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Policy Statement & Submission

2006/06/16

Public consultation on a strategy for the trade and economic relations between the EU and China

Hong Kong As the Bridge Between the EU and China

HKGCC Submission to the European Commission on 16 June

1. China and Globalisation

Since China officially became a member of the World Trade Organization (WTO) on December 11, 2001, the country has risen to the challenges of economic globalisation, and the country's economic landscape has undergone significant and rapid changes. Despite these developments, The Hong Kong General Chamber of Commerce believes that Hong Kong remains a critical gateway between China and the world. This entrepot role was further enhanced by the Closer Economic Partnership Arrangement (CEPA), a free-trade agreement between China and Hong Kong, which came into effect on January 1, 2004. Further liberalization of various sectors under CEPA II and CEPA III were added to the agreement in 2004 and 2005, respectively, to bolster the role of Hong Kong in China's development as it goes global.

Although China has, to a large extent opened its doors to international business, and European enterprises can now enter the Mainland directly, Hong Kong's intermediary, value-adding role - with its international business characteristics - continues to provide a crucial element for success for many businesses in the EU, in Hong Kong, and in China.

2. Hong Kong as the International Bridge of China

China's economic development has transformed the country into one of the major forces driving world economic growth. However, China is still transforming itself from a planned economy model, into a full market economy. Operations within government still need to increase their transparency, and a full market structure has yet to be established. Varying levels of economic development, regional discrepancies and varying interpretations of government policy and WTO commitments across the country can also add to the complications of doing business in the country.

As such, China remains a difficult market for many EU-based companies, especially small- and medium-sized enterprises. Hong Kong companies are very experienced and well placed to help these companies enter the China market. In short, Hong Kong companies know how to do business in China "on the ground," and are therefore good partners for EU firms wishing to access new opportunities.

Statistics on the number of EU companies opening offices in Hong Kong reveal that Hong Kong's middleman role has actually been strengthened in recent years. As of June, 2005, multinational companies from the EU have set up a total of 1,042 regional headquarters and regional offices in the city, up almost 4.6 per cent over the same period in 2004. Among these companies, 92 per cent have operations related to Mainland China.

Moreover, Hong Kong is not only acting as a bridge for EU firms entering the Mainland, it is also helping Chinese enterprises expand into EU markets. With support from the Mainland Government, Chinese enterprises and their products are increasingly capable of competing in the EU. Hong Kong businesses can provide Chinese companies with international know-how to help them market their products, through value-added services such as design and marketing, as well as provide one of the world's best transportation, distribution and logistics networks. All of these advantages reinforce Hong Kong's intermediary position between the EU and China.

3. New Advantages Arising from CEPA

Following the signing of CEPA in June 2003, the Central and SAR governments agreed to expand the landmark agreement in the form of CEPA II and CEPA III in August 2004 and October 2005, respectively. This has reinforced Hong Kong's role as a bridge between China and the EU. CEPA provides Hong Kong with comparative advantages in three areas: trade in goods, service sector investment opportunities and investment facilitation.

Since January 1, 2006, goods of Hong Kong origin have been entering China tariff free. According to China's WTO commitments, a tariff of more than 25 per cent will still apply on a range of non-Hong Kong products for many years after China's WTO accession. The zero-tariff treatment for Hong Kong goods under CEPA, therefore represents a substantial advantage.

CEPA rules of origin are often less stringent than those set under similar free trade agreements. Although labour costs in Hong Kong are relatively high, it may be profitable to carry out high value-added processes in the HKSAR for selected goods. Following the signing of CEPA, some EU enterprises expressed an interest in setting up factories or assembly lines in Hong Kong.

CEPA I, II and III collectively offer easier market access to 26 service sectors, either through relaxation of equity share restrictions for foreign investors, lower assets and registered capital requirements, early liberalization, or by opening up sectors not included in the WTO Protocol of Accession. This enhanced investment opportunity is available to companies that have been registered as doing business in the HKSAR for (usually) three years, regardless of the company's origin or headquarters.

The third section of CEPA articulates measures through which the Mainland and Hong Kong can establish and strengthen coordination mechanisms in such areas as trade and investment promotion, customs clearance, transparency in law and regulations, small and medium-sized enterprise promotion and traditional Chinese medicine and medical products. As CEPA is a "living" agreement, we believe future amendments will focus on establishing more investment facilitation mechanisms. They are useful for improving China's investment environment, attracting more overseas funds and promoting PRC investment abroad.

Relaxation of regulations under CEPA clearly show that China sees Hong Kong as a "testing ground" for assessing the impact that opening up to the world will have on its economy. As Hong Kong's role in this trial continues, businesses in Hong Kong will be able to grasp opportunities early to establish or expand operations in the Mainland and get the first-mover advantage from China's economic growth.

4. Pearl River Delta Integration

Hong Kong's economic integration with the Pearl River Delta (PRD) actually began more than 20 years ago, when Hong Kong manufacturers started migrating across the border. Since then, Hong Kong and the PRD have established a "shop in the front, factory in the back" arrangement. Not only Hong Kong manufacturers, but also EU manufacturing firms now follow this model.

Hong Kong is the logistics and financial hub for the Pear River Delta. Hong Kong handles 70 to 80 per cent of the delta's external trade and many enterprises in the PRD raise funds from Hong Kong financial market. As a service-oriented economy, Hong Kong's future lies in its ability to provide services to the manufacturing sector in the PRD as well as the whole country. EU firms should watch this development carefully to fully benefit from the economic growth of the PRD.

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