Since the signing of the Closer Economic Partnership Arrangement with the Mainland, economic exchanges between Hong Kong and the Mainland have been gathering momentum.

First came the "Individual Visit" scheme, which has given a boost to our tourism and retail industries. Then we signed cooperation agreements, first with Guangdong, followed closely by Shanghai.

I believe Hong Kong's businesses are on the launching pad for early entry into the Mainland market. All these activities have led to an improvement in business sentiment in Hong Kong. Economy has begun to rebound.

The property market has been stablised and is slowly trending upward. Unemployment has eased, though slowly, and the stockmarket is at a two-year high. Although economic restructuring will still continue for some time, I believe we have seen the light at the end of the tunnel.

Our challenge in the economic front in 2004 is how over time we balance the budget as defined by the Financial Secretary, how to squeeze deflation out of our economy and, above all, how to sustain our economic recovery.

CEPA to play a key role in sustaining economic recovery

I believe effective implementation of CEPA, and the continued enhancement and enrichment of CEPA in the coming years will play a key role in sustaining our economic recovery. Therefore, I will talk specifically about CEPA and the challenges and opportunities CEPA gives to Hong Kong.

Firstly, we all agree CEPA expands the market for our service industries. The Chinese economy is expected to grow in a rapid and orderly manner in the foreseeable future. The service sector of that economy actually represents only about 35% of the GDP, as compared with an average of 70% for developed economies.

The demand for the service sector on the Mainland will therefore grow rapidly in the years ahead. And this is exactly what Hong Kong is good at. As a major provider of quality services, we are more than able to support the Pearl River Delta region and the rest of the Mainland in this regard.

Indeed, CEPA creates new opportunities for our many professionals, accounting, auditing, legal services, engineering, IT, and management consultancy, et cetera. The 18 services sectors granted preferential treatment under CEPA are areas we excel in, but desire a bigger market. CEPA gives us a head-start to enter the Mainland market.

The WTO-plus market liberalisation measures will give Hong Kong businesses and professions not only a "first mover" advantage in the Mainland market, but also a wide range of market preferences which the Mainland has not committed to granting to any other WTO member.

Opportunities abound to enhance status as regional services hub

Secondly, in addition to providing Hong Kong the opportunities to enter the Mainland market, CEPA also provides opportunities for us to enhance our status as Asia's service hub.

Over the last two decades, economies in Asia have been the fastest growing region in the world. Having weathered the financial crisis, Asian countries have restructured their economies and have now resumed the path of growth. Some of the impetus of the growth are coming from trade within Asia.

Trade within Asia has grown very rapidly in recent years and now accounts for about 50% of the total trade in the region. Riding on this rapid development, Asia is now working towards greater regional economic cooperation in an institutional way. China has been a key player in promoting trade and investments within this region and establishing regional trade agreements.

Indeed, China and the Asean countries have agreed to reach agreement on a Free Trade Agreement by 2010, followed by Korea with Asean at 2011 and Japan with Asean by 2012. CEPA is the first regional trade agreement signed by China. The challenge for Hong Kong is how we can seize this opportunity to enhance our role and capabilities as a premier service hub for China as Asia's economies and trade relations expand and they are expanding very rapidly.

HK must harness new technology, innovation

The future is indeed very promising, but we must be aware that a salient feature of this new phase of globalisation is the relocation of productive forces of the service industries. Following the relocation of manufacturing processes, it has become a tendency to relocate service processes to areas of lower production cost, too.

This is increasingly a challenge in Hong Kong we must face. Only by harnessing new technology and innovation can Hong Kong manage the challenges of the relocation of low valued processes and sustain our economic growth and continue to improve the quality of life. We must capitalise on the opportunities brought by CEPA to restructure and upgrade our service industries, to further extend the scope of our services.

For instance, business-related services are a pillar of our economy. CEPA initially opens up the Mainland market to Hong Kong's distribution, logistics, freight forwarding, storage and warehouse and other services sectors, benefiting the advancement of our modern logistics industry, particularly the management of the supply chain.

Hong Kong's logistics service providers, with their sophisticated and efficient modes of operation, will have considerable new business opportunities servicing manufacturers on the Mainland, thereby helping to boost Mainland's fast-growing export sector at the same time.

More importantly, however, we must recognise that, even if we are ahead today, in a rapidly changing world, we need to continue to develop ways to enhance the service we can provide in this regard.

Product design, quality control, branding must be enhanced

Another example is for us to enhance our strength in product design and development in quality control and branding, to ensure that whether the products are made in Hong Kong or made in the Pearl River Delta by Hong Kong enterprises continue to enjoy the reputation and be one of the most sought after products by consumers.

At the same time, we need to leverage on the zero tariff arrangement provided by CEPA for those enterprises and see the advantages of doing manufacturing here in Hong Kong. We need to have a new approach and new thinking, as a Government, to attract manufacturing enterprises to Hong Kong, especially those in the high-value-added sectors.

Financial services are one of our most competitive and highest value-added industries. We must capitalise on the opportunities brought by CEPA to further extend the breadth and depth of our financial markets by developing comprehensive financial products, including expanding the capital markets, bonds markets, and derivatives markets.

The Central People's Government has agreed to allow our banks to conduct personal renminbi business and this is really the first step. It will enhance our competitiveness and thus help further strengthen our position as an international financial centre.

As wealth is rapidly created in Hong Kong and, indeed, as Asia has one of the highest savings rate in the world, we must aggressively develop asset-management business here.

Individual Visit scheme creates myriad tourism opportunities

The "Individual Visit" scheme has brought tremendous opportunities to our tourism and other related sectors, and has uplifted the local market sentiment. We have reached a consensus with the Guangdong province to extend the scheme in stages to the entire Guangdong province next year, and indeed, other parts of the country will also follow.

We must seize this opportunity to continue our investment in the software and hardware of our tourism sector so that Hong Kong will continue to be the preferred destination for tourists from the Mainland, from Asia and from other parts of the world.

Hong Kong people are artistic and creative. Over the years, we have excelled in such areas as product design, packaging, advertising and digital entertainment. For a long time, we have had successes in film making. With the huge market on the Mainland, CEPA has created new opportunities for our creative industries. I am pleased to note that there is much enthusiasm in the creative sectors to enter the mainland market and I wish them every success in their endeavours.

HK Gov't's role is that of an enabler

What is the role of the Government in all these? The role of the Government is that of an enabler, opening up markets and removing obstacles so that our businesses, our professionals and our individuals can flourish. Through CEPA, we have done that.

We will continue our effort to maintain other critical success factors of Hong Kong such as upholding the rule of law, maintaining the various freedoms, protecting intellectual property rights, improving our environment, continuing our investment in education and making the Government more business friendly, etc. Indeed, that work is never done.

The signing and implementation of CEPA has started a new era of economic co-operation between Hong Kong and the Mainland. Not only does it extend the scope and activities of our cooperation, but also uplifts the level and institutionalises the activities involved.

To ensure that we deliver what is promised in CEPA, the Government has placed high priority on the smooth implementation of CEPA. A designated one-stop unit has been established in the Trade & Industry Department to help those interested to enter the Mainland market through CEPA.

Another important task is to introduce and promote CEPA to potential beneficiaries and investors in and outside Hong Kong. The Trade Development Council and various trade and business associations including the General Chamber of Commerce, have been playing a constructive part in the concerted promotional effort with the Government.

If we can keep abreast of the times and foster cross-boundary partnership and service standards with new thinking and concepts, Hong Kong as an enhanced service hub will ride on the success of CEPA, and indeed, will have a brighter future.