HONG KONG - Hong Kong has still to emerge from the effects of the global economic slowdown despite early signs of returning stability, the city's chief executive Donald Tsang has said.

Tsang said that big challenges remained for the city, whose key industries of finance and exports have been hit hard by the crisis.

"There is no doubt we have yet to emerge from the impact of the financial tsunami," he said on local broadcaster RTHK's weekly Letter to Hong Kong.

"While recent statistics have shown some signs of economic stability returning, there are still many uncertainties in the global market."

He said reforms put in place after the Asian Financial Crisis of 1997 meant Hong Kong had not suffered a breakdown in its financial system.

He said that the latest crisis presented similar opportunities to improve the city's economic fundamentals.

The government has pointed out six sectors the city should focus on -- including education and environmental industries.

Tsang countered accusations that such directives went against Hong Kong's free market economic principles.

"Hong Kong has thrived as a free and open market. This must and will continue," he said.

"At the same time, increasing globalisation and regional competition have resulted in a need for a strong government role in facilitating economic development.

"So, we are not picking winners. Rather, we are providing a more favourable environment for industries to become even bigger winners than they are now."

Hong Kong fell into recession in the third quarter of 2008 and in May the government slashed its growth forecast for this year, saying the economy would contract 5.5-6.5 percent in 2009, from a previous forecast of 2.0-3.0 percent.