Chief Executive Tung Chee-hwa last month laid out his vision for economic recovery, based on strengthening ties with the mainland. In fact, the integration of the Pearl River Delta is nothing new.

It has been taking place for more than 20 years in one direction - the transfer of Hong Kong capital to the mainland. It started with manufacturing industries, but now even service industries are gradually moving north. The result has been a massive displacement of workers.

What has gone wrong and what should we do? In the past, Hong Kong had a significant role to play as an intermediary, providing support services for trade with the mainland. Hong Kong handled the mainland's orders, provided management services, organised trade fairs and exhibitions and explored business opportunities abroad. Service industries, ranging from law to accounting, design and marketing, have flourished as a result of the expansion of Hong Kong business to the mainland.

Yet Hong Kong's advantages as a middleman seem to be disappearing. Service professionals are moving north, and the mainland now has its own experts in law and accounting, logistics and management. While Hong Kong's financial, legal and accounting services have benefitted, other industries have shrunk as a result of competition from the mainland, and the Hong Kong economy overall has become overly dependent on services. This, together with the bursting of the bubble economy, is the source of our current difficulties. As many economists have pointed out, our economy has become too narrowly based to be able to sail through the ups and downs of business cycles.

If Hong Kong is indeed to develop a mutually advantageous business relationship with the mainland, it must capitalise on its advantages. The keys to success will be co-operation, integration and industrial diversification.

Integration will take place when restrictions on the flow of capital to Hong Kong are lifted. Once Chinese capital can move freely to Hong Kong, it can compete on a level playing field and attract manpower as well as capital from the mainland.

Entering into a Closer Economic Partnership Arrangement with the mainland is a good idea and will benefit Hong Kong's service sectors. Hong Kong should conduct a pilot scheme using the mainland's five special economic zones - Shenzhen, Zhuhai, Shantou, Xiamen and Hainan. If the test proves successful, other cities can follow suit with confidence. In the context of such an agreement, the government should fight to ensure China drops the tariff rates to zero for Hong Kong products. This will further attract foreign investment to Hong Kong.

Hong Kong must also capitalise on its advantages in capital-intensive innovative industries and technology, leaving labour-intensive industries to mainland producers. It is only through a rational division of labour that Hong Kong and the mainland can establish a mutually beneficial relationship. To maintain our position as a centre of trading, Hong Kong has to make its logistics industries and cargo services cheaper. Building Container Terminal No 10 is an important step to this end.

Regional economic integration is a worldwide trend, and regional trade agreements have been formed in Europe, East Asia and North America. We are already well into a new economic order in which multinational corporations and transnational economic unions out-compete the small economic powers. To meet this challenge, the mainland, Hong Kong, Macau and Taiwan should form a Greater China Economic Zone, each capitalising on its own advantages.

Successful integration can only be brought about by working together.

Yeung Sum

Chairman of the Democratic Party and a directly elected Legislative Councillor

[South China Morning Post, Feb04 , 2003]