By George Lauriat, Editor-in-Chief, AJOTCEPA (Closer Economic Partnership Arrangement) is the People’s Republic of China’s free trade agreement with Hong Kong. It grants easier access to China markets for Hong Kong-made products, and Hong Kong-based service companies. For many Hong Kong business leaders, CEPA represents the single most essential accord to Hong Kong’s economic prosperity. CEPA offers preferential access to China’s markets, over and above commitments made by China under WTO. CEPA adds to the long list of reasons why international businesses choose Hong Kong as a base for their China and Asia operations. The current agreement is really CEPA II. In December 2004, a number of additional annexes were signed to kick off implementation in January 2005. CEPA represented a liberalization of trade in goods, services and investment facilities. Prior to CEPA II some 374 categories were eligible for zero tariff. In January, 529 existing production categories of products that met the RO standard (Rules of Origin) became eligible for exportation from Hong Kong to mainland China at zero tariff. Under CEPA II, another 184 categories will be added in Jan. 2006, as will be additional service sectors. The 1,087 categories represents nearly all of Hong Kong’s manufacturing sectors. In short, CEPA II is the key to trade and investment in the Pan Pearl River Delta region. In the wider context, CEPA II might provide the blueprint for the implementation in the PRC of the WTO accords to fair and equal opportunity for foreign investment and trade. Key points: o Duty-free export to China for Hong Kong-made products 1,087 categories of ‘Made in Hong Kong’ products are exempt from tariffs when exported to the Chinese mainland. o Easier market entry for Hong Kong-based service providers CEPA covers 26 service sectors and reduces, or removes geographical, financial and ownership restraints. A foreign company can apply if it: 1. Is incorporated in Hong Kong 2. Has operated for 3 to 5 years (depending on the sector) 3. Is liable to pay Hong Kong profits tax 4. Employs 50% of its staff locally The immediate benefit to a foreign firm is that simply by outsourcing or partnering with a CEPA manufacturer the foreign firm will qualify for zero tariff. There is no Hong Kong residency requirement. For goods to qualify as ‘Made in Hong Kong,’ they need only satisfy Rules of Origin. One of the more interesting aspects of CEPA is the potential for the service sector. Under CEPA, the PRC has opened up its market to Hong Kong-based service providers in 18 sectors. As with the manufacturing sector, foreign companies that satisfy CEPA-eligibility can benefit. The following is a brief outline (Source: HK trade Development Council) of the requirements for service providers.
  • Accounting: One year permits for Hong Kong companies to conduct auditing services on the mainland. Hong Kong-qualified accountants who have practiced on the mainland will be treated as Mainland accountants.
  • Advertising: Firms from Hong Kong can establish wholly-owned advertising companies on the mainland.
  • Audiovisual: Hong Kong-produced Chinese language movies will be exempt from the 20 overseas film quota and can be distributed on the mainland. Co-produced movies will be treated as Mainland films.
  • Banking: Asset requirement for banks to establish Mainland branches is reduced from US$20 billion to US$6billion.
  • Conventions: Hong Kong firms can set up wholly owned operations.
  • Construction and real estate: Hong Kong firms can set up wholly-owned operations.
  • Distribution (excluding tobacco): Hong Kong firms providing distribution services, retailing or franchising can set up wholly-owned operations.
  • Hong Kong car dealers can open up to 30 wholly-owned retail outlets. Freight forwarding: Hong Kong firms can operate on a wholly-owned basis.
  • Insurance: Maximum limit of capital by a Hong Kong insurance firm in a mainland firm is 24.9%. Ho