Hong Kong has been ranked as the world's freest economy ahead of rival Singapore in a report released by a right-wing American think-tank, The Heritage Foundation.

The ranking by the Washington-based organisation puts the former British colony at the top of its Index of Economic Freedom, for a 13th successive year, as it scores top marks in six of the 10 categories on the index.

Saying Hong Kong is "clearly blazing a trial for others to follow" the foundation and co-sponsors, the Wall Street Journal, awarded the city's economy a score of 89.3 points, 1.6 points lower than last year.

"The way that Hong Kong (became) prosperous was simply through its free and fair playing field," said Mary Kissel, editorial page editor for the Journal.

The report lauded Hong Kong's low income and corporate tax rate environment, simple business regulation, minimal corruption and open policy towards foreign investment with virtually no restriction on foreign capital.

However, the report said the city could do better in trade freedoms, saying some points were deducted for non-tariff barriers in areas like pharmaceuticals and market restrictions for legal services.

Second-placed Singapore, which was lauded as "the top country in business freedom and labour freedom," scored 85.7 points, down 2.8 points from last year.

Tim Kane, the author of the index, said the biggest weakness in Singapore's economy was its banking system which has heavy state influence. If that improves, it could take over Hong Kong as the world's freest economy.

"Singapore ... has one great weakness and that's its banking system, financial freedom. If Singapore would have fixed that one freedom, it would surpass Hong Kong," he said.

The index ranks each economy according to 10 criteria including the level of government intervention, trade and monetary policy, property rights and regulations as well as labour freedom.

Hong Kong's ranking comes despite criticism that its economy is dominated by a handful of powerful family-controlled monopolies and cartels, which not only control prices of particular goods but also block market access to competitors as there is currently no competition law in place.

Kane admitted the limitations the foundation has when it tried to analyse 157 countries equally around the world, saying it would be difficult to address every aspect in an economy.

"It's a very difficult project to valuate freedom," he said in Hong Kong, where citizens do not enjoy a full democracy and are denied rights to vote for a leader.

When asked whether political situations should also be taken into considerations, Edwin Feulner, Heritage Foundation president said "we are not here to measure all freedom."

"We are here to measure simply economic freedom. But that did not mean that we don't think political freedom is not important," he said.

Nevertheless, Hong Kong Financial Secretary Henry Tang welcomed the report.

"We provide a business-friendly environment where all firms can compete on a level-playing field and (we) establish an appropriate regulatory regime to ensure integrity and smooth functioning of a free market," he said.

After Hong Kong and Singapore, the Foundation ranked Australia as the world's third freest economy, followed by the United States, New Zealand and the United Kingdom.

It ranked North Korea as the world's most economically repressed country, with Cuba, Libya, Zimbabwe and Burma at the bottom of the chart.