14 years after China free-trade deal saved Hong Kong from Sars slump, analysts warn city must innovate to make most of Cepa

Experts urge city to innovate as foreign investors enjoy more policy perks

PUBLISHED : Monday, 17 July, 2017, 8:00am
UPDATED : Monday, 17 July, 2017, 4:25pm

A free-trade deal with mainland authorities that was intended 14 years ago to bolster Hong Kong’s then-struggling economy may have run its course for the city unless it innovates, analysts warn.

June 29, 2003 was a joyful day for Hong Kong’s business community when China’s then premier Wen Jiabao came to town with an unprecedented agreement giving local investors preferential access to the massive mainland market – before extending the free-trade deal to other countries.

The Closer Economic Partnership Arrangement (Cepa) was largely seen as a timely economic panacea offered by Beijing, as Hong Kong battled the devastating effects of severe acute respiratory syndrome, or Sars.

A month later, the launch of an individual traveller scheme threw open the city’s doors to mainland tourists, and the struggling local economy saw an immediate boost. Over the next decade, prosperity followed, and the scheme allowed more residents from key mainland cities to visit Hong Kong without needing to book tour groups.

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Fast forward 14 years to today, however, and the economic benefits the city enjoyed under the free-trade pact seem to be diminishing. Many preferential terms that were once exclusive to Hong Kong investors have now become largely available to China’s major trading partners.

With the country further liberalising its market under international trade rules, a question has been raised: has Cepa accomplished its mission?

“Cepa is not as powerful as it used to be,” said Eddy Li Sau-hung, president of the Chinese Manufacturers’ Association of Hong Kong, which represents 3,000 firms. “The industries that can be opened [on the mainland] have already been opened. There is very little room to offer manufacturers further relaxing measures.”

Chinese authorities’ gambit giving Hong Kong residents, companies and products preferential access to the mainland market was meant to win hearts and minds in the former British colony.

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But Li said the concessions initially granted firms in the city were now enjoyed by most foreign investors.

Last month, two supplementary agreements under the Cepa framework were signed, ahead of the 20th anniversary of Hong Kong’s return to Chinese sovereignty.

The deals aimed to give the city the highest level of investment access to China in both service and non-services sectors, and local investors would be treated as Chinese nationals in most industries.

But simultaneously, Beijing agreed to relax its restrictions on foreign investment, including reducing the number of restrictive measures from 93 to 62. The decision removed access hurdles for dozens of trade categories, and gave foreign investors “national treatment” in 11 more sectors.

You either have a large market with more rivals or few competitors and weak demand
Billy Mak Sui-choi, Baptist University

Billy Mak Sui-choi, of Baptist University, said China was required to gradually remove barriers for all its trade partners as a member of the Word Trade Organisation. The effect for Hong Kong businesses, he added, would be fiercer competition from foreign firms.

But Mak did not forecast a dim future for local investors on the mainland.

“The economic scale was very small when Hong Kong entered the mainland market, but now, the pie is much larger,” he said.

“You either have a large market with more rivals or few competitors and weak demand. Which one is better?”

With additional overseas rivals joining the game, firms from the city have been urged to raise their competitive edge by incorporating more advanced technologies.

Relying on past policy advantages would offer no solution, added Stephen Wong Yuen-shan of Chinese University.

“It is very difficult for Hong Kong firms to survive on the mainland by purely counting on preferential policies now,” he said.

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While new commerce minister Edward Yau Tang-wah said the upgraded Cepa “opened a key door” for more local businesses to operate on the mainland, being treated as Chinese nationals would not always bring perks.

Caesar Wong, managing director of consulting firm RSM’s China business services, believed it would be increasingly difficult for Hong Kong businesses to bargain for preferential tax treatment.

“If mainland investors are subject to relevant laws, regulations and rules, Hong Kong investors will be subject to them too,” he said.