After one and a half years of negotiations, the Closer Economic Partnership Arrangement was formally brought into being with a signing ceremony on June 29.

Some analysts have called CEPA a "gift" to Hong Kong, and given that Canada's Fraser Institute last month again ranked Hong Kong as the world's freest economy, what positive aspects does China expect to gain from CEPA?

When China entered the World Trade Organisation in 2001, Mainland businesses were worried about stiff competition from foreign enterprises. When CEPA was announced, however, businesses throughout China welcomed the agreement.

Since the signing of the agreement, the Chamber has received a number of inquiries from provinces and cities across China. Businesses from Guangdong to Beijing, and from Xiamen to Tianjin are eager to learn how they can capitalise on CEPA in co-operation with Hong Kong.

The Pearl River Delta will most likely feel the benefits of the arrangement first. In the last few years, economic integration between Guangdong and Hong Kong has been progressing at a steady pace. The "Greater PRD" integration issue, however, has been a prickly subject that few have dared tackle.

Part of the problem is that the flow of people, merchandise and capital in the PRD has been largely one way. Infrastructure planning in the region also lacks co-ordination, and the Hong Kongs economic slump has allowed the Yangtze River Delta (YRD) to take over the PRD.

Most enterprises in the PRD are labour-intensive industries mainly involved in the processing trade. Collectively, they account for about 35 percent of China's total exports. However, due to the soft environmental factors, including government services, they are increasingly moving to the YRD and as a result are watering down the PRD's advantages.

CEPA will undoubtedly encourage manufacturers to take advantage of the Hong Kong brand name to export to the Mainland. Hong Kong's relatively high costs, however, need to be carefully studied. Under CEPA's "rules of origin," a product must have a certain percentage of value added in Hong Kong, but most of the work process can actually be done outside Hong Kong, and Guangdong is the most preferred destination.

This provides an opportunity for the PRD to re-engineer its industrial structure and to expand the domestic market. Under the CEPA framework, Hong Kongs advantages, as an international financial and business service centre, are expected to radiate across the PRD and enhance the overall competitiveness of the region.

CEPA's impact varies from industry to industry. The zero tariff arrangement will not only raise the competitiveness of made in Hong Kong products entering the Mainland, but will also provide an option for high value-added Mainland producers to manufacture in Hong Kong.

Although labour costs here are higher, such a move might offset the high tariffs that some Mainland producers need to pay for importing certain parts and components into China.

China's service industries are expected to face more competition under CEPA, but despite this, Mainland service providers have reacted positively to the agreement. The Shenzhen Institute of Certified Public Accountants was even disappointed that CEPA failed to grant further liberalisation to their Hong Kong counterparts.

The Mainland's professional service sectors that are covered under CEPA are expecting more Hong Kong firms to express interest in merging or taking over Mainland firms.

For sectors that were off-limits to Hong Kong firms prior to CEPA -- including convention and exhibition, real estate management, and audio-visual services, among others -- analysts expect Hong Kong firms to also expand into China through partnerships or acquisitions. Even though Hong Kong firms can establish wholly-owned enterprises in China in these fields, the Mainland firms do offer an edge with better knowledge of the China market.

The Mainland's service industry accounts for just 33 percent of China's national economy. The sector's immaturity, however, presents great potential for Hong Kong to tap into the China market and advance the industry.

For example, advertising constitutes 0.8 percent of China's GDP, far lower than the 2 percent in advanced countries, although the sector is growing faster than the country's GDP as a whole. In 2002, the advertising sector grew by 14 percent compared to 2001, while financial services, insurance and logistics in the Mainland show even greater potential.

In conclusion, CEPA provides a win-win arrangement which Hong Kong will soon benefit from, and by doing so, will help maintain the momentum of China's economic growth.