China inaugurated a harbor area with preferential tax rates on Thursday in the northeastern city of Dalian, a major step towards forming a free trade zone between China, Japan and the Republic of Korea (ROK).

The Dayaowan Bonded Harbor Area, located at the Dagushan Peninsula in the northeastern part of Dalian, enjoys preferential taxation and foreign exchange policies, said Zhang Shikun, director of the Dalian Bonded Area Administrative Committee.

"It will remove tariffs for foreign cargo and offer tax rebates for domestic cargo. It will also exempt businesses from value added taxes and consumption taxes if they trade with each other," Zhang said.

Analysts predict the efficiency of logistics will be raised by 20 percent after the port is put into operation.

The first phase of the area covers 3.06 square kilometers and includes warehouses, cold storage facilities, a container terminal and processing and logistics services.

About 200 million yuan (25 million U.S dollars) has been spent on the construction of the area since August 31 last year, when the State Council approved its establishment.

The second phase is expected to be finished by the end of next year, expanding the area to 6.88 square km.

The Dalian port is the seventh largest in China and handled 200million tons of cargo and 30 million containers (TEUs) last year.

The Dayaowan Bonded Harbor Area is the second of its kind in China, following the operation of the Shanghai-based Yangshan Bonded Harbor Area in December 2005. The State Council has also approved a third such area, the Dongjiang Bonded Harbor Area whichis under construction in north China's Tianjin Municipality.

Analysts say the Dayaowan area is expected to increase China's share in the northeast Asian shipping industry, and is also considered a major step towards forming a free trade zone between China, Japan and ROK, which political leaders and business circles of the three countries have repeatedly called for.

Dalian has advantages for a free trade zone in terms of its location and its close economic and cultural links with neighboring countries, said Wang Jun, associate professor on logistics studies with the Dalian Maritime University.

Dalian is one of the most successful Chinese cities in attracting Japanese and ROK businesses -- half of the city's overseas-funded businesses come from Japan and the ROK, more than 5,000 in number, and 40 percent of the city's foreign trade comes from the two countries, local government statistics show.

"The internationalization of Dalian has been largely due to Japan and the ROK, and Dalian has every advantage for building a free trade zone in northeast Asia," said Xia Deren, mayor of Dalian.

"We expect to develop the area of about 50 square km surrounding the Dagushan Peninsula into a free trade zone on the basis of the Dayaowan Bonded Harbor Area," he said.

"But, of course, it has to depend on the country's overall economic layout," he added.