The Closer Economic Partnership Arrangement signed between the Chinese mainland and the Hong Kong Special Administrative Region on Sunday offers the Asian financial centre a potentially productive hen, but not golden eggs.

Researcher Liu Xueqin said: "Although the benefits of reduced tariffs in accordance with the pact are limited in short term, they will fuel Hong Kong's economic restructuring and closer economic ties between the mainland, Hong Kong, Macao and Taiwan in the long term."

Liu is a senior research fellow with the Chinese Academy of International Trade and Economic Co-operation, a Ministry of Commerce think-tank.

Vice-minister of Commerce An Min and Hong Kong Financial Secretary Antony Leung signed the agreement on Sunday. It is virtually a free-trade pact between two separate customs zones within one country. It will take effect on January 1.

Premier Wen Jiabao said at the signing ceremony: "I hope that this arrangement will bring more opportunities to Hong Kong's business community and provide some practical help to Hong Kong's economic recovery and growth."

Hong Kong Chief Executive Tung Chee-hwa said he expected the pact would help rejuvenate the Hong Kong economy by offering business opportunities to Hong Kong's service and manufacturing industries.

Under the agreement, Hong Kong will continue to give all goods of mainland origin zero-tariff treatment. Beginning on January 1, goods of Hong Kong origin included in the mainland's 273 tariff categories will enjoy zero-tariff treatment when entering the Chinese mainland.

This treatment will be extended to all goods of Hong Kong origin by no later than January 1, 2006.

The exact definition of "Hong Kong origin" will be determined by January 1.

Hong Kong exported about US$10.7 billion of goods to the mainland last year, with the average tariff rate being 12 per cent.

The Hong Kong Chamber of Commerce estimated that the zero-tariff treatment will save Hong Kong manufacturers about US$690 million in duty every year or roughly 0.42 per cent of the region's gross domestic product.

Most of Hong Kong's manufacturing industry has already moved across the border to the mainland, but the city still produces some watches, jewellery, clothing and toys.

Liu told China Business Weekly: "Although the direct benefits to Hong Kong manufacturers are not very big, the arrangement could reduce the tendency of Hong Kong manufacturers to move to the mainland and it could thus create more jobs (in Hong Kong)."

In addition, the lack of an agreed definition of "Hong Kong origin" has also resulted in uncertainty.

Nearly all Hong Hong products are made from imported raw materials or semi-processed goods. If the Hong Kong added value of the products is too high, a lot of Hong Kong-produced goods will be excluded from the zero-tariff list.

Service sector more open to Hong Kong

The free-trade pact will benefit mainly the service sector, which accounts for 85 per cent of Hong Kong's GDP.

By January 1, the mainland will have opened more of its service sectors to Hong Kong, including management and consultancy, exhibitions, accounting, architecture and real estate, medical services, the wholesale, retail and franchise businesses, shipping agent services, storage, transportation, and audio-visual services.

Firms with 100 per cent Hong Kong financing will be allowed to operate in the areas of management and consultancy, with the exception of the legal sector, accounting, auditing and authentication.

The pact also covers bilateral co-operation in the financial sector and in the development of the tourism industry.

Zhang Hanlin, director of the World Trade Organization Research Academy under the Beijing-based University of International Business and Economics, said the pact would profit Hong Kong service firms, but that its main significance will lie in its stimulating effect on the region's economic restructuring.

Since 1997, the Hong Kong regional government has vowed to develop the territory into a high-tech industrial centre, but it failed to achieve this goal due to Hong Kong's lack of relevant professionals and research resources.

Hong Kong's second-board stock market, the Growth Enterprise Market, is also suffering due to the poor performance of the local high-tech sector.

But now, the new pact will allow for the freer movement of professionals, capital and technologies. This could enable Hong Kong to become a financial and operations centre for the high-tech industry while Guangzhou or Shenzhen in the neighbouring Guangdong Province could become research and manufacturing centres, Zhang said.

The pact is conducive to keeping Hong Kong's status as Asia's financial and operations centre, thus curbing the increasing trend of multinational companies to move their regional centre to rival Shanghai, Liu said.

In the past, the mainland has had most foreign investment in manufacturing, which made many multinationals consider moving their operations centres to the mainland as well.

With the implementation of the new pact, it will be still convenient for these multinational firms to stay in Hong Kong and still oversee their mainland manufacturing capabilities, Liu said.

But there are still uncertainties for Hong Kong's local firms and foreign firms in the region.

Henry Tang - Hong Kong's secretary for commerce, industry and technology - was quoted by the Beijing-based Financial Times as saying that the main economic effects would be felt in the long term.

"But, in the short term, Hong Kong firms may still need to overcome some barriers on the mainland, such as high administrative costs and lengthy registration and ratification procedures, which are more challenging than 100 per cent ownership of their mainland branches," said Winnie Yip, managing director of DTZ Debenham Tie Leung International Property Advisers' Beijing branch.

The definition of Hong Kong firms also remains elusive.

The pact says Hong Kong firms are companies that have operated in Hong Kong for at least three years, have paid income tax to the region's government and have hired at least 50 per cent of their employees in Hong Kong.

It remains to be seen whether that definition will exclude the Hong Kong branches of multinational banks and other service firms.

Companies such as Citicorp and Morgan Stanley have large operations in Hong Kong and they have been trying to expand on the mainland.

But research fellow Liu said he believed that, even if foreign firms' Hong Kong branches are excluded, the region's economy will still benefit as local firms make up most of Hong Kong's service sector.

Boost to Macao, Taiwan

The pact's benefits could also extend to Taiwan and Macao, said experts.

Wang Jianmin, a senior researcher with the Taiwan Research Institute under the Chinese Academy of Social Sciences, told China Business Weekly: "The closer economic ties between Hong Kong and the mainland could encourage some small Taiwanese high-tech firms to locate their operations centre in Hong Kong to save on transportation costs."

Under the pact's investment facilitation measures, more Taiwan businesses will find it less expensive to invest on the mainland via Hong Kong, Wang added.

(Business Weekly 07/01/2003 page2)