Hong Kong is set to benefit from greater access to the mainland market bestowed by CEPA in the long term, some major international investment banks said.

"CEPA does enable Hong Kong companies to take first-mover advantage," Merrill Lynch said in a report.

The Closer Economic Partnership Arrangement between Hong Kong and the mainland promises liberalization in 17 of the mainland's service sectors to Hong Kong firms.

Under CEPA, tariffs will be slashed to zero starting from next year on 273 products made in Hong Kong and exported to the mainland.

The benefit from this to Hong Kong, however, will depend on the agreement on the rules of origin which has yet to be finalized, Merrill Lynch said.

The tariff reduction is expected to save Hong Kong HK$750 million a year, the government said on Sunday.

Bringing in more immediate benefits to Hong Kong would be the mainland authorities' support for domestic banks to expand in Hong Kong and their decision to facilitate travel of mainland residents to Hong Kong, Merrill Lynch said.

As part of CEPA, the mainland will support State-owned commercial banks and certain shareholding commercial banks in relocating their international treasury and foreign exchange trading centres to Hong Kong.

It will also support mainland banks in developing networks and business activities in Hong Kong through acquisitions.

"The Hong Kong economy should benefit from closer economic ties with the mainland. Investment demand and, therefore, the labour market situation should improve, which should eventually benefit domestic asset markets," Merrill Lynch said.

Meanwhile, JP Morgan said it expected some foreign firms to set up their operations in Hong Kong as a result of the liberalization of some of the mainland's service sectors under CEPA.

"This will boost FDI (foreign direct investment) inflows to Hong Kong and improve local employment opportunities, though not in any significant way," it said.

However, the firm did not expect many foreign companies to set up manufacturing facilities in Hong Kong or Hong Kong manufacturers to move back, despite the tariff reduction.

Preventing that would be the high costs of land, labour, transportation and warehousing, among others, it said.

(HK Edition 07/02/2003 page7)

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