Closer Economic Partnership Arrangement

The Mainland-Hong Kong Closer Economic Partnership Arrangement (CEPA) was first concluded in June 2003 and implemented from 1 January 2004. Apart from providing enhanced access for Hong Kong's service providers to the mainland market, CEPA also creates opportunities for Hong Kong professionals and residents to establish business or work on the Chinese mainland. In a nutshell, CEPA will bring immense benefits to Hong Kong's service economy.

Under CEPA, Hong Kong companies in a wide range of services industries can benefit from market access measures above and beyond the Chinese mainland's WTO commitments.

CEPA is a living and forward-looking arrangement. Both the Central and Hong Kong SAR governments have agreed to pursue further trade liberalisation measures through consultation. Under the CEPA framework, the Chinese mainland and Hong Kong agreed on a second phase of liberalisation measures (CEPA II) in August 2004 to further relax the access to the mainland's services market.

Measures on mainland-Hong Kong cooperation are expected to further strengthen Hong Kong's role as an international commercial hub.

Market Access for Hong Kong Services Companies

The CEPA agreement reached between the Central and Hong Kong governments in 2003 (CEPA I) pertains to market access to 18 service industries. ¹ On 27 August 2004 the two sides agreed, under CEPA II, to further relax the market access conditions for Hong Kong services and service suppliers in the following areas, namely: legal, accounting, medical, audiovisual, construction, distribution, banking, securities, transport, freight forwarding agency and individually owned stores.

Under CEPA II, it is agreed that eight more areas will be opened up for preferential access to Hong Kong service suppliers from 1 January 2005. They include: airport services, cultural entertainment, information technology, job referral agency, job intermediary, patent agency, trade mark agency and professional qualification examinations. In other words, the Chinese mainland is committed to opening a total of 26 sectors to Hong Kong services and Hong Kong services providers with CEPA I and II combined.

Service Sectors Open Under CEPA I and II

* CEPA I service sectors with further liberalisation under CEPA II

**Individually owned stores are grouped within the distribution sector under CEPA I

Hong Kong services companies can enjoy market access conditions above and beyond China's WTO commitments. In industries such as logistics, freight forwarding, transport services, management consulting, advertising, and exhibition and convention, Hong Kong companies can establish wholly-owned operations on the mainland ahead of other foreign companies.

Smaller Hong Kong companies can benefit from many CEPA measures which lower the asset, capital, turnover or operational requirements for market entry. Examples include banking and legal services. Under China's WTO commitments, the thresholds of entry to the mainland's services sector are set high. CEPA lowers the thresholds for Hong Kong companies, thereby allowing them to have an “effective” market access to the mainland's services sector.

Although the liberalisation measures vary from industry to industry, the Chinese mainland has taken into account the special niche of Hong Kong, with CEPA commitments going beyond the country's WTO accession commitments in many sectors, for example, the audiovisual sector. In audiovisual services, Hong Kong-produced Chinese language films are no longer be restricted by the global import quota of 20 foreign films per year for screening on a revenue-sharing basisgiven the CEPA I relaxation, while the co-production requirements are also eased.

The audio-visual industry will receive another boon under CEPA II, with enhanced participation in the mainland's film and television markets. Wholly‑owned companies can be set up in pilot areas of the mainland to distribute mainland-produced motion pictures (including co-productions) upon approval by the State Administration of Radio, Film and Television (SARFT). Co-produced motion pictures can be processed outside the Chinese mainland upon approval by the SARFT.

Besides, television programmes co-produced by Hong Kong and the mainland can be broadcast and distributed as mainland-produced television programmes after being examined by the relevant mainland authorities. On the other hand, Hong Kong companies can construct or renovate movie theatres for screening business on a wholly-owned basis under CEPA II, an improvement from CEPA I which allows a majority ownership of up to 75%.

Qualifying Criteria

To be entitled to the treatment of CEPA, a services company, regardless of the nationality of its investors or shareholders, must meet the following criteria:

Opportunities for Hong Kong Professionals and Residents

Not only Hong Kong service companies but also Hong Kong professionals and residents can benefit from CEPA. For example under CEPA I, Hong Kong professionals in the securities and insurance industries can apply to practise on the mainland, and Hong Kong legal and medical practitioners are allowed to sit the mainland's qualification examination. Under CEPA II, eligible Hong Kong residents will be allowed to sit a total of 30 professional and technician qualification examinations, most of which are in the engineering and accounting professions.²

Authorities and professional bodies of both sides will continue to hold consultation meetings to consider specific methodologies for mutual recognition of professional qualifications.

CEPA also enables Hong Kong residents to identify greater employment and business opportunities on the mainland. In the case of Hong Kong lawyers, they may find additional business opportunities by offering professional assistance requested by mainland law firms in respect of individual cases, as they will not be subject to the requirement of a Hong Kong legal consultant permit thanks to the CEPA II provisions.

Hong Kong permanent residents with Chinese citizenship are formally permitted under CEPA I to set up individually retail stores in Guangdong. Under CEPA II, the geographical span will be extended to the rest of the country. Further, the business scope of individually owned stores is expanded from retail services to include food and beverage services, hair dressing and other specified services.

Hong Kong as a Financial Centre and Tourist Destination

CEPA not only opens the mainland door for Hong Kong's medium-sized banks and extend their reach to the fast expanding insurance market on the mainland, it will strengthen Hong Kong's role as an international financial centre for China and the region. The CEPA provisions on Financial Services Cooperation show the Chinese mainland's determination to make use of Hong Kong's global financial marketplace to modernise its financial sector.

Mainland financial institutions are encouraged to take active participation in Hong Kong to acquire international best practices. Mainland banks are encouraged to relocate their international treasury and foreign exchange trading centres to Hong Kong and to develop networks in Hong Kong through acquisition to acquire international best practices. Further, mainland financial institutions (e.g. insurance companies) are encouraged to seek stock listings in Hong Kong. As an international financial centre, Hong Kong also looks set to benefit from the mainland's recent moves to allow the insurance companies and National Social Security Fund (NSSF) to invest in overseas markets.

Banks in Hong Kong have been allowed since early 2004 to conduct RMB business including deposits, remittances, exchanges and credit card business for individuals on a trial basis. With arrangements like CEPA and simplified procedures for mainland enterprises to invest and set up offices in Hong Kong, there will be a growing demand for various kinds of RMB financial services. Allowing Hong Kong's banks to conduct RMB business properly channels in billions of RMB in cash into the banking system. As the next step, banks in Hong Kong are seeking to extend the RMB business to corporate clients. Allowing the development of a wider range of RMB products in Hong Kong will not only better serve the rising cross-boundary economic activities but will also facilitate in the long run the smooth evolution of RMB to full convertibility. 

On the tourism front, the Central government has since July 2003 allowed residents from selected mainland cities to travel individually to Hong Kong. Currently, residents from Guangdong as well as those from 11 other mainland cities -- an estimated total of 150 million, are eligible to apply for personal visits to visit Hong Kong.

Individual Traveller Scheme

Significance of CEPA for the Mainland

Through removing restrictions on market access and cooperation, CEPA ultimately aims to foster further economic partnership between the mainland and the Hong Kong economies. Areas for partnership are plentiful. For example, many mainland regions including the Pearl River Delta (PRD) have successfully developed into manufacturing powerhouses, with undisputed international competitiveness in production and assembly. In comparison, the development of production supporting services such as transport and logistics, distribution, financial services and business services lags considerably behind.

By improving the access for Hong Kong services companies to the mainland market, mainland enterprises can join hand with Hong Kong companies to provide efficient and sophisticated production supporting services, hence further improving the global competitiveness of China's manufacturing industries.

In addition, a sizeable number of mainland enterprises, including many energetic private enterprises, are determined to venture out and break into the overseas markets on the heels of their domestic success. In this context, there is no better place than Hong Kong for the mainland enterprises to establish an operational base for global expansion.

Hong Kong and the Pearl River Delta

Given the proximity of Hong Kong to the PRD and the interdependence between the two economies, CEPA has a special meaning to the closer cooperation of the two places. With CEPA, the PRD will continue to grow from strength to strength as one of the world's manufacturing centres, fully supported by the business services provided by Hong Kong companies. Examples of the special convenience provided by CEPA to enhance partnership within the Greater PRD include waiving Hong Kong lawyers' residency requirements to operate in Guangzhou and Shenzhen, letting Hong Kong residents set up individually owned retail stores in the province, and allowing Hong Kong cable television network operators to provide related professional technical services in Guangdong as a pilot area.

Equally of strategic importance are the proposed bridge linking Hong Kong and the less developed western PRD and the new era of policy cooperation between Hong Kong and Guangdong Province.

Significance of CEPA for Overseas Companies

Hong Kong is renowned internationally as a free and open economy, as well as the most advantageous business platform in the region. More regional headquarters and offices of multinational firms are located in the SAR than in any other city in the Asia-Pacific. Concomitantly, Hong Kong also offers an unrivalled business environment with superb and immediate access to the Chinese mainland. With CEPA, access to the mainland market has been considerably enhanced.

For overseas companies based in Hong Kong, like other Hong Kong companies, they are already drawing immense benefits from using Hong Kong as a base for the China and Asia operations. With the CEPA-reinforced Hong Kong advantage, Hong Kong-based overseas companies, as well as those overseas companies interested in developing their China business strategies through Hong Kong, can further benefit from the Hong Kong platform enhanced by CEPA. Overseas service companies planning to enter the burgeoning mainland service market can consider partnering with, investing in or acquiring a CEPA-qualified Hong Kong service provider, drawing on the latter's understanding of and experience in the mainland market.

¹ These 18 service sectors are: management consulting, convention and exhibition, advertising, accounting, construction and real estate, medical and dental, distribution, logistics, freight forwarding, storage and warehousing, transport, tourism, audio-visual, legal, banking, securities, insurance, and value-added telecommunications services.

² 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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