CEPA II: A Song of Sixpence?

It has been reported that, in negotiating CEPA II, the Hong Kong Side requested concessions in some service sectors that were rejected by the mainland, including much of the wish list of the Hong Kong General Chamber (GCC). At the same time, other concessions were granted in sectors in which requests had not been made.² Some of the major features of CEPA II are outlined below so that readers can decide for themselves whether CEPA II has substance or merely glitter.

"A Pocket Full of Rye": Trade in Products

(Annex I)

Under CEPA II, 713 additional Hong Kong product categories, which conform to the relevant Rules of Origin (ROs), will become eligible for zero tariff upon importation to the mainland from Hong Kong. A variety of food and drink products have been added since CEPA I's initial product list, which only contained one food product: ice cream! Other CEPA II product categories include leather, textiles, clothing, machinery, equipment, furniture and chemicals.

The 713 product categories are composed of 529 "existing production" categories, which can benefit from the zero tariff from January 1 2005, and 184 "planned production" categories, which will become eligible for the zero tariff from January 1 2006, upon confirmation by both Sides that the products to which they relate have in fact come into production. (The zero tariff applies in the year following the start of production.) The Trade & Industry Department (TID) is set to announce detailed arrangements in relation to this "shortly" and consultations on the ROs for the new product categories for the upcoming year are scheduled to be completed by October 1 2004. (It is reported that, at the request of the Hong Kong watch making industry, the Hong Kong government may seek to negotiate relaxation of the relevant RO requirement of 30% Hong Kong manufacturing process with respect to watches. The industry is reported as having expressed a preference for the criteria of Hong Kong-based design, assembly, quality control and IP royalties' payments since most actual manufacture of watches is carried out in the mainland, in Shenzhen and Dongguan and such criteria could therefore make CEPA's zero tariff realistically available to Hong Kong watchmakers.³)

Prior to CEPA II, a total of 374 product categories were eligible for the zero tariff concession. The addition of the 713 categories brings the total number of potentially eligible categories to 1,087, thereby covering most Hong Kong products. Manufacturers may suggest other product categories for future eligibility for the zero tariff.

CEPA II clarifies the procedure, already existing under CEPA I, for obtaining the zero tariff concession. A manufacturer must apply to the TID for factory registration that demonstrates that the factory in question has the capacity to produce the products for export. The manufacturer must then apply for a CEPA Certificate of Origin (CEPA CO) from the TID, or one of the other government approved certification organizations, in order to demonstrate conformity with the relevant ROs. At the time of writing, it is reported that about 2,000 CEPA COs have been issued under CEPA I.

"Six and Twenty Blackbirds Baked in a Pie"? Trade in Services (Annex II)

Two types of liberalization are granted to Hong Kong service sectors through CEPA II, with general effect from January 1 2005, unless otherwise specified in particular cases. First, 11 service sectors, which already benefit from concessions under CEPA I, are accorded additional concessions. Second, concessions are introduced for eight additional service sectors, which were not originally covered by CEPA I. The total number of service sectors eligible for CEPA concessions has therefore risen from 18 to 26.

In order to qualify for CEPA II service sector concessions, Hong Kong companies and individuals (where applicable) must comply with the relevant Hong Kong Service Supplier definitions contained in Annex 5 of CEPA I, as supplemented, if applicable, by Annex 2 of CEPA II (HKSS). Corporate HKSSs must obtain an HKSS certificate (香港服务提供者证明书) issued by the TID. This requires, among other things, certification by a China Appointed Attesting Office (中国委托公证人) (CAAO) of a statutory declaration made by the HKKS applicant company's "authorized person" and certification by a designated professional⁴ of various supporting documents to the application. In this respect, note should be taken of the provisions of TID Notice No. 3/2004 to Service Suppliers (the Notice), which relaxed certain requirements of the HKSS definition in the case of group companies, as well as in respect of some of the application documentation.

The Notice removed the requirement for a CEPA designated professional's reports with respect to the premises and staff used for the Hong Kong substantive business that is an essential part of the HKSS definition. It also removed the requirement for submission of original financial documents and the Extract of Information from the Register of Businesses, certified by the Business Registration Office.⁵ With respect to group companies, as long as the HKSS applicant is Hong Kong incorporated, the Hong Kong substantive business can have been carried out by the applicant's wholly owned subsidiary/ies (全资附属公司) for the relevant number of years required by the HKSS definition for the sector in question. In addition, the premises and staff used for the said substantive business can be owned/rented/engaged, as the case may be, by the holding company or subsidiaries of the group of which the applicant is a part. Some have expressed the view that the HKSS application procedure is still cumbersome. The TID, however, refers to the application as being a process, rather than a hurdle, and welcomes suggestions on its further streamlining.⁶

As far as services are concerned, CEPA II arrived against a backdrop of issuance of around 500 HKSS certificates since January 1 2004. Logistics has received the largest number of certificates (over 270 at the time of writing), followed by distribution (with over 150 certificates). The TID reports that foreign-owned HKSSs are among those that have been certified and it is currently compiling data on this aspect of the statistics, as well as seeking to obtain information from its mainland counterparts on the number and nature of HKSSs that have established WFOEs in the mainland.

Broadening Already Existing Liberalization

The 11 service sectors, included in CEPA I's original 18 service sectors, which receive additional concessions under CEPA II, are legal services, distribution, audiovisual services, banking, individual ownership of stores, construction and related engineering, land and maritime transport, freight forwarding, medical services, accounting, and securities and futures.

The following are a few observations on some of these additional concessions.

Legal Services

There is only one relatively minor additional concession accorded to this sector.

CEPA I provided for mainland law firms to employ Hong Kong legal practitioners,⁷ while stipulating that they are not permitted to handle matters related to mainland law. On this basis, on November 30 2003, the PRC Ministry of Justice (MOJ) promulgated the Administration of Employment of Hong Kong Legal Practitioners and Macao Practising Lawyers as Legal Consultants by Mainland Law Firms Procedures (the Legal Consultant Procedures). The Legal Consultant Procedures serve to regulate this form of employment and require, inter alia, the issuance of a Hong Kong legal consultant's certificate, in the case of a Hong Kong legal practitioner (香港法律顾问证). CEPA II provides that this certificate is not required in the case of a Hong Kong lawyer providing professional assistance at the request of a mainland law firm on an individual case basis.

This concession falls short of what has long been hoped for by some Hong Kong law firms, namely the possibility of setting up equity joint ventures between mainland and Hong Kong law firms. CEPA I provided for the formation of a contractual association between mainland and Hong Kong law firms (an Association) but excluded the possibility of partnership or constitution of a separate legal entity established by a mainland and Hong Kong firm,⁸ such as a Sino-foreign equity joint venture. The Hong Kong lawyers participating in an Association are precluded from handling mainland legal matters.⁹ In order to qualify to form an Association, the Hong Kong law firm in question is required to have established a PRC representative office. This requirement excludes many international law firms, even though they have Hong Kong offices. This is so because in many cases it is the head office in the home jurisdiction of the firm, rather than the Hong Kong office, which establishes the PRC representative office. To the writers' knowledge, only two Associations have been formed so far, one in Chongqing and one in Beijing.

PRC representative offices of foreign firms cannot employ PRC practising lawyers to advise on PRC law. This also remains unaddressed by CEPA II, even though it is an issue that continues to hold back foreign law firms in the mainland. CEPA II could perhaps have afforded an opportunity to relax this prohibition in the case of Hong Kong firms' representative offices due to the close relationship between Hong Kong and mainland lawyers and legal bodies.

Retail, Wholesale and Commission Agents' Services

CEPA II extends the range of products in respect of which HKSSs can establish wholesale, retail and commission agents' wholly foreign-owned enterprises (WFOEs). CEPA-qualified HKSSs are now permitted (with effect from August 28 2004¹⁰), to establish WFOEs in respect of certain products for which only joint ventures (JVs) would be possible for other foreign investors at this point in time and/or for which the time thresholds for other foreign investors, for establishment of any form of foreign investment enterprise in these restricted sectors, would commence from December 11 2004 or 2006, depending on the products. These products, with respect to retail, are books, newspapers, magazines, pharmaceutical products, pesticides, mulching films and processed oil. With respect to wholesale and commission agents' services the product list is the same as for retail, with the exception of the last item, processed oil.

CEPA I's previously high financial thresholds for HKSSs to establish WFOEs in the motor vehicle retail sub-sector have been waived by CEPA II. The Administration of Foreign Investment in the Commercial Sector Procedures (商务部外商投资商业领域管理办法)(promulgated by the Ministry of Commerce on April 16, and effective June 1 2004) specifically preserve and reiterate these financial thresholds for HKSSs establishing retail WFOEs in this sub-sector. Implementing regulations are therefore needed to integrate this new concession directly into PRC law. Nevertheless, this is an indication of CEPA's policy of progressively lowering and eliminating financial thresholds in advance of the general WTO-mandated level playing field.

Banking

The mainland branches of Hong Kong banks (i.e., qualified HKSS banks) are permitted to conduct insurance agents' business, subject to approval by the relevant PRC authorities.

Hong Kong's expertise in the banking field makes it an obvious potential learning resource for the mainland in the run-up to 2006 when the banking sector will be fully opened. It has been reported that the Hong Kong banking industry had therefore hoped for greater concessions that would allow it to extend its sectoral expertise further in the mainland.¹¹ Moreover, CEPA II's banking concession is given against a background of a policy of progressive general concessions planned for foreign banks. It is reported, for example, that by the end of 2004, foreign banks will be allowed to conduct renminbi business in three more cities, including Beijing, and that an additional four cities will be opened in 2005.¹²

Land Transport

Passenger transport companies operating franchised bus services in Hong Kong are permitted under CEPA II to establish WFOEs or JVs in all municipal-level mainland cities to provide passenger public transport and hire-car services in those cities. CEPA I had previously restricted road passenger service WFOEs to the mainland's western region.

In addition, CEPA II permits passenger transport companies, operating franchised bus services and companies operating non-franchised bus services in Hong Kong (Guangdong Province-Hong Kong cross-boundary coach services), to establish JVs in nine stipulated mainland provinces for direct inter-city passenger bus services.¹³ Passenger transportation is an example of a concession of substance that shows that CEPA is not limited to simply giving Hong Kong a head start over other WTO members.

Marine Transport

WFOE shipping companies can be established by HKSSs to provide stipulated shipping agency services for vessels owned or operated by their parent companies. These services include customs declarations and inspection. WFOE shipping companies of HKSSs can also be established to provide business services for feeders operated by them between Hong Kong and mainland ports open to foreign vessels, including issuance of bills of lading.

HKSSs can set up WFOEs to provide supply services for items other than fuel and water (such as components or food) to vessels owned or managed by their parent companies and HKSSs can also establish WFOEs to provide port cargo loading and unloading services.

Freight Forwarding

HKSS freight forwarding agency enterprises in the mainland can establish branch offices upon full payment of registered capital.

Individual Store Ownership

CEPA I permitted Hong Kong permanent residents with Chinese citizenship (Chinese PRs) to establish individually owned retail stores (with a sales area not exceeding 300 sq. metres) and excluding franchising in Guangdong province. CEPA II extends concessions to Chinese PRs geographically beyond the limits of Guangdong province to encompass all provinces, autonomous regions and municipalities directly under the PRC central government. Moreover, the scope of services that Chinese PRs' stores can provide is increased by CEPA II. In addition to retail services, Chinese PRs' can establish stores to provide food and beverage services, hair dressing and beauty treatments, bathing services and services for the repair of goods for daily use. This is one example cited by the TID as a sector where, in negotiating CEPA II, it had expected less and obtained rather more instead!¹⁴

In this context it may be noted that, where applicable, natural person HKSSs (i.e., individual persons, 自然人) may apply to the mainland authorities to supply their services in the relevant sectors in the mainland. They must provide copies of documents evidencing their Hong Kong permanent resident status. In sectors such as individual store ownership, where Chinese citizenship is an additional requirement, copies of the Home Visit Permit or Hong Kong SAR passport are also required. All these documents must be attested by a CAAO.

Introducing New Liberalizations

The eight new service sectors benefiting from CEPA II concessions are airport services, patent agency, job referral and job intermediary services, information technology, trademark agency, cultural entertainment and a miscellaneous group sector consisting of permission for eligible Hong Kong residents to sit professional qualification examinations for 30 stipulated types of professional and technical occupations, including various types of engineering and accounting professions.

Notable among these new liberalizations is the fact that WFOE job referral agencies can be set up. On the other hand, in the case of the related sector of job intermediary services, only JVs can be established and the maximum HKSS (foreign) participation is limited to 70%. The mainland partner in such a JV is required to have been established for over one year. For both these related sectors minimum registered capital requirements of US$125,000 apply.

HKSSs can now establish JV or WFOE operations for airport management services, airport management training and consultation, and seven stipulated forms of airport ground services, including passenger, baggage and aircraft services.

Timing: Coming Soon!

As was the case when CEPA I was signed last year, CEPA II maps out certain time frames and leaves some matters to be decided in the future.

The following is a chronological summary of time frames and dates stipulated in CEPA II.

Shortly

The TID Summary of Further Liberalization under CEPA, based upon CEPA II, states that the TID will announce detailed arrangements "shortly" in relation to the new 184 "planned production" product categories that will benefit from zero tariffs on importation to the mainland from Hong Kong, upon confirmation that their production has started.

By October 1 2004

CEPA II states that consultations on the ROs for the new product categories included in CEPA II's Annex I are planned to be completed by October 1 2004.

By December 1 2004

"The two Sides will complete the amendments and additions to the relevant Annexes ... and sign the relevant texts before December 1 2004" so that implementation of CEPA II can commence with effect from January 1 2005.

January 1 2005

529 existing production categories of products, which meet the relevant ROs, will become eligible for importation to the mainland from Hong Kong at zero tariff.

Generally speaking, CEPA II, Annex II's extra concessions to CEPA I service sectors and the newly introduced concessions to CEPA II's additional service sectors will become effective as of January 1 2005. Exceptions to this general commencement date are CEPA II's general wholesale, retail and commission agency concessions (excluding motor vehicle retail), and concessions in the sectors of construction and related engineering services, which came into effect on August 28 2004.

January 1 2006

184 planned production categories of products, which meet the relevant ROs, will become eligible for importation to the mainland from Hong Kong at zero tariff, upon confirmation that the said products have come into production. (The zero tariff applies in the year following the start of production.)

Trade and Investment Facilitation

CEPA I is composed of three major areas of liberalization: trade in goods, trade in services, and trade and investment facilitation. The last area, while more general in nature than the other two, is potentially most important since it sets the groundwork for cooperation between the mainland and Hong Kong governments for implementation of the concessions provided in the other two areas. It has the potential to assist in streamlining mainland procedures for Hong Kong manufacturers and HKSSs in their trade and investment in the mainland.

CEPA II, however, deals only with trade in products and trade in services, leaving trade and investment facilitation undeveloped by this current phase of agreements between the Sides. It could perhaps have presented an opportunity to deal with the "after sale service" syndrome, i.e. the difficulty in the mainland of effectively using a CEPA certification received in Hong Kong. For example, it is one thing to obtain HKSS certification from the TID, but hurdles may still have to be faced in establishing a WFOE in the mainland pursuant to the HKSS certificate.

It has been pointed out, however, that there have been practical developments in the trade and investment facilitation measures agreed upon under CEPA I, since its implementation at the beginning of this year.¹⁵ For example, the transparency of mainland laws has improved and there has been increased recognition of the bilateral principle of mutual furthering of trade and investment in order to include benefits for mainland companies in Hong Kong rather than just vice versa. A combined example of both these improvements is the promulgation by the PRC Ministry of Commerce of the Verification Matters Concerning the Investment and Establishment of Enterprises in the Hong Kong and Macao Special Administrative Regions by Mainland Enterprises Provisions (effective from August 31 2004).

A Pretty Dish to set before Hong Kong?

CEPA II's most substantial concessions appear to be those related to trade in products, with the list of product categories that will become eligible for zero tariff on importation to the mainland from Hong Kong growing considerably. The list potentially covers most Hong Kong products. Variety has also been added by CEPA II's product list.

With respect to trade in services, CEPA II could perhaps have given more, such as permitting joint ventures between mainland and Hong Kong CEPA qualified law firms, allowing HKSS representative offices to employ PRC practising lawyers to advise on PRC law, and opening up the banking sector further to Hong Kong banks.

CEPA II could also have been an opportunity to add more substance to the third part of CEPA, Trade and Investment Facilitation, which would increase the efficiency of the mechanics of implementation of the concessions on trade in products and trade in services.

Neither CEPA I nor CEPA II has addressed the issue of dispute resolution and, to the writers' knowledge, the CEPA Steering Committee has not yet settled any procedures for how disputes will be resolved. As the number of CEPA certifications increases, and the corresponding number of mainland applications (based upon those certifications), disputes will inevitably follow. It is therefore imperative that this issue be addressed in the next phase of CEPA. Hong Kong has much to offer in the field of dispute resolution, not only in terms of the rule of law and an independent judiciary, but also in terms of the international reputation of the Hong Kong International Arbitration Centre as a centre for arbitration. This might be considered as a useful dispute resolution option for CEPA-related disputes. Moreover, recognition and strengthening of Hong Kong as a centre for PRC-related arbitration, within CEPA's trade and investment facilitation measures, could play a significant role in highlighting Hong Kong's strategic advantages as a base for foreign trade and investment in the PRC. Inclusion of arbitration within CEPA could also perhaps provide a concrete channel for the creation of a greater China arbitration centre, based in Hong Kong. Such a project is reported to be under separate discussion by the arbitration authorities of both Sides.

Although there are lacunae in CEPA II, some of which are mentioned above, it must be remembered that it is part of an organic process. The fact that CEPA II has been signed is, after all, a positive sign in itself, proving at least that CEPA is effectively an "open platform", as promised, on which additional and varied concessions will continue to be laid as and when agreed upon by the two Sides. CEPA will not therefore be laid to rest, as some had predicted, on December 11 2004, when many, but not all, of its existing service sector concessions will become available to all WTO members.

Ultimately, the proof of the pudding is in the eating and only time will tell what, and how much, CEPA II brings to Hong Kong, what it leads to in CEPAs yet to come and whether CEPA as a whole will assist Hong Kong in effectively positioning itself as an essential part of the post-WTO era PRC. When the pie is opened, will the birds begin to sing?

Endnotes

1 See for example the Weekend Standard cartoon: "And Finally...Just for you!!" August 28-29 2004.

2 Speech by Raymond Young, Hong Kong's recently appointed Director General of Trade and Industry, at a GCC roundtable on September 23 2004 (the GCC Roundtable).

3 "Tsang says it is Time to Adjust CEPA Standard", South China Morning Post, September 2 2004.

4 A CEPA "designated professional" is a Hong Kong certified public accountant or a CAAO, being a practising Hong Kong lawyer registered under the Legal Practitioners Ordinance (Cap. 159 of the Laws of Hong Kong) and recognized by the PRC Ministry of Justice.

5 Copies certified by a designated professional will now suffice.

6 The GCC Roundtable.

7 香港律师执业者 Hong Kong barristers and solicitors.

8 Article 3 of the Administration of Association of Law Firms of the Hong Kong and Macao Special Administrative Regions and Mainland Law Firms Procedures (promulgated by the MOJ on November 30 2003, with effect from January 1 2004, the Association Procedures.)

9 Article 12(2) of the Association Procedures.

10 The day after the signing of CEPA II's Record of Consultations, which took place on August 27 2004.

11 "Banks Face 'Long March' Despite CEPA", Weekend Standard, September 11-12 2004.

12 "Regulator Slates More Cities for Yuan Trade", South China Morning Post, September 9 2004.

13 These provinces are Guangdong, Guangxi, Hunan, Hainan, Fujian, Jiangxi, Yunnan, Guizhou and Sichuan.

14 The GCC Roundtable.

15 Ibid.