The Chinese mainland-Hong Kong free trade pact, Closer Economic Partnership Arrangement (CEPA), has created even more business opportunities in and between South China's Guangdong Province and Hong Kong since its implementation a year ago, and its full potential has yet to come into play.

CEPA in its first phase opened up 18 service sectors in the Chinese mainland to Hong Kong and allowed zero tariffs on 273 types of Hong Kong-made products when exported to the mainland.

The extended CEPA, or dubbed CEPAII, opens up eight more service sectors and adds 713 types of products to the zero-tariff list, beginning this month. Talks for a CEPAIII are set to start later this year.

On the commodities front, HK$768 million (US$98.46 million) worth of goods passed customs in Guangdong free of tariffs last year, accounting for 74 per cent of the total on the Chinese mainland. It saved Hong Kong manufacturers 45.36 million yuan (US$5.46 million) in tariffs, official statistics indicate.

Imports and exports between Guangdong and Hong Kong, including re-exports, grew by 23 per cent year-on-year to US$226.15 billion from January to November last year.

Although the zero-tariff trade between Hong Kong and Guangdong made only a tiny part of the total trade, it has given more choices to manufacturers in locating their plants, Peter Leung, director of Hong Kong government's economic and trade office in Guangdong, said.

A number of foreign manufacturers of electronics and auto parts, unfamiliar with the Chinese mainland market, have shown interest in setting up manufacturing facilities in Hong Kong, Leung said.

In this way, these firms, hoping to use CEPA, could gain easier access to the market and information of the Chinese mainland while utilizing the business and living environment in Hong Kong that they are used to, he said.

Some mainland enterprises, including a traditional Chinese medicine manufacturer, are considering building factories in Hong Kong to take the advantage of CEPA, he said.

Some Hong Kong manufacturers have increased their local production capacity, said Jacky Chung, Hong Kong Trade Development Council's director for southern China.

Companies in Guangdong set up 69 manufacturing research firms in Hong Kong last year, which involved a total investment of US$470 million, according to Liang Yaowen, director of the Guangdong provincial department of foreign trade and economic co-operation.

Hong Kong has an advantage in some technology-intensive and high value-added manufacturing, such as integrated circuits, fashion and jewellery, said Chen Lei, deputy director of the Guangdong WTO Affairs Consultation Service Centre.

In the service sector, Guangdong is regarded as a top choice when Hong Kong service providers seek expansion in the mainland under CEPA.

Official statistics indicate the Hong Kong SAR government issued certificates to 668 Hong Kong service suppliers by the end of last year.

The Hong Kong Chamber of Commerce (HKCOC) in Guangdong has seen a significant increase in its members, especially those from service sectors in the past year, which are eager to build up connections and learn more about the mainland market, said Sonny Doo, president of the chamber.

CEPA is of great importance to furthering Hong Kong's service sectors, which account for about 87 per cent of Hong Kong's economy, Peter Leung said.

As more Hong Kong service providers arrive in Guangdong, they will support Guangdong's manufacturers, many of whom are Hong Kong-funded, and help enhance Guangdong's manufacturing competitiveness, Chen Lei said.

The service industry accounted for only 40 per cent of Guangdong's gross domestic product in 2003.

Given the fact that co-operation within the so called pan-Pearl River Delta (PRD) region is being promoted, Hong Kong and Guangdong could actually join hands in exploring the market in this region, Leung said. The pan-PRD region covers nine mainland provinces in South China, Hong Kong and Macao.

On the overall impact of CEPA on Hong Kong-Guangdong economic ties, Leung said although it is hard to quantify at the present, has laid a very positive and sound foundation for strong potential. The core of that potential is based on a changing mindset from a relationship of "you and me" to "us", he said, adding together, the two places have the potential of become a strong power in the globalization drive.

From his observation, Chinese mainland firms, which considered Hong Kong merely as a place to reduce risks before, are reassessing Hong Kong as a platform for their overseas expansion.

The key impact of CEPA on Hong Kong, said Jonathan Choi, chairman of Hong Kong-based Sun Wah Group, is that it has enhanced the region's confidence in its economy. And that was partly helped by the Individual Travel Scheme under CEPA.

The scheme, which relaxes visa requirements for mainlanders' visits to Hong Kong, had sent 4.93 million Guangdong residents to Hong Kong by the end of last year.

However, the implementation of CEPA is far from being perfect. Respondents in a survey among Hong Kong firms complained about a lack of supporting regulations, complicated application procedures and differences in the requirements among various mainland regions, among others.

Guangdong's foreign trade director Liang Yaowen said when outlining the goals of his department for this year that efforts will be stepped up in Guangdong-Hong Kong economic co-operation.

Editor: Olivia