9 October 2003

Will CEPA help Hong Kong?

In view of the significant impact of the CEPA on Hong Kong's economy, I would like to share with you some of my thoughts on the Agreement as contained in the following article. 

For more than a decade, China has been one of the world's fastest-growing economies in the world. During this period, Hong Kong has been playing a very successful role in the economic development of the Mainland as an intermediary between her and the international markets. Following years of negotiations, China formally became a member of the World Trade Organisation (WTO) in 2001.

The Mainland's accession to the WTO has ushered a new stage of its economic development and a new round of opening up of its economy. Hong Kong can avail of itself of the new opportunities to become a major hub connecting the Mainland and the international markets.

Against this background, the Central Government has agreed to discuss with Hong Kong a Closer Economic Partnership Arrangement under the framework of the WTO. As mentioned by Chief Executive Tung Chee Hwa in his 2003 Policy Address, this arrangement will benefit our services sectors in their expansion into the Mainland market, and open new opportunities for businesses. It will also help to promote Hong Kong's traditional industries and emerging industries, facilitate our economic restructuring and create jobs.

Although Hong Kong is part of China, it is possible for them to enter into the Free Trade Agreement (FTA) as they are separate customs territories. The CEPA was indeed the first ever FTA entered into by either the Mainland or Hong Kong under the WTO framework.

After rounds of high level consultations in the past year, the Mainland/Hong Kong Closer Economic Partnership Arrangement (CEPA) was signed in Hong Kong on 29 June 2003. As you may recall, its signing was witnessed by Premier Wen Jiabao and the Chief Executive Tung Chee Hwa. The conclusion of the CEPA was a new milestone in the economic cooperation and integration between the Mainland and Hong Kong. 

Exactly three months later, Vice Minister of Commerce An Min and Financial Secretary Henry Tang Ying-yen signed the six CEPA Annexe. The Annexes, which set out the implementation details of CEPA, cover the following areas: arrangements for implementation of zero tariff for trade in goods, rules of origin for trade in goods, procedures for the issuing and verification of certificates of origin, specific commitments on liberalisation of trade in services, trade and investment facilitation and the detailed definition of "Service Supplier" and related requirements.

The CEPA covers three major areas, namely, trade in goods, trade in services and trade and investment facilitation. On trade in goods, a total of 273 Mainland product codes meeting CEPA rules of origin will enjoy zero tariff starting from January 1, 2004. For other products, the Mainland will apply zero tariff at the latest by January 1, 2006 upon applications by local manufacturers and upon CEPA rules of origin being agreed and met. 

For 70% of the 273 Mainland product codes covered in the initial phase, Hong Kong's existing process-based origin rules will be adopted as the CEPA origin rules. For the rest, either the "Change in Tariff Heading" approach or the "30% value-added" requirement will be used. 

On trade in services, a total of 17 sectors was originally allowed to benefit in terms of additional market access or removal of specific restrictions in the Mainland market. They include management consultant services, exhibitions and conventions, advertising, accounting services, medical and dental services, real estate and construction services, distribution services, logistics, freight forwarding agency services, storage and warehousing services, transport services, tourism, audiovisual services, legal services, banking, securities and insurance. 

Besides, the CEPA annexes later signed added telecommunications to the original 17 service sectors. Telecommunications companies have access to five value-added services, starting this month, three months ahead of other service sectors. In addition, rules on equity participation in Mainland insurance companies will be relaxed.

In return, Hong Kong will undertake to continue to apply zero tariff for Mainland products. There will be no new or additional discriminatory measures introduced against services and service suppliers of the Mainland either. 

On trade and investment facilitation, both sides agreed on promoting co-operation in seven areas, namely, customs clearance, quarantine and inspection of commodities, quality assurance and food safety, small and medium-sized enterprises, Chinese medicine and medical products, electronic commerce, trade and investment promotion and transparency in law and regulations. Both sides agreed further on the Annexes that new areas of trade and investment facilitation might be added in future.

As regards the definition of "Hong Kong Service Suppliers", generally speaking, "juridical persons" include companies, partnerships, sole proprietorships. "Juridical persons" and "natural persons" of Hong Kong will be able to enjoy preferential treatment provided that they fulfil the definition and related requirements of Hong Kong service suppliers stipulated in the relevant annex of CEPA.

Unless otherwise specified in CEPA, a "natural person" means a Hong Kong permanent resident, whereas a "juridical person" means any legal entity duly constituted or otherwise organised under the applicable laws of Hong Kong and which has engaged in substantive business operations in Hong Kong for three to five years.

It is worth mentioning that foreign companies acquiring a Hong Kong firm will have to wait a year before qualifying to enter the Mainland market under the definitions.

Undoubtedly, the CEPA is a real boost to the economy of Hong Kong. It will definitely provide a new platform for local businesses to tap into the huge Mainland market. The agreement will also give our enterprises earlier access to the Mainland market and better market platform and opportunities. Indeed, many foreign companies are proactively seeking for new ways to take advantages of this new platform. This renewed interest in Hong Kong will definitely help attract more investment into Hong Kong. 

The closer economic cooperation and integration between the Mainland and Hong Kong also provide new opportunities for Hong Kong's manufacturing and services sectors. In the past, the manufacturing sector played a very important role in Hong Kong. Currently, the proportion of output value in our GDP represented by manufacturing dropped to 5.2% while that of services rose to more than 86%. Given our strengths in design, quality management, branding and goodwill, the tariff free treatment to be provided by CEPA will provide a better environment to attract manufacturers of high value-added products to establish their plants in Hong Kong. Indeed, there is considerable demand in the Mainland for brand-name products manufactured in Hong Kong.

As mentioned earlier, a total of 18 service sectors will also benefit from the liberalisation in market access to the Mainland. As a professional engineer, I am more familiar with the construction sector which is among the 18 service sectors. Hence, I would like to use the sector to illustrate how Hong Kong service sectors will benefit from the CEPA. 

Until the implementation of the CEPA, Hong Kong engineering consultancies are still subject to a number of restrictions on market access. They have to establish joint ventures with Mainland companies only. Setting up of 100% owned enterprises will be allowed 5 years after China's accession to the WTO.

Under CEPA, market access for Hong Kong engineering consultancies is relaxed. First, Hong Kong engineering consultancies are permitted to set up wholly-owned enterprises starting from 1 January 2004, 3 years ahead of China's WTO timetable. Second, they can undertake work in accordance with the categories of the qualification permits obtained. Third, their scope of work permitted will be the same as Mainland enterprises. Fourth, they are also allowed to acquire 100% Mainland engineering consulting enterprises. Fifth, the performance of both the enterprises in Hong Kong and those set up by Hong Kong companies in the Mainland are taken into account in assessing the qualification of the construction enterprises in the Mainland. 

With regard to market access for Hong Kong contractors, they are currently subject to a number of restrictions on market access too. Like foreign owned companies, Hong Kong contractors can undertake 4 types of projects only: (1) 100% financed by foreign investment and/or grants; (2) 100% financed by loan of international financial institutions and awarded through international tendering according to the terms of loans; (3) Chinese-foreign joint projects with foreign investment not less than 50% and (4) Chinese-foreign joint projects with foreign investment less than 50% but technically difficult to be implemented by Mainland companies. 

With the conclusion of the CEPA, Hong Kong invested construction enterprises in the Mainland are exempted from the foreign investment restrictions when undertaking Chinese-foreign joint construction projects. They are permitted to wholly acquire construction enterprises in the Mainland. They only have to follow the same procedures/rules as Mainland enterprises in application of qualification or work permits. Performance of mother company in Hong Kong is also taken into account in assessing qualification applications, except staff. Once these enterprises have acquired the quality certification, they are permitted to bid for construction projects in all parts of the Mainland. 

In view of the slacking property market in Hong Kong and the HKSAR Government's tight spending control on new public works projects, Hong Kong construction enterprises must look elsewhere for new opportunities. China Mainland with its booming economy becomes a natural choice. However, Hong Kong companies were subject to a number of restrictions in the past. The CEPA has now cleared the way for them and will give them a head start over its overseas counterparts in tapping into the vast Mainland market. 

Indeed, Hong Kong enterprises in the construction industry have much to offer. Integrated services from project inception to delivery, including financing, legal services etc can be provided. With years of experience in large infrastructure projects, local construction companies have both access to the latest construction technologies and experience in international practice. Their performance in project management and commitment in quality assurance, time and cost control are particularly assuring. 

Of course, the benefits of the CEPA to different sectors will vary. However, the CEPA does open up new frontiers in the Mainland markets for Hong Kong enterprises. 

Apart from manufacturing and service sectors, trade and investment facilitation constitutes an integrated part of the CEPA. Better cooperation on customs clearance, a higher degree of transparency on laws and regulations, streamlined licensing and accreditation regime must be in place to strengthen the trade flow between Hong Kong and the Mainland. Indeed, measures to implement the agreement are under way. It was recently reported in the press that the computer systems of Hong Kong and Mainland customs will be linked next year. The link-up means the two customs departments will be able to access each other's information relating to imports and exports. 

Given the gloomy outlook of Hong Kong shortly after the SARS crisis was over, the conclusion of CEPA is really a shot in the arm to Hong Kong. However, we must not presume that what lies ahead of us is just plain sailing and we must take note of the possible problems.

First, the mutual recognition of professional qualifications between the Mainland and Hong Kong is yet to be established. There are stringent qualification requirements in the Mainland. Currently, professionals in Hong Kong cannot take the full advantages provided by the CEPA. 

In fact, negotiations continue between professional bodies of Hong Kong and their Mainland counterparts. I truly believe that the problem can be resolved in a satisfactory manner to both sides. In the meantime, professionals in Hong Kong should lose no time in equipping themselves to face the challenges in the Mainland markets.

Second, Hong Kong enterprises, particularly those new-comers to Mainland markets may not be too familiar with their regulating requirements. Complicated administrative procedures in the Mainland will not help either. Moreover, implementation of rules varies in provinces. But with good preparations and research, they are the kind of problems that can be surmounted. It is also important for Hong Kong companies to establish a good network in the Mainland to obtain updated market information quickly.

Many people of Hong Kong said that CEPA is a big gift by the Central Government. Nevertheless, I agree more with the observation of the Secretary for Commerce, Industry and Technology, John Tsang that “CEPA provides an additional tool….. Whether companies can seize the opportunity depends on their own efforts”. And we must act now and make the best use of the agreement.

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