Last week, I delivered my Policy Address and set the policy priorities for the remaining eight months of this administration - reflecting in part the input of my 32 consultation sessions and the findings of public opinion polls.

The Policy Address is mainly about concrete measures and proposals. But today I would like to start off with something a little bit more philosophical. In the last month or so, economic philosophy has become a hot topic.

When one talks about economic philosophy, of course, the natural inclination is to lean on labels - labels like "Keynesian" or "mixed economy" or, dare I say, "positive non-interventionism".

Several catchphrases have been deployed to describe our long-cherished free-market principles, including recent ones such as "big market, small government" and "market leads, government facilitates". That's the sore point. I

 have been told the reason the popularity rating of my policy address was lower than that of the previous one was because I allowed the market to lead, instead of leading it myself.

But however you word it, the bottom line is that the Government works to sustain a competitive, business-friendly environment. We continually press for market opening. And we live within our means. We don't just talk the talk - we walk the walk. Total public spending has been reduced to 18% of GDP, which is under our target of 20%, and less than half of the OECD average of 40%.

The Government's role in the economy is to provide the physical, legal and regulatory infrastructure that underpins fair and free markets, to encourage enterprises through small government and low, stable and predictable taxation, and to manage our public finances to meet community priorities for modern infrastructure like healthcare, schools and the social safety nets, road and railroads.

We adhere to the principles of free enterprise and free competition. We respect private ownership and honour contractual obligations. You don't have to take my word for it. Our free-market credentials have been recognised annually since the mid-1990s by public policy institutes such as the Heritage Foundation, the Fraser Institute and so on. In their estimation, Hong Kong has long been, and continues to be, the world's freest economy.

So, we have never departed from the fundamental economic philosophy laid down by Sir Philip Haddon-Cave. The philosophy behind our prudent financial management has not changed in the past 30 years. Market has been and will continue to be the driving force.

Intervention is an exception rather than rule, and before we go for it, we will assess the short-term benefits and long-term costs of any policies scientifically. And we have to justify it publicly and obtain approval from the legislature. We will always carefully weigh the arguments for and against an intervention. This is exactly what Sir Philip Haddon-Cave had in mind and he had advocated that.

Surely, our philosophy does not prevent us from engaging different sectors to take a critical look at our economic strengths and weaknesses. Let me now turn to this subject.

There is no dispute that our future economic development is rooted in leveraging China's growth to consolidate Hong Kong's position as Asia's world city and to strengthen our status as an international centre for finance, trade, shipping and aviation. We believe that Hong Kong is rising to these challenges - challenges of our economic integration with the Mainland, our transformation from an industrial to a knowledge-based economy, and our sustainable development.

As I said, the philosophy behind our prudent financial management has not changed in 30 years. What has changed in that time has been the advent of information technology, the inexorable march of globalisation, and the breathtaking economic rise of China. As a result, it is incumbent on Hong Kong to play an active and positive role in the development of our nation.

The rise of China is not occurring in a vacuum. Rather, it constitutes part of the globalisation process. Adapting to globalisation and integrating with the Mainland economy are not two contradictory paths of development for Hong Kong. That is why we must develop into a cosmopolitan city in which we can all be proud of, into Asia's world city, playing a key role in the rapid and peaceful development of our nation, while also exerting a positive influence internationally.

There should be no more debate on whether Hong Kong should focus its attention on China or on the rest of the world. They are not mutually exclusive, but rather complementary parts of the same process.

In other words, in order to be useful to the Mainland, we must continue to be cosmopolitan and international. Otherwise, it would be rather a useless part or a very commonplace part of the Mainland territory. It must be unique. But in order to be successful internationally, we must leverage our position as a special administrative region of China, leveraging on investments we have made in the Mainland for the past 30 years and do our very best to ensure we are in the leadership position.

In this endeavour, we have the full backing of the Central Government. The 11th Five-Year Plan for National Economic & Social Development recognises our pillar industries - financial services, logistics, tourism and information services - and upholds Hong Kong's status as an international financial, trading and shipping centre that is crucial to China's development. Hong Kong is simply not just another Chinese city, but a Chinese city with a unique, irreplaceable role in our national development.

Towards this end, we convened an Economic Summit last month to address the challenges and opportunities presented to Hong Kong by the Five-Year Plan. In collaboration with the business community, the labour sector and the professional sector, we are continuing our deliberations with a view to reaching a practical and feasible action agenda by the end of this year or early next year.

The agenda will be built upon the wisdom of all sectors involved, not just the Government's, but everyone of us. Our objective is to chart a path for our sustainable economic development.

How do we chart such a path? The first step involves reviewing our advantages, closely examining our position in China, and asking ourselves the tough questions about what we can do to sharpen our competitiveness in the areas of finance, trade and logistics.

For example, how do we bolster our status as an international financial centre? The base has been secured by our traditional institutional strengths, including the rule of law, a level playing field, clean and efficient government, free flow of information, low and simple taxes, all of which provide a business-friendly environment.

But to stay in the forefront requires continuing liberalisation. This is why we aim to broaden the source of enterprises seeking to list in Hong Kong; why we want to make sure our regulatory regime stays in line with international standards, the best available; why we are creating the Financial Reporting Council, hosting the Asian Financial Forum, conducting an in-depth study into the development of a commodity futures market, and trying to attract more of the offshore securities investment business of Mainland insurance agencies to Hong Kong.

Charting a path for our sustainable economic development also involves exploring new initiatives in areas such as information technology and its application. The Government will create favourable conditions to upgrade our economic infrastructure to support innovative and high-value-added industries.

That's the philosophy behind the Government's one-stop portal, the plan to form a new Communications Authority, public consultation on radio spectrum management, and our initiatives to promote the application of technology in design and other areas.

Sustainable economic development is not just about how well our business executives do but also whether we can maintain harmonious labour relations. There has been quite a debate on the subject of statutory minimum wage. Views within the Labour Advisory Board and different sectors of the community on this issue remain diverse. But discussion cannot go on forever.

Despite the diverse views, we need to do something now. So we launch the Wage Protection Movement for cleaners and security guards. Wages in these two occupations have often come below the level for which Comprehensive Social Security Assistance becomes payable. We will encourage corporations and contractors to join this movement to ensure that employees in these two sectors will receive wages not lower than the average market rates.

We hope our business community is willing to take up its social responsibility and companies will require their subcontractors to pay their workers a fair wage, under written contracts. The Labour Advisory Board will monitor the situation. If after two years time, the movement fails to give us satisfactory results, I am afraid there is no more reason why we should not introduce statutory minimum wage. The Government will then go to Legco with proposed legislation.

Quality environment is an issue to the heart of the whole community, expatriate or local alike. In the Policy Address, we have several initiatives on the go, including introducing incentives to reduce vehicle emissions. These incentives will cost us more than $3.2 billion, but that is not too steep a price to pay for blue sky.

At this point I would be remiss if I did not commend the Hong Kong General Chamber of Commerce and the rest of the business community for exhibiting leadership with the Clean Air Charter. I saw the Charter displayed on our tables today. To date, over 300 companies and organisations have signed the Charter, including all the foreign international chambers in Hong Kong.

We are very mindful of the Charter's underlying message: that the business community demands action on the issue of air pollution, on both sides of the boundary. We hear your message loud and clear.

As I have said many times, we all have a part to play in returning blue skies to Hong Kong. That includes our own investors who have an interest in factories in the Pearl River Delta. I appeal to you, to the business community to do their bit to protect the environment by, for example, adopting comprehensive clean production and green procurement methods in your operations.

With patience and perseverance, and through shared responsibility, we will create a cleaner and better place to live and work.

Poised as we are on the threshold of a new phase of development, we need to squarely face three major challenges. The first is how to sustain our economic development. That means not only growing the economy at a healthy pace, but taking a holistic approach to ensure that the well-being of the people, society and the environment are all taken into the formula.

We need to be conscious of preserving our heritage and culture, of sharing the fruits of our success to promote social harmony, of conserving resources and keeping our skies blue.

To accomplish these things, of course, we have to maintain the pace of economic development. Without economic development, we won't have the wherewithal to do the rest. This means we have to pick up the pace of public-sector investment.

It will be important for the Government to enhance communication with the business community and other stakeholders on our development goals. It is the only way we can smoothly take forward our public investment programmes, including investments in East Kowloon and West Kowloon.

The second challenge we face is developing a democratic political system. To this end, the Commission on Strategic Development is studying all the issues with a view to issuing a report next year. This will lay a firm foundation for the next Administration to follow up.

We are working hard to draw up a blueprint for the development of our political system, covering 2012 and beyond. I am convinced this is the best way to achieve universal suffrage.

Our third major challenge is building a harmonious society. We must avoid the pitfall of leaving people behind in the rush to globalisation. At a time when the wealth gap in society keeps widening and social mobility begins to stall, we need to look for ways to resolve conflicts and promote social harmony.

So, these are the challenges that face us. As an optimist, I naturally believe that these challenges represent opportunities. But I also know that we cannot turn these challenges into opportunities - or the opportunities into a bright future - without the full participation of all sectors of our society.

We need the energy and ideas of the business community to help build a new consensus for our long-term, sustainable development. Let us work together for a better tomorrow.

Chief Executive Donald Tsang gave this address at the Hong Kong business community luncheon at the Hong Kong Convention & Exhibition Centre.