On New Year's Day, the Chinese mainland and Hong Kong will celebrate the first anniversary of the Closer Economic Partnership Arrangement (CEPA), the first bilateral free trade agreement for either of them.

The pact allows Hong Kong entry to the mainland market ahead of foreign competitors, which will be allowed access under China's World Trade Organization (WTO) commitments.

Now Hong Kong businesses are preparing to make the best use of the expanded CEPA that will be in place in 2005, before the mainland throws its doors open to foreign investors in 2006.

The immediate effect of the CEPA was that Hong Kong exports to the mainland increased. But more important, according to experts, is the potential revival of Hong Kong's manufacturing power.

Under the agreement, 374 Hong Kong-made products are exempted from import duties, accounting for more than 90 percent of goods the metropolis of 7 million makes, according to Roger Chu, director of the Hong Kong Trade Development Council's mainland division.

So far, 2,711 Hong Kong manufacturers have obtained certificates of origin that allow them to take advantage of the zero-tariff treatment.

As of December 13, a total of 2,811 items worth HK$1.7 billion (US$205.4 million) had been approved by the Trade and Industry Department of Hong Kong to enter the mainland duty-free.

Chu said traditional Chinese medicine, jewelry, chemicals and information technology products dominated Hong Kong's exports.

"Hong Kong produces intermediate goods with competitive technologies and exports them to the mainland for labor-intensive, further manufacturing," he said. "It has become a trend."

Following the export boom is the rejuvenation of Hong Kong's manufacturing sector, with an increasing number of companies moving production bases back from the mainland to take advantage of duty-free exports.

"There are signs that Hong Kong's manufacturing sector is bouncing back with a revitalization in certain products such as chemicals, medicine and food," said Chu.

That may have a profound effect on Hong Kong's economy in the long run, helping to create jobs and rally industrial confidence that was eroded by the Asian financial crisis in the late 1990s and the subsequent economic downturn.

CEPA's core spirit is investment facilitation and market opening, which led to a mushrooming of Hong Kong businesses on the mainland in 2004.

A total of 18 service sectors were opened in whole or in part to Hong Kong companies and individuals.

"Indeed, opening up of the service sectors is the most valuable privilege that CEPA has offered to Hong Kong businesses," said Chu. "It gives wider access to the 1.3-billion-person market."

Hong Kong service companies began making forays in the second half of the year, after completing market surveys and qualifying to operate on the mainland.

"Under CEPA, we are allowed to work on projects with state-owned enterprises. Previously, we were confined to business with foreign companies and joint ventures," said Ng Wing Fai, deputy director of Hong Kong's Widnell Ltd.

The construction and property management company established subsidiaries in Chengdu and Chongqing this year. Before that, it had offices in Beijing, Shanghai and Shenzhen.

"Our Beijing office is expected to increase turnover by 30 percent to about 5 million yuan (US$602,000), and total turnover on the mainland will reach 30 million yuan (US$3.6 million) this year," he said.

In other sectors such as advertising and exhibitions, CEPA allows Hong Kong companies to set up wholly owned firms on the mainland. The lifting of stakeholder restrictions for Hong Kong advertising agencies came about two years earlier than that for foreign investors.

Star TV, the Hong Kong-based News Corp. broadcaster, launched the mainland's first wholly foreign-owned advertising company in July. In Shenzhen, Hong Kong's nearest mainland neighbor, more than 10 Hong Kong-based exhibition firms have set up or applied to set up wholly owned subsidiaries.

An increased number of preferential measures will benefit Hong Kong industries beginning in 2005, according to an expanded CEPA pact, or CEPA II as it has been dubbed. Tariffs will be dropped on another 713 items and eight new service sectors will be opened.

However, the time left for Hong Kong businesses to enjoy the head start is short.

Similar treatment will be given to ASEAN countries under the China-ASEAN FTA and to other foreign investors under WTO commitments in the near future, making 2005 a critical year for Hong Kong investors.

(China Daily December 28, 2004)