TRADE RELATIONS between the mainland and Hong Kong have been tried and tested since the founding of the People's Republic 55 years ago. Re-exports from the mainland helped Hong Kong recover after the second world war, but this link was severed by trade sanctions imposed by the west during the Korean war. Trade relations resumed in the 1980s with the opening up of China and the country's reform programme, which encouraged Hong Kong manufacturers to move export processing across the border to tap the mainland's cheap labour and land. In return, conglomerates backed by the mainland government made their presence felt in Hong Kong by getting more involved in the local economy. They invested in Hong Kong transportation and warehousing, property development, banking, tourism, construction, international trade, retailing and wholesaling. The investment continued to the extent that today Hong Kong is the biggest recipient of overseas direct investment from mainland enterprises, accounting for 74 per cent of the accumulated US$33.4 billion up to last year. By the end of 2002, the mainland was the largest source of inward investment to Hong Kong, with cumulative direct investment reaching HK$594.6 billion, or 22.6 per cent of the total. More than 2,000 mainland-backed enterprises are believed to be registered in Hong Kong. Their assets total more than US$220 billion. More than 100 civilian- and state-owned mainland firms are listed on the main board and Growth Enterprise Market of the Hong Kong stock exchange. As of last year, Hong Kong remained the largest source of inward foreign direct investment in the mainland. Between 1979 and last year, contracted and actual direct investment from Hong Kong was US$414.5 billion and $222.6 billion respectively, accounting for 44 per cent and 44.4 per cent of the national total. In terms of trade, Hong Kong was the mainland's third largest trading partner, after Japan and the United States, in the first half of this year, with bilateral trade reaching US$48.8 billion, or 9.3 per cent, of the country's total external trade. A substantial portion of mainland-Hong Kong trade is related to export-processing for third countries. Last year, bilateral trade and economic relations gained a new lease of life when the mainland and Hong Kong signed a free-trade pact, the Closer Economic Partnership Arrangement (Cepa), which granted zero tariffs on goods of Hong Kong origin. The pact also gives Hong Kong businesses wider and easier access to the mainland's vast market in 18 service categories. Cepa is expected to strengthen Hong Kong's role as an international financial centre for the mainland and the region. Mainland banks are tipped to relocate their international treasury and foreign exchange trading centres to Hong Kong, while taking the opportunity to expand their business in the city. Meanwhile, local financial intermediaries are being encouraged to participate in the mainland's complex financial reforms. Local professionals, such as accountants and lawyers, will be eligible to practise across the border, while ordinary residents will be able to start businesses on the mainland without operating under the cover and licence of mainland citizens. Cepa has also lowered the entry threshold to the mainland services sector for Hong Kong's predominantly small companies. Cepa is timely for the mainland, which is evolving from a global production base into a vast consumer market with growing buying power. The 18 services industries that will benefit from Cepa include management consultancy, advertising, accountancy, banking, insurance, legal service, medical and dental services, logistics, tourism, value-added telecommunication services and retail and wholesale. In August, eight more service sectors were added to the list. These include airport services, information technology and professional technicians. The free-trade pact was also expanded in scope in August, with the number of product types entitled to zero tariff raised to 1,087 from the original 374. Categories range from electronic goods, jewellery and pharmaceuticals to toys, foodstuffs and clothing. The free-trade pact includes measures to facilitate trade and investment that require bilateral co-operation in customs clearance, quarantine and inspection of commodities, quality assurance and food safety, information exchange between enterprises on both sides, development and regulation of Chinese medicine, electronic commerce, promotion of trade and investment and enhanced transparency of laws and regulations. It is still too early to judge the impact of Cepa, but the response from the business world is mixed. Local businessmen joke that Cepa is 'too good, too late', pointing out that the pact comes a mere two years ahead of the country's full liberalisation of foreign businesses under World Trade Organisation terms. Moreover, manufacturers seem to have little to gain from Cepa because more than 80 per cent of them have relocated their factories to the mainland, while few others have developed sufficiently hi-tech goods to profit from zero-tariff sales.The service sectors, however, are more enthusiastic. The pact gives them an opportunity to enter China or expand their presence in the mainland's underdeveloped market for services.