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CEPA II Brings New Business Opportunities

CEPA II further liberalises the Mainland's vast service market, opening the door to more Hong Kong service industries and products, writes RUBY ZHU

Less than a year after the launch of CEPA, the Hong Kong SAR and Central governments agreed to further liberalise certain sectors under the arrangement. HKGCC has long been a champion of CEPA and besides pushing it forward, the Chamber collected members' views on what they would like to see included in CEPA II. Most of our requests were not adopted in the latest round of liberalisation announced in August this year, but we will continue to seek for their realisation in the next phase. Under CEPA II, zero tariff has been extended to an additional 713 tariff codes. The Mainland has also agreed to broaden the liberalisation of the original 11 service sectors under CEPA and introduce market access to eight new service areas.

Zero tariff products

Among the new 713 tariff codes added to the zero tariff list, 529 are for products currently produced in Hong Kong and will enjoy zero tariff starting January 1, 2005. A total of 119 of these are for food items. Hong Kong food products enjoy a good reputation in the Mainland. As reports of some Mainland food products having problems are commonplace, Hong Kong food products will have added appeal. Indeed, Hong Kong food companies are expanding their production bases in Hong Kong. For example, HKGCC member Wing Wah Cake Shop has established a new factory in Yuen Long and hired 200 more employees in order to expand into the Mainland market. Vitasoy is also selling its entire line of products on the Mainland, and plans to increase Hong Kong production depending on market demands.        

For the 184 tariff codes for products not currently produced in Hong Kong, these are expected to induce new investment and employment opportunities for Hong Kong. Though zero tariff is tariff code specific, and applies to a single type of product produced by a particular manufacturer, other companies producing the same type of product can also enjoy the zero tariff benefit. This may encourage Hong Kong manufacturers to look carefully into the list of 1,187 zero tariff product codes to find potential products that they can invest in.

Further liberalisation of trade in services

Liberalisation of trade in services continues to be the main focus of the arrangement for Hong Kong, and some sectors have been given attractive relaxation measures under CEPA II. Retail service industries in the Mainland, for example, have been completely opened up to Hong Kong investors. Permanent Hong Kong residents holding Chinese citizenship are allowed to set up individually owned stores in general retailing, food and beverage, beauty treatment, and hair dressing, et cetera, across the whole of China. This is a significant breakthrough compared to the first phase of CEPA when Hong Kong residents were only allowed to operate individually owned stores in Guangdong. Even this measure attracted over 600 applications from Hong Kong shortly after the implementation of CEPA, surpassing the number of applicants for the certification of Hong Kong Service Supplier (HKSS). Hong Kong SMEs can enter the Mainland market through setting up individually owned stores in the country. Application procedures involved are simple, and registered capital requirements are low.

Service industries in the Mainland have been steered by Hong Kong trends. First-class restaurants, beauty salons and boutiques run by Hong Kong people are preferred by many Mainland consumers. Under CEPA II, Hong Kong investors now enjoy national treatment in these sectors, far beyond measures granted to other foreign investors.

In the first phase of CEPA, many Hong Kong companies expressed hope that the distribution services would be further liberalised, which is reflected in one-fourth of HKSS applicants being from the distribution business. Currently, registered capital required for establishing wholesale and retail companies stands at ¥500,000 and ¥300,000 respectively. Items allowed to be distributed have been extended to include medical products. Like food products, Hongkong-made medicines are highly regarded in the Mainland and as such have huge potential. Also worth mentioning is the distribution of motor vehicles. Hong Kong enterprises have been granted national treatment and the asset and registered capital requirements have been waived. As the Mainland gradually lowers tariffs on motor vehicles, in line with its WTO commitments, Hong Kong distributors will hold the advantage in selling and distributing imported motor vehicles in the Mainland.

The logistics sector has also been further liberalised. Road passenger transport has been extended from western China to the entire country. As the public road passenger transport market in Hong Kong is reaching saturation point, and given the declining population growth here, most transport companies view going north of the border as a golden opportunity to expand their business.

In the first phase of CEPA, Hong Kong companies were allowed to provide direct, non-stop road freight transport from Hong Kong to different Mainland provinces. Under CEPA II, this has been further expanded to provide direct inter-city passenger bus services to the nine provinces in the Pearl River Delta. The extension will offer substantial support to the economic integration between Hong Kong and the Pan-PRD.

Job intermediary services included in CEPA II are mainly related to the job referral and personnel intermediary services. The former targets general, low-skilled workers, while the latter serves white-collar workers and senior personnel, which is more along the lines of head-hunting agencies here. For Hong Kong companies wishing to set up job agencies in the Mainland, the registered capital requirement is US$125,000, which is within reach of many small- and medium-sized Hong Kong agencies.

Airport services is another new sector included under CEPA II, allowing Hong Kong companies to extend their business north of the border. Hong Kong International Airport has been voted the best airport in the world for four years. Given this level of quality service, permitting Hong Kong airport services companies to operate in the Mainland will help raise the service quality offered at the country's airports. However, 'Hong Kong Service Suppliers' for this sector need five years of substantive business operations to qualify, compared to three years in other sectors.

HKGCC's proposal to the SAR government that Hong Kong entertainment companies and agencies be allowed to provide cultural and entertainment services in the Mainland has also been included in under CEPA II. Hong Kong entertainment companies regard the Mainland as their major market. Previously, they had to rely on support from Mainland companies to operate there. Under CEPA, Hong Kong companies can establish wholly-owned or joint ventures in the Mainland which will boost their efficiency.

Regarding professional qualifications, Hong Kong residents have a choice of 30 examinations to earn the necessary professional and technical qualifications to practice on the Mainland. In addition, the registered capital requirement for starting up consulting firms is only ¥100,000. The low threshold offers Hong Kong professionals another choice north of the border. Under CEPA II, benefits offered to Hong Kong companies are extended to Hong Kong residents, in addition to the business community.  

The above is just a small sampling of the new measures offered under CEPA II. Space restrictions do not allow me to detail each of these measures here, but interested parties can learn more about CEPA II through the Chamber'sCEPA Web page at www.chamber.org.hk/cepa. Meanwhile, if you have any requests or questions on CEPA, please contact me at ruby@chamber.org.hk. Your views will be reflected in our proposals to government.

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