Hong Kong – an eased access to the China market under CEPA

Introduction

On 29 June 2003, Hong Kong and Mainland China entered into the Closer Economic Partnership Arrangement (“CEPA”).  CEPA will come into effect from 1 January 2004.  The purposes of CEPA are threefold:

(1)         to eliminate tariffs and non-tariff barrier on trade in goods between Hong Kong and Mainland China;

(2)         to achieve liberalization of trade in services; and

(3)         to promote trade and investment facilitation.

Trade in Goods

Starting from 1st January 2004, exports to Mainland China of 273 products made in Hong Kong will enjoy zero tariffs and from a January 2006, export to the Mainland China of other products made in Hong Kong will be free to tariffs.     

A product will be qualified as "made in Hong Kong" if it satisfies the rules of origin under CEPA.  These rules will be made jointly by the Hong Kong Government and the Central Government of Mainland China before 1 January 2004.  While different rules of origin will apply to different types of products, the spirit of CEPA is to provide Hong Kong manufacturers with the greatest flexibility for them to maximize the market access opportunities in Mainland China.

The immediate benefit to Hong Kong of the trade in goods is savings in tariffs resulting in price competitiveness for Hong Kong manufacturers.  The longer-term effect of the zero-tariff arrangement is the potential for attracting more high value-added manufacturing activities to be located in Hong Kong, and promoting development of brand products made in Hong Kong to the emerging middle-class consumers in Mainland China.  

Trade in Services

Under CEPA, Mainland China will open 17 services industries to Hong Kong companies. These include: management consultant services, exhibitions and conventions, advertising, accountancy, construction and real estate, medical and dental services, distribution services, logistics services, freight forwarding and agency services, warehousing services, transport services, tourism, audiovisual, legal services, banking, securities and insurance.

To be entitled to the benefits of CEPA, a service company, regardless of the nationality of its investors or shareholders, must have substantive business activity in Hong Kong by fulfilling all of the following criteria:

(1)         the company must be incorporated under the laws of Hong Kong.  The business on the Mainland China that the company intends to engage in must be of the same nature as that the company conduct in Hong Kong;

(2)         the company must be liable to pay profits tax in Hong Kong;

(3)         For most services, the minimum period of the company’s substantial business operation in Hong Kong is three years, but for construction and real estate, banking and insurance, the requirement is five years;

(4)         The company must own or rent business premises in Hong Kong in its operations and the scale of the business premises must be commensurate with the scope and the scale of the business of the company.  Ordinary liaison offices, “mail box companies” cannot enjoy the benefit under CEPA; and

(5)         the company must employ in Hong Kong 50% or more of its total staff.

CEPA measures are therefore meant for all companies, indigenous or foreign, as long as they conduct substantive business in Hong Kong. 

Under China's WTO protocol, the thresholds of entry to the Mainland's services sector are too high to Hong Kong companies in most services industries.  CEPA lowers the thresholds for Hong Kong companies, allowing them to have an "effective" market access to the Mainland's services sector. Foreign companies can also gain market access to Mainland China through Hong Kong by acquiring relevant business in Hong Kong.

Trade and Investment Facilitation

Under CEPA, Hong Kong and Mainland China will cooperate in seven areas to facilitate trade and investment activities.  These areas are: (1) trade and investment promotion, (2)customs clearance facilitation, (3)quarantine and commodities inspection, food safety and quality assurance, (4)e-commerce, (5)transparency in law and regulations, (6)co-operation of small and medium-sized enterprises, and (7)cooperation in Chinese medicine and medical products.

It is hoped that the cooperation in these areas will improve the trade and investment environment in Mainland China. 

Conclusion

The impact of CEPA on the services sector is likely to be greater than that on the manufacturing sector. This is particularly true when services, accounting for only 34% of China's GDP, have become a constraint on China’s economic development.  Contributing 87% to the domestic economy, services are well developed in Hong Kong and will be able to contribute more to the modernization of Mainland China under CEPA.  

CEPA will leverage on the institutional strengths of Hong Kong and the huge market potential on the Mainland under the "one country, two systems" principle for revitalizing the Hong Kong economy and modernization of Mainland China.

CEPA will provide an direct market channel to Mainland China not only to indigenous Hong Kong companies but also to foreign companies in Hong Kong.

For inquiries on CEPA, please contact
Fred Kan (fredkan@fredkan.com),
Wu Wing Kit (wkwu@fredkan.com),
Raymond Ho (raymondho@fredkan.com)
Harry Lin (hlin@fredkan.com)