The synergy worked, making the Hong Kong-PRD connection an indispensable part of the global supply chain. At the last count, there were 77,000 Hong Kong companies in Guangdong employing about 11 million workers, almost the population of Hong Kong itself.

Hong Kong has become both a winner and a victim of its success. The migration of labour-intensive jobs to China has transformed Hong Kong from a sweat shop to be a leading financial and service centre. However, the Pearl River Delta has also been transformed into not only a giant manufacturing base but also a growing rival of Hong Kong in services.

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Nowhere is the competition more visible than in air transport. In the vicinity of Hong Kong’s Chek Lap Kok airport, there are four other international air terminals, in Shenzhen, Guangzhou, Zhuhai and Macau. The last two, with little traffic, pose no threat. Shenzhen, one-hour by boat from Hong Kong, however, has taken much of the low-cost flight business.

Now enter a more ambitious competitor: the newly expanded, Rmb20bn ($2.4bn) Baiyun Airport in Guangzhou, opened last August. “Baiyun has a lot of potential, thanks to its superior location. Flights that used to go via Hong Kong or Zhuhai, will now go to Guangzhou,”says Professor Zheng Tianxian, who runs a think-tank at Zhongshan University in Guangzhou.

From transport facilities to call centres, Hong Kong has to fight off competition posed by Baiyun-type challengers from its low-cost neighbours. Peter Leung, director of Hong Kong Economic and Trade Office in Guangzhou, says Hong Kong should embrace the challenge rather than complain about being hollowed out by its neighbour. “Business opportunities abound for Hong Kong as Guangdong becomes more service-oriented . We are still competitive in many aspects. Our stockmarket, for example raised $35bn last year, the third-biggest in the world, even though we ranked the eighth in terms of market capitalisation.”

For Hong Kong’s capital-raising and other services, foreign companies continue to use Hong Kong as a gateway to China, with 3600 of them setting up regional headquarters in the city in 2004. Of the newcomers, 200 were from mainland China.

Hong Kong-registered firms, regardless of their origin, benefit from a pact signed between Hong Kong and China in June 2003. Called the Closer Economic Co-operation Agreement (Cepa), it offers duty-free status to 1087 categories of goods originated from Hong Kong, and easier market access to the mainland market for 18 types of professional services, including accountancy, fund management, advertising and legal services. Firms can enter the China market with lower capital requirements, as long as they have been operating in Hong Kong for three to five years and half of their staff are Hong Kong residents.

It is still early to assess the success of Cepa, but it has already sparked off strong interest among Hong Kong businessmen.

Sonny Doo, chairman of the Hong Kong Chamber of Commerce in Guangdong notes that the number of members has increased by about 200 to 900 since Cepa was agreed – newcomers being mainly service providers.

For Guangdong and Hong Kong, their fates are intertwined, despite the ongoing rivalry. A recent study by the Hong Kong government shows that cross-border flow of people has surged, with over 200,000 Hong Kong citizens living in the mainland, mainly in the south. The number of visitors from China, meanwhile, will rise from 20.5 million in 2004 to 37 million by 2011. Most of them will arrive via the southern border. Hong Kong and its northern neighbour are becoming an ‘interactive region’, with an increasing exchange flow of people, goods and capital.