Director General of Invest HK, Mike Rowse, outlined three of these advantages at a luncheon hosted by theHong Kong Economic Trade Office and the Ontario Chamber of Commerce.  The first advantage offered by Hong Kong, as described in yesterday’s post, is the size of the domestic market and easy access to all of Asia, not just to Mainland China.

The second advantaged enjoyed by companies using Hong Kong as a base, according to Rowse, is the Closer Economic Partnership Arrangement (CEPA).  Essentially, CEPA is a free trade arrangement that allows easier access to Mainland China’s market for Hong Kong-made products and Hong Kong-based service companies. Companies that are 100% foreign owned can have the same advantages as a domestic company, however usually after three years in operation.  

CEPA is unusual in several ways.  First of all, it is a free trade agreement between two parts of the same country.  Secondly, it is a growing document.  CEPA is constantly being revised and broadened to be more inclusive of other sectors and products.  Since its inception in 2004, there have been 4 updates (supplements) with the most recent implemented in January 2008, known as CEPA V.  From the most current CEPA consultations, 29 liberalization measures have been agreed to in 17 service sectors (15 current CEPA service sectors and two new sectors).  This session expanded the services sectors covered under CEPA to 40. It was also agreed that e-commerce, trademark and branding, and recognition of professional qualifications would be further enhanced.    

Rowse made sure to note that all industries are open to foreign trade and investment in Hong Kong - once again, pointing out that they’re open for business.

For more info on CEPA please read the previous VENTURES post CEPA-Opening the Doors to Hong Kong-China trade.    

Tomorrow’s post will conclude this series with Mike Rowe’s third key factor to success in Hong Kong, what Invest HK can do for you.

Mike Rowse, Director-General of Invest HK speaking about getting Canadians excited about in Hong Kong

What does a former English tutor have to do with growing and sustaining your business in these turbulent economic times? Well quite a lot, if that person is Mike Rowse, Director-General of Investment Promotion in Hong Kong – Invest HK. Speaking at an event called, Establishing Business in Asia, a luncheon hosted by the Hong Kong Economic Trade Office and the Ontario Chamber of Commerce, Rowse discussed what businesses must do when looking towards Hong Kong as a market for expansion. He kicked off the discussion by saying that anyone can do business in Hong Kong and Mainland China. To make your business into a profitable one takes a bit more effort and involves a well thought out process. Rowse outlined three main keys to achieving this goal.

Today, in the first of a three part series, we’ll look at the first key to success.

First, Hong Kong has its own domestic market that mustn’t be overlooked. It’s not just the seven million people who live there that must be considered, but also the 28 million tourists that visit Hong Kong every year – many of whom visit Hong Kong to shop. It should also be seen as a conduit into the Asian market. With no value added tax (VAT), GST, and an excellent intellectual property rights enforcement regime, it’s not just cheaper, but also easier to protect your goods and services in Hong Kong than in Mainland China. This is why the world’s biggest luxury brands like Louis Vuitton and Armani have set up shop in Hong Kong.

Hong Kong is also a perfect coordination centre, not just for South China and China as a whole, but also all of Asia. Its legal system, English as an official language, low crime, low taxes, and its strategic location make it a prime spot for accessing the region. In other words, Hong Kong wants you to do business with them and it’s up to you to take advantage of what they have to offer.

Tomorrow on VENTURES, we’ll have Rowse’s second key to success in the Hong Kong Market.

Discussions are underway about developing a special cooperative region between Hong Kong, Guangdong and Macau thus creating a Hong Kong-Guangdong-Macau Special Cooperative Region for economic integration.

The Guangdong Foreign Trade and Economic Cooperation Department, Guangdong Development Research Centre, and Guangdong Academy of Social Sciences, among others, have come together to study the integration of the three areas.  Content, feasibility, advantages and disadvantages, impact on the state and neighboring areas, possible problems and formulation of counteracting strategies, and implementation of procedures are all being studied.  The Pearl River Delta, an area within this region has been struggling in recent years and officials are eager as they hope this will economic growth by raising its comparative advantage over other regions.

Advisors have pointed out that under the Closer Economic Partnership Agreement (CEPA), one of the best ways to encourage cooperation is by addressing specific issues.  For instance, allowing the free trading of stocks, securities and futures with this region has been suggested.

Shenzhen, a city within Guangdong, became a Special Economic Zone (SEZ) in 1979 and it has since developed into the second busiest port city in China, and ranking among the top in GDP per capita.  Shenzhen also has its own stock exchange, the ninth tallest building in the world (Shun Hing Square), and six land crossings to Hong Kong.  SEZs have special tax incentives for foreign trade and investment.   If anything were to happen, a trial period would be first step as the political, economic, culture and laws of Guangdong, Hong Kong and Macau are vastly different.  Eighty per cent of Hong Kong’s economy is dominated by the service sector with finance, transportation and tourism.  Macau is known for its casinos, but manufacturing, financial services and real estate also plays a key role in its economy.  Also noted is that while Hong Kong traditionally uses the British system, Macau follows Portuguese rule of law.

Essentially, CEPA is a free trade agreement (under World Trade Organization (WTO) rules) which allows easier access to China’s market for Hong Kong made products and Hong Kong based service companies.  CEPA is China’s first bilateral trade agreement.  

Since 2004, there have been four supplements, with the most recent implemented in January 2008 (CEPA V). 

CEPA covers three broad categories: 

1. Trade in Goods - All classified “Made in Hong Kong” goods that meet CEPA rules of origin (ROO) from approved local manufacturers are imported, tariff free, into mainland China.

There are 1,502 tariff codes outlining the ROO criteria for classification as a Hong Kong made product.  Foreign products must be substantially transformed to meet CEPA standards. The major criteria are:

• Value-Added Content- This applies to about 11% of the 1,502 tariff codes. This origin rule requires the total value of labour, product development, component parts and raw materials to more than or equal to 30% of the free-on-board value of the goods.
• Manufacturing or Processing Operations- This applies to about 72% of the 1,502 tariff codes. This origin rule requires the principal manufacturing or processing operations which confer the essential characteristics to the final product are carried out in Hong Kong.
• Change in Tariff Heading- This applies to about 11% of the 1,502 tariff codes. This origin rule requires the processing and manufacturing of non-originating materials to be carried out in Hong Kong and resulting in a product of a different four-digit tariff heading under the “Product Description and Harmonized System Codes.” manufacturing or processing operations, and change in tariff heading.

Each shipment of goods exported to mainland China must be have a Certificate of Hong Kong Origin- CEPA (CO(CEPA)). Applicants must comply with 11 criteria to be issued a CO(CEPA) by the Trade and Industry Department (TID) or one of the five Government Approved Certification Organizations:

• The Hong Kong General Chamber of Commerce
• Federation of Hong Kong Industries
• The Chinese Manufacturers’ Association of Hong Kong
• The Chinese General Chamber of Commerce
• The Indian Chamber of Commerce, Hong Kong

Before applying for CO(CEPA), the Hong Kong manufacturer must apply for a Factory Registration (FR) with the TID. A FR validates that its factory has the capabilities to produce the goods for export.

2. Trade in services - Hong Kong service suppliers are given preferential treatment in entering into mainland China in many service sectors. Professional bodies of Hong Kong and the regulatory authorities in China have also signed a number of agreements or arrangements on the mutual recognition of professional qualification.

There are 28 service sectors in which geographical, financial, and ownership restraints are either reduced or removed. Any company, foreign or domestic, can apply as a Hong Kong company and take advantage of CEPA, provided that it meets the following criteria:

• Incorporated in Hong Kong
• Has operated for three to five years (depending on the sector)
• Is liable to pay Hong Kong profits tax

[A company (domestic or foreign/ Hong Kong or foreign) must pay profits tax if it carries on a trade, profession or business in Hong Kong and has profits arising in or derived from Hong Kong.] 

• Employs 50% of its staff locally

3. Trade and investment facilitation - Both China and Hong Kong have agreed to enhance cooperation in eight core trade and investment areas: 

• Customs Clearance Facilitation
• Quarantine and Inspection of Commodities, Quality Assurance and Food Safety
• Cooperation of Small and Medium-Sized Enterprises
• Cooperation in Chinese Medicine and Medical Products
• Electronic Commerce
• Trade and Investment Promotion
• Transparency in Laws and Regulations
• Protection of Intellectual Property

For more information about CEPA:

Trade and Industry Department of Hong Kong (SAR) http://www.tid.gov.hk/english/cepa/index.html 

Hong Kong Economic & Trade Office http://www.hketo.ca/invest/cepa.html