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Thanks to CEPA

After the mainland resumed sovereignty over Hong Kong, economic and trade cooperation between the two entered a new era. The implementation of CEPA binds Hong Kong and the mainland closer and has become an important platform for their economic cooperation.

CEPA reflects the Central Government's strong support for the Hong Kong economy. In the first few years after Hong Kong returned to China (1997-2001), Hong Kong encountered huge development problems rising from Asian financial crisis and the slump in the world economy. During that time, Hong Kong suffered from declining real estate and stock markets, serious deflation and a high unemployment rate. In order to relieve the city from depression, the Central Government supported Hong Kong's proposal to establish a free trade zone between the two regions.

The Chinese mainland and Hong Kong launched CEPA negotiation in January 2002. After many high-level negotiations, the two sides officially signed CEPA on June 29, 2003, and it was implemented from January 1, 2004. The open nature of the agreement allows for constant renewal and supplement when necessary. From 2004 to 2006, the Chinese mainland and Hong Kong signed three supplementary agreements each year, encouraging the mainland to be more open to Hong Kong markets.

CEPA mainly involves three aspects: trade in goods, trade in services, and the convenience of trade investment. The CEPA was designed to promote balanced trade, exploit particular advantages, and achieve common prosperity. As the first trade agreement between the two sides, CEPA shows the Central Government's determination and sincerity to support the long-term stability and development of Hong Kong.

The further implementation accelerates the free trade access of the two partners and has stimulated the rapid development of the service industry in Hong Kong.

The zero tariff policy of trade in goods promotes the competitiveness of products made in Hong Kong. Among all free trade agreements signed by the Chinese mainland, CEPA has the fastest and broadest tariff reduction. According to supplemental agreements to CEPA, from January 1, 2004,  "made-in-Hong Kong" products have gained zero tariff treatment step by step. On January 1, 2006, free trade in goods between the two sides entered a new era, and all products originally made in Hong Kong now enjoy zero tariff treatment.

By the end of 2006, the mainland had imported goods worth of $870 million----subject to zero tariff----from Hong Kong, and a total of 620 million yuan was exempt from tariffs. The zero tariff policy greatly reduced the exporting cost on Hong Kong products, promoting its exporting competitiveness and stimulating the production of high added-value products and hi-tech products.

CEPA lowered the entry standard and Hong Kong businesses can access the mainland market under a much favorable condition, enhancing Hong Kong's confidence in the city's long term and stable economic development. The rapid economic development on the Chinese mainland has also provided golden trade opportunities between the two sides.

According to statistics from General Administration of Customs, from 1997 to 2002, the annual trade volume between the two regions grew 4.5 percent. After CEPA was implemented, the annual trade growth rate soared to 25.5 percent from 2003 to 2006. The Hong Kong statistics show that from 1997 to 2002, Hong Kong exports to the mainland grew 3.8 percent year on year, while the rate increased to 9.3 percent from 2003 to 2006. Hong Kong's status as an international trade hub continues to be strengthened.

The expanding service market on the mainland encourages investment from Hong Kong and further deepens the cooperation between the partners in this sector. According to CEPA agreement, the mainland will gradually open its service sector. In sectors such as law, accounting, audio/visual, architecture, distribution, banking, securities, tourism, and transportation where Hong Kong has competitive edge, the mainland will grant favorable treatment and those services provided by Hong Kong can enter the mainland market ahead of other world trade organization members.

The immature but potentially huge service market in the mainland provides Hong Kong investors with advantages and allows them to enter the market earlier. By the end of 2006, Hong Kong approved 1,697 applications to set up companies in the mainland including legal services, architecture, health care, real estate, advertising, transportation and logistics. About 60 percent of all the applications were relevant to transportation and logistics, which indicated that the international shipping and logistics hub has extended its services to the mainland. The Hong Kong service sector providers entered the mainland market ahead of other competitors, greatly promoting their competitiveness. According to statistics from Hong Kong, the service industry increased 8.6 percent from the year before.

The implementation of CEPA has strengthened financial cooperation between the two sides and boosted Hong Kong's financial industry. According to CEPA agreement, the mainland expanded the financial sector and reduced the market access restrictions for Hong Kong investors. By the end of June 2006, Hong Kong banks had opened 50 branches and 28 sub-branches on the mainland, accounting for 27 percent and 54 percent of all foreign banks.

The mainland allows Hong Kong banks to operate renminbi services. By the end of 2006, nearly all Hong Kong banks operating renminbi retail businesses in Hong Kong had opened renminbi deposit, exchange, remittance, and bankcard businesses on the mainland. Also by the end of last year, total deposits from Hong Kong banks operating on the mainland reached 22.6 billion yuan.

The huge business volume brought Hong Kong banks great development opportunities and have helped boost the Hong Kong banking industry, which grew 20.7 percent in 2006. The booming banking industry has become a highlight of Hong Kong's economic success. Additionally, more mainland companies are listed in Hong Kong. Last year, the initial public offering in Hong Kong collected 325.9 billion Hong Kong dollars, thus making Hong Kong the second largest financial center in the world after London, in terms of collecting money. Meanwhile, the total value of the Hong Kong stock market has surmounted 13 trillion Hong Kong dollars, outpacing the Frankfurt Stock Exchange as the seventh largest stock market in the world.

Individual mainland visitors have boosted the rapid development of the tourism industry in Hong Kong. As an international tourism hub, tourism is one of the major pillar industries of Hong Kong and the mainland visitors are the biggest source of customers. According to CEPA, the mainland has gradually allowed mainland individual visitors to Hong Kong. By the end of 2006, up to 200 million residents from six provinces and municipalities including Beijing, Shanghai and Tianjin have visited Hong Kong. The huge number of mainland visitors greatly promotes the hospitality, retailing and wholesaling, transportation and warehouse industries, growing 9 percent, 4.9 percent, 8.4 percent respectively last year compared with that of 2005. The development of those industries has increased the employment rate and income of the people of Hong Kong and has stimulated growth in local consumption and investment.

Currently, Hong Kong has entered a steady growth period. With the further implementation of CEPA, economic and trade relations between the two sides will become closer and Hong Kong will have more development opportunities.

Brighter future

From 2006 to 2010, the Chinese mainland is expected to grow at a rate of over 8 percent each year, providing huge momentum for Hong Kong economic development. The large scale development of western China, the new plan to develop central China, as well as other projects, have all provided Hong Kong investors golden opportunities.

The service industry is very strong in Hong Kong and has a relatively strong edge. Backed by high quality professionals, an integrated and efficient service chain, the Hong Kong service industry can grab a bigger market share in the mainland service sector. Hong Kong has a large number of financial elites and professionals who can help mainland residents manage their money.

In conclusion, economic and trade cooperation between the mainland and Hong Kong will promote the economic integration of the two sides. Hong Kong's status as an international trade, finance, tourism, and logistics hub will be further enhanced and upgraded. Hong Kong's future is bright.