Many of these companies use Hong Kong as their functional headquarters, and more are following. As of June 2001, Hong Kong was home to 3,200 regional operations, representing a 7.9 per cent increase over 2000.

For Hong Kong to maintain its attractiveness to multinationals as the region's premier financial, business and logistic hub, it must interact seamlessly with the Mainland. This includes allowing a smooth flow of people, cargo, capital, information and services between Hong Kong and the Mainland, and Mr Leung promised that while some progress has been made to this end, more will be done.

Hong Kong must also better leverage and promote its strengths, not least its well-established, efficient and mature financial market which can be used as a base for the Mainland to raise capital and to conduct various sorts of financing activities, including offshore banking and the issuing of bonds.

"I would like to add that in a knowledge-based economy, we must also strive to compete on the speed, quality and creativity of the services we offer. This points to the need for us to upgrade our human capital."

The government is investing heavily in education reform and augmenting the higher education system, including lifelong learning, but Hong Kong also needs to attract more talented Mainland people to work in the territory.

In addition to devising a more user-friendly business visa system for Mainland residents and the removal of quotas for Mainland tour groups coming to Hong Kong, the government will also review its immigration policy to see how it can attract more talented people to live and work here.

While the business sector must obviously position itself to maximise opportunities in China, Mr Leung said he has started internal discussions with various departments and public organisations to see how the government can assist business.

To facilitate the economic integration with the Mainland, an effective government-to-government link is indispensable.

The government has also been talking with the Mainland authorities on ways to further enhance the economic ties between the two places under a free trade zone agreement, Mr Leung said.

He said he is keen to set up a free trade zone with the Mainland, but he also sees difficulties in realising such an idea.

Because free trade zone agreements are reciprocal, Hong Kong might find that economies are not keen to negotiate because Hong Kong is a free port, he suggested. However, Singapore and the United States, which are also open economies, have successfully reached free trade zone agreements with many countries so there is no reason why Hong Kong cannot do likewise.

But he stressed that any China and Hong Kong agreement must be consistent with the rules of the WTO.