CEPA Supplement X: new moves towards freer trade with the Chinese mainland

Since the announcement of the Mainland-Hong Kong Closer Economic Partnership Arrangement (CEPA) in June 2003, the past decade has seen both the central and Hong Kong governments jointly announce additional liberalisation measures each year by way of adding a new Supplement to CEPA. In late August of 2013, both sides agreed on the latest package under Supplement X to CEPA, with the bilateral agreement scheduled for implementation in January 2014. Undoubtedly, CEPA and its 10 Supplements have formed an important framework for economic cooperation between the mainland and Hong Kong.

Thanks to CEPA, thousands of Hong Kong service suppliers (HKSS) have been able to set up shop on the mainland with market access terms that are more favourable than otherwise accorded to foreign investors generally pursuant to WTO provisions. Remarkably, Hong Kong has established itself to be the largest offshore Rmb centre with a clear first-mover advantage, with about 200 banks having introduced Rmb businesses, and Rmb deposits of more than Rmb780 billion. In addition, Hong Kong banks have established many subsidiaries, branches and sub-branches on the mainland, including more than 50 sub-branches set up in Guangdong Province, in accordance with CEPA’s cross location sub-branching provisions. Another impressive development is that since 2004 more than 120 million mainland tourists have visited Hong Kong as individual travellers as a result of the Individual Visitor Scheme (IVS), and they accounted for 67% of Hong Kong’s inbound mainland tourists in the first 10 months of 2013.

According to an estimate released in 2010, the Hong Kong government indicated that about half of the Hong Kong companies issued with HKSS certificates had established business operations on the mainland. Thus far, the top three HKSS certificate applicants come from the sectors of transport and logistics, distribution services and air transportation services, which account for about 60% of the approved total; and the percentage of such HKSS having established business operations on the mainland should be higher than the overall average.

Hong Kong service supplier certificate (Phase 1 to 11) as of Nov 2013

New moves towards freer trade with the mainland

Under CEPA Supplement X, 65 liberalisation service measures to widen and deepen the access of HKSS to the mainland market have been added, spanning 30 sectors, including 10 Guangdong pilot measures (contained in sectors highlighted in yellow in the table below). Together with the two newly open sectors of “duplicating services” and “after-death facilities services” under Supplement X, the mainland has increased the total number of liberalised service sectors under CEPA from 48 to 50, with the cumulative number of service liberalisation measures rising to 403.

Service sectors benefitting from CEPA (Phase 1 to 11)

* Existing service sectors with liberalisation under Supplement X to CEPA
~ Guangdong pilot and implementation measures under Supplement X to CEPA
^# New service sectors under Supplement X to CEPA

There are many “bright spots” in Supplement X, for example the permission to allow HKSS to establish fully-licensed joint-venture securities companies with majority ownership; along with the mainland’s undertaking to seriously study the mutual recognition of investment funds between the two places (please see the article on CEPA Supplement X and Hong Kong’s financial and distribution services sectors; and the breakthrough in permitting secondment of mainland lawyers to the Guangdong-based representative offices of Hong Kong law firms as consultants to advise on mainland law (see the article on CEPA Supplement X and Hong Kong’s professional services sector).

Another remarkable feature of CEPA Supplement X is the inclusion of a large number of liberalisation measures that allow HKSS to provide services in the mode of natural person movements, as seen in basically all sectors covered by Supplement X, with the exception of legal, banking, securities, fund management, market research, trade mark agency and personnel placement services.

Free trade with the mainland and Guangdong Province

In addition to providing business opportunities to Hong Kong companies and people on the mainland over the past decade, CEPA has been an important framework for economic cooperation between Hong Kong and the mainland, also cementing cordial cooperation with Guangdong. The Central government indicated as early as 2011 that it wanted to achieve basically free trade in services between the mainland and Hong Kong by the end of the 12th Five Year Plan period in 2015. This was then followed by a pledge from the Guangdong government in 2012 that the province would strive for basically free trade in services with Hong Kong by the end of 2014. It is not surprising to find Supplement X containing by far the largest number of service liberalisation measures considering the approaching targets to achieve basically free trade in services with either Guangdong or the mainland as a whole.

In retrospect, China was committed to liberalising 100 service sectors according to WTO classification upon its accession to the WTO in late 2001. When CEPA was first announced in June 2003, the mainland offered further liberalisation measures to Hong Kong, making CEPA WTO-plus not only a fact in the sectors covered, but also to the extent of liberalisation in the concerned service sectors. Currently, more than 90% of the 160 WTO service sectors are already open to Hong Kong under the CEPA framework, and it could be envisaged that the mainland will continue to open up WTO sectors relevant to Hong Kong in the lead up to 2015.

Nonetheless, the notion of achieving basically free trade between Hong Kong and the mainland is best seen in the context of national treatment being granted to HKSS in the service sectors already opened up by the mainland. Meanwhile, more than half of those WTO sectors are now completely open to Hong Kong, with HKSS granted national treatment accordingly, in particular the transportation and logistics sectors. Yet, with many service sectors remaining partially open, it will take further liberalisation measures, especially on the part of Guangdong, to accelerate the achievement of basically free trade in services with Hong Kong.

Keenly aware of the need to promote the early achievement of liberalisation of trade in services between Hong Kong and the province, the Guangdong government has drawn up an Outline Plan, as well as an Action Plan, relating to trade in services, while it has also released the Opinions on Accelerating the Development of Trade in Services, under which Guangdong is committed to progressively dismantling barriers to trade in services with Hong Kong, and supporting HKSS’ cross-border establishment of a commercial presence in the province.

A total of 10 service liberalisation measures for pilot implementation in Guangdong under Supplement X have been introduced, following the 17 measures introduced previously under Supplement IX. With Supplement X, the total number of Guangdong measures open to HKSS has risen to about 70, as the new package is implemented in 2014.

CEPA liberalisation and Guangdong measures

As Supplement IX incorporated five pilot measures specifically linked to Qianhai, a designated exemplary zone for the modern services industry, and innovative cooperation between Guangdong and Hong Kong, it may appear odd that, initially, Supplement X contains not a single Qianhai measure.

While Qianhai attached great importance to the adoption of pioneering liberalisation measures in Guangdong, one should not look beyond Guangdong’s announcement of the Opinions on Accelerating the Development of Qianhai in August 2013 to identify the provincial government’s continued commitment to reinforce the liberalisation drive in Qianhai, now an integral part of Guangdong’s overall economic reform. Apart from being given greater economic management authority, Qianhai will adopt 36 measures related to services liberalisation, enhancing the business environment and human resources provision. This comes on top of the 22 Qianhai measures adopted in 2012, announced in parallel to the release of Supplement IX to CEPA in August 2012.

While CEPA may not be the only arrangement with which service market reforms for foreign investment are introduced in Guangdong, Hong Kong companies look set to find emerging service market opportunities in Qianhai and other parts of Guangdong given the province’s emphasis on pilot implementation measures in achieving basically free trade with Hong Kong.

Guangdong-Hong Kong cooperation on CEPA and Guangdong Free Trade Zones

Following the 2013 Policy Address, Hong Kong formed a CEPA Joint Working Group with Guangdong, with the first meeting held recently to discuss matters relating to Guangdong’s CEPA implementation. The Working Group followed the cooperation agreement signed between the Hong Kong and Guangdong governments in September 2012 to expedite the early realisation of basic liberalisation of services trade between the two places.[i]

Meanwhile, it has been reported that Guangdong intends to develop free trade zones involving both Hong Kong and Macau, with Qianhai, Hengqin and Zhuhai expected to be candidates to host the new FTZs, following the launch of the Shanghai Pilot Free Trade Zone in August 2013. While realisation of those Guangdong FTZs may await Central government authorisation, Guangdong is expected to keep unveiling new measures to attract business and investment to expedite market reforms. Meanwhile, Guangdong is undergoing pilot reforms of the administrative approval system in cities such as Shenzhen, Dongguan and Zhuhai, rolling forward the business registration system.

Whether Guangdong will launch its FTZs involving Hong Kong shortly remains to be seen, but CEPA will undisputedly continue to be an important framework for Hong Kong to enhance economic cooperation with the mainland, in particular Guangdong, with pilot implementation measures. As such, new liberalisation measures adopted in 2014, which are the largest number of CEPA measures for any Supplement, mark a clear and important step towards achieving basically free trade in services between Hong Kong and the mainland or Guangdong.

[i] Co-operation Agreement between Hong Kong and Guangdong on Jointly Promoting Early Realisation of Basic Liberalisation of Trade in Services