The Central People’s Government and the Government of the Hong Kong Special Administrative Region (“The Government of HKSAR”) reached an agreement on the measures under the third phase of the “Closer Economic Partnership Arrangement” (“CEPA III”) between Mainland China and Hong Kong Government on 18 October 2005. Before that, the Central People’s Government and the Government of HKSAR signed the main text of CEPA (“CEPA I”) on 29 June 2003 and its Supplement on 27 October 2004 (“CEPA II”).

CEPA I and II have been remarkable achievements in promoting closer economic and trading relationships between Mainland China and Hong Kong. The report of the Government of HKSAR shows that in the first two years of the implementation of CEPA I, about 29,000 new jobs have been created for the Hong Kong labour market. The report on the implementation of CEPA II by China’s Customs Department shows that in the first three quarters of 2005, the cumulative value of the Mainland imports under CEPA is US$197 million and the tax benefit is RMB152 million, including tariffs and value-added tax benefit, in which the value of goods imported by Guangdong is US$147 million and the tax benefit is RMB108 million, accounting for 74% of all the Mainland imports and 70% of all the Mainland duties benefit respectively.

Further trade liberalisation for trade in goods

Under CEPA III, the Central People’s Government agrees that, starting from 1 January, 2006, free tariff benefits will be granted to all products of Hong Kong origin upon applications by local manufacturers whose products satisfy the CEPA rules of origin. Resembling the liberal measures adopted in CEPA I and II, rules of origin for 261 products are agreed under CEPA III. Under the first three phases of CEPA, Hong Kong and Mainland China have already reached an agreement on the CEPA rules of origin for a total of 1,369 products. For products that have no agreed rules of origin for the time being, their relevant rules of origin will be jointly worked out by both governments twice a year after 2005.

Apart from the above agreement to work out the rules of origin for more products, for the practical interest of Hong Kong manufacturers, the Central People’s Government agrees to amend the existing rules of origin under CEPA. For instance, the Mainland Government agrees to relax the rules of origin for watches with Hong Kong brand names by waiving the 30% value-addes requirement. Hong Kong is the world’s second largest exporter of watches and clocks in terms of both value and quantity. The relaxation on the rules of origin brings in a great business opportunity for Hong Kong-made watches. It also fosters the development of “high-tech” manufacturing industries.

More market access for trade in services

There are also new developments in service industries under CEPA III. So far as the banking industry is concerned, the amount of operating funds required for Mainland branches of Hong Kong banks in respect of their renminbi and foreign currency business offered to local customers will be assessed on the basis of all Mainland branches of the bank concerned rather than each individual branch. The average amount of operating funds required for all Mainland branches of the bank concerned is not less than RMB500 million, while the requirement on the amount of operating funds of an individual branch should be not less than RMB300 million. The Hong Kong banking industry is considered to be one of the industries that benefits most under CEPA, where the asset requirements for Hong Kong banks to set up branches or body corporates in Mainland China are substantially lowered from not less than US$20 billion during the preceding year prior to application, to an amount of not less than US$ 6 billion.

For the professional services sector, under CPEA III, Hong Kong lawyers who have already acquired Mainland lawyer qualifications are now allowed to practise simultaneously in both Hong Kong and Mainland China. Further, a Hong Kong law firm which has set up a representative office in Mainland China is now allowed to operate in association with one Mainland law firm situated in the province, autonomous region or municipality where its representative office is situated. Such measures give more room for Hong Kong lawyers to develop their business in Mainland China. The validity period of the “Temporary Business Permit” for Hong Kong accounting firms for the purpose of conducting business on a temporary basis in Mainland China is extended from one year to two years, which shall provide opportunities for the development of large-scale Mainland business projects for Hong Kong accounting firms.

Under CEPA III, the distribution services providers enjoy further trade liberalisation in the operation of commission agents - services in respect of chemical fertilizers, processed oil and crude oil business as well as wholesale and retail services in respect of chemical fertilizers. The entry threshold in Mainland China for Hong Kong travel agents has also been relaxed. The requirements for annual business turnover for setting up wholly foreign-owned and joint venture travel agency have been lowered to US$25 million and US$12 million respectively.

For the transport services sector, CEPA III allows Hong Kong service suppliers to set up wholly foreign-owned companies in Mainland China for the provision of tugs, ship maintenance and repair, leasing, buying and selling of international ocean containers. Market access has also been granted to air transport sales agency services.

CEPA III brings in greater business opportunities

CEPA III brings in more liberalisation measures for the promotion of business opportunities for Hong Kong service providers and manufacturers in Mainland China. However, CEPA is merely a framework. We trust that the Central People’s Government and the Government of HKSAR will continue to join hands in working out the solid rules for the smooth implementation of CEPA, which provides an effective platform for the promotion of closer economic co-operation between Mainland China and Hong Kong.