinforcing the institutional strengths, such as the rule of law, a low and simple tax regime, a level playing field and a business-friendly environment. Secondly, it has to provide infrastructure in which the private sector will not invest, but which will yield considerable economic and social benefits to Hong Kong. Thirdly, it has to provide an appropriate environment and the resources required to raise the quality of human capital, which includes investing in education and training as well as attracting outside talents and skills to Hong Kong; fourthly, securing more favourable market access for the local enterprises through multilateral and bilateral economic and trade negotiations and participation in relevant economic and trade organisations; and, in conjunction with the appropriate organisations, also assisting local enterprises to promote their products outside Hong Kong; and fifthly, considering the need to take appropriate measures to secure projects beneficial to the economy as a whole when the private sector is not ready to invest in them.

    In order to uphold the strength of the economy and to facilitate its structural transformation and upgrading, the Government consciously pursues an integral set of economic policies. First, it strives to restore fiscal balance by 2006–07, and to keep down the size of public spending as a ratio to GDP from 23 per cent to within 20 per cent over the coming few years. It also sets out to review its work processes, including to re-prioritise projects, re-organise structure, and re-engineer procedures, as well as to seek to outsource and to examine scope for corporatisation and privatisation, so as to raise efficiency and minimise wasteful use of resources. Secondly, it works to promote closer economic ties with the Mainland, by increasing two-way flows of people, cargo, capital, information and services. It collaborates with Guangdong to develop a regional economy in the greater Pearl River Delta, and to undertake joint marketing and investment promotion for the area. Thirdly, it works to promote development in high-value-added sectors. Fourthly, it tackles unemployment by reinforcing training and retraining as well as job matching and placement, developing tourism, and promoting personal and community services. Fifthly, it takes measures to stabilise the property market, by clearly defining the roles of the Government in the market and by reducing near-term supply of land.

    In facing up to the global marketplace, yet constrained by relatively high local costs, Hong Kong can hardly compete on price. It has to capitalise on its own strengths and develop higher value-added activities. This calls for market-driven, customer-oriented and needs-responsive products and services made and delivered with speed, quality and creativity. High value-added does not come solely from high technology, and can stem from a wide range of economic activities. Of the many sectors in Hong Kong, four are of more distinct edge, namely, financial services, trading and logistics, tourism, and producer and professional services. The Government will put emphasis on their further development in moving the economy up the value-added ladder. At the same time, the Government will foster the development of the local community economy, so as to help promote domestic consumption and create job opportunities for a broader span of the local workforce.