Implementation of the Chinese Mainland/Hong Kong Closer Economic Partnership Arrangement (CEPA) will, in the short term, have little effect on Shenzhen's manufacturing sector.

But, experts suggest, an appropriate division of labour between Hong Kong and Shenzhen, a boom city in South China's Guangdong Province, is needed over the long term to ensure Hong Kong and the Chinese mainland develop into a free trade zone.

"Manufacturers in Shenzhen should not feel threatened by tariff-free Hong Kong-made goods," Feng Bangyan, director of the Hong Kong and Macao Economies Institute at Jinan University, said.

Jinan University is in Guangzhou.

Although zero-tariff treatment under CEPA will result in huge savings, prices of products will decline only slightly, he said.

The first shipment of tariff-free goods - about HK$232,212 (US$30,155) worth of recordable compact discs - manufactured in Hong Kong arrived in the Chinese mainland last Wednesday via the Huanggang checkpoint.

The zero-tariff treatment, under CEPA, saved the exporter, Wing Li Holdings Ltd of Hong Kong, about HK$12,000 (US$1,538).

The Chinese mainland in 2002 imported US$4.7 billion worth of goods that had been manufactured in Hong Kong.

Analysts estimate the zero-tariff treatment will save exporters a combined US$700 million annually.

"But price is not such an important factor that affects consumers' buying decisions when it comes to Hong Kong made products," Feng told China Business Weekly.

Chinese mainland consumers prefer Hong Kong-made goods because they are fashionable, and top quality brands, he said.

In particular, Chinese mainland consumers like to buy watches and clocks, clothes and apparel, jewels, toys, cosmetics and electronics products from Hong Kong, he added.

It will be impractical for Hong Kong's manufacturers to relocate their plants to the island to benefit from the zero-tariff policy, Li Yushi, vice-president of the Chinese Academy of International Trade and Economic Co-operation, a think-tank affiliated with the Ministry of Commerce, told China Business Weekly.

"They will find it difficult to recruit new workers in Hong Kong," he said.

"Many Hong Kong companies have moved their plants to the Chinese mainland in recent years, and the number of local skilled workers has diminished."

A Hong Kong company, fearing it could not find a sufficient number of suitable workers, recently cancelled plans to relocate its plant from Central China's Hunan Province to Hong Kong, Li said.

Southern Metropolitan Daily recently reported Irasia, a clock and watch company from Hong Kong, relocated its assembly and quarantine lines to Hong Kong, from Shenzhen, three weeks ago so it could use the Hong Kong's certificates of origin.

The company also decided to invest HK$2 million (US$256,000) to launch two new production lines in Hong Kong.

An official from the General Administration of Customs said last month the tariff-free treatment on goods made in Hong Kong could be suspended if a dramatic increase in exports hurt manufacturers on the Chinese mainland.

Experts warn, however, the two economies need a rational division of labour over the long term to prevent vicious competition.

"It (vicious competition) is likely to happen in a few years," Feng said.

Both Shenzhen and Hong Kong are internationally renowned manufacturing centres, he added.

However, their manufacturers produce very similar goods - including electronics products, watches and clocks, toys and clothes, he said.

Shenzhen's decision-makers should take into account the needs and features of Hong Kong's economic development when making overall plans for their city.

"Shenzhen has advantages over Hong Kong in terms of human resources, technology and production costs," Li said.

Feng suggests the central government should establish a high-tech development zone bordering Shenzhen and Hong Kong.

That way, he said, the region could benefit from Hong Kong's capital and advanced workmanship and Shenzhen's lower labour and land costs.

A sound, responsible division of labour between Shenzhen and Hong Kong is crucial if there is going to be an economic integration of Hong Kong and the mainland, Feng suggested.

"CEPA is basically an agreement that creates a non-tariff, free trade zone involving Hong Kong and the Chinese mainland to ensure the free flow of capital, labourers, goods and information," Feng said.

Shenzhen, the closest neighbouring mainland city to Hong Kong, will be the first municipality to benefit from the free trade zone, he said.

CEPA, signed on June 29 by the central and Hong Kong Special Administrative Region governments, is meant to facilitate trade in goods, services and investment.

Goods under 273 tariff items made in Hong Kong now enjoy zero-tariff treatment when they arrive in the Chinese mainland.

CEPA was implemented on January 1. The pact will apply to other goods made in Hong Kong by January 1, 2006.

(Business Weekly 01/13/2004 page1)