CCGL 9028
Hong Kong and China’s
Economic Development
2. Trade between Hong Kong and
the Mainland
Trade before Economic Reform
China’s Past External Economic Relations
◼ US embargo in 1949
◼ US freezing of China assets in 1950
◼ United Nations trade embargo on China in 1951 after
the start of the Korean War
◼ Breaking up with the Soviet Union – ideological and
military conflicts
◼ Domestically, socialist ideology, central planning and
policy of self-reliance (自力更生)
◼ Political campaigns with disastrous outcomes on the
economy (Great Leap Forward, Cultural Revolution)
◼ Resumption of external links in early 1970s
China’s Trade Regime Before Reform
◼ China’s trade was carried out according to quantitative
guidelines under central planning
◼ Unlike trade in a market economy, China’s trade in
those years was:
not in accordance with its comparative advantages
◼ monopolized and had little competition at home
◼ not responsive to world prices and exchange rates
◼
◼ Between 1952 and 1960, 48% of China’s trade were
with the Soviet Union and 2/3 with central-planning
economies
Overall Trade Experience
◼ Volume of China’s trade doubled in post-1949
industrialization
◼ There were fluctuations during years of large political
campaigns
◼ There was more opening to trade in the early 1970s, but
the appearance of trade deficits led to internal debates
on opening
◼ The next two slides show the amounts of China exports
and imports in current prices and constant prices
◼ Most of the increase in trade in the early 1970s was due
to world inflation, and more so for China’s imports than
exports
The Role of Hong Kong
◼ The Mainland had trade surplus with Hong Kong over
those years and had net earnings of Hong Kong dollars,
even during the Cultural Revolution
◼ Hong Kong dollars had the advantage of being fully
convertible to any international currency, and Hong
Kong’s foreign exchange market was well integrated
with the international market
◼ The Mainland could therefore finance its imports with the
surplus from Hong Kong
Hong Kong in China Trade
◼ After the United Nations embargo on China, China
leaned to the Soviet Union and the Eastern European
bloc and Hong Kong’s share in China’s exports fell in the
1950s
◼ Hong Kong’s importance resumed in the early 1960s as
China broke with the Soviet Union
◼ Hong Kong accounted for about 20 percent of the
Mainland’s exports since mid-1960s to the onset of
China’s economic reform
◼ Japan became China’s largest trading partner after
China’s break with the Soviet Union
Hong Kong in China Trade
◼ China’s exports to Hong Kong were mostly (75%) for
Hong Kong consumption and not so much for re-export
during these years
◼ Food from the Mainland accounted for about half of
Hong Kong’s domestic food consumption then
◼ It is estimated that, had Hong Kong not imported
relatively cheap foodstuffs from the Mainland, the cost of
living in Hong Kong would have been at least 15%
higher in 1973
◼ Food prices affected wage growth, which in turn affected
the competitiveness of Hong Kong exports
Hong Kong in China Trade
◼ 1971: “Ping-pong” diplomacy, US abandoned its
embargo on exports to China
◼ 1972: Nixon’s visit to China and the signing of the
Shanghai Communiqué (上海公報)
◼ Trade between China and the US increased but limited
to non-strategic items
◼ Yet Chinese goods to the US faced high tariffs since
China was not on the list of Most-Favored Nations (MFN
最惠國待遇)
Hong Kong as a Trade Intermediary
Hong Kong as a Trade Intermediary
◼ Why is HK a trade intermediary
◼ The first natural reason is HK’s deep-sea harbor that
facilitates shipment of goods – i.e., a “technological”
factor which underlines HK’s comparative advantage
◼ But this advantage has been phasing out over time as
new ports in the region emerged
◼ https://www.bts.gov/archive/publications/pocket_guide_t
o_transportation/2007/table_04_16
◼ https://www.worldshipping.org/top-50-ports
◼ Note that the decrease in HK’s container throughput is
also due to HK’s transformation into a services center –
trade in services does not need containers
Hong Kong as a Trade Intermediary
◼ Another possible reason for HK being a trade
intermediary is China’s isolation during the central
planning period, so HK served as the intermediary
between the Mainland and the rest of the world (ROW)
◼ It was suggested that such role of HK would disappear
as the Mainland opened more fully, but this has not
been the case
◼ Recall HK had already been a middleman in trade
between the Mainland and the rest of the world before
the central planning years – see HK’s re-exports related
to the Mainland in the 1930s in File 1
Hong Kong as a Trade Intermediary
◼ Moreover, HK’s role as intermediary has actually
increased after the Mainland opened up
◼ When the Mainland was under central planning, trade
was carried out by command
there were only a few state firms that could trade
◼ each of these firms traded only in specific goods
◼ the volume of trade was not sensitive to world prices and
exchange rate changes
◼
◼ In other words, the Mainland’s trade links with outside
were few and weak at the beginning of reform
◼ After reform, there were less restrictions to establish
trade links with outside, so more firms took part in trade
Hong Kong as a Trade Intermediary
◼ Firms with FDI (e.g., HK invested firms in the Mainland)
might already have trade links, but there were also many
Mainland firms emerging as well
◼ Individual Mainland firms may not set up many trade
links themselves even if they are allowed to do so, since
there are fixed costs in establishing such links
◼ While the Mainland’s opening reduces the need for trade
intermediation, its fast economic development increases
the demand for intermediation – hence the role of HK
◼ It is not true that there is no need for intermediation in a
free market – e.g., there are real estates agents in the
property market (due to information costs)
Hong Kong as a Trade Intermediary
◼ A related factor is that more and more services were
needed when the Mainland moved from central planning
to market, e.g., finance, logistics, retailing, advertising
◼ The Mainland did not emphasize services during the
central planning years, due to Marxist thinking
◼ According to the latter’s labor theory of value, income
should be derived from labor input, so, e.g., returns to
financial services, such as interest payments for the
availability of funds, are considered as exploitation
◼ FDI in services to the Mainland was allowed only as late
as the early 1990s – thus the role for HK even after the
Mainland opened up
Hong Kong as a Trade Intermediary
◼ It has also been suggested that HK is a trade
intermediary with lots of re-exports because of the
advantage of hubbing for international shipping
◼ As a hub, HK would be a center for goods to be
unloaded, re-combined with other cargo directed to the
same destination, etc.
◼ However, goods in transit do not clear customs and so
do not appear as HK re-exports in trade statistics
Intermediation in General
◼ Intermediaries can be a firm or a city (like HK)
◼ One major reason for the emergence of Intermediaries
in the market is that they could reduce costs as the
quantity produced increased or the kinds of activities
increased – economies of scale, economies of scope
and economies of agglomeration
◼ These underly all kinds of “centers”
◼ Another major reason for intermediaries to exist is
information costs
◼ Due to asymmetric information, it is costly for people to
find out the most appropriate counterparty for a
transaction, so they go to intermediaries
Information Costs
◼ Intermediaries do not just provide information on who
are the buyers and sellers – in some transactions they
provide more services, such as quality verification (who
is trustworthy buyers and sellers)
◼ Buyers are not perfectly informed of the quality of the
product from suppliers, while suppliers are not perfectly
informed about the preferences of buyers
◼ Imagine a HK intermediary connects a producer in the
Mainland to a retailer in the US – it then serves as a
match-maker, but it may also undertake quality control,
or even oversee the whole production process, from the
purchase of inputs to the final shipping
Quality Verification
◼ The HK intermediary charges the US importers relatively
high prices, but assures the latter that the goods are of
their desired quality
◼ It invests in “inspection technology” to better check the
quality of products – this “technology” could be
experience, monitoring, research or networking, etc.
◼ Since inspection is costly, the intermediary would
inspect only a sample of what they buy from the
producer
◼ Detected low-quality goods are returned to the
producers
Quality Verification
◼ For those low-quality goods that are not detected and
shipped overseas, the intermediary would buy back from
the foreign retailer to maintain their reputation
◼ It may re-sell these low-quality goods at a lower price
than what they originally pay, so there could be a
negative markup for their operations
◼ If higher income economies pay higher prices for better
quality goods and lower income economies pay lower
prices for lower quality goods (i.e., quality is incomeelastic), this means HK’s re-export markups are higher
for trade with higher income economies, and lower or
even negative with lower income economies
Information Costs
◼ Another implication of the above ideas is that the
markups charged by the HK intermediary would be
higher if the information costs are also higher
◼ Buyer-seller search costs are higher for differentiated
products and smaller destination countries as these
markets are thin
◼ There are empirical findings that markups are higher for
products with higher export-price variability, suggesting
that products subject to higher information costs have
higher markups
◼ Markups are also higher for differentiated products than
for homogenous goods or referenced-priced goods
Tax Evasion
◼ Given HK has a lower corporate tax rate than the
Mainland, firms with presence in both locations set
artificially low price on Mainland products to HK (transfer
pricing)
◼ This would affect the share of HK’s re-export in total HK
exports
◼ This would also affect the export markups
◼ But this has no implications on the variation of markups
across the kinds of goods and the ultimate destinations
Hong Kong Trade Patterns
Contribution of Major Sectors 2023
◼ https://www.censtatd.gov.hk/en/data/stat_report/product/
FA100099/att/B72412FA2024XXXXB0100.pdf
Sector
Share of GDP
Share of Employment
Banking
18.2%
2.6%
Insurance + Other Finance
6.7%
4.6%
Tourism
2.6%
3.9%
Trading
15.3%
10.9%
Logistics
3.6%
4.6%
Professional Services
4.8%
6.8%
Other Producer Services
6.0%
8.9%
Total
57.2%
42.3%
Some Basics
◼ By the Basic Law, the HKSAR is a separate customs
territory from the Mainland – thus, merchandise trade
between HK and the Mainland must clear customs, and
are included in separate sets of trade statistics in HK
and the Mainland
◼ Total merchandise trade refers to all the movements of
merchandise between HK and its trading partners, by
land, air, water and by post – it comprises total exports
and imports of goods
◼ Total exports of goods comprise domestic exports and
re-exports
Some Basics
◼ Domestic exports are the natural produce of HK or the
products of a manufacturing process in HK which has
changed permanently and substantially the shape,
nature, form or utility of the basic materials used in
manufacture
◼ Re-exports are products which have previously been
imported into HK, and which are re-exported without
having undergone in HK a manufacturing process which
has changed permanently and substantially the shape,
nature, form or utility of the basic materials used in
manufacture
Some Basics
◼ The values of both domestic exports and re-exports are
recorded on f.o.b. (free on board) basis
◼ Imports of goods refer to goods which have been
produced or manufactured in places outside the
jurisdiction of HK and brought into HK for domestic use
or for subsequent re-export as well as products of HK
which are re-imported
◼ The values of imports are recorded on c.i.f. (cost,
insurance and freight) basis
Some Basics
◼ Trade in services (TIS) refers to exports of services and
imports of services
◼ Exports of services are the sales of services to the rest
of the world, whereas imports of services are the
purchases of services from the rest of the world
◼ Exports and imports of services represent transactions
between “residents” and “non-residents” of the economy
of HK
◼ According to international statistical standards, residents
refer to organizations which ordinarily operate in the
economic territory of the economy, and persons who
normally stay in the economic territory of the economy
Four Modes of Trade in Services
◼ There are four modes of trade in services
◼ cross-border supply – only the service crosses the border
(e.g., delivery of services through telecom)
◼ consumption abroad – consumers go overseas (e.g.,
tourism)
◼ commercial presence – set up branches to provide
services overseas (e.g., foreign bank branches) – this
mode links trade in services to foreign direct investment
◼ presence of natural persons – individuals move
temporarily to the territory of the consumer to provide the
service (e.g., business consultants go to a foreign
country)
Trade Patterns
◼ HK’s domestic exports of goods are a relatively small
share of total exports, while re-exports of goods make
up most of total exports
◼ Import of goods are mostly for re-export
◼ Retained imports are a high percentage of GDP
◼ Total export of goods is less than total Import of goods,
so there is a deficit in trade in goods
◼ Exports of services are larger than Imports of services,
so there is a surplus in trade in services
◼ Note that there is no re-export of services
Retained Imports
◼ Retained imports are those imported goods which are
retained for use in HK
◼ As there is no directly observed data, the value of
retained imports has to be estimated as
value of retained imports
= total import – import value of re-exports
◼ import value of re-exports
= re-exports – re-export margin (estimated)
◼
◼ E.g., HK’s imports are $100, re-exports $120, and there
is no domestic export – if the re-export margin is 20% or
$24, then the imported content of re-export is $96, so
retained import is $4, and HK’s value-added is $24
Trade Profile
◼ Trade profiles refer to export destinations and import
sources, as well as what kinds of products
◼ For Hong Kong:
https://www.tid.gov.hk/english/trade_relations/mainland/t
rade.html
◼ For Hong Kong and the Mainland:
http://wits.worldbank.org/visualization/country-analysisvisualization.html
Trade Profile: Hong Kong
◼ https://tradingeconomics.com/hong-kong/exports-by-
country
◼ https://tradingeconomics.com/hong-kong/imports-bycountry
◼ https://tradingeconomics.com/hong-kong/exports-bycategory
◼ https://tradingeconomics.com/hong-kong/imports-bycategory
Trade Profile: The Mainland
◼ https://tradingeconomics.com/china/exports-by-country
◼ https://tradingeconomics.com/china/imports-by-country
◼ https://tradingeconomics.com/china/exports-by-category
◼ https://tradingeconomics.com/china/imports-by-category
Trade in Services
◼ Note that the “product” and “category” in export and
import in the previous slides are merchandises or goods
only and do not include trade in services
◼ For Hong Kong, the major examples of trade in services
are transport, travel, financial services, and other
business services
◼ See Charts 3 (kinds of activities) and Charts 4 (trading
partners) in:
https://www.censtatd.gov.hk/en/wbr.html?ecode=B1020
0112022AN22&scode=240
Offshore Trade
◼ While HK is known as a re-export center, its re-exports
have gradually been replaced by its exports of traderelated services (mostly offshore trade)
◼ Note that re-exports are trade in goods, while offshore
trade is trade in services (from HK’s perspective)
◼ Offshore trade (離岸貿易) in goods covers
"merchanting" and "merchandising for offshore
transactions" provided by establishments operating in
HK (but not their affiliates located outside HK)
◼ The goods involved in offshore trade are shipped
directly from a party outside HK to another party outside
HK without the goods passing through HK
Offshore Trade
◼ Merchanting (轉手商貿活動) is defined as services
associated with the trading of goods purchased from
and then sold to parties outside HK without the goods
ever entering and leaving HK
◼ The HK entity takes ownership of the goods involved
◼ Merchanting also includes transactions of goods
manufactured through sub-contract processing
arrangement and directly sold to parties outside HK
without the goods entering and leaving HK
Offshore Trade
◼ Regarding merchandising for offshore transactions (與離
岸交易有關的商品服務), the entity operating in HK
arrange services on behalf of buyers/sellers outside HK
the purchases/sales of goods according to their
specifications
◼ The services include multiple sourcing, marketing,
contract and price negotiation, shipment, inspection and
arrangement of follow-up order, etc.
◼ The goods involved do not enter and leave HK
◼ The HK entity serves as agents or brokers – they earn
commissions or service charges, but do not take
ownership of the goods involved
Offshore Trade
◼ HK’s role in Mainland trade was mostly re-exports in the
early years of economic reform
◼ Offshore trade was small since the port facilities of the
Mainland had yet to develop, and FDI in container ports
were restricted before the 1990s
◼ Shipping activities (container ports and cargo areas) are
land-intensive, and are naturally more expensive in HK
◼ Trading activities (e.g., financing, networking, marketing,
etc.) are less land-intensive
◼ It is natural that, as Mainland ports developed, shipping
activities gradually shifted from HK to the Mainland
Offshore Trade
◼ On the other hand, most of the trading activities were
still carried out in HK
◼ Some of HK’s re-exports were gradually replaced by its
offshore trade
◼ The next slide shows the growth rates of the two kinds
of trade before and after the mid-1990s, and that their
values were already quite equal in 2002-03
◼ The value of re-exported goods in 2020 was HK$3.88
trillion, while that of goods in offshore trade in 2019 was
HK$4.71 trillion – offshore trade had already exceeded
re-exports in terms of the value of the goods involved
(but not necessarily in terms of HK’s value added)
Earnings Margins
◼ HK’s value added or GDP generated from the trade
activities are not the value of the goods involved, but the
“earnings” which are referred to as
re-export margin for re-exports
◼ rate of gross margin for merchanting
◼ commission rate for merchandising for offshore
transactions
◼
◼ https://www.censtatd.gov.hk/en/scode454.html#section3
Other Trade Issues
Related to the Mainland
East Asia Production Restructuring
◼ Note that the rapid expansion of China’s trade since
economic reform was not just a result of the Mainland’s
economic growth
◼ It also coincided with the restructuring of manufacturing
production in East Asia as China opened up
◼ Products that used to be produced in Japan, Taiwan,
Hong Kong, Korea, Singapore, etc., and exported to the
US, are now partly made in the Mainland, and in many
cases by non-Mainland firms
◼
relocation of production from nearby economies to the
Mainland
East Asia Production Restructuring
◼ It was not just HK – other East Asian economies that
previously traded with the US and Europe also relocated
some of their production to the Mainland
◼ The next slide shows that US manufactured imports
from the Pacific Rim as a share of total US
manufactured imports remained the same between 1990
and 2015
◼ But China’s share increased at the expense of those of
non-China Pacific Rim economies
◼ A major part of this shift involved Japan (next 2 slides)
East Asia Production Restructuring
◼ The links on the trade profile in the previous slides show
that while the Mainland exports a lot to the US, it also
imports a lot from South Korea, Japan and Taiwan,
which is consistent with the restructuring of production in
East Asia
Trade Statistics
◼ The next slide shows China and US statistics on goods
from the US to China are similar (the blue lines), but
there is a big and consistent gap for goods from China
to the US (the red lines)
◼ One major reason is the role played by Hong Kong
◼ Hong Kong has been a major destination of the
Mainland’s exports – in 2022, HK and Japan accounted
for 8.5% and 4.9% of the Mainland’s exports
◼ https://tradingeconomics.com/china/exports-by-country
◼ Given the much smaller size of HK compared to Japan,
it was quite unlikely that HK consumed that much of
Mainland goods
Trade Statistics
◼ Most of the Hong Kong imports from the Mainland were
re-exported
◼ However, China classifies its exports to Hong Kong,
including those for transshipment, as direct exports
◼ The US, on the other hand, considers these goods
through Hong Kong as imports from the Mainland and
not Hong Kong
◼ Thus, the Hong Kong factor results in China’s claims of
much smaller trade balances with the EU and the US
than these trading partners claim in their statistics
Trade Statistics
◼ Trade statistics published by the US and the EU distort
the other way – they exaggerate the value of China’s
exports because they attribute to China the value added
by Hong Kong’s services
◼ The EU and US statistics also understate the value of
imports to China by ignoring the fact that many China
exports are manufactured from imported components
and raw materials
Trade Statistics
◼ Suppose the Mainland exports $100 to Hong Kong
which is later re-exported to the US
◼ On the average, the value-added of HK’s re-exports is
16% so HK adds $16 to the good
◼ Here, the Mainland statistics say it exports $100 to HK,
while US statistics say they import $116 from the
Mainland – both are not correct by value-added terms
◼ China also imports about $32 from places like Japan
and Korea before producing the $100 of exports
◼ Conceptually, the US imports $32 from Japan or Korea,
$68 from the Mainland and $16 from HK
Mainland-Hong Kong Trade Statistics
◼ Another interesting issue related to statistics is that of
Mainland-HK trade
◼ In Dec 2015, the Mainland reported that imports from
HK increased 64.5% year on year, while HK reported
that exports to the Mainland increased by only 0.9%
◼ The gaps in the two sets of statistics date back to earlier
years as well (next slide), but the Dec 2015 difference
was quite large – it could be due to capital outflow from
the Mainland as the RMB was expected to devalue
◼ Trade mis-invoicing (under-invoicing exports and overinvoicing imports) has been a major channel of illicit
capital flows in the world
Processing Trade
◼ Processing trade (加工貿易), as opposed to ordinary
trade, has been a major form of trade in the Mainland,
especially before its accession to the WTO in 2001
◼ Firms in the Mainland import raw materials or
intermediate inputs from abroad, process them locally,
and export the processed goods
◼ The government establishes special export zones (加工
出口區) for such activities for easier management
◼ The practice is quite common in the world, and does not
exist only in China – but China’s trade volume is so
large that its processing trade catches more attention
◼ HK is a major player in the Mainland’s processing trade
Processing Trade
◼ In 2010, processing trade accounted for more than 55%
of the Mainland’s total exports and 45% of total imports
◼ The numbers dropped to 32% and 22% in 2018
respectively
◼ There are different categories of processing trade, and
the more important kinds in the Mainland are processing
with assembly and processing with intermediate inputs
◼ One difference between the two is that under processing
with assembly, firms in the Mainland import the raw
materials for free and then send the value-added
products to the same firm in the economy of origin (e.g.,
HK)
Processing Trade
◼ Under processing with imported materials, firms in the
Mainland have to pay for the imported inputs and then
sell their valued-added products to the rest of the world
◼ Another difference is that processing with assembly is
100% duty free
◼ Under processing with intermediate inputs, the firms in
the Mainland must pay import duties for those inputs,
but they can receive a full rebate after exporting their
processed goods
◼ Despite the rebate, the requirement to pay duties upfront
could pose a funding problem
Processing Trade
◼ Processing with assembly was prevalent in the 1980s,
but processing with imported inputs became popular
after 1990 – a sign of the Mainland’s development and
the increasing share of domestic value-added there
◼ Most processing imports are attributable to foreigninvested enterprises and Sino-foreign joint ventures
(either contractual or equity joint ventures)
◼ State-owned and private enterprises in the Mainland
account for only a relatively small share of processing
trade, which is quite different from ordinary trade where
SOEs dominated in the earlier years
WTO and CEPA
China Trade and FDI before WTO
◼ China became a member of the WTO on 11 Dec 2001,
after long negotiation with other members, and
experienced rapid growth in trade and the economy in
the subsequent years
◼ The Mainland’s trade in those days can be classified into
processing trade and ordinary trade
◼ Processing trade
produced entirely for exports with (duty-free) imported
inputs and intermediate goods
◼ liberalized with little restrictions
◼ HK played an important role here
◼
China Trade and FDI before WTO
◼ Ordinary trade
◼ much more restrictive with tariffs and nontariff barriers, as
well as restrictions on trading and distribution rights
◼ As for inward FDI, those in (export-oriented)
manufacturing had been quite liberalized since
economic reform
◼ But inward FDI in services were very restrictive,
especially in strategic areas such as
telecommunications and finance
◼ Before the early 2000s, there was little outward FDI
aside from those to HK
China’s WTO Accession
◼ Note that tariff reduction had begun long before WTO
accession, as part of trade reform and opening of the
economy (next slide)
◼ On the other hand, China’s commitments on trade in
services in WTO represented a new milestone
◼ After WTO accession, some non-trade barriers still exist
or could be newly introduced as impediments to trade
◼
e.g., high capitalization requirements in finance and retail,
phytosanitary measures in agricultural imports, and
continued violation of intellectual property rights
China’s Tariff Reduction
WTO Accession: Impacts on the Mainland
◼ The effects of WTO accession on trade have been
mainly on ordinary imports, especially agricultural
products, automobiles, telecom, petrochemicals etc.
◼ There was little impact on processing trade, though
processing exports rose after 2005 upon removal of
MFA (Multi-Fiber Agreement) by the US
◼ There was large inflow of FDI in services, especially in
telecom, finance, retailing and distribution, etc.
◼ There was the need to restructure in enterprises and
banks, etc., in response to keener foreign competition,
so more import of related services (accounting, finance,
legal)
The Mainland’s WTO Accession and HK
◼ Hong Kong became a member of the General
Agreement on Trade and Tariffs (GATT ) in April 1986,
and was one of the first members of the WTO as GATT
was re-organized into WTO in January 1995
◼ The reduction in Mainland tariffs benefited HK’s
domestic exports but this effect was small since HK’s
domestic exports to the Mainland had mostly been in
processing trade which were already quite liberalized
◼ Moreover, HK does not produce goods that were most
liberalized under WTO, e.g., agricultural products
The Mainland’s WTO Accession and HK
◼ The Mainland’s non-processing exports to HK became
cheaper since the inputs to the Mainland became
cheaper after tariff reduction
◼ With lower tariffs in the Mainland, there was more China
trade and so more trade for HK, especially HK’s reexport of processing products from the Mainland
◼ There were more HK re-export of non-processing
exports from the Mainland, but this was a smaller share
of HK’s re-exports from the Mainland
◼ There were also more HK re-export to the Mainland, but
the re-export margins were lower than the opposite
direction
The Mainland’s WTO Accession and HK
◼ HK’s outward FDI to the Mainland increased significantly
with liberalization of services there, mostly in finance,
telecom, distribution, etc.
◼ HK also provided the services needed for restructuring
Mainland’s enterprises and banks, so there were more
HK’s exports of services to the Mainland
◼ HK also received more inward FDI from overseas firms
that used HK as a base to expand operation in the
Mainland
The Mainland’s WTO Accession and HK
◼ On one hand, there has been much faster integration
between HK and the Mainland, further shift of lower
value-added services and manufacturing to the
Mainland
◼
recall the second re-structuring of the HK economy
◼ On the other hand, HK’s role as the main window to the
Mainland in both trade and finance could be reduced
with more competition from other business centers in the
Mainland
CEPA
◼ Trade treaties and agreements
◼ international and regional
◼ multilateral and bilateral
◼ Note Articles 114 to 119 of Hong Kong’s Basic Law:
https://www.basiclaw.gov.hk/en/basiclaw/chapter5.html
◼ Free port, separate customs territory, etc.
◼ The Closer Economic Partnership Agreement (CEPA,
內地與香港關於建立更緊密經貿關係的安排) between HK
and the Mainland was first signed in Jun 2003, to take
effect in Jan 2004
◼ https://www.tid.gov.hk/english/cepa/index.html
CEPA
◼ There were many Supplements to CEPA in subsequent
years, each expanding the scale and degree of opening
◼ Moreover, there was also the Individual Visit Scheme
(IVS) side by side CEPA, to take place in 2004
◼ Trade in goods – by CEPA, all products of HK fulfilling
the Rules of Origin (ROO) can enjoy zero tariff treatment
when imported to the Mainland, except some prohibited
items (e.g., chemical and medical waste)
◼ Trade in services – by CEPA, HK enterprises and
professionals in services industry enjoy preferential
treatments in various sectors when setting up business
in the Mainland
CEPA
◼ Trade and Investment Facilitation – by CEPA, both sides
would strengthen cooperation to improve overall
business environment and facilitate CEPA, e.g.,
customs clearance, rules and regulations
◼ For both goods and services, the sources of funds do
not matter as long as it is HK exporting to the Mainland
◼ It could be foreign invested firms located in HK exporting
to the Mainland – CEPA was expected to attract foreign
investment in HK targeting the Mainland market
◼ What about from the Mainland to HK?
CEPA
◼ On 1 Jan 2004, goods from HK that fell under 273
Mainland product codes (equal to 90% of HK’s direct
exports to the Mainland, not counting re-exports)
became eligible for zero-tariff treatment
◼ There were even more relaxation in subsequent CEPA
Supplements
◼ Market access to the Mainland under CEPA is wider
than under China’s WTO commitments
CEPA
◼ HK’s services benefit the most due to lower entry
barriers to the Mainland
◼ For example, CEPA lowers the minimum assets
requirement for banks to open branches in the Mainland
from US$20b (by WTO) to US$6b (by CEPA)
◼ Various services became eligible for favorable
treatment, including telecom, banking, insurance,
management consultancy and some not covered in
WTO commitments
◼ http://www.tid.gov.hk/english/cepa/tradeservices/trade_s
ervices_requirement.html
CEPA
◼ CEPA relaxes equity share restrictions for foreign
investors in the service sectors
◼ Less stringent Rules of Origin than other similar free
trade agreements: manufacturing firms are required to
have only 30% of their value-added in HK to qualify for
CEPA benefits
◼ On the whole more long-term advantages given to HK
than Mainland’s commitments to other economies under
WTO
HK’s Trade in Services
◼ https://www.censtatd.gov.hk/en/wbr.html?ecode=B1020
0112022AN22&scode=240
◼ https://www.info.gov.hk/gia/general/202502/14/P202502
1400292.htm
◼ https://www.censtatd.gov.hk/en/web_table.html?id=42057002&full_series=1&download_excel=1