China in Transition
Revitalizing the Hong Kong Economy Through the CEPA - Recommending a "Come on in" strategy
Chi Hung KWAN
Consulting Fellow, RIETI
Hong Kong and mainland China formally signed the Closer Economic Partnership Arrangement (CEPA) in June 2003, and details of the arrangement were announced on September 29. The CEPA's contents are more wide-ranging than a free trade agreement, and include such items as facilitation of services trade and investment. Although Hong Kong is a part of China, such a framework became necessary because it forms a separate customs territory under the WTO. With regard to the CEPA, the burden of adjustment would fall mainly on mainland China, since Hong Kong has virtually no import tariffs from the outset. The reason why the Chinese side has shown interest in the CEPA despite this is because the Hong Kong economy has not been doing well since reversion, and some form of assistance has become necessary.
With the CEPA, 273 product items that altogether comprise more than 60% of Hong Kong's exports to mainland China, including electric and electronic products, apparel, plastic products, paper products, chemical products and watches, will be able to enter the Chinese market tariff-free. This will not only help realize Hong Kong's advantages in terms of funds, information, start-ups and technology inflow, but also be very favorable for the development of new industries that utilize mainland China's strength in research and development and its abundant human resources.
The other pillar of the CEPA is the opening of 18 areas of China's services sector such as finance, retail, distribution and telecommunications to Hong Kong companies. The definition of a Hong Kong company is a firm that has been incorporated or established in Hong Kong with substantive business operations for three to five years, and the CEPA also applies to Hong Kong subsidiaries of multinational corporations that meet this criteria. For companies in mainland China, especially, it is advantageous to set up a base in Hong Kong so as to reap the benefits of the CEPA. In this way, through CEPA-related measures, Hong Kong's position as a business center can be strengthened and new industries producing high-value-added services can be created. Especially, banks in mainland China will be encouraged to relocate their international treasury and foreign exchange trading centers to Hong Kong, as well as to develop network and business activities in Hong Kong through acquisitions. In line with the expansion of offshore Renminbi transactions, Hong Kong is likely to solidify its position as China's financial center.
Up to now, the integration of the two economies has proceeded through the relocation of production facilities from Hong Kong to China. In fact, from China's viewpoint, Hong Kong is its No. 1 source of investment, surpassing the United States, Europe and Japan. As a result, Hong Kong's manufacturing industry has shrunk considerably, and entrepot trade now forms the core of its trade, with domestic exports now comprising less than 10% of total exports. While "going out" is a rational choice for companies in pursuit of profit, it cannot be denied that it has had the negative effect of inviting a hollowing-out of the Hong Kong economy.
The CEPA should help ease Hong Kong's unemployment problem and revitalize its economy by boosting the inflow of investment as well as human resources and tourists from the mainland. In fact, since this summer, after the end of the SARS scare, thanks to the influx of tourists from the mainland that accompanied the partial easing of entry restrictions, the Hong Kong economy has shown signs of recovery. On the heels of this, it has been decided that foreigners who invest more than 6.5 million Hong Kong dollars (about ¥100 million) in such assets as real estate in Hong Kong and maintains that investment for seven years will be granted the right of abode. So far, residents of mainland China are not eligible, but such restrictions will probably be eased as the liberalization of capital movement proceeds in China. In addition, in an effort to absorb China's human resources, authorities should show more flexibility toward the immigration of professionals.
While much has been made of the hollowing-out of the Japanese economy for quite some time, no one speaks of the hollowing-out of Tokyo. This is because the city attracts goods, people, money and information not just from the rest of Japan but also from around the world. In terms of business with China, the position of Hong Kong will not be shaken that easily given its experiences so far, as well as its advantages on the geographical, linguistic and cultural fronts. If Hong Kong can shift its strategy from "going out" to "come on in" using the CEPA as a lever, the day in which it transforms itself from simply being a gateway to China into the business center of South China will be imminent.
October 10, 2003
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