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CEPA 2017: New Measures and New Opportunities for Hong Kong

First introduced in 2003, the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) allows qualified Hong Kong products, companies and residents to enjoy preferential treatment accessing the mainland market.

Hong Kong and the Chinese mainland inked two new agreements on 28 June 2017, namely the Investment Agreement and the Economic Technical Cooperation Agreement (Ecotech Agreement) to further facilitate trade and investment between the two. This follows the signing of ten supplements and two agreements on trade in services (i.e. the Agreement on Trade in Services (ATIS), and the Agreement between the Mainland and Hong Kong on Achieving Basic Liberalisation of Trade in Services in Guangdong) to progressively enrich the CEPA content over the years.

With the two new agreements, CEPA has broadened its scope to become a comprehensive free trade agreement (FTA) covering investment as well as economic and technical cooperation on top of trade in goods and trade in services. The Investment Agreement will be implemented from 1 January 2018, with the Ecotech Agreement taking immediate effect.  

AreaDetails
Trade in goods

All goods manufactured in Hong Kong and meeting the CEPA rules of origin (ROOs) enjoy zero-tariff benefit when imported into the mainland.

As of 30 June 2017, about 151,000 CEPA Certificates of Hong Kong Origin had been approved, with food and beverages, plastics and plastic articles, and textiles and clothing being the top three product types.

Trade in services

Hong Kong service suppliers (HKSS) enjoy preferential treatment entering the mainland market in various service areas. Since the implementation of the ATIS in June 2016, the Chinese mainland has opened up 153 sectors to HKSS, in full or in part, accounting for about 96% of all 160 services trade sectors.

Hong Kong professional bodies and the regulatory authorities on the Chinese mainland have also signed many agreements on mutual qualification recognition to facilitate Hong Kong professionals entering the mainland market.

InvestmentFrom 1 January 2018, CEPA will be expanded to cover non-services sectors. New measures to promote and protect investment made between Hong Kong and the mainland, in both services and non-services sectors, will also be introduced.
Economic and technical cooperationThe Ecotech Agreement consolidates and updates the economic and technical cooperation activities set out in CEPA and adds new cooperation areas in relation to Belt and Road Initiative (BRI) and sub regional cooperation. 12 major cooperation areas are highlighted to facilitate and promote trade and investment.

Investment Agreement

Bilateral investment treaties deal primarily with the admission, treatment and protection of foreign investment. Prior to the emergence of the Investment Agreement, CEPA liberalisation measures only covered trade in goods and services, even though HKSS made cross-border investment by establishing a commercial presence on the mainland. Starting from 1 January 2018, Hong Kong companies will gain explicit protection in respect of their mainland investments in non-services sectors, e.g. manufacturing, mining, and asset investment. 

The Investment Agreement is the Chinese mainland’s first investment agreement with pre establishment national treatment (PENT) adopting a negative-list approach. With national treatment, Hong Kong investments and investors will be treated on a par with mainland investment and investors, except for industries on the negative list as annexed. Meanwhile, there are 26 restrictive measures on the negative list, including petroleum and natural gas exploitation, shipbuilding, aircraft manufacturing and Chinese medicine production. Further, the Investment Agreement gives Most-Favoured Treatment (MFT) to Hong Kong investments and investors, ensuring that Hong Kong investments and investors are not worse off than investments and investors from other countries in these industries.

A key element of the Investment Agreement is the provision on investment protection and facilitation, spanning investment expropriation, compensation, subrogation and transfers. A new dispute resolution mechanism will also be implemented to resolve any disputes that might arise. The Investment Agreement is applicable to investment that exists on and after 1 January 2018, and covers both service and non-services sectors.

Hong Kong enterprises seeking to establish a commercial presence on the Chinese mainland in non-services sectors with preferential access provided for under the Investment Agreement are required to meet its definition of “investors”. In short, an investor can be a natural person or an enterprise from Hong Kong that seeks to make, is making or has made a covered investment on the mainland.

The Trade and Industry Department (TID) is the primary official agency to issue Certificate of Hong Kong Investor (CHKI) to a Hong Kong enterprise intending to set up a commercial presence on the mainland in the capacity of an investor. The criteria of investors’ substantive business operations are quite similar to the current HKSS requirements[1]. On the other hand, investors making investments on the mainland in a form other than a commercial presence can be an enterprise or natural person[2], but they are not required to submit any CHKI application.

Ecotech Agreement

Unlike other CEPA agreements, the Ecotech Agreement does not cover market access commitments or substantive liberalisation measures, but set forth the direction for closer future cooperation between Hong Kong and the Chinese mainland.

The Ecotech Agreement has three major highlights, first and foremost, a dedicated chapter to support Hong Kong’s participation in the BRI through building a communication platform.

Second, the Ecotech Agreement promotes deepening economic cooperation within the Pan Pearl River Delta Region, in particular the Guangdong-Hong Kong-Macau Bay Area (Bay Area). It also supports further liberalisation for Hong Kong services industries, such as finance, transport and shipping, commerce and trade, professional services and technology in the Pilot Free Trade Zones, as well as in Qianhai, Nansha and Hengqin.

Third, the Ecotech Agreement consolidates and enriches prior CEPA cooperation provisions to offer new opportunities for Hong Kong's professional services providers. In total, 12 areas of cooperation activities are listed under the Ecotech Agreement. A summary of the cooperation areas is shown below:

Cooperation Areas
IndustryLegal and dispute resolution servicesFinancialAccountingInnovation and technology
Electronic commerceIntellectual propertyTrademark and brandingQuality supervision, inspection and quarantine (related to testing and certification)
Trade and investment facilitation areasDeepening cooperation in economic and BRI trade areasDeepening economic and trade cooperation in Pan-Pearl River Delta RegionSupporting the participation of Hong Kong in the development of pilot free trade zonesDeepening the cooperation between Hong Kong and Qianhai, Nansha and Hengqin

Source: Trade and Industry Department, HKSAR

Implications for Hong Kong

Hong Kong is a premier gateway to China thanks to its strategic location, sound legal system and efficient financial infrastructure. In 2016, Hong Kong was the Chinese mainland’s largest source of realised foreign direct investment (FDI) and second largest trading partner. Many foreign investors have established business operations in Hong Kong to leverage CEPA benefits in tapping the vast opportunities of the mainland market.

The two new CEPA agreements strengthen the existing framework and reinforce Hong Kong’s role by directly benefiting Hong Kong investment and investors, including those overseas companies making use of the Hong Kong platform while intending to acquire CHKI to set up commercial presence on the mainland. Currently, CEPA clauses pertaining to investment via commercial presence are expressly confined to services sectors. With the Investment Agreement, effective January 2018, CEPA’s coverage will be extended to non-services sectors. Foreign investors can make good use of Hong Kong as an entry point for their operations in non-services sectors on the Chinese mainland.

In particular, by incorporating new cooperation areas in relation to BRI and sub-regional cooperation under the CEPA framework, Hong Kong businesses are given explicit endorsement of their participation in the Chinese mainland development strategies, capitalising on the business opportunities arising from related initiatives and measures.

Formalised Investment Protection in Broad Range of Financial and Non-Financial Assets

Similar to the Investment Promotion and Protection Agreements (IPPAs) signed between Hong Kong and foreign partners, the Investment Agreement gives assurance to Hong Kong investors that their investments on the Chinese mainland are protected, and at the same time allows mainland investors to enjoy similar protection in respect of their investments in Hong Kong. These new measures will help boost investors’ confidence and further reinforce investment flows between the two.

Investment is clearly and broadly defined to include but not limited to the following: enterprise, financial instruments, licences, and construction or production contracts, other tangible and intangible assets such as leases, mortgages and pledges[3]. In other words, a Hong Kong enterprise or resident can invest in a broad range of assets on the mainland without being an investor issued with a CHKI under the Investment Agreement, and such investment can be made in financial, non-financial, tangible, or non-tangible assets.

Under the specific scope stipulated by the Investment Agreement, Hong Kong and the Chinese mainland will provide non-discriminatory treatment in compensation for losses due to war, a state of emergency, riot, natural disaster or other similar events, as well as compensation for expropriation of investments. Both sides will also provide investment protection including recognition of transfer of rights and transfer abroad of investments and returns.

Hong Kong’s Role as a Dispute Resolution Centre Reaffirmed 

In recent years, the surge in trade and economic activities between Hong Kong and the Chinese mainland has given rise to a strong demand for dispute resolution services, which in turn creates demand for the respective professional services in Hong Kong. In particular, the use of alternative dispute resolution mechanisms, such as arbitration and mediation, is becoming increasingly popular as they can resolve disputes faster than litigation.

Hong Kong is a prime venue for commercial dispute resolution given its well-developed legal system and the existence of a large pool of experienced professionals. In 2016, the Hong Kong International Arbitration Centre (HKIAC) handled 460 new cases, including both arbitration and mediation. The total disputed amount for the administered cases was HK$19.4 billion, with corporate and finance, maritime and construction being the top industry sectors.

Against this background, the Investment Agreement introduces a dispute resolution mechanism, which will further reinforce Hong Kong’s attractiveness as a dispute resolution venue for investment on the mainland. Under the newly introduced mechanism, disputing parties will be able to settle dispute through (i) amicable consultation; (ii) existing complaint handling procedures; (iii) mediation; and (iv) legal proceedings as provided for under the domestic laws on the respective sides. In addition, there will be coordination within the government on one side or between the two sides to oversee dispute resolution of the respective sides.

Hong Kong Development Dovetailed with National Strategy

As mentioned, the Ecotech Agreement lays the foundation for deeper cooperation between Hong Kong and the Chinese mainland, and will enable Hong Kong businesses to leverage their advantages in the national development blueprint and ride on the opportunities presented under the BRI.

At present, about 60% of Chinese outbound investment goes through Hong Kong. As China pushes forward the BRI, many mainland enterprises will be interested in investing in those large-scale infrastructure projects along the planned trade routes. In this respect, Hong Kong can act as a springboard for Chinese companies, providing professional services covering finance, risk management, legal, and accounting and taxation services to support their expansion into overseas markets. At the same time, there are also opportunities for Hong Kong companies to develop large-scale infrastructure projects jointly with their mainland partners in construction and operation.

In regard to the development of Guangdong-Hong Kong-Macau Bay Area, the region has a diversified cluster of industries scattered across different cities, each with its own competitive edge. For instance, Foshan, Zhongshan and Dongguan are strong in manufacturing, yet less developed in the services sector, which Hong Kong excels in. 

With large-scale infrastructure projects coming on stream, such as the Hong Kong-Zhuhai-Macau Bridge (HKZMB) and the Guangzhou-Shenzhen-Hong Kong High-speed Railway (GSHKR), Hong Kong, Shenzhen, Zhuhai, Macau and other nearby cities will form a ‘one-hour living circle’. By forming industrial clusters that complement each other’s strengths, the Bay Area will provide an opportunity for Hong Kong to further upgrade its status as an international financial hub and push forward the development of innovative technology.

With the BRI and sub-regional cooperative schemes like the Guangdong-Hong Kong-Macau Bay Area, it can be envisaged that many government procurements will arise. Under the Investment Agreement, government procurement (GP) is defined as the process by which a government obtains goods or services via various contractual means, which may include purchase, rental or lease, as well as build-operate-transfer (BOT) contracts, etc. As Hong Kong enterprises undertake BRI projects, involving mainland parties as well as GP elements, they can be assured of the protection availed under the CEPA’s Investment Agreement.

Hong Kong to Reinforce its Role as China’s Offshore RMB and International Financial Centre

The financial services sector is a major beneficiary under the new CEPA agreements. Hong Kong is China’s most open international financial centre and the largest offshore RMB centre. The new agreements will not only facilitate investment promotion and protection via the Hong Kong platform, but also expand mutual market access schemes.

So far, Chinese regulators have opened up a number of ways for foreign investors to tap into the capital markets on the mainland in an orderly manner. Aside from schemes such as Qualified Foreign Institutional Investor (QFII) and RMB Qualified Foreign Institutional Investor (RQFII), the mainland has worked with Hong Kong in setting up respective Stock Connects with Shanghai and Shenzhen, and most recently, implemented the Bond Connect.

Under the newly signed Ecotech Agreement, the Chinese mainland will further support Hong Kong in developing offshore risk management business for the mainland financial markets, and further study the models of mutual access between bonds, over-the-counter financial derivatives and commodity derivatives markets.

Another major activity listed under the Ecotech Agreement is the enhancing of two-way cross-border RMB fund flow mechanisms between Hong Kong and the mainland, including increasing the RQFII investment quota for Hong Kong.

In perspective, RQFII has been an important channel for overseas investors to invest in the mainland financial markets since late 2011. Underscoring Hong Kong’s pivotal role as a gateway for overseas investors to the mainland’s financial markets, the People's Bank of China (PBOC) announced on 4 July 2017 that the RQFII quota for Hong Kong is to increase from the current RMB270 billion to RMB500 billion.

More Support for Innovation and Technology Collaboration

To foster innovation and technology development, a number of initiatives have been introduced recently to encourage collaboration between Hong Kong and mainland research institutes. For example, in January 2017, the governments of Hong Kong and Shenzhen agreed to jointly develop the Lok Ma Chau Loop into a Hong Kong-Shenzhen Innovation and Technology Park, which will serve as a key base for cooperation between Hong Kong and the mainland in innovation and technology research.

Riding on existing cooperation, the Chinese mainland will further support Hong Kong in nurturing industries in areas including robotics, bio-medicine, smart city and financial technology under the Ecotech Investment. The use of co-working spaces and high-tech zones are also encouraged to enhance communication and exchanges of young entrepreneurial talent.

In 2016, Hong Kong's exports of high-tech products amounted to US$264 billion, accounting for 57% of its total merchandise exports in the year. With both Hong Kong and the mainland expected to deepen cooperation, drawing upon the city’s research capability and the latter’s knowledge in high-tech manufacturing, Hong Kong researchers will gain better support to develop and commercialise their ideas and results.

Enhancing Hong Kong as an IP Hub

With increased spending on research and development (R&D), Chinese enterprises have also become increasingly aware of the commercial value and importance of intellectual property (IP) protection. Hong Kong licensing agents, thanks to their strong networks on the Chinese mainland, are considered by many foreign licensors the most preferred partners to tap these opportunities. By the same token, Hong Kong is also an ideal gateway for mainland-based enterprises to promote their brand names and trademarks overseas due to Hong Kong’s remarkable connection to global IP players.

Under the Ecotech Agreement, Hong Kong and the mainland will jointly promote IP cooperation in areas spanning creation, exploitation, protection and trading between the two jurisdictions. To support the enhancement of Hong Kong’s patent system, technical support will also be provided in various areas covering substantive examination, review, post-grant patent disputes, and automation services. With more trade expected to go through Hong Kong’s IP intermediaries, the city’s role as an IP hub will be further enhanced.

Summary

The signing of the Investment Agreement and the Ecotech Agreement completes the current framework by turning CEPA into a full-fledged FTA between Hong Kong and the mainland, which is also an upgrade to instil greater clarity and stability in relation to the promotion and protection of investment flows between the two. Under the upgraded CEPA framework, Hong Kong will continue to enjoy the most preferential treatment in accessing the mainland market, drawing upon express investment protection accorded under the Investment Agreement.

Further, Hong Kong enterprises and residents can gain both access and assurance pertaining to their investments in a wide range of assets on the mainland, whether in the services sector, non-services sector, or other asset classes. Aside from such investments, business activities and opportunities linked to more intimate economic and technology cooperation are expected to increase under the Ecotech, eventually culminating in investment in one form or another, in particular their engagement in BRI development and sub-regional cooperation.


[1]  Hong Kong companies investing on the mainland may be considered investors under the Investment Agreement if they have been incorporated in Hong Kong, engaged in substantive business operations for no less than three years in owned or rented premises, paid profit tax, and employed more than half of employees who are Hong Kong residents.

[2]  A Hong Kong natural person refers simply to a permanent resident of the Hong Kong Special Administrative Region (HKSAR).

[3]  Forms that an investment may take include, though not exclusively, the following: (i) an enterprise; (ii) shares, stocks and other forms of equity participation in an enterprise; (iii) bonds, debentures, loans and other debt instruments, including debt instruments issued by an enterprise or one side; (iv) futures, options and other derivatives; (v) turnkey, construction, management, production, concession, revenue-sharing and other similar contracts; (vi) intellectual property rights; (vii) licences, authorisations, permits and similar rights conferred pursuant to the laws of one side; and (viii) other tangible or intangible assets, movable or immovable property, and related property rights, such as leases, mortgages, liens and pledges.

Content provided by Picture: Winnie Tsui
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