CEPA gets HK off to a head start
By Liang Hongfu (China Daily)
Updated: 2004-03-09 13:46

The rapid opening of mainland markets in line with China's World Trade Organization (WTO) commitments is seen as a boon to Hong Kong's businesses, according to Eden Woon, chief executive officer of the Hong Kong General Chamber of Commerce.

That is because the capacity of Hong Kong companies has been greatly enhanced by the Closer Economic Partnership Arrangement (CEPA), which came into effect at the beginning of the year, Woon says.

It is widely understood that the full implementation of the CEPA is complicated, at least in certain specific areas. But the commitment by the mainland authorities to ensure "transparency" in the process is "comforting," says Woon, who was recently in Beijing to meet mainland officials to discuss technical questions related to the arrangement.

The CEPA, concluded in July last year, is a comprehensive economic pact that seeks to give Hong Kong businesses a head start over potential foreign competitors during the progressive opening of mainland markets.

It not only allows tariff-free entry of a wide range of Hong Kong products but also opens the door to specific Hong Kong companies and professionals ahead of WTO schedules.

Hong Kong has already realized benefits from the CEPA which also calls for the relaxation of control over mainland tourists coming to Hong Kong.

The resulting influx of mainland visitors in the past couple of months, especially from neighbouring Guangdong Province, has fuelled a boom in Hong Kong's tourism industry.

And the benefits have spilled over to various related business sectors, including retail, catering and entertainment.

More importantly, according to Woon, are the CEPA's potential and the real benefits it has already created.

The surge in property prices is widely seen as a reflection of increasing confidence in Hong Kong's economic future.

The resurgence of interest in property has been so sudden and intense that a prominent banker was moved to warn against excessive speculation that could threaten to create another market bubble. His forecast comes at a time when the devastating effects of the bursting of the 1997 bubble have yet to wear off completely.

Although nobody seems to doubt the potential benefits of the CEPA, numerous questions will have to be addressed before it can be effectively and fully implemented, Woon said.

One of the issues raised in his latest meetings with mainland officials involved what he describes as "electronics communication," which is basically a set of logistics protocols linking the goods and the customers, who are either the shippers or buyers. There have been a lot of problems arising from the lack of an established standard, Woon said.

"We are working (with the mainland authorities) to arrive at a mutually agreed uniform way to process things," he said.

Another matter of concern to Hong Kong business people relates to taxation, or more specifically value added tax (VAT). But there is no need for concern, Woon says. It was agreed that the refund of the 2003 VAT "will be in the pockets of (Hong Kong) exporters by the middle of this year."

Many Hong Kong businesses have long complained about the differences in interpretations of the many economic rules and regulations between the local authorities of different cities and provinces. They say they are afraid that the same problem will surround the CEPA.

For example, a Hong Kong company that is allowed under the agreement to establish a wholly-owned subsidiary on the mainland to carry out nationwide operations, may run into difficulties in some cities where it is required by local authorities that it go through the costly and time-consuming process of registering separately.

Woon said this concern was brought up at his latest meetings with mainland officials and that he was assured the central government would do its best to arbitrate to achieve a mutually acceptable solution.

It is important to bear in mind that "everybody wants the CEPA to succeed," Woon said.

To be sure, zero-tariff entry into the mainland is unlikely to turn Hong Kong back into a manufacturing base. "That's not our goal," Woon says.

The high cost of land and labour in Hong Kong relative to the mainland has precluded that possibility.

But the CEPA, combined with the many advantages in Hong Kong - including a low tax base, the rule of law and a well developed financial sector - has greatly increased Hong Kong's attractiveness as a manufacturing base for high value-added products for export to the mainland market.

"Hong Kong has been receiving a lot of attention from foreign investors since the conclusion of the CEPA last year," Woon said.

"They are taking another look at Hong Kong as a stepping stone to the mainland market."

The agreement, Woon says, has greatly strengthened Hong Kong's role as a bridge linking the mainland with the rest of the world.

Woon said he was given the impression by mainland officials that Hong Kong's role as a financial centre will be enhanced as the mainland continues to pursue banking reform. Although Hong Kong banks have been allowed to accept renminbi deposits, subject to certain restrictions, there is no time-table for the development of a renminbi offshore centre in the special administrative region, Woon said.

The next logical step would be to allow Hong Kong banks to conduct limited lending business, such as mortgage financing, in renminbi, he said.

"But no time frame has been set and no commitments made," he added.

Nevertheless, it seems clear that Hong Kong is being used more and more as a testing ground for economic and financial reform on the mainland, Woon said.

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