CEPA Supplement X and Hong Kong's Transportation and Tourism Service Sectors

As an international transportation and sourcing hub, Hong Kong is renowned for its efficient logistics and supply chain services. With growing intra-Asia trade and China’s ascendance to be the world’s manufacturing centre, many overseas transportation and logistics service companies have chosen to set up regional headquarters and offices in Hong Kong to capitalise on the fast growing opportunities in Asia. Of the 1,379 overseas companies having established regional headquarters in Hong Kong in 2013, 131 or 9.5% of them were engaged in the sector of transportation, storage and courier services.

Hong Kong’s tourism and exhibition sector has boomed in the past decade, thanks in no small measure to CEPA measures. The surge in inbound mainland tourists, many of whom are business tourists and trade fair visitors and exhibitors, can be attributed to the Individual Traveller Scheme and CEPA provisions, which open up the mainland’s outbound tourism and exhibition market.

CEPA liberalisation and Hong Kong’s transportation and logistics sector

Based on the latest official statistics,[1] Hong Kong’s logistics sector accounted for about 3.6% of Hong Kong’s GDP in 2011, down from 4.2% in 2001. In terms of employment, the sector hired about 190,500 people and accounted for 5.3% of Hong Kong’s total employment in 2011, down from 5.8% in 2001, when people hired in the sector stood at about 187,900. In comparison with the other pillar industries, the logistics sector’s performance is relatively lacklustre. In the five years to 2011, the logistics sector’s value-added growth decreased at an average annual rate of 1.3%, contrasting with the positive growth registered in other pillar industries.

China’s WTO ascension in 2001 brought about a major round of industry liberalisation in the country’s logistics and transportation sector, followed closely by the offer, under CEPA to Hong Kong in 2004, of a wide range of WTO-plus measures. While China phased in all its WTO commitments over the first five years after ascension, liberalisation measures have been successively added since 2006 through CEPA supplements to enable Hong Kong service suppliers (HKSS) to better tap into business opportunities on the mainland.

Based on HKSS certificate categorisation, “transportation and logistics” and “air transport” ranked first and third in terms of the numbers of issued HKSS certificates, reaching, respectively, 636 and 165 as of the end of November 2013, and combining to account for about 44% of total HKSS certificates. There are no separate statistics for maritime transport, rail transport, road transport and logistics.

Service sectors benefitting from CEPA (Phase 1 to 11)

* Existing service sectors with liberalisation under Supplement X to CEPA
~ Guangdong Province pilot and implementation measures under Supplement X to CEPA
^# New service sectors under Supplement X to CEPA
Existing transportation and tourism service sectors with liberalisation under Supplement X are entered in green boxes, and those without liberalisation in blue boxes

Maritime transport services

Of the dozen liberalisation measures for Hong Kong’s transportation and logistics sector under Supplement X, three of them are related to the maritime transport sector, in keeping with the mainland government’s 12th Five-Year Plan commitment to support Hong Kong, reinforce and enhance the city’s status as an international maritime centre, while generating more business opportunities to HKSS on the mainland.

For maritime services, CEPA generally allows HKSS to have a lower threshold when it comes to licensing and greater flexibility in service provision compared with the conditions that apply to other foreign companies. HKSS are allowed to form wholly owned units, with national treatment given in many areas, and expeditious approval or registration of applications for their operating units in Guangdong.

For foreign-invested enterprises, China's Regulations on the Administration of Foreign Investment in International Marine Transportation stipulate that only minority-owned joint ventures are allowed to provide services that include the following: international shipping agency, international ship management, international shipping, maritime cargo-handling services, customs clearance services for maritime transport, container station and depot services, international marine shipping, freight loading and unloading, and international marine shipping container terminal and yard businesses. By contrast, HKSS are allowed to form wholly owned units that provide a wide range of maritime services.

Service areas in which HKSS can operate as wholly owned enterprises include international ship management services, container station and depot services, non-vessels operating common carrying services, port cargo loading and unloading services, tug services between Hong Kong and mainland ports, ship maintenance and repair services, international ocean container leasing, buying and selling as well as trading of container parts, and ship survey services for ships registered in Hong Kong. In addition to acting as service suppliers, Supplement X widens the business scope of HKSS by allowing them to act in the capacity of investors to construct port facilities along with operating port cargo handling, yards and warehousing. HKSS are also given national treatment in that the requested capital amounts are identical with those for their mainland counterparts.

In Guangdong, HKSS are allowed to set up wholly owned enterprises to provide regular business services such as shipping undertaking, issuance of bills of lading, settlement of freight rates, signing of service contracts, and so on, for shipping transport between Hong Kong and Class B ports in Guangdong operated by HKSS, using chartered mainland vessels. Additionally, HKSS are allowed to set up wholly owned enterprises and branches in Guangdong on a pilot basis that provide shipping agency services to vessel operators for routes between Guangdong and Hong Kong and Macau.

Under Supplement X, HKSS are given greater preferential treatment, with administrative expediency expected to further improve with delegation to Guangdong’s transport authorities approval of HKSS’ applications for general water cargo transportation between Hong Kong and Guangdong, and applications for shipping liners engaged in waterborne transportation between Hong Kong and Guangdong for changing the relevant records of ships. Furthermore, Guangdong’s transport authorities are delegated to deal with the registration of foreign-invested enterprises operating international ship management services established by HKSS in Guangdong. Regarding the registration of an HKSS’ operating unit engaged in international maritime container stations, container yard services, and international cargo warehousing services in Guangdong, it is delegated to the provincial transport authorities of prefecture-level or above.

Consistent with the general thrust of Supplement X, HKSS in the maritime services sector are allowed to have their contractual service providers provide cargo handling services as well as container station and depot services in the mode of movement of natural persons on the mainland.

^# For a HKSS providing maritime transport services, 50% or more of the ships owned by it, calculated in terms of tonnage, should be registered in Hong Kong, as set out in CEPA Annex 5. But this 50% tonnage requirement is not applicable to HKSS that provide towing services.
~ Guangdong pilot measure under Supplement X to CEPA
* Include services under this sector or sub-sector

Air transport sales agency services

CEPA provides enhanced access to HKSS in the provision of air transport sales agency services, as they are allowed to set up wholly owned, equity and contractual joint-venture units to provide air transport sales agency services on the mainland to cover both domestic as well as international routes (including Hong Kong, Macau and Taiwan), that is, Type I and Type II air passenger and freight sales agency services. National treatment is given in the area of registered capital requirement, which is the same as that for mainland enterprises.

CEPA provides administrative expediency in terms of licensing applications. For example, China’s Qualification Procedures for China Civil Aviation Transportation Agency Services issued by the China Air Transport Association (CATA) stipulates that the applications for Type I and Type II air transport sales agencies on the mainland, irrespective of the extent of equity ownership, are required to go through a substantive initial vetting by CATA's local representative offices. Contrastingly, HKSS can submit their application materials directly to CATA for examination.

CEPA offers a wider scope of parties eligible for providing an economic guarantee for HKSS in their applications to set up air transport sales agencies on the mainland. Apart from submitting an economic guarantee from China-capital banks on the mainland or guarantee companies recommended by CATA (provided that the registered capital of the China-capital enterprise is not lower than that of the Hong Kong enterprise being guaranteed), HKSS are allowed to obtain economic guarantees by mainland-incorporated banks, including both domestic and foreign banks.

Apart from its commercial presence, Supplement X to CEPA considerably enhances the operational flexibility of HKSS by allowing them to provide, in the mode of cross-border supply, sales agency services for international flights or regional flights between Hong Kong, Macau and Taiwan for the mainland. Contractual service providers employed by HKSS can offer air transport sales agency services on the mainland, with the exclusion of those not eligible for the statutory operating body qualification in such service activities.

* Include services under this sector or sub-sector

Road Transport Services

Foreign enterprises involved in road freight transport services are allowed to form wholly owned operating units on the mainland, generally with an operating licence of 12 years. If more than half the investment is used in constructing road freight stations and related facilities, the operational tenure can be lengthened to 20 years. According to mainland regulations, services that can be typically rendered at road freight stations include warehousing, storage, cargo handling, container transhipment and logistics operations. For road passenger transport services, foreign enterprises are allowed to form equity joint-venture units with percentage holding limited to 49%. Half of the registered capital should be used in the construction of the infrastructure of passenger transport facilities and the vehicles put in use should be passenger cars of middle level or above.

CEPA currently allows HKSS to establish wholly owned enterprises for the provision of road freight transport and related services like road freight transportation stations (depots) and motor vehicle repair services. Except for explicit delegation to the provincial level, approval is vested in the Ministry of Transport. As part of Guangdong’s pilot implementation measures, CEPA stipulates that Guangdong is delegated as the authority to approve HKSS’ applications for the provision of road freight transport services as well as transport-related services including road passenger and freight transport stations (depots), repair and driver training enterprises, a provincial practice that has been effective from 2009. Supplement X further enhances market access conditions by removing the project establishment requirement for HKSS in respect of their investment in road freight transport and motor vehicle repair services in Guangdong Province, with the applications processed and approved in accordance with the existing national laws and regulations.

In an apparent extension of the Guangdong measures to Fujian Province, HKSS are allowed to set up road passenger transport stations (depots) in Fujian in the form of a contractual joint venture, or equity joint venture with percentage shareholding limited to 49%. Further, Fujian's transport authorities are delegated to examine or approve applications of HKSS investing in the manufacturing activities for the establishment and modification of business in respect of providing road passenger and freight transport (depots) in the province.

Regarding road passenger transport services, CEPA allows Hong Kong’s franchised bus service companies to establish wholly owned units to provide public transport services in the mainland’s municipal cities. Franchised and non franchised bus services companies, as well as public light bus operators, are allowed to set up joint-venture units to provide inter-city bus services in nine mainland provinces or autonomous regions (namely, Guangdong, Guangxi, Hunan, Hainan, Fujian, Jiangxi, Yunnan, Guizhou and Sichuan). In addition, HKSS are allowed to set up wholly owned units to provide road passenger transport services in the Western Region, and joint-venture units to provide inter-urban regular passenger transportation services.

* Include services under this sector or sub-sector.

Freight forwarding agency services

As China phased in its entire WTO commitments, market access privileges initially provided to HKSS upon CEPA inception and enhanced with streamlined administrative measures, were then applied to other non-CEPA foreign enterprises, as in the area of establishing wholly owned operating entities. Nonetheless, HKSS are essentially given national treatment on the mainland in their establishment of a commercial presence to provide freight forwarding agency services. They are allowed not only to operate wholly owned enterprises, but also register with minimum capital requirements, the same as those for mainland enterprises.

Supplement X provides greater flexibility for HKSS operating in the freight forwarding agency business, as they are allowed to employ contractual service providers to provide such services in the mode of movement of natural persons.

Transport services provided by individually owned store (IOS) operators

CEPA makes a significant contribution to creating business opportunities and promoting entrepreneurship in a wide range of service areas for people from Hong Kong, without any geographical restrictions. The IOS provisions fall outside of China’s WTO ascension protocol commitment, and are a privilege given to Hong Kong’s permanent residents with Chinese citizenship, freeing them of the relatively more cumbersome approval procedures otherwise applicable to foreign investment.

Under the IOS scheme, Hong Kong people are allowed to establish business units to provide certain logistic and transportation services, including goods handling and loading/unloading services related to road freight transport, storage and warehousing services with the premises not exceeding 500 sqm, and transport services other than an international freight forwarding agency and courier services. Each IOS operation should engage no more than 10 persons.

Tourism and travel-related services

The latest Hong Kong official statistics[2] indicate that Hong Kong’s tourism sector accounted for about 4.5% of Hong Kong’s GDP in 2011, almost double the 2.3% in 2001. In terms of employment, the sector hired about 233,500 people, which represented 6.5% of Hong Kong’s total employment in 2011, up sharply from 3.7% in 2001.

Among the pillar industries, the tourism sector has chalked up the best performance, in particular the inbound tourism segment, which has been helped by CEPA’s Individual Visitor Scheme (IVS) that allows mainland tourists to visit Hong Kong as individual travellers. More than 120 million IVS tourists from the mainland have come to Hong Kong since 2004, and they alone accounted for 67% of Hong Kong’s inbound mainland tourists in the first 10 months of 2013. In the five years to 2011, the inbound and outbound tourism sectors expanded, respectively, at average annual rates of 14.4% and 4.6%, while the overall economy increased by about 5.2% annually over the same period.

One of the major advantages of CEPA for Hong Kong companies seeking mainland opportunities is the substantial lowering of market access thresholds, as most of them are small to midsize enterprises with limited financial resources and low business turnover. While wholly owned operations are allowed for foreign investors, Supplement X further helps HKSS by requiring no reference to annual business turnover in their application for mainland registration. In addition, they are given national treatment with respect to the requirements for business premises, business facilities and minimum capital for registration of travel agencies on the mainland. Under Supplement X, HKSS gains additional flexibility in the travel agency and tour operating business, as they can employ contractual service providers in supplying the concerned services in the mode of natural person movements.

As part of the pilot implementation scheme, CEPA stipulates that Guangdong is delegated as the authority to approve HKSS applications setting up travel agents on a wholly owned, equity or contractual joint-venture basis in the province. Hong Kong permanent residents with Chinese citizenship are further allowed to take an examination to qualify as mainland tour guides.

Under CEPA, the mainland agrees to open up its outbound tourism market to Hong Kong travel agencies, a remarkable endeavour not extended to other non CEPA service operators. HKSS are allowed to set up wholly owned or joint venture travel agencies in Guangdong to apply to conduct group tours to Hong Kong and Macau on a pilot basis for permanent residents, in the nine provinces and autonomous regions of Guangdong, Guangxi, Hunan, Hainan, Fujian, Jiangxi, Yunnan, Guizhou and Sichuan.

To help HKSS capture business opportunities in light of the mainland’s booming domestic tourism sector, CEPA allow HKSS to establish wholly owned units to construct, renovate and operate hotels (on top of restaurants and apartment buildings) with no geographic restriction.

* Include services under this sector or sub-sector

Convention and exhibition services

Hong Kong’s convention and exhibition market has been helped in the past decade by CEPA, which allows HKSS’ operating units on the mainland to organise outbound exhibitions on top of mainland exhibitions. China opened up its local market of convention and exhibition services to foreign invested companies as early as 2004, but they are prohibited from organising exhibitions in the overseas or outbound markets. Opening up the outbound market not only marked a significant liberalisation measure on the part of the mainland authorities, but also gave more choices to mainland enterprises in attending offshore exhibitions.

HKSS were allowed to set up exhibition companies on the mainland to organise outbound exhibitions on a pilot basis for enterprises registered only in Guangdong and Shanghai, in 2007, and more places have been sequentially added to cover Beijing, Chongqing, Fujian, Guangxi, Guizhou, Hainan, Hunan, Jiangxi, Sichuan, Tianjin, Yunnan and Zhejiang. From 2013, HKSS are allowed to set up contractual JV enterprises across the mainland to conduct overseas exhibition businesses on a pilot basis, with participating enterprises being those registered in the concerned province, autonomous region or municipality.

As the lead province undertaking pilot measures, Guangdong is entrusted with the authority to approve HKSS applications for organising foreign economic and technical exhibitions with an exhibition area exceeding 1,000 sqm in the province. Yet, exhibitions using the word "China/Chinese" at the beginning of their titles still require the approval of the Ministry of Commerce upon notification by the relevant Guangdong authorities.

As a trade fair capital, Hong Kong has attracted many international players to establish their presence in Hong Kong given CEPA's advantages, yet many of Hong Kong's exhibition companies are relatively small and may lack the resources to run permanent establishments on the mainland in relation to the convention and exhibition business. Supplement X allows contractual service providers employed by HKSS to provide convention and exhibition services in the mode of movement of natural persons on the mainland. This new measure further supplements the existing practice that HKSS are allowed to organise mainland exhibitions on a "cross-border supply" basis, which covers basically the major locations where exhibitions are held on the mainland, namely, Beijing, Chongqing, Fujian, Guangdong, Jiangsu, Shanghai, Tianjin and Zhejiang.

* Include services under this sector or sub-sector
^# Subject to the approval of the China Council for the Promotion of International Trade (CCPIT), according to the relevant mainland laws and regulations.
^## Subject to the approval of the Ministry of Commerce (MOFCOM), according to the relevant mainland laws and regulations.
^### Subject to MOFCOM approval upon notification by Guangdong Province's commerce authorities only if exhibitions use the word "China/Chinese" at the beginning of their titles.

[1] The Hong Kong Census and Statistics Department released in April 2013 The Four Key Industries and Other Selected Industries in the Hong Kong Economy.

[2] As above