Hong Kong Special Administrative Region (HKSAR) Chief Executive Donald Tsang gave priority to tackling economic challenges in the 2009-10 policy address delivered at the Legislative Council on Wednesday.

Outlining policy directions for the coming year, the policy address was titled "Breaking New Ground Together" and set out the plan for Hong Kong to constantly enhance its competitiveness and to evolve into a high value-added, knowledge-based economy.

Tsang set out plans for Hong Kong to build on the strength of Hong Kong in its four traditional pillar industries, and boost the development of six industries where it has a clear advantage, like education and medical services.

Tsang said Hong Kong was hit hard by the global financial turmoil and the economic downturn but the Hong Kong people have done a great job in keeping the ship afloat.

"I am confident that, for the rest of the year, our economy will improve further and gradually recover," he told the Legislative Council.

Hong Kong reversed four quarters of economic contraction in the second quarter this year to record a quarter-on-quarter growth of 3.3 percent, boosted by forceful stimuli and benefiting from the strength of the mainland's economy.

Tsang said challenges remained ahead for Hong Kong to maintain its status as a global financial center and its competitiveness as a trade and logistics center.

"Hong Kong must constantly enhance its competitiveness and continue to evolve into a high value-added, knowledge-based economy to maintain its leading edge over global competitors and create more quality jobs," Tsang said in the 90-minute address.

The six industries, proposed earlier by a task force as potential growth engines, were education services, medical services, testing and certification, environmental industries, innovation and technology, and cultural and creative industries.

Tsang said the innovation and knowledge-based industries also include traditional pillars such as financial services, tourism, trading and logistics, and professional services.

"We must try every means to enhance the flow of people, goods, capital and information that are related to the four pillar industries," he said.

In terms of the financial services industry, Tsang said the plan was to continue to develop Hong Kong as a global financial center, asset management center and offshore Renminbi business center while meeting the development needs of China.

Hong Kong's roles as a testing ground for the gradual opening up of the mainland's financial industry and a capital raising center will be strengthened, he said.

Tsang said the proposals to develop the six industries had won wide support, reflecting the realization that the Hong Kong economy could not rely solely on its financial sector but need to diversify.

He urged the Hong Kong people to look to the future from a broader perspective, saying that the integration between Hong Kong and the Pearl River Delta, one of the most developed areas in China, "will speed up and increase in breadth and depth."

Tsang said the HKSAR government strategy for promoting the six industries was to seize the opportunities arising from Hong Kong's cooperation with Guangdong province, as Hong Kong has an important role to play in the blueprint for Pearl River Delta.

Measures that will be considered or put in place will make the mainland's market more accessible to Hong Kong-based enterprises, in addition to attracting more students to receive education in Hong Kong and bring mainland tourists to Hong Kong.

The free trade hub will also pursue active economic, cultural and social exchanges with the province of Taiwan, Tsang said in the policy address.

The HKSAR government will allocate about 200 million HK dollars (25.6 million U.S. dollars) to launch a "R&D Cash Rebate Scheme," under which eligible enterprises may enjoy a cash rebate equivalent to 10 percent of their investments.

While making it clear that the policy direction is to return to the fundamentals, Tsang also outlined measures covering healthcare reform, cultural conservation, anti-drug campaign, support for the elderly and the disadvantaged, among others.

Tsang dismissed concerns that Hong Kong may be marginalized with the rapid rise of the mainland cities, saying that Hong Kong will be allowed full play of its unique competitive edges, such as the rule of law, the free flow of information and the international networks, under the "One Country, Two Systems" framework.

"We need not be worry about the new competitive landscape. With an open mind, pioneering spirit, and full preparation, we can break new ground together," he said.

In terms of constitutional development, Tsang said the decision of the Standing Committee of the National People's Congress in December 2007 that the HKSAR Chief Executive may be elected by universal suffrage in 2017, followed by the election of all Legislative Council members by universal suffrage, "set a clear timetable."

"It also established a clear direction for the future constitutional development of Hong Kong," he said.