The Government of the HKSAR believes in free markets, and adopts "market leads, government facilitates" as the guiding principle of its economic policy. Over the past few years, the Government has taken a proactive role to create a conducive environment for business and facilitate economic development, so to enhance Hong Kong's competitiveness and reduce rigidities in the economy. While these measures aim at a longer-term target, they also aided the swift revival of the Hong Kong economy after SARS.

Proximity to the Mainland as a huge and dynamic economic hinterland is a key edge that Hong Kong possesses over neighbouring economies. Over the past two decades, economic relations between the two places continued to strengthen. Bilateral trade has grown by leaps and bounds. Two-way visitor flows have surged, more so upon the Mainland's progressive liberalisation on residents travelling abroad. Hong Kong and the Mainland are each other's largest source of external direct investment. In the financial sector, cross-boundary fund flows have risen markedly over the years. Hong Kong is an important fund raising centre for Mainland's state-owned enterprises and recently private enterprises.

Hong Kong aims to reap the enormous opportunities being accorded by rapid growth and further liberalisation in the Mainland economy, while making effective use of its international business perspective to meet the Mainland's development needs. Thus, it is essential to foster the inter-flows of people, goods, capital, information and services between the two places.

The signing of CEPA was a major milestone in improving the economic interface between Hong Kong and the Mainland. CEPA adopts a building block approach whereby more measures will be added as necessary. On trade in goods, the zero tariff concession on Hong Kong's domestic exports effective since January 1, 2004, has helped lift the competitiveness of Hong Kong's products in the Mainland market, as compared with products imported from other places. On trade in services, by giving Hong Kong companies a 'first mover' advantage in a large number of sectors, CEPA should facilitate expansion of Hong Kong's services across the boundary and open up more opportunities for business in the Mainland. Trade and investment facilitation will help promote and streamline trade, investment and other business flows between the two places.

The launch and progressive extension of the Individual Visit Scheme for Mainland residents coming to Hong Kong has added fuel to the already strong upturn in Mainland visitor inflow. In 2004, there were nearly 4.3 million Mainland visitors to Hong Kong under this scheme, accounting for only one-third of the growth in overall visitor arrivals from this source. This is rendering an important invigorating force to Hong Kong's inbound tourism.

Focusing on areas where Hong Kong has clear comparative advantages is the only way to compete with the rest of the world. Financial services; trading and logistics; tourism; and producer and professional services are the sectors that give Hong Kong this edge. They are not only the key drivers of Hong Kong's economic growth, they have also been providing the main impetus to job creation. In 2003, these key industries taken together contributed to 54.9 per cent of GDP and 44.3 per cent in terms of total employment.

Over the past year, a number of measures have been put in place to foster the development of these key industries. To develop Hong Kong as an international financial centre, measures were initiated to improve our regulatory regime and reinforce corporate governance of listed companies and professional standards of intermediaries. The securitisation of government toll tunnels and bridges has helped promote development of the bond market and generated one-off revenue for government coffers. To enhance Hong Kong's position as a regional logistics centre, airline services were progressively liberalised, and measures were implemented to reduce cross-boundary trucking costs in order to enhance the efficiency of our port services. The HKSAR Government has drawn up a concept plan on development of Lantau for public consultation with a view to strengthening Hong Kong's position as a regional transportation, logistics and tourism hub.

The Hong Kong economy has also benefited from several policy measures initiated by the Central Government in 2004. In early 2004, the Central Government agreed to enable Hong Kong's local banks to operate personal renminbi business, including deposit, exchange, remittances and renminbi bank cards. This enhanced the role of Hong Kong as a key financial centre for the Mainland. In August, measures were introduced to facilitate Mainland enterprises investing in Hong Kong and Macao. The Central Government's other relaxation measures, though not exclusive to Hong Kong, will also benefit the Hong Kong economy by facilitating the inflow of Mainland capital. For instance, Mainland insurance companies are now allowed to invest in overseas capital markets, and it is reckoned that Hong Kong will be the key beneficiary. Hong Kong also stands to benefit from relaxation of restrictions on outward remittance associated with emigration of Mainland residents and Mainland students studying overseas, and from the raising of the limit on renminbi cash Mainlanders are allowed to carry on overseas trips.

The vision of the HKSAR Government is to develop Hong Kong as Asia's world city by consolidating Hong Kong's unique position in the region as well as its role as a gateway to the Mainland. Reflecting the prominent role of Hong Kong as a business hub in the region, the number of overseas and Mainland companies to set up operations in Hong Kong has continued to rise in recent years, more so after the launch of CEPA. Specifically, the number of regional headquarters and regional offices in Hong Kong in 2004 hit new highs. Within this total, the number of regional headquarters set up by Mainland companies in Hong Kong had a more distinct increase, as many of these Mainland companies set up business operations or joined forces with local enterprises to tap the vast market potential of CEPA. The envisaged benefits of setting up operations in Hong Kong under CEPA are also one of the factors considered by many overseas companies in investing in Hong Kong.