Oct. 14 (Bloomberg) -- Hong Kong Chief Executive Donald Tsang may break with a tradition of laissez faire government when he makes his annual policy address today, as policy makers grapple with the rising challenge from Shanghai.

“Hong Kong’s two major industries, namely finance and trade, are facing fierce competition,” Hang Seng Bank Ltd. economist Irina Fan said. Compared with the non-interventionist policies of the past, the government has a clear economic outline with “attitude change for the first time,” Fan said.

China’s government has said it wants to develop Shanghai as the country’s international financial and shipping center, and that Hong Kong should find new sources of revenue. Tsang may set out policies to develop six pillar industries that will help Hong Kong diversify away from financial services and trade.

That would mark a departure from the past, Central Policy Unit chief Lau Siu-kai, who advises Tsang, said Oct. 9 in an interview on government-funded broadcaster Radio Television Hong Kong. Hong Kong may provide tax benefits and land incentives for the pillar industries, he said.

“Increasing globalization and regional competition have resulted in a need for a strong government role in facilitating economic development,” said Tsang in his letter to Hong Kong published on the government Web site June 28. The policy address is set to start at 11 a.m. today.

China Gateway

The city of 7 million has long trumpeted its “free and open market” and “gateway to mainland China” as the keys to economic success. Hong Kong’s economy has expanded more than 10- fold in the three decades to the end of last year and now amounts to $215 billion, larger than Malaysia, which has almost four times as many people. When adjusted for purchasing power, the city’s gross domestic product per person is higher than Germany, Japan and Sweden, according to World Bank data.

The Chinese State Council in March vowed to make Shanghai an international financial and shipping hub by 2020, raising concern Hong Kong will lose out.

Shanghai has already usurped Hong Kong’s role as the perennial contender with Singapore to be the world’s largest container port. Hong Kong-listed companies including HSBC Holdings Plc and Citic Pacific Ltd. have said they want their shares to trade on the Shanghai exchange.

Tsang set up a task force in his previous policy address to “enhance international competitiveness” in face of the global financial crisis. The group identified six industries with high potential: medical services; education; cultural and creative industries; environmental protection; innovative science and technology; and inspection and certification.

Small Government Legacy

“Donald Tsang has turned his back on Hong Kong’s legacy of small government and a positive non-interventionism,” Mark Clifford, executive director at the Asia Business Council, a think-tank comprising senior executives of publicly traded companies in Asia, said in an Oct. 9 interview.

The new six-industry focus is not “picking winners” but rather “providing a more favorable environment for industries to become even bigger winners than they are now,” Donald Tsang said in the public letter dated June 28, adding that the city will continue as a “free and open market.”

“The six industries may develop in parallel with our traditional economic pillars,” Jeffrey Lam, representing the commercial sector in the Legislative Council, said by telephone Oct. 12. “We hope the government will provide support in tax, land, talents and strategic planning.”

In last year’s address, Tsang focused on stimulus measures to cushion the local economy from the effects of the global decline in trade triggered by the financial crisis. The city government allocated HK$87.6 billion ($11.3 billion), or 5.2 percent of gross domestic product, to stimulus and relief spending since 2008.

The economy grew 3.3 percent in the second quarter from the previous quarter, ending a yearlong contraction. Hong Kong’s government in August raised its forecast for full-year GDP to a contraction of 3.5 percent to 4.5 percent, on year, from the previous estimate of a 5.5 percent to 6.5 percent decline.

To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net

Last Updated: October 13, 2009 21:15 EDT