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Hong Kong needs to ensure its infrastructure and the quality of its service keep growing or it may be overtaken by fast-growing mainland cities, business leaders and economists say.

The city's gross domestic product rose by 5 per cent last year, largely on the back of several large mainland initial public offerings in the finance sector.

But Standard Chartered Bank economist Tai Hui   said that while Hong Kong's infrastructure and logistical facilities were world class, mainland cities were catching up rapidly in some areas.

Salaries are rising on the mainland - by more than 9 per cent in Shenzhen, Guangzhou and Shanghai last year. This was almost double the rise in Hong Kong.

But logistical capabilities have also increased markedly, with Shenzhen leading the way.

Seen typically as a low-cost option to Hong Kong, the Yantian International Container Terminals port facility handled more cargo than Kwai Chung last August and was due to bring more facilities online by 2009.

Mr Hui said Hong Kong would need to maintain its high-speed turnover and service quality to remain competitive in either its finance or logistics sectors.

'We shouldn't kid ourselves - there's stiff competition with cost and improving quality of service,' he said.

Hong Kong manufacturers have also been shifting focus towards working on the mainland.

Stanley Lau Chin-ho,  vice-chairman of the Federation of Hong Kong Industries,  said Hong Kong manufacturers' operational costs had gone up 7 to 8 per cent in the past three months largely on the back of the stronger yuan.

The yuan became stronger than the Hong Kong dollar in January this year, hovering around HK$100 to 99 yuan recently. 'The currency is difficult to manage at the moment because nobody can predict where it will go,' Mr Lau said.

This resulted in more Hong Kong employees being hired to work in the mainland permanently or travel there for work frequently.

This was a continuing trend as more Hong Kong workers from manufacturing and other sectors spent more time on the mainland, he said.

Mr Hui said while the mainland might look more attractive to larger players, Hong Kong's government structure, legal system and proximity to customers meant it was still easier for small to medium-sized enterprises to keep their businesses here where they had a better chance of getting a fair deal.

He said it was important that Hong Kong protect its name as a provider of quality services because that was key to making sure Hong Kong retained its advantages over other mainland cities in the years to come.



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