This news is greeted with excitement in Hong Kong, as it would open up a lot more business opportunities for Hong Kong investors, in Beijing city. Some see this as an attempt by the Central Government to help Hong Kong's economy. But Antony Leung, Hong Kong's Financial Secretary, says that this is a mutually beneficial arrangement and should not be seen as the Central Government trying to save Hong Kong. He said further that the Hong Kong government would explore with other provinces and cities, the possibility of introducing similar arrangements.

However, as China is about to join the WTO, this preferential treatment given to Hong Kong companies (without giving the same treatment to investors from other countries) raises questions related to China's observance of MFN (Most Favoured Nation) treatment rules. These rules require all WTO members to treat each and every other member in the same way. (Hong Kong investors have always been treated as foreign investors in Mainland China. The Basic Law gives Hong Kong the right to participate in international economic, financial, cultural or other organizations as an independent member, including the WTO.)

There are of course exceptions to the MFN rules. The most prominent of such exceptions is the setting up of Free Trade Areas (such as the NAFTA). But such exceptions are specified clearly in WTO rules and there are detailed regulations governing such Free Trade Areas or Agreements.

It is reported in the media that Beijing's special treatment given to Hong Kong will be launched in the form of an experimental attempt by China. The Beijing city government believes that this new initiative is allowed under WTO rules.

How things evolve have yet to be seen. Giving out preferences in the form of an experimental attempt is probably a new subject for the WTO. The special status of Hong Kong, being both an independent member of the WTO as well as part of China, may also be a special situation.

However, many countries (the US and some European countries in particular) have already set up special committees to monitor China's adherence to WTO rules once it joins the organization. Some of these countries would probably try to get the same preferential treatment in due course, and if they fail, may challenge China through WTO dispute settlement procedures.

It is perhaps worth noting that, so far, the idea is an initiative by the Beijing city government. I have yet to hear anything from the Central Government.

Longer term, there may be a case for Hong Kong to agree a more comprehensive bi-lateral Free Trade Agreement with the Central Government. This idea has been raised by some Hong Kong businessmen for some time. But so far, the Central Government has not said anything about this possibility -- WTO negotiations and accession were the key issues for the Central Government in the past.