CEPA Supplement X and Hong Kong’s Cultural and Creative Industries

Hong Kong’s cultural and creative industries (CCI) are a very dynamic sector of the local economy. CCI, along with the sectors of medical services, testing and certification services, environmental industries, innovation and technology, educational services, are considered industries in which Hong Kong enjoys comparative advantages. They started to be treated as a new grouping in 2010, in both GDP and employment terms, to compile official statistics,[i] and to an extent, industry development and promotion by the Hong Kong government. [ii]

CCI are knowledge-based industries and their output is often translated into intellectual properties (IP), typically consisting of copyrights, industrial designs, trade marks and patents. Based on international guidelines together with local adaptations, Hong Kong’s CCI are classified into having 11 domains, (i) art, antiques and crafts; (ii) education and library, archive and museum services; (iii) performing arts; (iv) film, video and music; (v) television and radio; (vi) publishing; (vii) software, computer games and interactive media; (viii) design; (ix) architecture; (x) advertising; and (xi) amusement services.

CEPA and cultural and creative industries

Statistically, CCI accounted for 4.7% of Hong Kong’s GDP in 2011, up from 4% in 2009. As a group, their GDP contribution was greater than either the tourism or logistics and transportation sectors in Hong Kong.[iii] CCI hired about 193,000 people in 2011, or 5.4% of Hong Kong’s total employment for that year, which represented little change from the level in 2009. [iv]

Notably, liberalisation measures related to constituent CCI domains were introduced at the outset of CEPA implementation a decade ago, followed by official CCI conceptualisation and compilation of related statistics in Hong Kong. Since Supplement VI, CCI-related measures have been introduced on a yearly basis, with no exception in Supplement X (green boxes in the table below). This article examines some CCI segments which receive liberalisation measures under Supplement X, while the analysis of other selected industries such as testing and certification services is placed in another article CEPA Supplement X and emerging growth service sectors in Hong Kong.

Service sectors in which Hong Kong enjoys comparative advantages

For the purpose of analysis, it should be noted that mapping between the CEPA sectors and CCI segments can be sufficiently direct with an almost one-to-one correspondence in some cases, but not in the others. For instance, the CEPA sector of advertising finds a perfect match with the CCI segment above of (x) advertising; the CEPA sector of library, museum and other cultural services is largely in line with the CCI segment above of (ii) education and library, archive and museum services, with a separate CEPA sector of education services. Similarly, the CEPA sector of audio-visual services overlaps well with the CCI segments above of (iv) film, video and music, and (v) television and radio.

Nonetheless, the CCI segment above of (vii) software, computer games and interactive media spans the CEPA sectors of computer and related services, and cultural services (i.e. internet culture business units). Of note is that the CEPA sector of cultural services also deals with performing arts agencies and performance venues, which corresponds to the CCI segment above of (iii) performing arts. The CCI segment of architecture, however, is an integral part of the CEPA sector of construction and related engineering services, and yet for the purpose of CEPA analysis, is covered under “professional services” in the article CEPA Supplement X and Hong Kong’s professional services sector.

Categorisation difficulties notwithstanding, the article looks at the Supplement X measures in the CEPA sectors of audio-visual services, computer and related services, cultural services, printing services, and trade mark agency services (green boxes below). While printing is not among the CCI domains, it is included in this analysis as it sits right at the downstream portion of the same value chain. In the same vein, the sector of trade mark agency service is also included too. Some other CEPA sectors, though without liberalisation measures under Supplement X, are treated as part of the analytical framework, such as patent agency, photographic, translation and interpretation services (blue boxes).

Service sectors benefitting from CEPA (Phase 1 to 11)

* Existing services sectors with liberalisation under Supplement X to CEPA
~ Guangdong Province pilot and implementation measures under Supplement X to CEPA

Audio-visual services

Hong Kong has a vibrant creative sector in the generation of audio-visual content, be it film, television, music or digital entertainment. Existing CEPA measures have opened up significantly the mainland market for Hong Kong services suppliers (HKSS) in the sector audio-visual services, including cinema operations, production and distribution of audio-visual products, motion pictures and television drama.

Of the six measures for the audio-visual services sector, the most visible one is the breakthrough that allows Hong Kong-produced motion pictures privileged access to the mainland market, as they can be screened on the mainland with the original dialect sound track, along with standard Chinese subtitles. Yet, these dialect-version Hong Kong-produced movies are to be imported solely by the China Film Group Corporation’s Film Import and Export Corporation for distribution and screening on the mainland, after being examined by and obtaining approval from the relevant mainland authorities, again on the condition that standard Chinese subtitles are provided.

These measures enrich the current practice of allowing Cantonese versions of Hong Kong-mainland co-productions to be distributed and screened in Guangdong Province in two aspects. First, Hong Kong-produced movies rather than co-productions are entitled to such benefits and second, there is no restriction on Cantonese-version movies being screened and distributed in Guangdong. In addition, Supplement X widens the scope of film processing permitted to be carried out in Hong Kong, with HKSS allowed to process mainland as well as mainland-Hong Kong co-productions in Hong Kong, on top of post-productions.

In terms of the mode of commercial presence, HKSS are allowed to set up wholly owned or joint-venture (JV) enterprises on the mainland to distribute, as well as produce videos and sound recording products (including movie products), allowing them to vertically integrate their audio-visual production and distribution businesses. In addition, HKSS are allowed to establish wholly owned enterprises on a pilot basis to distribute mainland-produced movies after obtaining the approval of the relevant mainland authorities.

Under Supplement X, HKSS gain additional operational flexibility, as they can hire contractual providers to engage in motion picture or videotape production services on the mainland in the mode of movement of natural persons. While production of audio-visual products falls under the restrictive categories for foreign-invested enterprises (FIEs), CEPA creates business opportunities not just for HKSS, but also Hong Kong people, as permanent residents with Chinese citizenship are allowed to apply for the License for Operating Audio and Video Products to set up individually owned stores.

* Include services under this sector or sub-sector

Computer and related services

CEPA lowers entry barriers and provides greater flexibility for HKSS targeting the mainland market of software implementation and data processing services. In terms of commercial presence, HKSS are allowed to set up wholly owned enterprises to provide software implementation and data processing services, as opposed to the formation of joint-venture enterprises by other foreign service providers. The mode of service delivery is enhanced by Supplement X, which adds the clause to allow the employed service providers of HKSS to provide software implementation and data processing services on the mainland in the mode of movement of natural persons.

In addition to allowing HKSS to provide software implementation services covering all consultancy services related to the development and implementation of software (including both packaged and customised software), and data processing services covering input preparation, data processing and tabulation, time-sharing and related services, CEPA opens up the market of database services to HKSS, which was not a WTO-accession protocol requirement. Currently, HKSS can form equity joint-venture enterprises with shareholding limited to 50% on the mainland to provide database services, covering internet data centre services, store and forward services, and content services.

As the regional demand for database services continues to increase, particularly in light of the rapid uptake of cloud computing, Hong Kong needs to reinforce its appeal as a regional service platform while managing to secure cost-economical back-end support, including the provision of database services. As such, CEPA supplements the development of Hong Kong as a key data centre market, allowing HKSS to upscale its database capability and provide cross-boundary database services in Qianhai and Hengqin on a pilot basis.

As of the end of November 2013, a total of 17 HKSS certificates had been issued in the sector of computer and related services.

* Include services under this sector or sub-sector

Cultural services

The scope of cultural services under CEPA covers two main areas, performing arts and related services on the one hand, and internet business services on the other. For both areas, HKSS enjoys much greater business flexibility than non-CEPA foreign service suppliers.

HKSS are allowed to establish wholly owned enterprises to operate performing venues, performing arts agencies, art galleries, art shops and artwork exhibition units on the mainland. In addition, wholly owned operations are allowed in the area of internet online service business premises, while contractual joint-venture operations are permitted for both internet culture business units and internet online service business premises. In comparison, other foreign service providers are allowed to form joint ventures in the market of performing arts and related services.

The operation of internet cultural business is essentially the operation of websites or the provision of cultural products produced, disseminated and circulated through the internet. On the mainland, internet cultural products cover online music entertainment, online games, online shows and plays, online works of art and online cartoons and other cultural products. The Ministry of Culture (MOC) promulgated a new version of the Tentative Provisions on the Administration of Internet-based Cultural Operations (“Tentative Provisions”) that went into effect in April 2011. While setting out the implementation rules for the administration of online cultural businesses on the mainland, the Tentative Provisions notes that internet culture businesses are now a permitted category for foreign investment. Nonetheless, with the exception of online music entertainment, foreign-invested applications to conduct other forms of internet cultural business activities are currently “temporarily” not accepted by the MOC or concerned provincial authorities.

Regarding the establishment of internet culture business units, this is a business area that HKSS can much better explore on the mainland given their CEPA advantages, yet it remains largely closed to other foreign service operators, even though the latter are now permitted to tap into the mainland’s booming online music market, which is an improvement on previous rules that explicitly prohibited foreign investors from setting up or operating internet-based cultural activity units.

For HKSS intending to operate internet culture business units on the mainland, the minimum capital requirement stands at Rmb1 million with the exception of online game operations, which sets the minimum capital requirement of Rmb10 million. This may be a hurdle for Hong Kong online game developing companies, most of which are SMEs. As of the end of November 2013, a total of 16 HKSS certificates had been issued in the cultural services sector.

Printing services

Strictly speaking, printing is not part of the cultural and creative industry domains, as previously mentioned, and it is included in this analysis simply owing to the fact that printing forms a critical part of the value chain. CEPA is instrumental in lowering the thresholds of HKSS in entering the mainland’s printing services market, and this can be reflected by a surge in the associated HKSS application and approval numbers over the past few years. As of the end of November 2013, a total of 106 HKSS certificates had been issued in the printing services sector, making it the fifth largest group of HKSS recipients.

Compared to a minimum registered capital requirement of Rmb10 million in respect of setting up of printing enterprises to provide printing services for packaging materials by other foreign companies, HKSS are accorded national treatment in respect of the minimum capital requirement for setting up printing enterprises to provide packaging material printing services, down substantially from Rmb10 million to Rmb1.5 million.

In addition to being allowed to set up minority-owned JV enterprises on the mainland in the printing of publications and other printed matters, HKSS are further allowed under Supplement X to set up contractual joint-venture enterprises to engage in the printing of publications and other printed matters, with the mainland investors holding dominant position in these enterprises. On the other hand, if HKSS are to set up these operations in Qianhai and Hengqin, their holding in an equity joint-venture is limited to 70%. Supplement X increases the operational flexibility of HKSS by allowing them to hire contractual service suppliers in providing printing and auxiliary services in the mode of movement of natural persons.

Currently, HKSS are allowed to engage in an array of pre-press services such as proofreading, design and typesetting for books, and they can set up typesetting and production operations on the mainland on a wholly owned, equity or contractual joint-venture basis. A new initiative promised under Supplement X for HKSS is the simplification of the approval procedures for importing Hong Kong books, and a Green Passage will be established for the importation of Hong Kong books.

* Include this sector and sub-sectors

Trade mark agency services

China has ranked first since the early 2000s in terms of the numbers of both resident- and non-resident trade mark applications, thus underscoring the enormous business opportunities for practising trade mark agencies. The allowable business scope of a trade mark agency on the mainland includes (i) the handling of trade mark applications, modification, renewal, assignment, opposition, revocation, examination and infringement, (ii) the provision of providing legal advice and acting as a legal consultant on trade mark laws, and (iii) handling of other trade mark related legal matters.

China’s soaring trade mark applications Source: WIPO statistics database (last updated in May 2013)

Under CEPA, HKSS are allowed to provide trade mark agency services on the mainland after registering with the Administration for Industry and Commerce at the provincial level and acquiring the qualification of a statutory operating body.

According to the Temporary Measures Concerning Trade Mark Agency by Service Providers from Hong Kong and Macau SAR on the Mainland, HKSS are permitted to set up limited-liability corporations on the mainland to undertake trade mark agency services in the form of joint ventures, cooperative enterprises and Hong Kong-invested enterprises. HKSS gain additional operational flexibility from Supplement X, which allows their contractual service suppliers to provide trade mark agency services on the mainland in the mode of movement of natural persons.

[i] Hong Kong’s Census and Statistics Department (C&SD), after completing a review of the statistical framework for the city’s CCI, taking into account international statistical guidelines and adapting to the economic situation in Hong Kong, released in 2011 aggregate CCI statistics in value added and employment for 2008 and 2009; and in 2012 released detailed CCI statistics for the 11 component domains for 2005 to 2010.

[ii] In the 2013 Policy Address, the new HKSAR government considered it imperative to review the overall development strategies for those new industries, given the clashes between serving local demand and promoting industry growth in the medical and education sectors. The government noted that the medical sector is facing a manpower shortage, while Hong Kong’s ageing population has increased the local demand for healthcare services. On the other hand, the government also found that public is divided over whether education services should be regarded as an industry.

[iii] CCI mainly covers the private sector production activities, and services provided by government departments in Hong Kong are therefore excluded.

[iv] The Hong Kong C&SD released in April 2013 The Four Key Industries and Other Selected Industries in the Hong Kong Economy, with the 2011 figures being the latest statistics. In one feature article on CCI, C&SD noted that statistics for 2005 to 2008 may not be strictly comparable to data for 2009 and onwards.