CEPA IV: Headlines and Fine Print

With the signing of CEPA III in 2005, effectively all Hong Kong products (with the exception of certain restricted products) have become eligible for zero tariff on importation to the PRC from Hong Kong, provided they comply with the relevant CEPA rules of origin (ROOs). The Hong Kong manufacturers of products for which ROOs have yet to be agreed on by the Sides, may make an application to have such products included in subsequent bi-annual ROO discussions. Therefore, since 2005, Hong Kong manufacturers have virtually received all that could be expected from CEPA.

So far in 2006, ROOs have been formulated for 37 additional products. From July 1 2006, they were eligible for zero tariff subject to compliance with the ROOs. The products include: aquatic products, food and seasonings, chemical products, plastic and rubber products and mechanical and electrical products, raising the number of products for which there are ROOs to 1407. However, although these additional ROOs are reported as being part of CEPA IV, the product concessions are not expressly included in the written text.

Trade in services

Hong Kong service suppliers, however, may not have fared so well under previous phases of CEPA. CEPA's service sector concessions have largely been time-based, giving just a short head-start in time to CEPA-qualified Hong Kong service suppliers (HKSSs) over other World Trade Organization (WTO) members' service suppliers. Moreover, these time-based concessions have now mostly been overtaken by the PRC's WTO-accession commitments schedule (WTO Commitments) and new PRC laws and regulations generally applicable to all foreign investors.

CEPA IV is therefore devoted exclusively to service sector concessions, which will come into effect from January 1 2007, and to TIF. The following is a detailed overview of these additional concessions.

Service sector concessions

CEPA IV grants additional concessions in the 10 existing CEPA service sectors of legal services, construction, information technology, convention and exhibition services, audiovisual services, distribution, tourism, air transport, road transport and individually-owned stores to duly qualified HKSSs.

Since the PRC's level playing field will be largely in place by December 11 2006, following the gradual phasing in of the WTO Commitments, CEPA IV foreshadows the last stages of the WTO Commitments. Therefore, CEPA IV provides an opportunity to trace the PRC's gradual liberalization of market access to WTO members' service providers and how the corresponding CEPA concessions fit into this general framework of the opening up of the PRC market. The following is a brief outline discussing some of CEPA IV's service sectors.

Tourism and air transport services

Benefiting most from CEPA IV is probably the tourism sector, in the sense that the concession granted is not just a time-based advantage. It is one of substance since it provides for outbound tour services by HKSSs from within the PRC for its residents to places outside the country. The WTO Commitments do not contain the possibility of any form of outbound tour services.

On analysis of the fine print, however, this concession, albeit one of substance, is quite restricted in scope. HKSSs are permitted to set up wholly foreign-owned enterprises (WFOEs) or joint ventures (JVs) for outbound tours, but such WFOEs/JVs can only be set up (i) in Guangdong province; (ii) on a pilot basis (试点经营); (iii) for the organisation of tours exclusively to Hong Kong and Macao, and (iv) only for registered permanent residents of Guangdong province. In relation to this last point, it is worth noting that Guangdong's total population has a large floating population of workers who are not registered permanent residents in the province.

On the positive side, it must be acknowledged that CEPA IV could potentially enhance the benefits that Hong Kong is already undoubtedly receiving from its large volume of tourists from the PRC.

Observations indicate that many couples in the PRC like to get married in Hong Kong.³ From March 13 2006, amendments to Hong Kong's Marriage Ordinance (Cap. 181 of the Laws of Hong Kong) (MO) permit Hong Kong solicitors, who meet the MO's requirements, to become civil marriage celebrants and conduct marriage ceremonies in any lawful place in Hong Kong. Marriage by a civil celebrant offers the possibility of flexibility as to location, type and style of ceremony, provided the MO basic requirements are met. The first batch of civil celebrants was appointed on April 21 2006. Inventive HKSS tour operators in Guangdong may incorporate into their tours special bridal packages for such couples who want to be married in Hong Kong.

The CEPA IV concession to the air transport sector is significant in the context of tourism. HKSS WFOEs will be permitted to be established in the PRC (without geographic restrictions and with registered capital requirements on par with PRC enterprises) to provide air transport sales agency services. Such services are prohibited to foreign investors under the WTO Commitments.

Legal services

CEPA IV's legal sector concessions appear to represent the prime example of the difference between headlines and fine print. The following five concessions may seem a great deal numerically, but may be lacking in substance on closer examination.

Waiving number of full-time PRC lawyers of an association

CEPA I allowed an HKSS law firm, which had previously established a PRC representative office (RO), to form a CEPA-defined association with a PRC law firm (an Association).⁴ Measures for the Administration of Associations Between Law Firms of the Hong Kong and Macao Special Administrative Regions and Mainland Law Firms (香港和澳门特别行政区律师事务所与内地律师事务所联营管理办法) (Association Measures)⁵ set out the requirements to be met for the formation of an Association, including the requirement that the PRC law firm in the Association must have at least 20 full-time lawyers. This requirement has been waived by CEPA IV, thereby allowing Associations to be formed with smaller PRC firms.

Waiving representative's residency requirement

The Measures for Administration of Representative Offices Set-up by Hong Kong and Macao Law Firms (香港和澳门特别行政区律师事务所驻内地代表机构管理办法) (RO Measures)⁶ required the representatives of Hong Kong and Macao law firm ROs to reside in the PRC for at least six months each year. CEPA I waived this requirement for Hong Kong representatives of Hong Kong law firms' ROs located in Shenzhen and Guangzhou and reduced the minimum residency period to two months in locations other than Shenzhen and Guangzhou.⁷ CEPA IV has extended the complete waiver of residency requirements to apply to the representatives of all Hong Kong law firms' ROs throughout the PRC.

Hong Kong matrimonial and succession matters

CEPA I provided for Hong Kong individuals to be eligible to qualify as PRC lawyers through examination and internship and to practise law in the PRC, excluding litigation work. In order to qualify in the PRC, however, being a Hong Kong practising barrister or solicitor is insufficient. CEPA I stipulated that only "Hong Kong permanent residents with Chinese citizenship" (HKPR Chinese Citizens) are entitled to sit the PRC legal qualifying examination, acquire PRC legal professional qualifications and practise in the PRC pursuant to a PRC practising certificate (PRC Qualified HK Lawyers). Moreover, even those who succeeded in becoming PRC Qualified HK Lawyers could not litigate in the PRC. CEPA IV slightly relaxes the ambit of what PRC Qualified HK Lawyers can do. It permits them to "engage in activities as agents in matrimonial and succession cases relating to Hong Kong in the capacity of PRC lawyers". Considering the complexity of the English common law regime of succession and probate existing in Hong Kong, input of Hong Kong lawyers would have appeared necessary on a consultancy/correspondent basis, even if PRC Qualified HK lawyers were not permitted to provide this service directly.

PRC civil litigation cases

CEPA IV further provides for Hong Kong barristers to "act as agents in civil litigation cases [in the PRC]", to the exclusion of criminal cases. Also, it is important to note that Hong Kong barristers may only act in civil litigation "in the capacity of citizens". It has been reported that this may possibly refer to barristers acting pro bono without payment.⁸ What is meant exactly is not yet clear. Such issues may be clarified by the revised rules and regulations relating to CEPA legal service concessions, which the Hong Kong Department of Justice is reported to be currently working on with the PRC authorities.⁹

Hong Kong internships

HKPR Chinese Citizens, who have obtained PRC legal professional qualification, are required to undertake successfully an internship in a PRC law firm. CEPA IV permits them to undergo this internship in a Hong Kong branch of a PRC law firm established under the Outline for Practical Training and the Guidelines on Practical Training PRC requirements. This concession will facilitate completion of PRC professional practice requirements in Hong Kong.

The Law Society of Hong Kong made various proposals for legal sector concessions,¹⁰ only two of which (waiving the number of full-time lawyers and Hong Kong internships) were included in CEPA IV. Perhaps the most notable Law Society proposal was its suggestion that Hong Kong law firms' ROs be permitted to engage PRC practitioners to provide local legal services. In the reported current climate of discontent among some PRC practitioners at what they perceive to be the gradual encroachment by foreign ROs in the practice of PRC law,¹¹ it is perhaps not surprising that this concession did not find its way into CEPA IV.

Distribution sector

CEPA IV constitutes the last CEPA phase to be executed prior to December 11 2006, when the WTO Commitments will generally be in place. Therefore, there was virtually nothing left for CEPA IV to offer in the distribution sector. At the same time, the importance of the sector and its application to so many varied industries would have made it difficult to bypass in a CEPA phase, which is intended partly at least, to emphasize service sector concessions.

Therefore, it is not surprising that CEPA IV provides further but slight relaxation of the PRC's '30-shop rule' relating to retail chain stores selling books, newspapers, magazines, pharmaceuticals, pesticides, mulching films, chemical fertilizers, staple food, vegetable oil, edible sugar and cotton of different brands and emanating from different suppliers.

Under the WTO Commitments, a foreign investor is limited to a 49% shareholding in a foreign investment enterprise which has over 30 PRC outlets selling these restricted products of different brands and emanating from different suppliers. This rule was carried over into the Measures for the Administration of Foreign Investment Commercial Enterprises (外商投资商业企业领域管理办法) (Measures).¹² CEPA III subsequently increased the 49% foreign shareholding ceiling to 51% and the 51% threshold was incorporated into the supplementary provisions to the Measures (外商投资商业企业领域管理办法的补充规定), with respect to CEPA HKSSs and their Macao counterparts.¹³ CEPA IV has raised this maximum foreign shareholding limit to 65%. The CEPA IV distribution sector concession is therefore a mere 14% increase in foreign shareholding in stores operating under the '30-shop rule'.

Convention and exhibition services

This is an interesting service sector which is gaining momentum in the PRC as market economy style conventions and exhibitions are increasingly being held in various PRC cities. The PRC appears to recognise its need for input from overseas companies, which have perfected the many varied services required in this sector, as well as the logistics and expertise to bring them all together flawlessly in order to organize a major convention/exhibition. At the same time, the potential influence of such powerful forms of communication and marketing have resulted in a strong dose of caution in the WTO Commitments in this unique sector and a correspondingly mixed bag of CEPA concessions to HKSSs and their Macao counterparts.

The WTO Commitments only permit the creation of a foreign majority JV for convention services (会议), leaving the more sensitive and difficult sector of exhibition services (展览服务) unaddressed. CEPA I permitted HKSSs to establish WFOEs to provide convention and exhibition services restricted to the territory of the PRC. It expressly excluded (by footnote) exhibitions outside the PRC.

The Ministry of Commerce's Tentative Provisions on the Establishment of Foreign-invested Exhibition and Convention Companies (设立外商投资会议展览暂行规定) (MOC Provisions), announced on January 13 2004 and effective from February 12 2004, permitted all qualified foreign investors to establish WFOEs for services relating to economic and technological conventions and exhibitions in the PRC, but only conventions outside the PRC.

While overseas exhibitions remain prohibited for other foreign investors, CEPA IV permits HKSSs to establish WFOEs and JVs for the organization of exhibitions in Hong Kong and Macao, thereby giving HKSSs limited outbound exhibition services rights, which other service providers do not have. Moreover, CEPA IV does not restrict these services to economic and technological exhibitions, as the MOC Provisions do, in relation to conventions and exhibitions in the PRC (各类经济技术展览会和会议). It remains to be clarified whether this means that HKSSs are not limited to economic and technological exhibitions and can organise a wider range of exhibitions in Hong Kong and Macao.

Financial services

When CEPA IV was announced at the Mainland, Hong Kong and Macao Trade and Economic Co-operation Forum on June 29 2006, Jia Qinglin, chairman of the Chinese People's Political Consultative Conference, mentioned that the State Council is currently studying policies to expand renminbi business in Hong Kong. These future policies, reported to be under analysis by the Hong Kong Monetary Authority and the People's Bank of China, include allowing Hong Kong importers to settle direct import trade from the PRC in renminbi and allowing financial institutions in the PRC to issue renminbi financial bonds in Hong Kong on a pilot basis. Hong Kong financial secretary, Henry Tang, has been reported as saying that several issues need to be resolved before these concessions can be implemented, such as the question of tax rebates for PRC exports, trade financing for Hong Kong importers and the type of institutions that could receive authorisations to sell renminbi denominated bonds.¹⁴

Financial services are not among the 10 service sectors receiving CEPA IV concessions. Nevertheless, further concessions in this important sector will likely be recognized to be within the general framework and context of CEPA, if and when they are finalized and implemented. CEPA is an organic arrangement, flexible enough to permit ongoing growth and additional concessions being granted between the signing of its various phases. The additional 37 ROOs for Hong Kong products agreed in 2006 have been brought under the general umbrella of CEPA IV in this way, although not expressly included in its written text.

Trade and investment facilitation

The third branch of CEPA, TIF,¹⁵ had not been developed in CEPAs II and III since its seven subdivisions¹⁶ were first announced in CEPA I, in June 2003. CEPA IV now adds an eighth division to the TIF branch of CEPA, intellectual property protection (IPP). In CEPA IV, the Sides agree to recognise the importance of IPP in advancing economic development and promoting economic and trade exchanges, and agree to strengthen co-operation on IPP. The importance of IPP is undeniable, but is this just CEPA IV rhetoric?

The IPP co-operation mechanisms listed in CEPA IV appear to amount substantially to exchange of information and materials and discussion between the Sides. Whether CEPA IV will make a real difference to IPP appears doubtful, at this stage at least, when IPP is viewed in the context of the history of the other areas of TIF which, generally speaking, do not appear to have vastly improved since they were enshrined in CEPA I three years ago.

Uncovering the truth behind headlines

Overall, it appears that CEPA IV contains little additional substance either in relation to service sector concessions or TIF. The most significant advance it makes is possibly in the sectors of tourism, notably outbound services relating to Hong Kong and Macao tours, air transport sales agency services and exhibition services relating to Hong Kong and Macao exhibitions. It is unfortunate for those who go beyond CEPA IV's bold headlines to examine its fine print, only to find that what remains on the table appears to be a fairly skinny sacrificial lamb!

Endnotes

* This summary is intended solely as a general overview of the subject matter based on the author's research. The author is a Hong Kong solicitor, not a PRC practising lawyer. Only PRC practising lawyers are permitted under PRC law to render legal advice on PRC law. This article is not intended as, and should not be relied upon as, legal advice. DLA Piper therefore takes no responsibility for any such reliance.

1 Reference to CEPA's third supplement as CEPA IV and the preceding phases of CEPA through 2003-2005 as CEPAs I, II and III respectively is only in the interests of brevity. Trade and Industry Department Director-General, Raymond Young Lap-moon, has been reported as saying that the third supplement would not take the name CEPA IV: "HK Service Sector to Gain More from CEPA", South China Morning Post, June 21 2006.

2 See note 1 above.

3 See "Concessions tipped to boost Tourism", South China Morning Post, June 30 2006.

4 An Association falls far short of a fully-fledged equity JV, which is what Hong Kong law firms had originally hoped to gain from CEPA.

5 Promulgated November 30 2003 with effect from January 1 2004.

6 Promulgated March 13 2002 with effect from April 1 2002.

7 These provisions of CEPA I were subsequently integrated into PRC law by the Ministry of Justice Decision Amending the RO Measures, issued on November 30 2003 with effect from January 1 2004.

8 "Lawyers Welcome Small Steps", South China Morning Post, 30th June 2006.

9 The Law Society of Hong Kong Circular 06-366 (SD) issued July 3 2006.

10 See "CEPA Proposal for Further Opening in Relation to Legal Services", Hong Kong Lawyer, July 2006, pg 71.

11 On April 17 2006, the Shanghai Bar Association is reported to have issued a memorandum alleging that some foreign law firms in the PRC engage in the illegal practice of PRC law in violation of the limits on their activities imposed by the RO Measures. (See "Mainland Lawyers Fire Salvo to Defend Turf," South China Morning Post, July 24 2006; China Legal Watch, June 15 2006, pg 1).

12 Promulgated by the Ministry of Commerce (MOC) on April 16 2004 with effect from June 1 2004.

13 Promulgated and brought into effect by MOC on January 9 2006.

14 "Talks underway to Expand Scale of HK Yuan Business", South China Morning Post, June 30 2006.

15 The first two branches of CEPA being trade in products and trade in services.

16 Trade and investment promotion, customs clearance, quarantine and inspection of commodities/food safety and quality assurance, electronic commerce, transparency in law and regulations, SMEs, and Chinese medicine and medical products.