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CEPA in Review

The Closer Economic Partnership Arrangement is now in its second year. RUBY ZHU looks at the benefits that the agreement has created for Hong Kong, and what phase II of CEPA might include

Mainland China and Hong Kong signed the Closer Economic Partnership Arrangement (CEPA) just over a year ago on June 29, 2003 -- a time when Hong Kong's economy was at its lowest level for decades. During the ensuing months, Hong Kong economy grew stronger. In this article, we will weigh CEPA's contribution to Hong Kong's economic growth, which will also provide a foundation on which phase II of CEPA consultations can be built upon.

Individual Visit Scheme

The Individual Visit Scheme, which starting July 2003 permits individual travellers from four Guangdong cities to visit Hong Kong (previously, Mainland tourists could only visit Hong Kong as part of a tour group), was the first impact to be felt from the agreement. The scheme was extended to Beijing and Shanghai in October last year, and since May 2004 covers the entire Guangdong Province. In July 2004, nine more cities from Zhejiang, Jiangsu and Fujian provinces were added to the list, bringing the number of Mainlanders allowed to visit Hong Kong on their own to 150 million.

In the first half of 2004, Hong Kong received between 400,000 and 500,000 Mainland visitors a month. Following the expansion of the scheme, Hong Kong can expect to welcome over 1 million Mainland tourists every month, and with each visitor spending between HK$5,000 to HK$6,000 during their visit, this will inject an estimated HK$70-80 billion into our economy.    

The leap in Mainland tourist volumes also boosts other sectors besides tourism, such as retail and catering industries whose businesses recorded growth of over 30 percent in the first half of this year. Hong Kong's real estate market has also benefited, with residential transactions and total sales surging by 58 percent and 93 percent respectively, compared to the same period last year, due to rising confidence. The Individual Visit Scheme, as the first CEPA initiative to come into effect, has generated quick and powerful results. It has boosted our ailing domestic consumption and put growth of our domestic economy back on track.   

Trade in goods

Since January 1, 2004, made-in-Hong Kong goods falling under one of 374 product codes can be exported to the Mainland tariff free under CEPA. The first zero tariff shipment passed through Mainland customs on January 7 this year, and was shipped by a Chamber member using a HKGCC CO. The program, jointly managed by the Mainland and Hong Kong customs departments and CEPA CO issuers in Hong Kong, has so far gone very smoothly.

At the end of June this year, 1,240 CEPA CO applications had been received, mainly for clothing, medicine, plastic and chemical products, representing a total value of over HK$400 million and tariff savings of up to HK$40 million. The savings are not overly huge due to the limited number of real "made-in-Hongkong" products that are produced. Some Hong Kong companies have been trying to export their products to the Mainland, but finding the right product for the market will take time. As more Hong Kong products are exported to the Mainland under CEPA, and Mainland cities are keen to open CEPA trading centres, it has never been easier for made-in-Hong Kong products to enhance their presence on the Mainland.  

Hong Kong companies have submitted about 200 applications, covering over 700 tariff codes, to the authorities to have their products classified as zero tariff under Phase II of CEPA. Some of the products have a high intellectual property value, signifying that CEPA is drawing in investments from reputable overseas companies. Production of high-tech and high-tariff products is also growing. It is interesting to note that a number of overseas and Mainland producers have expressed interest in using CEPA's zero tariff privilege for made-in-Hong Kong products to develop the Mainland market. With the zero-tariff privilege, Hong Kong remains an attractive choice for companies producing high-tech and capital intensive products. 

Trade in services

One of the main concerns about CEPA involves the opening of markets for trade in services. For the first six months of 2004, a total of 407 companies in 18 service sectors had applied for Certificate of Hong Kong Service Supplier (HKSS) under CEPA. Half of these firms are involved in the logistics and transport services, a quarter are from distribution services, and over 20 companies are from the advertising, consulting and telecom services.

Entry terms for certain sectors are more attractive than others, and therefore have attracted more applications. But even companies in sectors with fewer applications also stand to benefit from CEPA. For example, among the five banks that have applied for HKSS, three small and medium banks (Wing Lung Bank, Dah Sing Bank and Shanghai Commercial Bank) are already operating branches in Shenzhen. Golden Harvest Entertainment, through CEPA, has invested in China's largest movie city in Shenzhen, and two movies produced by Universe International in early 2004 have found their way into the Mainland through CEPA.

These new opportunities have also attracted more foreign investment into Hong Kong. In the first half of 2004, foreign investment had reached 89 percent of last year's total, with 20 percent of companies saying that they decided to invest in Hong Kong because of CEPA.

Hong Kong residents can also set up individually owned retail stores in Guangdong. As of the end of May, 489 applications had been received with registered capital totalling HK$19.02 million. The new measure gives Hong Kong residents who are faced with unemployment an alternative as they can start up a business in Guangdong with relatively limited capital.

For professional services, the biggest implication stemming from the opening of the market concerns mutual recognition of professional qualifications. Progress in this area has been going well so far with both sides reaching consensus on mutual recognition of qualifications for property valuers, registered architects and structural engineers. To date, 97 Hong Kong professionals have been certified as real estate valuators in the Mainland. Furthermore, about 400 Hong Kong professionals have sat for the PRC Securities Regulations Examination offered by the Securities Association of China. Both sides are also working on the mutual recognition of professional qualifications in accountancy and real estate agencies. However, the road for recognising professional service qualifications will be long. Besides involving both governments, agreements must also be worked out by concerned professional bodies on both sides of the border.

Compared to how smoothly the zero-tariff arrangement went into effect, the service sector arrangement is far more complicated. Like other foreign investors in the Mainland, Hong Kong companies holding a HKSS still have to undergo a complex approval procedure, meet high registered capital requirements, fathom out huge regional difference and tackle strong protectionism measures. Needless to say, China needs to improve its investment environment, and in particular, to cultivate change in people's attitudes. The Mainland economy will benefit from CEPA as Mainland companies strive to increase their competitiveness and the overall investment environment improves.          

Trade and investment facilitation

Both the Hong Kong and Mainland governments have done a great deal to streamline customs clearance procedures, conduct trial runs on "Unified Road Cargo Manifest" and implement the "Colocation Customs Clearance System" to facilitate trade, investment and people flows. In view of the waves of Mainlanders visiting Hong Kong and the surge in trade volumes, streamlining customs clearance procedures is of vital importance.

In addition to customs clearance, one of the seven areas of cooperation under trade and investment facilitation includes establishing an information exchange system for areas such as quarantine and inspection of commodities and food safety. Other areas include cooperation among SMEs and cooperation in Chinese medicine, but no concrete measures have been achieved so far. The Mainland has improved the transparency of its law and regulations in many ways, and implemented CEPA relatively smoothly. However, standardising quality assurance measures for both areas will not be as easy due to the different systems that are used.

CEPA's contribution to Hong Kong's economic recovery in the past year is obvious. Following a 6.8 percent GDP growth in the first quarter, financial institutions have all adjusted their economic growth forecast for the year, with Hang Seng Bank raising its forecast from 5.5 to 6 percent, and Standard Chartered Bank and HSBC predicting 6.5 percent. In short, all sectors are very bullish towards Hong Kong's economic prospects.

Of course, the stronger growth does not mean that measures to open markets under CEPA are complete. For some sectors, greater market access needs to be granted, which partly explains why less than 1 percent of Hong Kong companies have applied for a HKSS. The Chamber is currently compiling a proposal, based on feedback from members, on what the second phase of CEPA should contain. Once complete, we will submit this to government. As such, we hope that the benefits under CEPA can quickly be expanded to allow more Hong Kong companies to enjoy the agreement.

Ruby Zhu is the Chamber's China Economist. She can be reached at, ruby@chamber.org.hk