CEPA 2015 – Free Trade with Guangdong in Transportation and Tourism Services

Hong Kong is the world’s eighth largest trading economy with merchandise trade valued at more than four times its nominal GDP. Attracted by Hong Kong’s position as an international sourcing hub, one underpinned by efficient logistics and supply chain services, 1,389 international companies established regional headquarters (RHQs) in the city in 2014, with almost 40% of these companies engaged in cross-border and local trade, while 9% had interests in transportation, storage and courier services. In terms of access to the mainland market for Hong Kong services suppliers (HKSS), “transportation and logistics” and “air transport” were ranked first and third, respectively, based upon the number of HKSS certificates issued. As of March 2015, 1,356 transportation and logistics and 234 air transport certificates had been issued. In aggregate they accounted for 55% of all 2,893 HKSS certificates. There are no separate statistics for maritime transport, rail transport, road transport and logistics.

In 2014, more than 60 million visitors – the equivalent of 8.4 times the size of Hong Kong’s local population - travelled to the city. Inbound tourists, including business travellers, trade fair participants, and the exhibition sector, are a key contributor to the Hong Kong economy, not to mention the enormous tourist spending at retail stores, hotels and restaurants. The boom in Hong Kong’s tourism and exhibition sector over the past decade has been accelerated by CEPA’s many liberalisation and facilitation measures. The Individual Visit Scheme (IVS), in particular, saw IVS travellers account for more than 66% of the 47 million-plus visitors from the Chinese mainland in 2014.

The Agreement between the Mainland and Hong Kong on Achieving Basic Liberalisation of Trade in Services in Guangdong (“Guangdong Agreement”), effective from March 2015, adopts a negative-list approach with respect to the market access for HKSS in Guangdong. HKSS operating in Guangdong are essentially accorded the same rights as their mainland counterparts in the province, except for reserved restrictions laid down in the negative list. On the whole, the breadth and depth of liberalisations under the Guangdong Agreement exceeds the previous CEPA Supplement measures. Without exception, they cover all sub-sectors of Hong Kong’s four pillar industries – finance, tourism, trade and logistics [1] and professional services.

The Guangdong Agreement has been designated as a subsidiary agreement, rather than a CEPA supplement. This is in light of the new hybrid approach and the focussed market access for HKSS through having a commercial presence in Guangdong. The following table illustrates the liberalised sectors established under CEPA since its inception (Phase 1) through to the Guangdong Agreement (Phase 12). The boxes in yellow and orange show the newly added sectors under the Guangdong Agreement with, respectively, national treatment and reserved restrictive measures on the negative list for HKSS. Similarly, the boxes in green and blue show the existing liberalised sectors with, respectively, national treatment and reserved restrictive measures for HKSS [2]. Sectors with liberalisation measures concerning cross-border services on the positive list of the Guangdong Agreement are in the grey boxes. With the Guangdong Agreement, HKSS are given enhanced access to the transportation and tourism services market in Guangdong.

Maritime Transport Services

The transport and logistics sector has been the sector with by far the greatest number of positive-list liberalisation measures accorded under CEPA since 2004. As a sub-sector, maritime transport services have been granted about 20 liberalisation measures. This makes it the top-ranked transport sub-sector, in keeping with the Central government’s commitment to support, reinforce and enhance Hong Kong’s position as an international maritime centre. Invariably, HKSS enjoy a lower threshold when it comes to licensing and more flexibility in the provision of services compared with non-CEPA foreign companies. They are allowed to form wholly-owned units, with national treatment given in many areas, as well as being given 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 foreign companies are allowed to form minority-owned joint ventures, which provide a limited number of services [3]. By contrast, HKSS can operate as wholly-owned enterprises including: 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. Furthermore, HKSS can act as investors in the construction of port facilities, as well as handling port cargo, yards and warehousing, with national treatment given in terms of capital requirements.

Effective from March 2015, the Guangdong Agreement allows HKSS to receive national treatment in new areas, though there are reserved restrictions outlined in the negative list. For instance, HKSS are now given national treatment in Guangdong when providing the maintenance and repair of vessels; rental of vessels with crew (excluding coastal waterway transportation); passenger and freight transportation (minority ownership and where mainland suppliers cannot meet the demand); materials supplying support (excluding fuel and water); and vessel registration (minority ownership). The Guangdong Agreement explicitly states the conditions HKSS need to fulfil to be eligible for national treatment. For maritime passenger or freight transportation, the capital contributions of HKSS in an equity joint venture in Guangdong will be capped at 50%. Additionally, they may only seek to provide such services if the local supply in Guangdong is outstripped by demand. Aside from possessing good pre-establishment operating records, any intended change in the equity holding of HKSS in the joint venture post-establishment must obtain the approval of the original authority-in-charge.

Apart from the measures mentioned above, the Guangdong Agreement essentially reiterates the CEPA Supplement measures, by allowing HKSS to set up wholly owned units to provide regular business services. These include shipping undertaking, issuance of bills of lading, settlement of freight rates, signing of service contracts, and so on, for vessels that they own and operate; for shipping transport between Hong Kong and Class B ports in Guangdong that they operate using chartered mainland vessels; and shipping agency services [4] to vessel operators for routes between Guangdong and Hong Kong and Macau. Similarly, third-party international shipping agency services are allowed under the Guangdong Agreement, which also caps the shareholding of HKSS to 51% in the equity joint venture.

In keeping with the goal of achieving free trade between Guangdong and Hong Kong, applications for many liberalisations are processed by the transport authorities in Guangdong in order to expedite administrative matters [5]. The table below shows the access that HKSS have under CEPA compared to non-CEPA service suppliers. Where it is not explicitly indicated as liberalisations under the Guangdong Agreement, the concerned liberalisations for HKSS are reported as positive listings under the respective CEPA Supplements.

# 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.
* Includes services under this sector or sub-sector

Air Transport Services

Prior to the Guangdong Agreement, all of CEPA’s positive-list liberalisation measures for the air transport services sector had been confined to services other than passenger or freight transportation. HKSS were only allowed to provide air transport sales agency services, Computer Reservation System (CSR) services, mainland airport management services and airport management training and consultation services for small and medium airports. They can also provide seven types of ground services (including agency services; loading/unloading control, communication and departure control system; unit-load devices management; passenger and baggage services; cargo and mail services; ramp services; and aircraft services).

Nonetheless, HKSS are afforded much greater access to the mainland market than non-CEPA operators. Air transport sales agency services, for example, are given wider access in terms of equity ownership, business scope, capital requirements (national treatment), options for economic guarantees, and licensing application expediency[6]. Under CEPA Supplements, HKSS are allowed to set up wholly owned, equity and contractual joint-venture units for both domestic and international routes (including Hong Kong, Macau and Taiwan), that is, Type I and Type II air passenger and freight sales agency services.

Notably, under the Guangdong Agreement, HKSS are for the first time offered the right to operate public air transport companies that provide passenger or freight transportation services. They are granted national treatment, though the investment portion of all HKSS concerned will be capped at 25%, in accordance with the reserved restrictions on the negative list. Furthermore, HKSS are allowed to set up minority-owned equity or contractual joint-venture general aviation enterprises to provide flights, aerial tours and services to industries. In the rental business of aircraft with or without crew, HKSS are granted national treatment free of any reserved restriction.

As mentioned above, CEPA Supplements allow HKSS to operate seven types of airport ground services including loading/unloading control, communication, and departure control system on the mainland. The Guangdong Agreement, though, explicitly states that HKSS are only allowed to form wholly-owned operations in Guangdong to provide those ground services. Similarly, it clearly states that HKSS are allowed to provide contract management services for large airports, but wholly-owned operations that offer these services are not allowed. The provision of aviation oil supply is a new service area, though HKSS are confined to a minority-ownership role, such as investment in computerised reservation system projects.

The Guangdong Agreement adopts a hybrid approach towards air transport service liberalisations, with the positive-list measures allowing Hong Kong airlines, through cross-border services, to sell air tickets and hotel packages either via their offices or their official websites, thereby not engaging mainland sales agents. This further complements the many CEPA Supplement measures introduced to enhance the operations of HKSS in air transport sales agency services.

* Includes services under this sector or sub-sector

Road Transport Services

China has opened its road transport market to foreign investors for the provision of both road freight and passenger services. According to mainland regulations, foreign enterprises involved in road freight transport services are allowed to form wholly-owned operating units on the mainland [7]. Services typically rendered at road freight stations (depots) include warehousing, storage, cargo handling, container transhipment and logistics operations. Foreign enterprises are also allowed to form minority-owned equity joint ventures to provide road passenger transport services. The regulations further state that half of the registered capital should be used to build infrastructure for passenger transport facilities and that the vehicles put into use should be passenger cars of middle level or above.

Under CEPA Supplements, HKSS can establish wholly-owned enterprises to provide road freight transport, freight depot and motor vehicle repair services. As part of Guangdong’s pilot measures, HKSS applications for businesses engaging in road freight transport, passenger and freight depots, repair and driver training enterprises, can be approved at the provincial level. Thanks to the Guangdong Agreement, HKSS are now given national treatment without any restriction in the provision of road freight transport services, rental of commercial vehicles without operator, and maintenance and repair of road transport equipment.

Nonetheless, under the Guangdong Agreement there is no substantial progress in relation to road passenger transport services. HKSS are generally limited to forming minority-owned equity joint ventures in Guangdong to provide regular bus services between Hong Kong and the mainland, and inter-city bus services. By contrast, CEPA Supplements provide that franchised and non-franchised bus services companies, as well as public light bus operators, are allowed to set up joint ventures to provide inter-city bus services between Hong Kong and nine mainland provinces or autonomous regions (namely, Guangdong, Guangxi, Hunan, Hainan, Fujian, Jiangxi, Yunnan, Guizhou and Sichuan).

The Guangdong Agreement allows HKSS to form wholly owned units to operate road-based passenger transport services in the Western Region [8]. This liberalisation measure is identical to the CEPA commitment adopted since 2004, when HKSS operating franchised bus services in Hong Kong were first allowed to establish wholly-owned units to provide public passenger transport and hire car services in mainland municipal.

* Includes services under this sector or sub-sector.

Freight Forwarding Agency Services

CEPA Supplements do not give HKSS substantially greater privileges in the mainland’s freight forwarding or transport agency services market. Since the late 2000s, non-CEPA foreign enterprises have had the special market access previously only given to CEPA beneficiaries, such as in the area of establishing wholly owned operating entities.

Nonetheless, HKSS essentially receive national treatment on the mainland when establishing a commercial presence to provide freight forwarding agency services. They can operate wholly owned enterprises and can register using the same minimum capital requirements as mainland enterprises. Furthermore, they enjoy greater flexibility in terms of employing contractual service providers to provide such services in the mode of movement of natural persons.

The liberalisation measures concerning freight transport agency services under the Guangdong Agreement are related to the sub-sector of maritime freight transport agency services, and are covered under the section on maritime transport services above.

Transport Services Provided by Individually Owned Store (IOS) Operators

Compared to other free trade agreements entered into by the Central government, CEPA is unique in that it promotes entrepreneurship for Hong Kong permanent residents with Chinese citizenship. It gives them business opportunities in a wide range of service areas without being subject to any geographic restrictions and the more cumbersome approval procedures applicable to foreign investment.

Under the IOS scheme, Hong Kong people are allowed to establish business units to provide certain logistics and transportation services on the mainland, including goods handling and loading/unloading services related to road freight transport; storage and warehousing services with the premises not exceeding 500 square metres (sqm); and transport services other than international freight forwarding agency and courier services. Restrictions on the number of people employed by an IOS operator were abolished in 2013.

Under the Guangdong Agreement, all IOS liberalisation measures are on the positive list, and areas concerning logistics and transportation services in Guangdong include road freight transport; other maritime transport auxiliary activities, specifically referring to port cargo loading and unloading services, storage and warehousing, port supplies (vessel materials and daily commodities), leasing and repair of port facilities, equipment and port machinery; goods handling and loading/unloading services, and transport agency services (excluding agency services for air passenger and cargo transport); storage and warehousing services.

Tourism and Travel-related Services

Under CEPA, the mainland has agreed to open its outbound tourism market to entities set up by HKSS, a privilege not applied to other non-CEPA service operators. HKSS are allowed to set up wholly owned or joint-venture travel agencies to operate group tours to Hong Kong and Macau for residents who have permanent residence status in the original provinces, autonomous regions or municipalities. Under the Guangdong Agreement, HKSS setting up in Guangdong are allowed to operate outbound tours beyond Hong Kong and Macau (excluding Taiwan) on a pilot basis. This gives them greater latitude in organising and packaging their outbound tour products. However, the restrictive measure on the negative list states that the number of eligible HKSS for these outbound tours will be limited to five.

It should be noted that as part of Guangdong’s pilot implementation scheme, 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. CEPA further helps HKSS by not requiring any reference to annual business turnover in applications for mainland registration. These operators are also granted national treatment as to the requirements for business premises, business facilities and minimum capital for registration of travel agencies on the mainland.

Meanwhile, CEPA Supplements allow HKSS to set up wholly owned units to construct, renovate and operate hotels (on top of restaurants and apartment buildings) with no geographic restriction, thereby helping them capture business opportunities in the mainland’s booming domestic tourism sector. Under the Guangdong Agreement, national treatment is applied to HKSS establishing entities in Guangdong.

While Hong Kong permanent residents with Chinese citizenship are allowed to take an examination to qualify as mainland tour guides, a proviso under the Guangdong Agreement spells out that HKSS are granted national treatment in Guangdong to provide tourist guide services.

* Includes services under this sector or sub-sector

Convention and Exhibition Services

China’s convention and exhibition market is open to foreign-invested companies, though many restrictions still apply. For example, they are prohibited from organising exhibitions in overseas or outbound markets. By comparison, HKSS enjoy greater market access under CEPA, as their operating units on the mainland are allowed to organise outbound exhibitions on top of mainland events.

HKSS are allowed to organise overseas exhibitions on a pilot basis for locally registered enterprises in Guangdong, Shanghai, Beijing, Tianjin, Chongqing, Zhejiang, Guangxi, Hunan, Hainan, Fujian, Jiangxi, Yunnan, Guizhou and Sichuan. Furthermore, CEPA allows HKSS 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.

Under the Guangdong Agreement, HKSS setting up in Guangdong are given national treatment with no reserved restrictions in the convention and exhibition services sector. It should be noted that the Guangdong authorities have the designated right to approve applications from HKSS wanting to organise foreign economic and technical exhibitions with an exhibition area exceeding 1,000 sqm in the province.

* Includes 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] Based on the official statistics released in April 2014, Hong Kong’s logistics sector accounted for about 3.3% of Hong Kong’s GDP in 2012, down from 4.2% in 2001. In terms of employment, the sector hired about 183,200 people and accounted for 5% of Hong Kong’s total employment in 2012, down from 5.8% in 2001. In comparison with the other pillar industries, the logistics sector’s performance is relatively lacklustre. In the five years to 2012, the logistics sector’s value-added growth declined at an average annual rate of 1.4% as opposed to positive growth registered in other pillar industries.

[2] The boxes in blue merely show that there are reserved restrictive measures under the negative list of the Guangdong Agreement for the concerned sector as a whole, while individual sub-sectors may attract national treatment in terms of establishing a commercial presence in Guangdong.

[3] China allows foreign maritime transport services providers to form minority-owned entities to provide services including 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.

[4] The scope of business for the “shipping agency services” is defined in Article 29 of the Regulations of the People’s Republic of China on International Maritime Transportation to consist of the following: (1) undergoing formalities for ship’s entry into or departure from ports, arranging pilotage, berthing and loading and unloading of vessels;(2) signing bills of lading or carriage contracts and accepting cargo space booking on behalf of the carrier; (3) undergoing customs formalities for vessels, containers and shipments; (4) canvassing cargo, arranging shipments and attending to procedures for shipments and transshipment of cargo and containers; (5) collecting freight and settling payment on behalf of the principal; (6) arranging passenger transport and attending to procedures for transport of passengers by sea; and (7) other pertinent business.

[5] Guangdong’s transport authorities are delegated to process and approve the applications of HKSS for operating general water cargo transportation between Hong Kong and Guangdong; shipping liners engaged in waterborne transportation between Hong Kong and Guangdong for changing the relevant records of ships; registration of foreign-invested enterprises operating international ship management services established by HKSS in Guangdong; and international maritime container stations, container yard services, and international cargo warehousing services in Guangdong (the latter by Guangdong’s transport authorities of prefecture-level or above).

[6] 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.

[7] Foreign investment in road freight transport services on the mainland is generally granted an operating licence of 12 years, and where more than half the investment is used in constructing road freight stations and related facilities, the operational tenure can be lengthened to 20 years.

[8] Western Region refers to 12 provinces and autonomous regions/municipality, including Chongqing, Sichuan, Guizhou, Yunnan, Tibet, Shaanxi, Gansu, Qinghai, Ningxia, Xinjiang, Inner Mongolia and Guangxi; and Xianxi Tugia-Miao Autonomous Prefecture of Hubei Province and Yanbian Korean Autonomous Prefecture of Jilin Province.