In his first speech to Hong Kong's legislature since huge street rallies calling for free leadership elections, Leung made no concessions to protesters and questioned their "understanding" of the intricacies of politics in the semi-autonomous Chinese city.
"Hong Kong's power originates from the central authorities (in Beijing)," said Leung.
"Hong Kong's autonomy... Is a high degree of autonomy, not an absolute autonomy."
Beijing has ruled that candidates for the city's first ever public vote for its chief executive in 2017 must be vetted by a loyalist committee, which campaigners denounce as "fake democracy".
But Leung reiterated that any vote for the city's top post must adhere to Beijing's ruling on vetting candidates.
"The selection of the chief executive comprises both the elements of election and appointment," he said.
He added that students -- who led two months of mass protests which ended in December -- "should be guided towards a full understanding" of Hong Kong's relationship with Beijing in order to prevent "fruitless" discussions.
The city is ruled under a "one country, two systems" structure since former colonial power Britain handed it back to China in 1997, giving it greater freedoms than seen on the mainland.
But there are growing fears over increasing Chinese influence.
Around 20 pro-democracy lawmakers walked out of the legislative council chamber and two were bundled out by security before Leung's speech.
Carrying banners and yellow umbrellas, the symbol of Hong Kong's pro-democracy movement, they shouted: "Down with CY Leung! True universal suffrage!".
Chan Chi-chuen and Chan Wai-yip were eventually carried out.
Leung, whose address was delayed for 15 minutes, gave a faint smile and busied himself reading through his speech as the protests continued.
The chief executive usually lays out domestic policies for the year ahead in the annual address, which this year also covered issues including the economy, housing and transport.
