The rule of law and the pursuit of free market policies are two 'critical success factors' to the continued prosperity of Hong Kong, Chief Executive Mr Tung Chee Hwa said today.

Speaking at an Australian Chamber of Commerce luncheon at the Grand Hyatt Hotel, Mr Tung said the first month of the Hong Kong Special Administrative Region had been very much 'business as usual'.

"If people ask me: 'What has been the biggest change since July First' I would have to answer: 'There has been no big change. It is business, as usual," said Mr Tung.

"There are demonstrations, as usual. Law suits, as usual. Media scrutiny, as usual. And indeed, this is part of our culture.

"In fact, it would be unusual if this was not the case, since this is what we know and expect of Hong Kong and its people.

"What has changed is that Hong Kong has become a part of China and there is immense pride that this has happened. There is immense confidence, too, that tomorrow will be even better."

Mr Tung said today was somewhat of a small milestone for Hong Kong, since it marked the end of the first month of existence of the Hong Kong Special Administrative Region.

He said the past month had been very important for Hong Kong because it had given Hong Kong people the chance to put into practice the concepts of 'One Country, Two Systems' and 'Hong Kong people ruling Hong Kong'.

"Before the establishment of the Hong Kong SAR on July First, we could only talk about what we earnestly believed would continue to make Hong Kong a success," he said.

"I often spoke about the safeguards for Hong Kong's autonomy contained in the Basic Law. I often spoke about maintaining our lifestyle; about the rule of law being upheld; about a level playing field for all who do business here.

"I often stressed the importance of maintaining and building Hong Kong's role as an international trade and finance centre and pursuing the tried and tested policies of free, open trade unencumbered by unnecessary rules and regulations.

"Now, one month after the establishment of the Hong Kong SAR, we are living the Basic Law, we are part of one country with two different social, economic and political systems and we Hong Kong people are, for the first time, masters of our own destiny.

"It has been a very busy month and one which I think has shown clearly that Hong Kong people have no reservations about openly expressing their views or exercising their rights and freedoms as guaranteed in the Basic Law."

Mr Tung told luncheon guests that the rule of law was essential to Hong Kong's future.

"Mark my words, the rule of law must be preserved by all means and it will be preserved by all means," he said.

"All that I do, all the Government does, must be and will be in accordance with the law because we know that the rule of law is essential to the continued success of Hong Kong.

"There are some who cast doubt on this and in this past month we have seen landmark challenges to the legitimacy of the Provisional Legislature and the very legitimacy of Hong Kong's laws themselves.

"We are expecting another challenge soon concerning mainland-born children with Hong Kong parents.

"All of these challenges have been, and will continue to be, dealt with by our own courts.

"Some friends have asked me: 'Are you disappointed that the validity of Hong Kong's laws, of Hong Kong's provisional legislature have been challenged within these first 30 days?'

"The answer is: 'No'.

"Why? Because it shows the people of Hong Kong and those in the rest of the world that the rule of law is of paramount importance in Hong Kong.

"It shows that the Hong Kong SAR Government will argue its case in court, and abide by the court's ruling."

Mr Tung said legal challenges were part and parcel of the Hong Kong legal system and part and parcel of the rule of law itself.

He said more challenges may arise and that was only natural given the fact that the Basic Law had been in effect for just a month.

Mr Tung said another critical success factor for Hong Kong was its free market economy.

"In Hong Kong, we practice capitalism to the hilt. We let the market take the lead in setting its own parameters while Government intervention is kept to a minimum," he said.

"This approach seems to have worked well, if I may be allowed to understate the obvious.

"We are, after all, the world's 7th largest trading economy; we have some of the world's largest foreign currency reserves; we have the busiest container port in the world and the busiest international air freight throughput.

"We have an annual GDP higher per capita than many Western nations. We have been consistently rated as the freest economy in the world by the US-based Heritage Foundation."

Mr Tung said that in any free market economy there would always be a sector of the community which was left behind and the community had a duty to be caring and compassionate and to give such people a helping hand.

"For those who cannot help themselves we clearly have a responsibility to ensure they live a decent and dignified life," he said.

"For those who can help themselves, we must provide them with on-the-job training or retraining so they can participate in, and benefit from, the fruits of our success. We must help them to learn new skills to meet the demands of the market.

"One of the major reasons for our remarkable economic success is undoubtedly Hong Kong's industrious, flexible and skilled workforce.

"This, combined with our entrepreneurial spirit, has enabled a gradual and smooth shift from a manufacturing-based economy to one based on the provision of services.

"This transformation of the economy would not have been possible unless employers and employees could react quickly and flexibly to prevailing or emerging market forces.

"In fact, employers and employees in Hong Kong have built generally harmonious relations over these past few decades, despite the tremendous changes in the economy.

"We rarely have serious labour disputes in Hong Kong and there are laws in place to protect employees. The average number of working days lost through labour disputes in Hong Kong is only half-a-day for every thousand workers. This is certainly one of the lowest rates in the world."

Mr Tung said there had been recent criticism of the SAR Government's move to freeze several labour laws which were passed in a rush of legislation a few days before the Handover.

The Chief Executive said he believed these laws were passed hastily, without proper consultation or careful consideration.

"My main concern is that these laws could hurt our competitiveness by bringing in unduly restrictive employment practices, terms and conditions," he said.

"Excessive protection and restrictive employment practices have failed elsewhere in the West and they have no place in Hong Kong.

"Such practices will hurt Hong Kong in the long-term and in doing so they will hurt the very labour force they are designed to protect.

"While there is no doubt in my mind these laws would have far-reaching implications on Hong Kong's economy, I also believe it is right for the community to make up its own mind by examining and assessing the true extent of their implications.

"Yes, there is a need to protect the long-term interests of the workforce.

"There is also a need to ensure the long-term competitiveness of Hong Kong's economy.

"I am sure that after careful consideration and consultation with all sides, we will be able to find the right way forward in maintaining Hong Kong's economic vitality which in turn will mean more job opportunities for everyone.

"I believe in Australia you would say that all we want is a 'fair go' for the economy, for employees and employers."

Noting that almost 500 Australian companies were now doing business in Hong Kong, Mr Tung said the HKSAR was in fact the regional hub for thousands of other international companies.

He told luncheon guests that foreign investors and multi-national companies would continue to be welcomed to Hong Kong where there was a stable economic environment, a solid linked-exchange rate, a level-playing field, low taxes and excellent infrastructure.

"You can rest assured, also, that we will continue to look ahead for ways to improve our international appeal by upgrading our information infrastructure, reducing red tape, helping entrepreneurs develop high value-added industries and investing in human resources development," he said.

"I am sure many of you are also looking towards the tremendous opportunities which will present themselves in the enormous markets within China.

"Since the opening up of China's economy in 1978 there has been remarkable economic growth, unmatched by any other economies in recent history.

"If you have travelled to China you will see tremendous vitality and energy and you will begin to understand why, not too far into the 21st Century, China will have the world's largest economy.

"And where else but Hong Kong to make your base? We already have the people, the skills, the management expertise, the knowledge, the language, the cultural and geographical links to provide international corporations with all they need for successful business in China."

Mr Tung also pointed out that since Hong Kong had been separated from China for more than 156 years, many people in Hong Kong were now involved in a steep learning process about their Motherland.

"People in Hong Kong are beginning to learn more about our country, about our culture and our history and that is absolutely essential if we are to make a success of the 'One Country, Two Systems' concept," he said.

"At the same time, we in Hong Kong remain very much international in our outlook. We accept diversity of culture, we seek out new ideas and new practices.

"We take the best of the East and West and blend these ingredients to give us the recipe of success that is Hong Kong."