Chief Executive Tung Chee-hwa said in his first policy address that the education system should be firmly rooted in the needs of Hong Kong.
He said it should help contribute to the development of China and give the territory an international outlook.
'To achieve that, my administration will begin to implement immediately the recommendations in the Education Commission Report No 7, which provides a basis for promoting quality and innovation.
'We will allocate $5 billion to establish a Quality Education Development Fund to encourage innovation, competition and self-motivated reform in primary and secondary schools,' Mr Tung said.
School-based management would be promoted and strengthened.
To 'enhance the professional status of teachers and help them do their job more effectively', a General Teaching Council will be set up within two years.