The mainland and Macao Special Administrative Region (SAR) are likely to ink an economic partnership agreement so the former Portuguese region can enjoy virtual free trade treatment simultaneously with Hong Kong at the beginning of next year.

"Our negotiations on the issue are so far very successful and the (free trade) deal is expected to be fulfilled at the beginning of next year," an official with the Ministry of Commerce said on condition of anonymity.

But the official did not give a clear timetable for the discussions, stressing that they have only started.

Insiders revealed the deal could be signed around December 20, the date on which Macao was returned to Chinese sovereignty in 1999.

Representatives of the Ministry of Commerce and the Macao SAR government late last month held their second round of negotiations over the free trade deal, which might also be called a closer economic partnership arrangement (CEPA), a deal that was signed between the mainland and Hong Kong on June 29.

The commerce ministry official refused to compare the ongoing talks between the mainland and Macao with the CEPA signed between the mainland and Hong Kong.

"They are different things," he said.

Yet scholars and trade experts said the mainland-Hong Kong CEPA could play an important role in enabling the mainland and Macao to finish their negotiations in a short period of time.

"The mainland-Hong Kong CEPA is a useful exemplary text for the two sides (mainland and Macao) to follow," said Zhou Yunyuan, a professor with the Research Centre of Hong Kong, Macao and the Pearl River Delta under Guangzhou's Sun Yat-sen University.

According to the CEPA between the mainland and Hong Kong, beginning from January 1, goods of Hong Kong origin included in the mainland's 273 tariff categories will enjoy zero-tariff treatment when entering the mainland. It will be extended to all goods of Hong Kong origin by no later than January 1, 2006.

By the start of 2004, 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, 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.

The mainland and Macao could copy the exact definition of the Hong Kong agreement as well as the particular areas to be opened to Macao businesses, Zhou told China Business Weekly. Compared with Hong Kong, the situation in Macao is much simpler.

Starting in late 2001, the CEPA negotiations between the mainland and Hong Kong lasted for more than half a year.

With a population of 441,600 in 2002, the 26.8-square-kilometre Macao is a much smaller economy than Hong Kong, with a population of 6.8 million. Macao's gross domestic product in 2002 was US$6.72 billion.

Macao's service sector does not have Hong Kong's complicated situation.

A crucial question in the negotiations between the mainland and Hong Kong is whether Hong Kong subsidiaries of multinational companies would be defined as Hong Kong firms so they could have greater access to the mainland market.

But most multinationals operating in Hong Kong do not have Macao branches.

"People in Macao are more prone to develop trade relationships with the mainland because we are smaller and poorer than Hong Kong and hence rely more on the mainland," a tour guide surnamed Tseng told China Business Weekly early this year.

Francis Tam Pak Yuen, secretary for Economy and Finance of the Macao SAR government, was quoted by the Guangzhou-based newspaper 21st Century Economic Herald as saying a CEPA with the mainland would help Macao's businesses to explore the mainland market and strengthen Macao's role as a platform to connect the mainland with European countries.

The former Portuguese colony is still a transfer station for the mainland to develop trade and investment relationships with Portuguese-speaking countries such as Portugal, Brazil and Mozambique.

Lau Benli, an economist with the Macao Productivity and Technology Transference Centre, said Macao's service firms are not strong enough to compete with their Hong Kong counterparts to enter the mainland market.

But to Macao, the expected zero-tariff treatment of goods may be more beneficial than to Hong Kong because the territory's lower labour and land costs may attract foreign investors to produce mainland market-oriented commodities in the territory.

Macao's labour cost is half of that in Hong Kong while its average land price is also much cheaper.

According to statistics from the Ministry of Commerce, last year Macao imported mainland goods valued at US$876 million and exported products worth US$142 million - a figure economists say could be greatly increased - to the mainland.

Since early this year, officials from Macao and its neighbouring Guangdong Province's Zhuhai have talked about jointly launching an industrial park across Guangdong's Zhuhai and Macao.

The Chinese newspaper Macao Daily reported last Thursday that from today, Macao officials will talk with the central government about constructing a US$1.9 billion bridge to connect Hong Kong, Zhuhai and Macao.

But to Macao, the greatest beneficiary of the proposed CEPA would be to its gambling industry.

It is the unquestionable pillar industry of Macao.

In 2002, revenue from gambling accounted for 69 per cent of the tax income of the Macao SAR government, which was about US$1.37 billion.

Travelers from the mainland have become an important client source for Macao's 11 casinos in recent years. The number of mainland tourists to Macao rose to 4.24 million in 2002 from the previous year's 3 million.

Under a CEPA, it would be easier for mainland residents to visit Macao and hence contribute more money to Macao's slot machines and poker tables.

Macao's gambling and tourism industry has been seriously hit by severe acute respiratory syndrome in the second quarter of this year.

In May, tourists on package trips to Macao decreased by 97.8 per cent compared to the same month of the previous year.

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