The buzzword in the Hong Kong government 2006-07 financial budget speech delivered by Financial Secretary Henry Tang on February 22 was indisputably "mainland," as the word cropped up frequently throughout. Of the 88 paragraphs in the budget, which is supposed to lay out government income and expenditure plans, at least 21 were directly related to the region's economic integration with the mainland, covering basically the Closer Economic Partnership Arrangement (CEPA), financial services, tourism, logistics and the talent pool.

To some, there appears to be a danger of over-dependence on the mainland for Hong Kong's future development. However, those who hold this view fail to see the region as an integral part of the overall Chinese economy under "one country, two systems."

It took many years and a lot of internal debate before most people began to accept this new paradigm, and judging from the robust performance of the Hong Kong economy for the last two years since the beginning of CEPA, which signaled whole-hearted economic integration into the mainland, it works.

The first two years of CEPA has brought about 29,000 new jobs, and Hong Kong businesses have already saved HK$240 million (US$31 million) in tariffs, covering exports of HK$3.7 billion (US$480 million). The budget, which was in the red for the past seven years in a row, is now expecting a surplus of HK$5.8 billion (US$753 million) in the Operating Account, and HK$4.1 billion (US$532 million) in the Consolidated Account, which includes capital investments. This pleasant surprise comes three years earlier than previously projected.

When completely integrated into the Chinese economy, Hong Kong stands to reap the full benefits of continuous high growth of the mainland economy, and its exports can enjoy zero duty and compete on an equal footing with items locally produced. Enterprises and professionals registered in Hong Kong can freely enter into many sectors that were previously restricted. All in all, this will facilitate the use of Hong Kong by more multinational companies as the gateway to the mainland market, as well as that to the international market by mainland enterprises.

This will be especially true of those in the Pan-Pearl River Delta region thanks to a Regional Co-operation Framework signed by nine provinces and two SARs, consolidating Hong Kong's role as the prime hub for regional headquarters in east Asia.

This development will further strengthen Hong Kong's position as an international financial centre. The regional government is now geared up to expand the scope of the Chinese currency renminbi business and upgrade the quality of its financial markets. At the end of 2005, 38 banks in Hong Kong were authorized to provide RMB deposit-taking, exchange and remittance services.

As revealed in the budget speech, the Hong Kong government is now discussing with the central government to allow cross-boundary trade to settle in RMB and to establish a RMB debt issuance mechanism in Hong Kong.

When approved, Hong Kong would be the only place outside the mainland permitted to trade in yuan-denominated securities. This will help promote Hong Kong's brand name in financial services, and also facilitate mainland ventures to develop a global presence and overseas ventures to gain a share in the mainland market.

In addition, an offshore market of RMB bonds may help dampen speculative inflows into the mainland betting on yuan appreciation. It might also shed more light on the market value of the yuan, but only for limited capital transactions.

With skilful implementation to limit its scope and the pace of experimentation, this will be a very useful instrument protecting the country's monetary security without undue hampering of international trade and foreign direct investment, at the same time providing a testing ground for the inevitable full convertibility of the yuan in the future.

The issuance of bonds in Hong Kong by mainland enterprises is on the rise, and Hong Kong is therefore destined to become Asia's leading bond-issuing centre. Since the beginning of this year, more than 20 mainland enterprises have already issued and listed their bonds in Hong Kong, raising over HK$65 billion (US$8.4 billion).

In line with the above developments, Hong Kong's financial markets have evolved into the predominant fundraising platform for mainland enterprises. The 10 companies that have made the largest ever IPOs in the Hong Kong market are all from the mainland. Mainland companies now make up 30 percent of the total number of Hong Kong-listed firms, and their market value accounts for a 40 percent stake in the total Hong Kong stock market capitalization.

As all of the key players are now clustered in Hong Kong, and they are generally more familiar with the mainland market and enterprises than their counterparts elsewhere, the turnover of shares of mainland enterprises in Hong Kong is far higher than in any other international financial centre.

A whopping 80 percent of stock transactions among mainland companies listed in both Hong Kong and US stock markets are now conducted in Hong Kong. By all measures, there will be many more mainland enterprises lining up to get listed in Hong Kong rather than anywhere else in the coming years.

Together with the supply of some 200 million mainland tourists from 38 mainland cities under the Individual Visit Scheme, and a bid to add six more, as well as the renewed effort to recruit talent from the mainland, the above initiatives by the HKSAR government and the support from the central government as outlined in the budget speech, the Hong Kong economy will gradually attain a more healthy repositioning and sustained growth.

The author, from Hong Kong, is a member of the Chinese People's Political Consultative Conference.

(China Daily March 1, 2006)