Question: Where did the idea for a free trade agreement between Hong Kong and the Mainland come from?

Answer: The Chamber's WTO study, "China's Entry into the WTO and its Impact on Hong Kong Business" first raised the idea of a RTA with China in January 2000. After the report was released, the Chamber made a submission to the Chief Executive Tung Chee-hwa in March 2000 initiating the concept of a RTA. The Chamber continued to pursue the RTA concept and conducted extensive studies into the matter. In November 2001, after China signed the WTO Protocol of Accession at Doha, the Chamber elaborated the RTA idea in a letter to the Chief Executive, and discussed the subject with him at a meeting two days later. Mr Tung then formally put forward the RTA concept to the Central Government.

Q: If a Hong Kong businessman wants to operate an import business on the Mainland and he imports Hong Kong manufactured goods tariff free to sell them on the Mainland, he will receive payment in renminbi, but he has to pay for his goods in Hong Kong dollars. So how can he get foreign exchange to keep importing?

A: If you are a Hong Kong businessman and have invested in China, you must have your own foreign exchange account, so you can use this account to import goods. If it is a Mainland enterprise and a Hong Kong businessman, they can also set up a foreign exchange account. If you want to purchase foreign exchange, the application procedures are not difficult. About 10 years ago you could not do this, but now China has large foreign exchange reserves, so on trade, it does have a liberal arrangement.

Q: Can flexibility be built into the rule of origin (ROO) formula so that content requirement (25 percent) can also be used as an alternative, for products where ROO is presently determined by "principal processes?" If that can be done, will design or R&D cost be calculated as the value added?

A: The HKSAR Government has committed to agree with the Mainland side on the ROO for the 273 products by September 30. This is a tough deadline to meet. In line with the Chamber's recommendation, the Hong Kong Government will endeavour to maintain the status quo for ROO. Thus, alternative ROO will not be actively pursued for the time being. In practice, this means that for most products the "substantive transformation (principal processes)" rule will continue to apply, not the value content (percent of value added), although that cannot be ruled out in future.

For products currently using value content to determine ROO, status quo means applying the current percentage. In addition, there may be a small number of other products for which percentage content may be used for ROO. For these cases, the government is aware that the private sector would like to have design and R&D included in the calculation.

Q: How will a Hong Kong company be defined?

A: When CEPA comes into effect, there will need to be a process to certify "Hong Kong companies," like the certification of origin for goods. There are a number of relevant considerations:

• Based on the concept of CO, a company seeking to claim CEPA benefits will need to go through a certification process;

• In designing the certification process, the principle must be that it is as simple as possible. One model is to have a simple declaration plus submission of basic supporting documents;

• Supporting documents may include tax return, office rental contract, MPF record, business registration paper, etc. It is reasonable for these to undergo a basic checking process;

• For certain cases, an independent third party report by professional agencies may be required to support the application;

• Unlike CO, which is consignment-specific, the CEPA certificate of "Hong Kong company" will be more like a certificate to operate in the Mainland. The role of the Hong Kong Government and the Mainland authorities in the certification will need to be further discussed. It is felt that for the purpose of certifying a Hong Kong company, the Ministry of Commerce's role could be to act as endorser;

• The qualified applicant will thus get a certificate to go to the Mainland to claim CEPA benefits.