HONG KONG AND MAINLAND EXPAND ECONOMIC PARTNERSHIP

UNCLAS HONG KONG 000880

SIPDIS

STATE FOR EAP/CM AND EEB/OMA

E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD HK CH
SUBJECT: HONG KONG AND MAINLAND EXPAND ECONOMIC PARTNERSHIP
ARRANGEMENT


1. Summary and Comment: Government officials from Hong Kong
and the PRC agreed on May 9 to accelerate the implementation
of the sixth annual supplement to the Closer Economic
Partnership Arrangement (CEPA). The latest supplementary
agreement will take effect sooner than expected (on October
1) to help offset the effects of the global economic
downturn. The PRC will liberalize investment and trade
practices in 20 service sectors, with significant impact
expected in the financial services and professional trades
(e.g. law, medicine, accounting). Supplement VI will likely
boost the flow of direct service sector investments by Hong
Kong companies and individuals into the PRC. Such
investments will provide an attractive growth opportunity for
Hong Kong-based investors, while enhancing the skill sets and
performance capabilities of the PRC's legal, medical and
other service sector professionals. End summary and comment.

Expanding CEPA
--------------


2. The Hong Kong government (HKG) and the PRC on May 9 signed
the sixth supplement to their CEPA. Since its initial
implementation on January 1, 2004, the CEPA has liberalized
trade, investment and the provision of services between Hong
Kong and Mainland China (especially Guangdong Province). The
CEPA has played a major role in building and accelerating the
already significant economic ties between Hong Kong and the
Mainland. According to the HKG's Trade and Industry
Department, Hong Kong was the PRC's largest source of foreign
direct investment (FDI) as of August 2008, accounting for
almost 40 percent of the total. Meanwhile, the PRC remains
Hong Kong's largest trading partner and source of FDI.


3. Under the sixth annual supplement to the CEPA, the PRC
will introduce 29 liberalization measures covering 20 service
sectors, including two new sectors (research and development,
and rail transport). Supplement VI will take effect on
October 1, 2009, three months ahead of the usual January 1
implementation date for the previous five CEPA supplements.
The HKG cited the desire to accelerate the benefits of the
new measures during the current economic downturn.

Financial Services and Professional Trades to Benefit
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4. Supplement VI will enable Hong Kong-based banks to expand
their operations in Guangdong Province. The banks' branches
in Guangdong will be allowed to open "sub-branch" service
locations anywhere in the province. Hong Kong securities
companies will also be allowed to own up to one-third of
joint venture securities investment advisory companies
located in Guangdong. Mainland securities companies approved
by China's Securities Regulatory Commission will be allowed
to establish subsidiaries in Hong Kong. In addition, the PRC
will lay the groundwork to allow Chinese residents to
purchase index-tracking exchange-traded funds of Hong
Kong-listed stocks. This could significantly boost
Mainlanders' financial investments in shares traded on the
Hong Kong stock exchange.


5. The PRC agreed to liberalize the provision of legal
services by allowing Hong Kong lawyers to practice law in the
PRC. They must have at least five years' professional
experience, pass the PRC State Judicial Exam, and undergo one
month of additional training and a subsequent assessment by
one of the Mainland's lawyer associations. Supplement VI
also includes several measures to encourage technical
exchanges and mutual recognition of other professional
qualifications in sectors such as medicine, accounting,
construction and real estate. Government officials and
industry observers in Hong Kong believe these steps will
raise the level of cross-border investments, especially into
Guangdong Province, while boosting the technical competence
and professional standards of Mainland professionals.
DONOVAN