Economic Effects of CEPA and its Implications to Korean Companies. Pansy Yau Deputy Director of Research June 2014

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1 Economic Effects of CEPA and its Implications to Korean Companies Pansy Yau Deputy Director of Research June 2014

2 2 Major concerns on CEPA: - What are the main provisions of CEPA? - Who qualifies? - What are the benefits of CEPA? - How can companies take advantage of CEPA? - How can CEPA benefit Hong Kong as a regional business hub?

3 3 What are CEPA s main provisions? Trade in Goods CEPA 10 Supplements adopted since 2004 (Zero tariff for 1,757 HK-origin products) Trade in Services (Preferential access to 50 service sectors, financial cooperation and mutual recognition of professional qualification) Trade and Investment Facilitation

4 4 Who qualifies (trade in goods)? Manufacturers: Products fulfill CEPA Rules of Origin are classified as made in Hong Kong CEPA Rules of Origin Specific Manufacturing Process criterion Change in Tariff Heading approach 30% Value-Added requirement Value of raw materials and component parts of mainland-origin is included in the Value-Added content up to 15% (under Supplement VIII)

5 Distribution of Products with Approved Hong Kong-origin (as of 30 April 2014) 5 Product types No. of CO approved Food and beverages 27,426 Textiles and clothing 24,880 Plastics and plastic articles 22,882 Pharmaceutical products 12,353 Chemical products 6,439 Base metal products 5,107 Paper and printed articles 3,329 Colouring matters 3,208. Total 110,423. Source: HKSARG Trade and Industry Department

6 6 What are the benefits of CEPA? Increase price competitiveness CEPA effect on the import price of Hong Kong products Example: High-end Knitwear Ex-factory price: HK$100; Tariff rate: 17.5%; VAT: 17% Import price = ex-factory price x (1+tariff rate) x (1+VAT) Without CEPA Import Price = HK$100 x (1+17.5%) x (1+17%) = HK$137.5 With CEPA Import Price = HK$100 x (1+17%) = HK$117 Savings = HK$20.5 (i.e. 15%)

7 7 Who qualifies (trade in services)? Hong Kong service suppliers (HKSS) Incorporated in Hong Kong and engaged in substantive business for at least three to five years (regardless of the nationality of its investors) Liable to pay Hong Kong tax Own or rent business premises in Hong Kong Employ 50% or more of its staff in Hong Kong

8 8 For what services? Accounting Distribution Management consulting Advertising Environmental Maritime Transport Air Transport Audio-visual Banking Examinations for Professional and Technical Qualification Freight forwarding agency Individually owned stores Market research Building cleaning Insurance Photographic Computer and related services Inter-disciplinary research & experimental development service Construction Legal Printing Conventions and exhibitions Cultural entertainment Library, Museum and Other Cultural Services Real Estate Related Scientific and Technical Consulting Services Research & development Sporting Storage and warehousing Technical testing, analysis and product testing Medical Road Transport Telecommunications Patent Agency Securities and Futures Tourism Placement and Supply Services of Personnel Services incidental to Manufacturing Services incidental to Mining Services related to Management Consulting Trade mark agency Translation & interpretation Education Public utility Social Services Duplicating Logistics Rail Transport Specialty Design After-death facilities

9 Distribution of Services with Approved Hong Kong Service Supplier (as of 30 April 2014) 9 Service sector No. of HKSS approved Transport and logistics services 1,333 Distribution services 352 Air transport services 223 Placement and supply services of personnel 145 Advertising services 130 Printing services 111 Construction professional services and construction and related engineering services 102 Audiovisual services 62.. Total 2,793 Source: HKSARG Trade and Industry Department

10 10 What are the benefits of CEPA? - HKSS granted preferential access to the mainland s service market service liberalisation measures introduced since January 2004; over 50 pilot measures implemented in Guangdong since January Lower entry thresholds, broader business scope and first-mover advantage compared to non-cepa foreign companies WTO-plus benefits

11 How can overseas companies take advantage of CEPA? 11 For overseas service providers Become HKSS, in particular taking advantage of the relaxation of requirement under Supplement VIII Partner with, invest in, or buy into a CEPA-qualified firm in Hong Kong thus qualifying for CEPA benefits one year after majority-stake acquisition) For overseas manufacturers or traders of goods Develop high intellectual property value units in HKG targeting mainland market Partner with, or outsource to Hong Kong manufacturers

12 12 Success Story In 2004, AEON received the Hong Kong Service Supplier (HKSS) Certificate under CEPA to open its retail chains in Guangdong. According to its latest corporate profile, AEON is now operating some 60 retail outlets, including 25 department stores, 5 hypermarts and 29 convenient stores on the mainland. In 2011, AEON established a microfinance company in Shenyang and started providing installment loans for purchasing electrical appliance and houseware. AEON established another micro-finance company in Shenzhen after HKSS was allowed to set up consumer finance company in Guangdong in 2013.

13 13 Success Story In 2004, Yamato Transport Co., received the Hong Kong Service Supplier (HKSS) Certificate under CEPA. In 2010, Yamato Transport (China) Ltd. Established in Shanghai, providing home delivery service and 3 rd party logistic service Its operating network for chilled and frozen products covered most YRD area. Vision to become a major player providing B2B and B2C general logistics and ecommerce logistics services in China

14 How can overseas companies take advantage of CEPA? 14 In addition, using the Hong Kong platform to do business on the Chinese mainland Regional headquarters (RHQs) Marketing & Sales Banking Capital/fund raising Import-export services Business negotiations

15 No. of companies Overseas companies using Hong Kong as a regional business hub Regional Headquarters Regional offices Local Offices

16 16 Hong Kong: Core Competence as a Business Hub Free market Systematic High quality service Infrastructure Factors affecting choice of setting up RHQ/RO/LO in Hong Kong RHQ/RO/LO Simple tax system and low tax rate 92% Free flow of information 92% Free port status 91% Rule of law and independent judiciary 91% Geographical location 91% Protection of intellectual property rights 91% Political stability and security 90% Corruption-free government 90% Productivity of staff 90% Business opportunity in the mainland of China 90% Communication, transport and other infrastructure 89% Note: Percentage above shows share of respondents saying the factor is favourable or neutral for Hong Kong Source: HKSARG Census and Statistics Department

17 No. of companies Geographical Responsibility of RHQs and ROs in the Region (other than Hong Kong) RHQs ROs China Singapore Taiwan Korea Japan Note: Top 5 countries/territories listed in terms of total no and shares of RHQs and ROs having responsibility for the operation/business there, as of Jun Source: HKSARG Census and Statistics Department

18 How can CEPA benefit Hong Kong as a regional business hub? 18

19 Free trade in services between the Mainland and Hong Kong 19 Then Vice-premier Li Keqiang indicated in his 2011 visit to Hong Kong that trade in services (TIS) between the Chinese mainland and Hong Kong should be basically free by end of the 12th Five-year Plan in 2015 The Mainland has opened up 149 out of 160 categories in TIS as classified by the United Nations, with national treatments being granted in 56 categories The Hong Kong and Guangdong governments have agreed to jointly promote the early and basic achievement of free TIS in 2014, especially through the effective implementation of CEPA Guangdong and Hong Kong will pay special attention on areas spanning finance, international shipping, logistics, convention and exhibition, and environmental protection

20 20 Other key provisions of CEPA Individual Visit Scheme (IVS) IVS was first introduced in the middle of 2003 in four Guangdong cities, allowing residents of those cities to visit Hong Kong in their individual capacity The Scheme is now implemented in 49 Mainland cities In 2013, 27.5 million Mainlanders came as IVS travellers, representing about 66% of total Mainland visitors.

21 21 Financial Cooperation Support mainland financial institutions (banks, securities companies, futures companies) to set up subsidiaries for business operation, FX trading, treasury function and develop international business in Hong Kong Support mainland banks/companies to get listed or issue bonds in Hong Kong Support Hong Kong banks and insurance companies to enter the mainland market, and lower the eligibility requirement for Hong Kong financial institutions to apply for QFII status Allow ETF backed by HK-listed stocks to be launched on the mainland at an appropriate time, and study mutual recognition of funds between the mainland and Hong Kong Hong Kong is allowed to invest in the mainland securities market via the RQFII scheme

22 22 Cooperation in Product Testing Hong Kong testing organisations are allowed to cooperate with designated mainland organisations to undertake testing for products in the CCC catalogue that are processed in Hong Kong Hong Kong testing organisation can undertake testing for food and others of voluntary product certification in Guangdong Hong Kong can cooperate with mainland testing and certification organisations in respect of acceptance of testing data (results)

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