Summary

• 29 liberalisation measures spanning 20 service sectors
• 2 new business sectors added, with 4 new service areas opened under the individually-owned stores scheme
• 9 Guangdong pilot measures under CEPA service sectors
• Products with CEPA origin rules expanded by 28 to 1,565

In May 2009, the Central and Hong Kong governments agreed on the package of liberalisation measures under Supplement VI to the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA). ¹ Building on the liberalisation of 18 existing services sectors, while opening two new sectors in respect of rail transport as well as research and development services, Supplement VI to CEPA spans 20 services sectors and introduces a total of 29 service liberalisation measures. These new CEPA measures are to take effect from October 2009.

In a fashion consistent with Supplement V to CEPA,² which pioneered the notion of Guangdong Province adopting a variety of early and pilot implementation measures, these Guangdong initiatives continue to feature prominently in the latest package under Supplement VI to CEPA. A total of nine Guangdong pilot measures are to be effective from October 2009. Evidently, these measures complement the policy direction enshrined in the Outline of the Plan for the Reform and Development of the Pearl River Delta (2008-2020), which calls for intensive cooperation with Hong Kong,³ and are conducive to higher service standards in Guangdong.

One of the latest Guangdong pilot measures that will particularly help Hong Kong banks, compared with other mainland-based foreign banks, is the permission to establish cross-location sub-branches in Guangdong Province. This measure will surely expedite the setting up of sub-branches of Hong Kong banks within Guangdong Province by negating the need for first establishing a branch within the administrative area of the same municipality, thus lowering the capital requirement in adding sub-branches and more expeditiously widening the service coverage of Hong Kong banks in Guangdong.

Apart from the banking sector, Hong Kong’s legal sector will also be helped by easier conditions under which mainland law firms in Guangdong can enter into association arrangements with Hong Kong law firms with mainland presence. The rest of Guangdong pilot measures cover seven sectors, namely, convention and exhibition, public utility, telecommunications, securities, maritime transport and rail transport sectors.

By removing restrictions as well as improving the access conditions, these Guangdong pilot measures are expected to deepen cooperation of the service industry between Hong Kong and Guangdong, and offer unprecedented opportunities for Hong Kong services suppliers (HKSS) in the Guangdong market. For example, HKSS can use Class-B ports of Guangdong that are not open to other foreign companies; construct and operate city gas networks in Guangdong cities with a population below one million without being subject to shareholding restrictions; and submit applications of holding exhibitions exceeding 1,000 sqm in Guangdong to provincial authorities for approval.

CEPA has been an important mechanism that the Central and Hong Kong governments have employed to enhance financial cooperation. Under Supplement VI to CEPA, the Chinese mainland and Hong Kong agreed to study the introduction on the mainland of open-end index-tracking exchange-traded funds (ETFs) backed by Hong Kong-listed stocks. This will in future bolster the demand for Hong Kong stocks and give Hong Kong a key role in structuring related ETF products. Under Supplement III to CEPA, the Central government agreed to earnestly study the scope for further expansion of RMB business in Hong Kong, after allowing Hong Kong to become the first city outside the mainland to conduct personal RMB business in 2004, alongside CEPA’s implementation. After the first batch of RMB bonds was issued in Hong Kong in 2007, the green light was given in April 2009 to allow Hong Kong to settle in RMB its trade with selected mainland cities, such as Shenzhen, Dongguan and Guangzhou, a measure above and beyond what the Central government was initially committed to studying in 2006.

On the other hand, Hong Kong permanent residents with Chinese citizenship are permitted under CEPA to operate individually owned stores throughout the country. Thanks to Supplement VI to CEPA, the allowable business scope is widened to include four new services, namely: solo clinic, economic and trade consulting, company management consulting and some wholesale services. These new scopes will further stimulate the entrepreneurship of Hong Kong residents.

One salient feature of CEPA is its being a “live agreement”, with the Central government accustomed to incorporating into CEPA some liberalisation measures offered to other free-trade agreement partners, yet not reflected in previous phases of CEPA. Under Supplement VI to CEPA, three liberalisation commitments made to Pakistan are incorporated, following inclusions of commitments to Chile and ASEAN in two preceding supplements.

The liberalisation initiatives under Supplement VI to CEPA, including the  Guangdong pilot measures, will not only offer new business opportunities on the mainland for Hong Kong service suppliers and give them a first-mover advantage, but also further promote cooperation between Guangdong and Hong Kong, fostering closer economic integration of the two places.

Tariff-free access to the Chinese mainland has been granted since January 2006 to Hong Kong-made products which comply with the agreed CEPA origin rules. Through January 2004 to June 2009, the number of goods eligible for CEPA’s tariff-free treatment expanded from 273 to 1,537. From July 2009, the zero-tariff list has been extended by 28 to 1,565. For the new items, the applicable tariff rates which would otherwise apply range from 4% to 17.5%.


Trade in Services

The latest service liberalisation measures under Supplement VI to CEPA, the seventh phase of CEPA package jointly announced by the Central and Hong Kong governments, was signed in May 2009 for implementation in October 2009, which will be three months ahead of the usual implementation time for other phases of CEPA measures.

A total of 29 liberalisation measures covering 20 services sectors (18 existing sectors and two new sectors) are provided under Supplement VI to CEPA. As a result, the total number of service sectors covered by CEPA has been expanded from 40 currently in force, to 42. Since the implementation in 2004, some 250 service liberalisation measures have been introduced under CEPA.

Thanks to the service liberalisation measures under Supplement VI, the Chinese mainland has specifically granted relaxed market access conditions in the following services sectors, namely: air transport, audio-visual, banking, construction, convention and exhibitions, cultural, distribution, individually owned stores, job intermediary, legal, maritime transport, medical, printing, public utility, rail transport, real estate, research and development, securities, telecommunications, and tourism.

Geographic proximity and strong business ties between Guangdong Province and Hong Kong have always been the underlying force to drive and foster closer economic cooperation between the two places. In December 2008, China’s National Development and Reform Commission announced the “Outline of the Plan for the Reform and Development of the Pearl River Delta (2008-2020)”.  This visionary blueprint, giving the PRD greater autonomy in its reforms and economic restructuring programme, stresses the need for intensive cooperation between Guangdong and Hong Kong.

First and foremost, the Outline emphasises the use of CEPA’s pilot measures (先行先試) in further liberalising the PRD and cooperating with Hong Kong. Other key areas under the Outline include strengthening cooperation with the financial industries of Hong Kong, supporting Hong Kong as an international financial centre, jointly developing international logistics services, as well as increasing the PRD’s convergence with Hong Kong in transportation and information networks.

Under Supplement VI to CEPA, there are a total of nine liberalisation measures for early and pilot implementation in Guangdong, covering the following eight sectors: banking, convention and exhibition, legal, public utility, telecommunications, securities, maritime transport and rail transport. It is understood that if the Guangdong pilot measures were to prove effective, they would be extended to other mainland provinces. This notion also sits well with the policy direction as set out in the Outline for PRD development, which envisages the PRD to be developed into a leading economic engine of China to lead the development of surrounding areas as well as the Pan-PRD region.⁴

Financial Liberalisation and Cooperation under CEPA

CEPA has been an important mechanism that the Central and Hong Kong governments have adopted to enhance financial cooperation between the mainland and Hong Kong. In addition to introducing liberalisation measures for enhancing the access of Hong Kong service suppliers (HKSS) to the mainland’s financial sector, various initiatives have been added under the CEPA arrangements to promote the participation of mainland financial institutions in Hong Kong. 

Banking Services

Hong Kong’s banking sector has been a big beneficiary of CEPA liberalisation measures. One key benefit of CEPA is the substantial reduction of entry thresholds, so that smaller Hong Kong banks can gain better and more cost-effective access to the mainland market. For example, the minimum asset requirement for setting up a branch or body corporate, or acquiring a shareholding of a mainland bank, is uniformly set at US$6 billion, which is lower than that would otherwise apply to non-CEPA foreign banks (comparing market access for HKSS and other foreign enterprises without CEPA benefits).

Under Supplement VI to CEPA, the business cost of setting up sub-branches in Guangdong will be lowered as per the new Guangdong pilot measures introduced in 2009, whereby Guangdong-based branches set up either by a Hong Kong bank, or the wholly foreign-funded bank established on the mainland by a Hong Kong bank, can set up "cross-location" sub-branches within the province. In other words, a sub-branch can be registered in an administrative area within Guangdong without a branch being first established in the same administrative area.

Currently, the capital requirement for a foreign bank to set up a branch in Guangdong is RMB100 million, whereas that for establishing a sub-branch is only RMB10 million. In other words, it would take only 1/10th of the capital requirement for establishing a sub-branch. This new CEPA provision, which is not applicable even to mainland banks, will enable Hong Kong banks to expeditiously expand their business network. Currently, there are 13 Hong Kong banks operating in Guangdong,⁵ all of which will stand to benefit from this latest CEPA measure. 

Service standards of Hong Kong banks are regarded as excellent in the region. Making the Guangdong market more open to Hong Kong banks, and allowing the latter to expand their business network more expeditiously in the province, will contribute to better banking services provided to Guangdong-based companies, many of which are from Hong Kong.

After allowing Hong Kong to be the first city outside the Chinese mainland to conduct personal RMB business (covering RMB deposits, remittances, exchanges, and cards) on a pilot basis in 2004, when CEPA was first implemented, the Central government indicated, as part of the new initiatives under Supplement III to CEPA, that it would earnestly study the scope for further expansion of RMB business in Hong Kong, concerning the issue of RMB bonds by the mainland’s financial institutions in Hong Kong, and settlement of Hong Kong’s direct imports from the mainland in RMB.

In essence, the Central government has agreed on measures beyond what it was initially committed to studying in 2006. The first batch of RMB bond issue in Hong Kong was debuted in June 2007, followed by six other RMB bond issues, with a combined issuance total of US$22 billion. Following the RMB bond issues by mainland financial institutions, the Central government also agreed in principle in December 2008 to let eligible Hong Kong enterprises issue RMB-denominated bonds in Hong Kong. Recently, the Central government has also announced to allow mainland branches of Hong Kong banks to issue RMB bonds in Hong Kong. Hong Kong banks which have proceeded to issue RMB bonds include HSBC, Bank of East Asia, Bank of China and Standard Chartered.

Thus far, the operation of all these RMB services in Hong Kong has proved quite successful, as reflected by a steady rise in RMB deposits, smooth transactions and a stable exchange rate. As of April 2009, RMB deposit in Hong Kong totalled RMB 53 billion, with about 1.18 million RMB accounts held with 39 licensed banks engaged in RMB business in Hong Kong.

Similarly, instead of just promising that Hong Kong importers could settle their “direct imports” from the Chinese mainland in RMB, the Central government gave the green light in April 2009 to allow Hong Kong to settle in RMB its “trade with five selected mainland cities”, namely, Dongguan, Guangzhou, Shanghai, Shenzhen and Zhuhai.⁶ Needless to say, Guangdong accounts for the lion’s share of mainland trade with Hong Kong. The new CEPA initiative to widen the scope from conducting personal business to corporate business marks a big step to open up the RMB market for Hong Kong. It will further underpin Hong Kong as an international financial centre and its role as an important testing platform for realising the RMB’s internationalisation and full convertibility.

To enhance financial cooperation, the Central government agreed under Supplement IV to CEPA to give priority to Hong Kong banks’ applications to open branches in Guangdong as well as the central western and north eastern regions of the mainland. In this connection, the permission to set up “cross-location" sub-branches under Supplement VI to CEPA lays testimony to the Chinese mainland giving priority to Hong Kong banks’ operations in Guangdong.

The Central government also promised under Supplement IV to CEPA that it would actively support mainland banks in setting up subsidiary operations in Hong Kong, enabling mainland banks to make use of the international financial platform of Hong Kong to develop their banking business outside the mainland. On the other hand, Hong Kong banks are encouraged to tap the potential of the mainland’s rural banking market, also helping rural development. While enhancing Hong Kong banks’ access to these places, these measures will help facilitate financial development in these targeted mainland markets.

Also under the auspices of CEPA in respect of financial cooperation, the Chinese mainland has undertaken to support its banks in developing network and business activities in Hong Kong through acquisition, re-locating their international treasury and forex trading centres to Hong Kong, listing of eligible mainland financial companies in Hong Kong, and full utilisation of Hong Kong’s financial intermediaries in reforming and restructuring the mainland’s financial sector. Many mainland financial institutions have listed or incorporated their subsidiaries in Hong Kong since the inception of CEPA, and some of the initial public offers (IPOs) ranked among the biggest in the world (e.g. the IPO by Industrial and Commercial Bank of China (ICBC) in late 2006).⁷

As can be seen from the table below, CEPA provides preferential access for Hong Kong service suppliers (HKSS), effectively lowering their entry threshold for accessing the mainland market compared with other foreign companies (whose access conditions are subject to the mainland regulations as depicted in the left-hand column of the table below, under Current Scope of Access. Therefore, CEPA is certainly WTO-plus).

Securities, Futures and Fund Management Services

In addition to the banking sector, financial cooperation between Hong Kong and the Chinese mainland under CEPA also covers the securities, futures and fund management sector. CEPA creates a win-win situation for the industry on both sides by bringing the markets of both jurisdictions closer together.

Under Supplement VI to CEPA, qualified Hong Kong and mainland securities companies which satisfy the requirements for establishing subsidiaries can set up joint-venture securities investment advisory companies in Guangdong Province, focusing specifically on securities investment advisory services. Hong Kong securities companies can hold up to one-third of the total shareholding of the joint ventures. This Guangdong pilot measure, allowing Hong Kong intermediaries to be the first-movers in a fast-growing market, builds on the CEPA liberalisation provision which lets Hong Kong financial intermediaries set up minority joint-venture futures brokerage firms on the Chinese mainland.

To reinforce financial cooperation, the Chinese mainland and Hong Kong also agreed under Supplement VI to CEPA to study the introduction on the mainland of an open-end, index-tracking exchange-traded fund (ETF) backed by portfolios of Hong Kong-listed stocks. Hong Kong is Asia’s largest ETF centre outside Japan and can play a key role in structuring related ETF products. Industry operators in Hong Kong welcomed this ETF proposal, considering it a positive measure to stimulate the demand for Hong Kong-listed stocks in future to boost stock market turnover.

Although the ETF proposal is not comparable to the scheme of “Direct Foreign Portfolio Investments by Mainland Individuals” announced in 2007, it will be a welcome alternative for mainland investors to diversify their investment in Hong Kong-listed stocks, while facilitating the orderly or controlled outflow of mainland capital, just like the scheme of “Qualified Domestic Institutional Investor” (QDII).

Thanks to CEPA, some qualified mainland securities, futures and fund management companies are allowed to establish subsidiaries in Hong Kong. Some of these mainland players have succeeded in setting up their Hong Kong subsidiaries, marking the entry into a market that is closely integrated with the global financial market. On the other hand, this has helped contribute to broadening the intermediary base of Hong Kong and strengthening Hong Kong's role as an international financial centre.

Generally speaking, Hong Kong’s securities and futures sector may benefit from new business opportunities in the mainland market through CEPA, while injecting new impetus into the future development of the mainland market. Besides, as the securities and futures markets of the two places expand, there will be growing employment opportunities for financial professionals, thanks to the mutual recognition of the professional qualifications and related examination arrangements, which greatly increase the flexibility of securities professionals integrating into the markets of both sides.⁸

Legal Services

The Chinese mainland is committed to opening its legal market to Hong Kong above and beyond what is allowed for law firms and lawyers from other places. Currently, foreign law firms on the mainland are not allowed to practise Chinese law or operate in association with mainland law firms.

Successive CEPA liberalisation packages have not only brought about association possibilities between mainland and Hong Kong law firms, but also progressively improved on the conditions of association arrangements. For instance, there is no geographic restriction under CEPA on the mainland law firm in association with Hong Kong law firms, thus offering the latter greater flexibility of association arrangements with mainland law firms.

Under Supplement VI to CEPA, as one of the Guangdong pilot measures, the association arrangements are further streamlined. Hong Kong law firms with representative offices on the mainland, from October 2009, can operate in association with those mainland law firms in Guangdong that have been established for one year or more, with at least one person who established the firm having been in legal practice for no less than five years. This would certainly increase the flexibility for Hong Kong law firms to team up in association arrangements with their Guangdong counterparts.

In addition, Supplement VI to CEPA also makes it easier for Hong Kong lawyers, be they solicitors or barristers, to practise as lawyers on the mainland. The current CEPA provision stipulates that Hong Kong legal practitioners may apply to practice as lawyers on the mainland, after having passed the National Judicial Examination and undergone a one-year internship with a mainland law firm (the internship of which can be carried out in its Hong Kong-based branch). In contrast, Hong Kong lawyers with no less than five years of legal practice can, from October 2009, apply to practise as lawyers on the mainland, after having acquired the mainland’s legal professional qualifications, and received intensive training of no less than a month offered by mainland lawyers’ associations in accordance with relevant mainland rules.

With the newly added flexibility accorded under Supplement VI to CEPA, Hong Kong law firms and lawyers will be able to make effective use of their time and resources, while tapping the legal services market and maximising business opportunities on the mainland.

Medical Services

Hong Kong’s medical service standards are highly regarded in the region, and many people from the Chinese mainland, especially those in Guangdong, travel to Hong Kong to receive premier medical services. In recognition of Hong Kong’s edge in medical services, the Hong Kong government recently announced its enabling plans to develop medical services as one of the six new engines for economic growth of Hong Kong.¹⁰

In view of the unfulfilled demand for quality medical services on the mainland, provision of Hong Kong’s quality medical services via Hong Kong-run hospitals and clinics and Hong Kong-trained doctors will help improve services by enhancing competition in the mainland’s medical services market.

The Outline of the Plan for the Reform and Development of the Pearl River Delta (2008-2020) states clearly that the PRD is to elevate the levels of public health and medical services, including more vigorous development of the medical service system in rural and urban areas, so that all residents in the PRD region will be able to enjoy high-quality medical and health services by 2020. Further opening up the medical service market in Guangdong for Hong Kong medical practitioners will surely contribute to the cause embodied in the PRD development blueprint. 

As one of the Guangdong pilot measures implemented from January 2009, HKSS investing in outpatient clinics in Guangdong Province are no longer subject to any minimum investment amount or restriction on the ratio of capital investment for setting up outpatient clinics. Besides, project establishment and approval procedures are now handled by Guangdong’s health administrative department.

On the heels of permitting HKSS to operate outpatient clinics in Guangdong as either wholly-owned or joint-venture units under much relaxed investment conditions, Supplement VI to CEPA explicitly states that HKSS can, from October 2009, set up medical institutions offering medical and dental services on the mainland in either equity or contractual joint ventures, with equity ratio up to 70%.

In addition to previous measures to allow eligible Hong Kong permanent residents to sit the mainland’s qualification examination in the medical and dental areas, Supplement VI to CEPA also provides opportunities for Hong Kong’s licensed pharmacists, as they will be allowed to sit the mainland’s licensed pharmacist qualification examination under the Provisional Regulations on Licensed Pharmacists Qualification System. Upon passing the examination and receiving the related qualification certificate, they can apply to register in accordance with the mainland’s Provisional Mechanism for Licensed Pharmacists Registration Management and related regulations.

In light of the very strong domestic demand for pharmacist services in Hong Kong, and a small number of local pharmacists graduating each year, it will take time to see how effective the new CEPA measures will become in enticing Hong Kong pharmacists into the mainland market. Yet, one strong advantage of CEPA is that adaptive changes are periodically introduced to enhance the preferential access treatment. For example, apart from allowing medical practitioners to sit the concerned mainland qualification examinations, they can apply to obtain the mainland’s “medical practitioner’s qualification certificate” through accreditation.

Audio-visual Services

The existing CEPA provisions include significant market liberalisation measures for Hong Kong’s audio-visual services industry, including cinema operations, production of both movies and television programmes, as well as the distribution of audio-visual products.

Under Supplement VI to CEPA, HKSS in the provision of distribution services of videos and sound recording (including motion-picture products) will be given greater flexibility in equity ownership on the mainland. From October 2009, HKSS can form wholly-owned operations in distributing video and sound-recording products, compared to forming joint ventures with equity ownership that is capped currently at 70%.

In addition, HKSS in the audio-visual industry will also be allowed under Supplement VI to CEPA to engage in post-production of mainland-produced movies as well as mainland-Hong Kong co-productions, subject to approval by the State Administration of Radio, Film and Television (SARFT) on applications initiated by the principal production entity on the mainland. In recent years, the Chinese mainland has screened over 300 movies each year, including many Hong Kong-mainland co-productions. This latest CEPA measure will further widen the service spectrum of HKSS in relation to the value-chain of the mainland’s audio-visual sector, thus creating additional business opportunities.

Cultural Services

HKSS are granted preferential access to develop or host online video games on the Chinese mainland, which fall under the mainland’s Internet cultural business sector that is not open to other foreign-invested enterprises (FIEs). HKSS are allowed to form minority-owned joint ventures, though it still appears to be quite a task to obtain all the required licences for engaging in Internet cultural business to develop or operate online game business on the mainland.¹¹  Besides, the registered capital for engaging in online game products is set at more than RMB 10 million.

In comparison, Hong Kong online game developers selling their products as imported online games to qualified Internal cultural business companies on the mainland appears a quicker way to tap the mainland market. Nonetheless, industry sources noted that it would still take months for the responsible mainland authorities to complete examination of imported online game products. Therefore, the new provision under Supplement VI to CEPA is a timely answer to such concern, as it sets out that the time limit for completion of the examination of contents of imported online game products developed by Hong Kong, including examination conducted by experts, will be two months, subject to provision of full supporting documents.


Construction Professional Services

Currently, China allows foreign-owned construction and engineering design enterprises to set up wholly-owned or joint-venture enterprises on the mainland. Nonetheless, there are strict requirements on the proportions of Chinese-qualified architects, engineers and technical staff with relevant design experience. Besides, for setting up joint ventures, there is also the requirement regarding the proportion of capital contributed by the partners. In comparison, CEPA offers more relaxed access conditions for HKSS, for example, by allowing them to employ mainland registered professionals to fulfil the staffing requirements, and offering them enhanced flexibility in partnering with their mainland counterparts in terms of capital contribution.

Additionally, CEPA also takes into account the impact on HKSS that might otherwise arise resulting from the amendment in regulations on the mainland’s construction sector, which is rapidly evolving in light of the country’s huge urbanisation drive and infrastructure boom. A case in point is the Ministry of Construction’s (MoC) ongoing amendment of the qualification assessment of construction enterprises on the mainland.

Under Supplement VI to CEPA, the Chinese mainland is committed to continuing the recognition of Hong Kong project managers employed by Hong Kong-invested construction enterprises in relation to the qualification assessment of the latter, both during the amendment and after the promulgation of the new “Standards for the Qualifications of Construction Enterprises”. Thanks to this new CEPA provision, Hong Kong project managers can expect no change in their role in projects involved or commenced before promulgation of the new standards; and after the promulgation, until the completion of the concerned projects.

Real Estate Services

Real estate services cover three major sectors, namely property agency, property management and surveying (valuation, building surveying and land surveying). Real estate services are a relatively new industry on the Chinese mainland. Foreign companies, particularly those from Hong Kong, have been active players with well recognised service standards, while local companies are gradually emerging.

By expanding the business scope to include real estate project services, and forming wholly-owned operations to provide such services, HKSS can enter the mainland market more effectively with better and more clearly defined work scope, while helping contribute to the modernisation of real estate services on the Chinese mainland.

Convention and Exhibition Services

China opened up its local market of convention and exhibition services to foreign-invested companies in 2004, but they are prohibited from organising exhibitions in the overseas or outbound market. Under CEPA, the mainland agrees to open up its outbound exhibition market to Hong Kong companies, making it a rather significant liberalisation endeavour.

Since 2007, exhibition companies set up on the Chinese mainland by HKSS have been permitted to tap the outbound exhibition market. Initially, they were only allowed to organise outbound exhibitions in Hong Kong and Macau, either on a wholly-owned or joint-venture basis. HKSS were then allowed to organise overseas exhibitions on a pilot basis for enterprises registered in Guangdong and Shanghai. Geographic coverage has been expanded to Beijing, Tianjin, Chongqing and Zhejiang since January 2009. With Supplement VI to CEPA, places like Guangxi, Hunan, Hainan, Fujian, Jiangxi, Yunnan, Guizhou and Sichuan will be added effective from October 2009. Evidently, respective CEPA phases have widely opened up the outbound market for Hong Kong-invested exhibition companies, covering essentially nearly all of the mainland’s key manufacturing bases, where there is robust demand for overseas exhibitions to showcase products of those venture-out enterprises and brand aspirants.

As a trade fair capital, Hong Kong has attracted many international players to establish their presence in Hong Kong given CEPA’s advantages, yet many of Hong Kong’s exhibition companies are smaller establishments. The CEPA provisions for organising mainland exhibitions on a “cross-border supply” basis should help smaller HKSS to devise their mainland exhibition strategies more cost-effectively. Under Supplement VI to CEPA, Beijing, Tianjin, Chongqing, Zhejiang, Jiangsu and Fujian will be added from October 2009 to the existing list of Guangdong and Shanghai.

As one of the Guangdong pilot measures, HKSS can expect to see expedited approval for their applications for organising foreign economic and technical exhibitions in Guangdong with an exhibition area exceeding 1,000 sqm, as the approval will be entrusted to Guangdong authorities.

Tourism and Travel-Related Services

The Chinese mainland has opened up its outbound tourism market to Hong Kong travel agencies as a result of CEPA. Wholly-owned or joint-venture travel agencies set up by HKSS in places like Guangdong, Guangxi, Hunan, Hainan, Fujian, Jiangxi, Yunnan, Guizhou and Sichuan are allowed under CEPA to organise group tours to Hong Kong and Macau for permanent residents of those places.

Complementing the existing CEPA provisions on group tours to Hong Kong and allowing Hong Kong permanent residents with Chinese citizenship to qualify as mainland tour guides, Supplement VI to CEPA states that mainland international travel agents, as well as Hong Kong-invested travel agents which operate group tours to Hong Kong/Macau can, from October 2009, employ Hong Kong tour guides who have obtained the mainland’s outbound tour guide credential.

As more and more mainlander tourists have taken international travels, much of which is long-haul travel, there will be additional opportunities created not just for Hong Kong guides who have a good command of foreign languages and ample experiences of escorting international tours, but also Hong Kong travel agencies, which are renowned for organising international tours. On the other hand, the CEPA provisions to ease the entry of HKSS into the mainland market, including the Guangdong pilot measure on approving Hong Kong-invested travel companies in the province, will help modernise the mainland’s tourism sector through the introduction of quality Hong Kong travel agencies and tourist guides.

Hong Kong’s tourism sector will also benefit from an expected increase in mainland tourists who enter and remain in Hong Kong in transit during the tour to and from Taiwan. As a result of this new CEPA arrangement under Supplement VI, mainland travel agents authorised to operate group tours to Taiwan can organise group tours for mainland residents who hold valid exit/entry permit for travelling to and from Taiwan, as well as travel endorsement (type L) to enter and remain in Hong Kong in transit. Hong Kong’s tourist sector is expected to capitalise on this new CEPA measure by developing multi-destination tour products. Hong Kong’s retail and hotel sectors will also likely see higher spending with CEPA bringing in this new source of mainland tourists.

Transport Services

Air Transport Sales Agency Services

Hong Kong companies providing air transport sales agency services benefit from CEPA’s enhanced access to the mainland market. Currently, HKSS can set up wholly-owned, equity joint-venture or contractual joint-venture units to provide air transport sales agency services on the mainland to cover both domestic routes as well as international routes (including Hong Kong, Macau and Taiwan), that is, Type I and Type II air passenger and freight sales agency services. The registered capital requirement is the same as that for mainland enterprises. 

As stated in Qualification Procedures for China Civil Aviation Transportation Agency Services issued by the China Air Transport Association (CATA), the applications for Type I and Type II air transport sales agencies on the mainland, however, are required to go through substantive initial vetting by CATA’s local representative offices. Thanks to CEPA, HKSS can submit their application materials directly to CATA for examination, whether in the form of wholly-owned enterprises, equity or contractual joint ventures.

In their applications to establish air transport sales agencies on the mainland, HKSS are currently required to submit an economic guarantee provided by mainland-incorporated banks, including both domestic and foreign banks on the mainland, or guarantee companies recommended by CATA (provided that the registered capital of the China-capital enterprise is not lower than that of the Hong Kong enterprise being guaranteed). Under Supplement VI to CEPA, HKSS can submit economic guarantee by Hong Kong banks to apply for setting up of an air transport agency, and supplement it with the economic guarantee provided by mainland-incorporated banks or guarantee companies recommended by the CATA within a specified period of time after the applications have been approved by the mainland.

Under this arrangement, HKSS access to the mainland will be further facilitated from October 2009, with the economic guarantee provided by Hong Kong banks allowed in an initial application to CATA. Since Hong Kong banks have better knowledge of HKSS business operations, it would therefore be easier for HKSS to obtain the necessary economic guarantee for the application.

Maritime Transport Services

CEPA allows HKSS to have greater flexibility in providing many types of maritime services, as they are allowed to form wholly-owned units compared with the more restrictive equity-ownership conditions applying to other foreign companies.

China’s Regulations on the Administration of Foreign Investment in International Marine Transportation state that only minority-owned foreign joint ventures are allowed to provide services that include the following: international shipping agency;  international ship management;  international shipping; maritime cargo-handling services; customs clearance services for maritime transport; container station and depot services; international marine shipping, freight loading and unloading, and international marine shipping container terminal and yard business.

Under CEPA, Hong Kong service providers can form wholly-owned units in providing maritime services such as international ship management services, container station and depot services, non-vessel operating common carrying services, port cargo loading and unloading services, tug services between Hong Kong and mainland ports, ship maintenance and repair services, international ocean container leasing, buying and selling as well as trading of container parts, ship survey services for ships registered in Hong Kong, and provision of shipping agency services to vessel operators for routes between Guangdong and Hong Kong.

Because of Supplement VI provisions, the business scope is further expanded for HKSS, as they will be allowed from October 2009 to set up wholly-owned shipping companies on the mainland to provide regular business services such as shipping undertaking, issuance of bills of lading, settlement of freight rates, signing of service contracts, etc. for the shipping transport between Hong Kong and Class B ports in Guangdong operated by HKSS using chartered mainland vessels.

There are two types of ports on the Chinese mainland, Class A and Class B. Under mainland law, foreign vessels can only have access to Class A ports. Although HKSS are allowed to set up wholly-owned shipping companies on the mainland to provide regular business services for vessels that they have owned or operated since January 2004, their activities have been limited to Class A ports.

In Guangdong, there are some 30 and 80 Class A and Class B ports respectively. Guangzhou, Shenzhen, Zhuhai, Dongguan, Foshan and Jiangmen are typical examples of cities with Class A ports. Examples of cities with Class B Ports are Yufu (雲浮) and Zhaoqing (肇慶). From October 2009, HKSS can conduct regular business services in Class B ports in Guangdong using chartered mainland vessels, saving the need to use a third-party mainland company to access Class B ports.

Rail transport services

Railway passenger transportation services are under the Catalogue of Restricted Foreign Investment Industries, and foreign enterprises are only allowed a minority ownership in a joint venture with a mainland company.

Thanks to Supplement VI to CEPA, HKSS will be allowed to construct, operate and manage the Shenzhen Metro Line 4 project in Shenzhen in the form of wholly-owned operations. This liberalisation is a newly added sector under CEPA, also marking a breakthrough for HKSS in tapping the mainland’s railway transportation market.

Hong Kong has considerable experience going back decades in constructing and operating underground railways and its rail systems rank among the best and most efficient in the world. By allowing HKSS to gain access to building and operating the underground railway in Shenzhen, Hong Kong’s expertise can help improve the service standards of its mainland counterpart.

Further, under the Outline of the Plan for the Reform and Development of the Pearl River Delta (2008-2020), Hong Kong will progressively be integrating into the PRD. By allowing HKSS to participate in developing Shenzhen’s underground railway, it can help improve infrastructure connections between the two cities.

Individually Owned Stores

The individually-owned stores, provision under CEPA is a significant measure to promote entrepreneurship and relocation for Hong Kong people. The allowable scope for Hong Kong permanent residents' individually-owned stores on the mainland has considerably increased since CEPA was first implemented in 2004, when individually-owned stores were allowed to form in Guangdong to provide only retailing services with the exclusion of franchising operations.

With four new areas added under Supplement VI to CEPA, namely, solo clinic, economic and trade consulting services, company management consulting services, and selected wholesale services, CEPA allows Hong Kong permanent residents with Chinese citizenship to set up individually-owned stores on the Chinese mainland in a total of 27 areas, without being subject to the approval procedures applicable to foreign investments. Additionally, two other areas are also applicable to individually-owned stores set up in Guangdong, covering trade brokerage and commission agency services (excluding auctions),¹³ as well as renting and leasing services (excluding the renting and leasing of housing premises), both of which were introduced from January 2009 as a result of the Guangdong pilot measures. Given the widened scope of business that individually-owned stores can participate in, the investment opportunities and choices opened to Hong Kong individuals are substantial.

From January 2009, CEPA substantially eases the conditions for which outpatient clinics can be set up in Guangdong, with no requirement for any minimum investment amount or the ratio of capital investment for setting up outpatient clinic joint ventures. Yet, compared with outpatient clinics which are divided into several categories on the Chinese mainland, like “integrated outpatient clinics” and “specialist outpatient clinics”, each with their specific establishment requirements, it would appear relatively easier for Hong Kong medical practitioners to set up solo clinics, especially following the introduction of “accreditation” as a means of acquiring the mainland’s medical practitioner’s qualification certificate since January 2009.

Under CEPA, Hong Kong permanent residents who are legally eligible to practise in Hong Kong and have practised in Hong Kong for at least five years are allowed to open clinics on the mainland after obtaining the medical practitioner’s qualification certificate of the mainland, with matters on the application for opening and registration of clinics handled in accordance with mainland regulations. Thanks to Supplement VI to CEPA, solo clinics is included as a new area under individually owned stores, conceivably further streamlining the application procedures for setting up clinics on the mainland.

Distribution Services

CEPA is instrumental in removing the remaining hurdles for Hong Kong companies to participate in the mainland's distribution business, which is already very open. China removed all restrictions on foreign participation in distribution services in December 2006 in observing its WTO accession commitments, except one. For a single foreign enterprise that opens more than 30 stores cumulatively in China, and if the commodities for sale include pharmaceutical products, pesticides, mulching films, chemical fertilisers, vegetable oil, edible sugar and cotton, the proportion of capital contribution by its foreign shareholders cannot exceed 49%.

In comparison, CEPA allows Hong Kong companies to supply the aforementioned commodities on a wholly-owned basis, if these commodities are of different brands and come from different suppliers. This measure, which was adopted from January 2009, provides greater flexibility and incentives for Hong Kong's large retailers to mount more aggressive expansion in the mainland market.

Under Supplement VI to CEPA, HKSS can set up publication distribution enterprises on the mainland and the minimum registered capital required will follow the requirements applicable to mainland enterprises.

Printing Services

CEPA is instrumental in lowering the thresholds of Hong Kong service suppliers in entering the mainland market. Compared to a minimum registered capital requirement of RMB 10 million in respect of setting up of printing enterprises to provide printing services for packaging materials by other foreign companies, national treatment is accorded to Hong Kong companies in respect of the minimum capital requirement for setting up printing enterprises to provide packaging material printing services, down substantially from RMB 10 million to RMB 1.5 million.  Similarly, with the latest provisions under Supplement VI to CEPA, HKSS can establish publication distribution enterprises on the mainland, whether the units are wholly-owned or joint-venture enterprises.

New Services Sectors under Supplement VI to CEPA and Other Guangdong Cooperation Measures

Supplement VI to CEPA brings about liberalisation measures spanning 18 service sectors, while adding two new sectors. One of the new sectors is related to rail transportation, as covered earlier. Another lies in research and experimental services on natural sciences and engineering, and HKSS can set up wholly-owned or joint-venture enterprises to provide such services on the mainland from October 2009.  

Worth noting is that the new sector on research and experimental services arises as a regular practice of the Central government in adding to CEPA some liberalisation measures offered to other free trade agreement partners, yet not reflected in prior phases of CEPA. Therefore, following inclusions of commitments to Chile and ASEAN in two preceding CEPA supplements, the Central government agreed to incorporate under Supplement VI to CEPA three liberalisation commitments made to Pakistan (the other two are “real estate project services”, and “medical and dental services”, as covered earlier).

A total of nine Guangdong pilot measures are to be effective from October 2009. Apart from the banking, legal, exhibitions, securities, maritime transport and rail transport sectors covered earlier, Supplement VI to CEPA also provides enhanced access for HKSS to the Guangdong market of public utility services and telecommunication services. Specifically, for HKSS engaged in public utility services, they will no longer be subject to the shareholding restriction in relation to constructing and operating city gas networks in Guangdong cities with a population below one million.

Guangdong Province has 21 prefecture-level divisions, comprising 19 prefecture-level cities (地級市) and two sub-provincial cities (副省級城市) (i.e. Guangzhou and Shenzhen),¹⁴ each of which has a population of over one million. Besides, there are 23 county-level cities (縣級市), many of which have a population of less than one million. The new CEPA provision is expected to give greater flexibility to HKSS in public utility services in reaching out to a wider market in Guangdong.

HKSS in the telecommunication services sector will be allowed to distribute in Guangdong Province fixed/mobile telephone service cards that can only be used in Hong Kong, subject to the requirements stipulated in the concerned mainland-Hong Kong Memorandum of Understanding (MOU). Mobile satellite phone service cards, however, are explicitly excluded.

Mutual Recognition of Professional Qualification and Professional Examinations

CEPA broadens not only the mainland’s services sectors for Hong Kong companies, but also enhances the latitude of Hong Kong professionals and residents participating in the mainland’s services market, by way of encouraging mutual recognition of professional qualifications and allowing them to sit the mainland’s professional qualification examinations.

For example, eligible Hong Kong residents are allowed to sit a wide range of qualification examinations for professionals and technicians on the mainland (e.g. medical, pharmacist, legal, insurance, engineering and accounting sectors).¹⁵

Under Supplement VI to CEPA, the Chinese mainland agrees to allow Hong Kong residents who were members of the Hong Kong Institute of Certified Public Accountants (HKICPA) on and before 31 March 2009 to be exempted from the "Finance and Accounting" paper when sitting the mainland’s Certified Tax Agent qualification examination. Owing to CEPA’s supplementary agreements, a far greater number of HKICPA members will be eligible for the mutual exemption arrangement.

As part of the service liberalisation measures under Supplement VI to CEPA, the Chinese mainland and Hong Kong have agreed that competent authorities or professional bodies from both sides will continue to promote work on the mutual exemption of (a) the mainland’s supervision engineers, and Hong Kong’s building engineers and architects of Hong Kong; (b) estate agents of both places, as well as taking forward technical exchange work of (i) landscape architectural professionals of both Hong Kong and the mainland; (ii) the mainland’s Certified Property Managers and members of The Hong Kong Institute of Housing; and (iii) printing technicians.

Trade in Goods

Recent Developments

The Chinese mainland has granted all products of Hong Kong origin tariff-free treatment under Supplement II to CEPA, which took effect from January 2006, except for prohibited items such as used electrical machinery and medical products, chemical residual, municipal waste, tiger bone and rhinoceros horn. However, eligible products must fulfil the CEPA rules of origin to enjoy tariff-free treatment. For products which have no agreed CEPA rules of origin, Hong Kong will initiate discussions with the mainland twice a year upon request by local manufacturers.

From the implementation of CEPA in 2004 until the first half of 2009, the mainland and Hong Kong have reached agreement on the rules of origin for a total of 1,537 products. Effective from July 2009, 28 new products have been included in the list of goods eligible for tariff-free treatment under CEPA. As a result, the number of products with agreed CEPA rules of origin, and hence which are eligible for zero-duty access to the mainland market, has increased from 1,537 to 1,565.

These new products cover fresh or dried pineapples, unfrozen potatoes, shampoos, hair care products, toothpastes, bath preparations, woven cotton fabrics, woven man-made fibre fabrics, iron or steel containers, magnetic resonance imaging apparatus, x-rays apparatus and tooth brushes. In 2008, Hong Kong’s domestic exports of these 28 products to the mainland only amounted to around HK$8 million. But now with zero-duty access, Hong Kong’s domestic exports of these products to the Chinese mainland are expected to go from strength to strength in the way ahead. Without tariff-free treatment, the applicable tariff rates for these 28 products range from 4% to 17.5%.

Cost Savings for Hong Kong Products

The immediate benefit of tariff-free access is cost savings for Hong Kong’s domestic export items being sold to the Chinese mainland. From January 2004 to May 2009, a total of 44,233 Certificates of Hong Kong-origin (CEPA) were approved under different phases of CEPA, incurring a total value of HK$17.8 billion. Textiles and clothing products continued to be the largest beneficiary, closely followed by food and beverages. Other beneficiaries included plastics and plastic articles, pharmaceutical products, chemical products, base metal products, colouring matters, and paper and printed articles.

Indeed, spurred by the growing number of products eligible for tariff-free treatment, which has surged from 374 in 2004 to 1,565 on 1 July 2009, the share of Hong Kong exports benefiting from CEPA in Hong Kong’s domestic exports to the mainland has increased from 3% to over 18% accordingly.

CEPA 2009 Liberalisation Measures - Implications and Prospects

As an open and developing platform, CEPA allows Hong Kong to continue to engage mainland authorities in further liberalisation of trade in goods and services with the mainland, and other areas of cooperation in the future. Close cooperation between Hong Kong and Guangdong, in keeping with the spirit of the PRD’s visionary blueprint entitled “Outline of the Plan for the Reform and Development of the Pearl River Delta (2008-2020)”, is embodied with a spate of Guangdong pilot implementation measures under Supplement VI to CEPA.

Like the previous CEPA agreement, Supplement VI announced in 2009 focuses intently on deepening service sector liberalisation, easing the entry conditions as well as enhancing the flexibility of Hong Kong service suppliers, professionals and residents in tapping the mainland market, especially Guangdong. Of the 29 liberalisation CEPA measures spanning 20 service sectors, nine of them belong to the Guangdong pilot measures. True to their forms, they offer unprecedented opportunities for HKSS in the Guangdong market. For example, HKSS can establish “cross-location” sub-branches in Guangdong; use Class-B ports of Guangdong that are not open to other foreign companies; construct and operate city gas networks in Guangdong cities with a population below one million without being subject to shareholding restrictions; submit applications of exhibitions exceeding 1,000 sqm to Guangdong authorities for approval; and distribute in Guangdong some fixed/mobile telephone service cards to be used in Hong Kong.

While CEPA allows Hong Kong to better explore the mainland market, it is also conducive to the development of the local industry. For example, many measures under Supplement VI to CEPA, such as audio-visual, cultural and publishing and printing, fall under the sector of creative services, which the Hong Kong government considers one of the six new economic engines.

On trade in goods, the zero import tariff preference has the potential to attract to Hong Kong more investment and production, targeting goods with higher-value added content, in terms of brand, design, quality, technology, etc., or substantial intellectual property input. The bi-yearly discussions between Hong Kong and the mainland on origin rules provide further flexibility to potential investors planning to manufacture products that are not currently produced in Hong Kong.

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¹ The first CEPA agreement was signed by the Central and Hong Kong governments in June 2003 for implementation in 2004. Thereafter, the two sides have signed six yearly Supplements between 2004 and 2009, with the sixth phase of CEPA liberalisation measures by virtue of Supplement VI to be implemented in October 2009.

² An analysis of the measures under Supplement V to CEPA can be found at  http://www.hktdc.com/info/mi/a/ef/en/1X0041FI/1/Economic-Forum/CEPA-2008-Liberalisation-Measures-Opportunities-For-Hong-Kong.htm

³ China’s National Development and Reform Commission announced in December 2008 the “Outline of the Plan for the Reform and Development of the Pearl River Delta (2008-2020)” (http://en.ndrc.gov.cn/policyrelease/P020090120342179907030.doc)

⁴ The Pan-PRD region, commonly known as “9+2”, includes the nine provinces of Guangdong, Fujian, Jiangxi, Hunan, Guangxi, Hainan, Sichuan, Guizhou, Yunnan and the two special administered regions of Hong Kong and Macau.

⁵ These Hong Kong banks include: (1) Bank Of China (HK); (2) Bank of East Asia; (3) Chong Hing Bank; (4) CITIC Ka Wah Bank; (5) Dah Sing Bank; (6) Hang Seng Bank; (7) HSBC; (8) Industrial and Commercial Bank of China (Asia); (9) Nanyang Commercial Bank; (10) Public Bank (HK); (11) Shanghai Commercial Bank; (12) Wing Hang Bank; and (13) Wing Lung Bank.

⁶ The pilot RMB trade settlement scheme took effect on 6 July 2009, following the release of the administrative rules to implement the pilot scheme by the mainland authorities.

⁷ A good number of popular Chinese financial institutions have sought listings in Hong Kong since CEPA was implemented. They include, naming just a few, the Bank of Communications, Bank of China, China Construction Bank, Industrial and Commercial Bank of China, China CITIC Bank, China Merchants Bank, Ping On Insurance, and China Life Insurance.

⁸ In implementing CEPA, the Securities Association of China and Hong Kong Securities Institute have arranged that securities practitioners who wish to sit for either the mainland or Hong Kong regulatory examinations may do so in their respective jurisdictions. Those who have passed the examinations on mainland rules and legislation in Hong Kong can apply for the relevant licences on the Chinese mainland, or vice versa.

⁹ Hong Kong legal practitioners include both solicitors and barristers. Their years of practice are calculated in accordance with the actual number of years for which the solicitor or barrister has practised in Hong Kong, as shown on the relevant certificate respectively issued by the Law Society of Hong Kong or the Hong Kong Bar Association.

¹⁰ The six new economic engines are: (1) medical services; (2) educational services; (3) testing and certification; (4) innovation and technology; (5) cultural and creative industries; (6) and environmental industries.

¹¹ Approval has to be obtained from, among other things, the administrative department of the Ministry of Culture (MOC), the administrative unit of telecommunication under the Ministry of Industry and Information Technology (MIIT), and General Administration of Press and Publication (GAPP, which is responsible for monitoring the contents of online publishing).

¹² High-standard real estate projects refer to those real estate projects with construction cost per unit exceeding two times that of the average construction cost per unit in the same city.

¹³ “Trade brokerage and commission agency” generally refers to activities by commission agents, merchandise brokers and auctioneers (but Supplement V to CEPA specifically excludes auctioning); sales agency services specifically conducted for a certain manufacturing enterprise; the provision of business opportunities to the buying and selling parties or execution of merchandise transaction activities on behalf of entrusting clients as the agent.

¹⁴ (1) Qingyuan (清遠市); (2) Shaoguan (韶關市); (3) Heyuan (河源市); (4) Meizhou (梅 州市); (5) Chaozhou (潮州市); (6) Zhaoqing (肇慶市); (7) Yunfu (雲浮市); (8) Foshan (佛山市); (9) Guangzhou (廣州市); (10) Dongguan (東莞市); (11) Huizhou (惠州市); (12) Shanwei (汕尾市); (13) Jieyang (揭陽市); (14) Shantou (汕頭市); (15) Zhanjiang (湛江市); (16) Maoming (茂名市); (17) Yangjiang (陽江市); (18) Jiangmen (江門市); (19) Zhongshan (中山市); ( 20) Zhuhai (珠海市); and (21) Shenzhen(深圳市).

¹⁵ These include the qualification examinations for registered architect, registered structural engineer, registered civil engineer (geotechnical), construction supervising engineer, cost engineer, registered town planner, estate agent, registered safety engineer, registered nuclear safety engineer, builder, registered facility engineer, registered chemical engineer, registered civil engineer (harbour and waterway), registered facility supervising engineer, environmental impact assessment engineer, real estate appraiser, registered electrical engineer, accounting technician, assistant accountant, accountant professional qualification (professional title), certified tax accountant, certified asset appraiser, prosthetist and orthotist, mining rights assessor, registered consulting engineer, international business personnel, land registration agent, gemstone quality examiner, translator, and computing technology and software.

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