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

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? 2

3. CEPA Trade in Goods (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 10 Supplements adopted since 2004 What are CEPA’s main provisions? 3

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) 4

5. Distribution of Products with Approved Hong Kong-origin (as of 30 April 2014) Product typesNo. of CO approved Food and beverages27,426 Textiles and clothing24,880 Plastics and plastic articles 22,882 Pharmaceutical products12,353 Chemical products6,439 Base metal products5,107 Paper and printed articles3,329 Colouring matters3,208................ Total110,423 Source: HKSARG Trade and Industry Department 5

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%) 6

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 7

8. For what services? AccountingDistribution Management consulting Real Estate Sporting AdvertisingEnvironmental Maritime Transport Related Scientific and Technical Consulting Services Storage and warehousing Air Transport Examinations for Professional and Technical Qualification Market research Research & development Technical testing, analysis and product testing Audio-visual Freight forwarding agency MedicalRoad TransportTelecommunications Banking Individually owned stores Patent AgencySecurities and FuturesTourism Building cleaningInsurancePhotographic Services incidental to Manufacturing Trade mark agency Computer and related services Inter-disciplinary research & experimental development service Placement and Supply Services of Personnel Services incidental to Mining Translation & interpretation ConstructionLegalPrinting Services related to Management Consulting Education Conventions and exhibitions Library, Museum and Other Cultural Services Public utilitySocial ServicesDuplicating Cultural entertainment LogisticsRail TransportSpecialty Design After-death facilities 8

9. Distribution of Services with Approved Hong Kong Service Supplier (as of 30 April 2014) Service sectorNo. of HKSS approved Transport and logistics services1,333 Distribution services352 Air transport services 223 Placement and supply services of personnel145 Advertising services130 Printing services111 Construction professional services and construction and related engineering services 102 Audiovisual services62................ Total2,793 9 Source: HKSARG Trade and Industry Department 9

10. What are the benefits of CEPA? -HKSS granted preferential access to the mainland’s service market -403 service liberalisation measures introduced since January 2004; over 50 pilot measures implemented in Guangdong since January 2009 -Lower entry thresholds, broader business scope and first-mover advantage compared to non-CEPA foreign companies WTO-plus benefits 10

11. How can overseas companies take advantage of CEPA? 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 11

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 micro- finance 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. 12

13.  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 Success Story 13

14. How can overseas companies take advantage of CEPA? 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 14

15. Overseas companies using Hong Kong as a regional business hub No. of companies

16. Hong Kong: C ore Competence as a Business Hub Free market Infrastructure Systematic High quality service 16 Note: Percentage above shows share of respondents saying the factor is “favourable” or “neutral” for Hong Kong Source: HKSARG Census and Statistics Department Factors affecting choice of setting up RHQ/RO/LO in Hong Kong RHQ/RO/LO Simple tax system and low tax rate92% Free flow of information92% Free port status91% Rule of law and independent judiciary91% Geographical location91% Protection of intellectual property rights91% Political stability and security90% Corruption-free government90% Productivity of staff90% Business opportunity in the mainland of China90% Communication, transport and other infrastructure89%

17. Geographical Responsibility of RHQs and ROs in the Region (other than Hong Kong) 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 2013. Source: HKSARG Census and Statistics Department 17 No. of companies

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

19. Free trade in services between the Mainland and Hong Kong 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 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 19

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. 20

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 21

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) 22

23. Asia's Business Hub 23

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