In a few days, the Chinese mainland and Hong Kong will celebrate the first anniversary of the Closer Economic Partnership Arrangement (CEPA), the first bilateral free trade agreement (FTA) for either of them.

The pact has met early expectations of giving Hong Kong a head-start in accessing the mainland market ahead of foreign competition to be allowed access under the mainland's World Trade Organization (WTO) commitments, said business people and experts.

Hong Kong businesses are making best use of an expanded CEPA that will be in place in 2005, before the mainland opens its markets to foreign investors in 2006 at an unprecedented level.

Trade

The immediate effect of the CEPA was that Hong Kong exports to the mainland increased.

But what is more important, said experts and industry leaders, is the potential revival of Hong Kong's manufacturing power.

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

"CEPA has given Hong Kong products an advantage," Chu told China Daily.

Up to now, 2,711 Hong Kong manufacturers have obtained certificates of origin that allow them to enjoy zero-tariff treatment.

By December 13, a total of 2,811 items of goods, worth HK$1.68 billion (US$215 million), have been approved by the Trade and Industry Department of Hong Kong to enter the mainland free of duties, according to official data.

Chu said traditional Chinese medicine, jewellery, 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 labour-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 producers 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 might have a profound effect on Hong Kong's economy in the long run, helping create jobs and rally industrial confidence that was eroded by the Asian financial crisis in the late 1990s and the subsequent economic downturn.

Services

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 advance or much more widely to Hong Kong companies and individuals, compared with the pledges that the mainland made to the WTO upon its entry in late 2001.

"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 accesses to the 1.3-billion-population market."

Hong Kong service companies made forays into the mainland market 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 of State-owned companies. Previously, we were confined to business with foreign companies and joint ventures," Ng Wing Fai, deputy director of Hong Kong-based Widnell Ltd, told China Daily.

The construction and property service company established two subsidiaries in Chengdu and Chongqing this year. Before that, it had offices in Beijing, East China's Shanghai and South China's Shenzhen.

And Ng is glad to see his company's earnings soaring this year.

"Our Beijing office is expected to increase its turnover by 30 per cent to about 5 million yuan (US$602,000), and the total turnover on the mainland will reach 30 million yuan (US$3.61 million) this year," he said.

In other sectors such as advertising and exhibitions, Hong Kong investors also surged ahead of foreign companies, with CEPA allowing them to set up wholly-owned firms on the mainland.

Star TV, the Hong Kong-based News Corp broadcaster, launched the mainland's first wholly foreign-owned advertising company in July.

Meanwhile, foreign investors are bound to share requirements in the mainland.

The lifting of share restrictions for Hong Kong advertising agencies came about two years earlier than foreign investors.

In Shenzhen, Hong Kong's nearest mainland neighbour, more than 10 Hong Kong-based exhibition firms have set up or applied to set up wholly-owned subsidiaries.

CEPA II

An increased number of preferential measures will benefit Hong Kong industries beginning from 2005, according to an expanded CEPA pact, or CEPA II as it has been dubbed.

Another 713 more items will enjoy zero tariffs and eight new service sectors will be opened for Hong Kong investors.

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

Similar preferences are supposed to be given to ASEAN countries under the China-ASEAN FTA and to other foreign investors under WTO commitments in the near future in a phase-by-phase manner.

"So, the year 2005 will turn out to be critical for Hong Kong business people," Fan Ying, a professor at China Foreign Affairs University in Beijing, told China Daily.

Chu echoes her view, saying under CEPA II, almost all the sectors that could be opened to Hong Kong will be opened in 2005, and Hong Kong businesses should not miss their chance.

"We should get as strong as possible before foreign competitors arrive. We plan to set up subsidiaries in Northwest China next year," Ng of Widnell said.

"That is the last move of our goal of covering major Chinese cities."