20 Jan 2014
CEPA Supplement X and emerging growth service sectors in Hong Kong
As a “living agreement” with the annual addition of new Supplement measures, CEPA has developed into an effective cooperation framework between the mainland and Hong Kong, while taking into account the city’s evolving economic landscape. For example, many measures incorporated in CEPA packages since 2010 (i.e. from Supplement VII onward) have been connected with “new” industries in which Hong Kong enjoys competitive advantages, notably the six industries of: medical services, testing and certification services, environmental industries, innovation and technology, educational services, cultural and creative industries.
Service sectors in which Hong Kong enjoys comparative advantages
Testing and certification
Cultural and creative
Innovation and technology
The six industries arose as a group for industry development and promotion in the wake of the international financial crisis of 2008-09 that dealt a heavy blow to Hong Kong’s traditional industries, with the Hong Kong government then affirming the need for further expanding and strengthening the industry base of Hong Kong. Official statistics for these industries have since been released.
However, in the 2013 Policy Address, the new government considered it imperative to review the overall development strategies of these new industries, given the clashes between serving local demand and promoting industry growth in the medical and education sectors. The government noted that the medical sector is facing a manpower shortage while Hong Kong’s ageing population has increased the local demand for healthcare services. On the other hand, the government also found that public is divided over whether education services should be regarded as an industry.
In April 2013, the latest statistics apropos the six “selected service sectors” in terms of GDP and employment were released. They collectively accounted for 8.5% of Hong Kong’s GDP in 2011, up from 7.4% in 2008. The number of people employed in these selected sectors reached 420,680 to account for 11.8% of the total employment in 2011, compared with 11% in 2008. In terms of value-added growth, these selected sectors expanded 12.1% in in 2011, much faster than 9.5% for the broader economy. They also had a faster pace of employment growth, 3.4%, compared with 2.9% for Hong Kong’s total employment.
Regarding the six selected service sectors, this article examines only three sectors of CEPA X liberalisation measures, namely: medical services; technical testing, analysis and product testing services; and environmental services (in green boxes, see table below), leaving the analysis of the various measures related to the cultural and creative services to another article, CEPA Supplement X and Hong Kong’s creative industries. In addition, this article also touches on other emerging growth sectors like placement and supply services of personnel (i.e. job referral agencies and job intermediary services), value-added telecommunication services, social services for the elderly and disabled, market research services (in green boxes), and the two new sectors of duplication services and after-death facility services (orange boxes). Service sectors with no liberalisation measures announced under Supplement X and not covered by articles in this CEPA series are in blue boxes.
Service sectors benefitting from CEPA (Phase 1 to 11)
Individually owned stores
Professional qualification examinations
After-death facilities and services
Inter-disciplinary research and experimental development service
Placement and supply services of personnel *~
Research and development
Scientific and technical consulting services
Computer and related services*
Services related to management consulting and project management
Construction and real estate*
Medical and dental *
Social services for elderly and disabled*~
Conventions and exhibitions
Recreational, cultural and sporting services (including library/museum services)*
Storage and warehousing
Technical testing, analysis and product testing*~
Other business services - factoring
Trade mark agency*
Freight forwarding agency*
Translation and interpreting *
* Existing services sectors with liberalisation under Supplement X to CEPA
~ Guangdong Province pilot and implementation measures under Supplement X to CEPA
Hong Kong’s medical sector is renowned for its premier service standards and professionalism. Over the years, Hong Kong has attracted many inbound medical tourists from the mainland, in particular nearby Guangdong. In addition to satisfying the demand for medical services of mainland patients in Hong Kong (i.e. consumption abroad), HKSS have also made substantial inroads into the mainland’s medical sector under CEPA (i.e. commercial presence), as investment thresholds are lower than those for non CEPA service providers, and there is basically no geographical choice for HKSS in establishing various kinds of Hong Kong-run medical institutions on the mainland.
As far as commercial presence is concerned, HKSS in the medical sector are more or less given national treatment, thanks to progressive moves under various CEPA Supplements, which enable them to provide Hong Kong-style management and medical services on the mainland. Nowadays, HKSS can basically establish all kinds of medical institutions across the country, be they wholly owned by HKSS or joint ventures entered into with mainland partners, and are subject to similar standards and requirements applicable to medical institutions established by mainland entities and individuals. In Guangdong, HKSS are allowed to establish wholly owned medical institutions including outpatient clinics, convalescent hospitals, and hospitals; with the exception of wholly owned hospitals, approval of joint-venture or wholly owned medical institutions is now delegated to health administrative authorities at the provincial level.
Supplement X supplements other CEPA provisions by making it possible for HKSS to engage in the cross-border supply of health-related services from Hong Kong, and they can render services through their contractual service providers in the mode of movement of natural persons on the mainland.
Apart from this, CEPA enhances the flexibility with which HKSS can team up with mainland partners to set up medical institutions. From 2013 onward, HKSS are allowed to pair up with mainland counterparts other than medical institutions in their endeavour to set up joint-venture medical institutions. This widens the HKSS’ prospective choices of mainland joint-venture partners, as there would be parties that may bring capital, corporate management or a non-medical contribution to the joint ventures.
Along with the enhanced flexibility of HKSS under CEPA in establishing medical institutions on the mainland, Hong Kong healthcare practitioners may find greater latitude in working at Hong Kong-run medical institutions. With CEPA, all 12 types of statutory healthcare practitioners[i] (more than 76,000) are allowed to apply for the three-year, renewable licence under CEPA to provide services on the mainland.
As at the end of November 2013, 20 HKSS certificates had been approved within the medical and dental service sectors. Meanwhile, some Hong Kong-run outpatient clinics have been established in Guangdong, especially in Shenzhen.
The table below shows that HKSS enjoy preferential access to the mainland market with lower entry thresholds, wider location choices to set up medical institutions, and partner choices in establishing joint ventures, which are more favourable than those provided to non-CEPA foreign-invested companies (under current scope of access).
|Current scope of access||Access for HKSS under CEPA|
Technical testing, analysis and product testing
In light of the sputtering growth in developed markets, China has made a greater attempt to rebalance its economy with a stronger emphasis on domestic demand, in particular consumer consumption. Undoubtedly, this is creating plenty of opportunities for entering the fast expanding China market. However, there is a safety requirement for products covered in the China Compulsory Certificate (CCC) catalogue,[iii] and they must receive the CCC mark before being allowed to sell in the China market. The CCC mark is administered by China’s Certification and Accreditation Administration (CNCA), which designates the China Quality Certification Centre (CQC) to process CCC mark applications and defines the products that require CCC. Normally, the certification process takes between four to eight months.
In support of Hong Kong’s new industries that relish comparative advantages, in 2010 the mainland started to open up for HKSS CCC product testing in relation to the relevant kinds of goods processed in Hong Kong, a WTO-plus prerogative not granted to other non-CEPA testing service suppliers. However, HKSS need to co-operate with CNCA-designated mainland certification bodies to undertake the required CCC product testing.[iv] Testing organisations in Hong Kong need to be accredited by the Hong Kong Accreditation Service (HKAS), a unit of the Hong Kong Government, before they are allowed to perform testing for all existing products processed in Hong Kong that require CCC testing.
For Hong Kong companies targeting the mainland market with CCC-related products processed in Hong Kong, their products can be first tested and certified locally, and then expeditiously get into the mainland market. In contrast, other overseas processed products will have to be tested by CCC-compliant testing organisations on the mainland, and that may take more time to process given the backlog of products that await testing and certification services.
In addition to CCC, by far the widest-ranging certification requirement, China has other certification schemes, which may require product testing in Chinese laboratories too. Meanwhile, China also operates a voluntary product certification mark scheme under the China Quality Certification (CQC) mark, which is processed in largely the same way as CCC, and covers some 500 products. Meeting the safety and quality test voluntarily will be a big help in enhancing the brand image for products targeting the China market.
As Asia’s gourmet paradise, Hong Kong has many companies engaged in processed food production. Among products of CEPA-qualified origin, which can then be exported to the mainland free of tariff, food and beverages just top the list in terms of the number of Certificate of Origin (CO). While CCC covers a wide range of products, in particular electronics, electrical, telecommunication goods, food as a voluntarily certified product is visibly excluded.
Hong Kong processed food companies, along with the city’s product testing organisations, can benefit from the pilot implementation measure recently adopted in Guangdong, in 2013, with the scope of certification services expanded to cover food. Under Supplement X, the scope is widened further from food to other areas of voluntary product certification, including typically products like clothing, kitchenware, plastic goods and furniture.
Another breakthrough in the area of product testing and certification is the streamlining of dual testing. As previously mentioned, HKSS need to co-operate with CNCA-designated mainland certification bodies to undertake product testing. Supplement X provides that in cooperation with mainland testing and certification organisations, the test results produced in Hong Kong will be accepted on the mainland on the basis of mutual trust and mutual benefit. Yet, specific cooperation arrangements are subject to further discussion between the two sides. Furthermore, CEPA has gone to the point of giving national treatment to certification bodies, inspection bodies and laboratories jointly or solely set up on the mainland by HKSS in respect of their carrying out testing and certification activities. Greater operational flexibility is also achieved as HKSS are allowed to employ contractual service providers to conduct product testing activities on the mainland in the mode of movement of natural persons.
|Current scope of access||Access for HKSS under CEPA|
While China is bent on hastening urbanisation to spur domestic consumption, there is also growing attention to the effects on the environment due to the impact of both urbanisation as well as industrialisation. Hong Kong environmental service companies are expected to benefit from such developments, due to their understanding of the technologies and facilities that need to be introduced and customised in the mainland market. Under CEPA, HKSS are given WTO-plus treatment to set up wholly owned enterprises on the mainland to provide environmental protection services, compared to the majority-owned joint ventures allowed for other foreign companies.
Basically, the business scope of services allowed for HKSS under CEPA is similar to that under WTO, including sewage, refuse disposal, cleaning of exhaust gases, noise abatement, sanitation, nature and landscape protection, and other environmental protection services, but excluding environmental quality monitoring and pollution source investigation.
Apart from being given the freedom to form wholly owned operations on the mainland, Supplement X further lowers the entry threshold for HKSS by taking into account their substantive business in operating environmental pollution control facilities in both Hong Kong and the mainland when applying for the qualification assessment of their operating environmental pollution control facilities on the mainland. They also gain operational flexibility under Supplement X as their contractual service providers can be deployed in operating environmental pollution control facilities on the mainland in the mode of movement of natural persons.
Meanwhile, for those enterprises set up by HKSS in Guangdong to operate environmental pollution control facilities, the Guangdong authorities are delegated the power to approve the qualification of HKSS. Besides, Guangdong is committed to cooperating with Hong Kong in the abatement of atmospheric pollution in the PRD as well as the prevention and control of water pollution of the Pearl River. Specifically, this includes the enhancement of prevention and control techniques, optimisation and upgrading of the air/water quality monitoring network in Guangdong and Hong Kong as well as improving the quality of fuel oil.
As of end-November 2013, only one HKSS certificate had been issued for the environmental services sector.
|Current scope of access||Access for HKSS under CEPA|
Job referral agencies and job intermediaries’ services
Hong Kong job placement agencies have gained enhanced flexibility compared with other foreign companies to explore the huge mainland market, thanks in no small measure to the much lower entry thresholds and national treatment accorded to HKSS, and the locations where they are entitled to CEPA privileges. Not only are HKSS allowed to set up wholly owned job referral and intermediary agencies on the mainland, they are also given national treatment in that the required minimum registered capital for setting up these agencies is substantially lower than that of the US$300,000 applicable to other foreign-invested job placement agencies.
After being initially allowed to establish wholly owned job referral and intermediary agencies in Guangdong Province with the minimum registered capital set at Rmb100,000, like their mainland counterparts, they now receive similar treatments in the four municipalities of Beijing, Tianjin, Shanghai and Chongqing, and also Jiangsu Province and Fujian Province. National treatment in respect of the minimum registered capital is also provided to HKSS when setting up human resources service operations in the human resources service industrial parks approved by the Ministry of Human Resources and Social Security.[v]
Guangdong continues to be the place where pioneering liberalisation measures are implemented, and under Supplement X, HKSS are not subject to the pre-established term of years of experience required in their applications to set up job intermediaries in the province.
As an international maritime service centre, Hong Kong's ship owners own and manage about one-tenth of the world's merchant fleet in terms of deadweight tonnage. However, about one-quarter of the seafarers employed by the ship owners and managers come from China. CEPA includes a favourable measure in relation to the deployment of seafarers, under which HKSS that have set up wholly owned or joint-venture international ship management companies on the mainland can apply for the qualification to conduct the dispatch of seafarers, making this a type of foreign labour service co-operation, without the need to apply for qualification in foreign-invested personnel placement agencies or talent intermediary agencies. Once qualified, they can dispatch seafarers to vessels owned by Hong Kong ship owners or vessels registered in Hong Kong.
In recent years, Hong Kong’s job referral and intermediary agencies have made big inroads into the mainland market, as reflected by the rapid growth in the number of approved HKSS certificate applications. As of the end of November 2013, there were 97 approved HKSS certificate applications in the sector of job referral and intermediary agency services, ranking seventh in terms of the number of approved applications for transport and logistics, distribution, air transport, advertising, printing and construction professional services.
|Current access for foreign firms||Access for HKSS under CEPA|
Value-added telecommunication services
In China, basic telecommunication services are essentially off-limits to foreign enterprises, yet they are permitted to provide telecommunication value-added services, subject to various restrictions. Under CEPA, HKSS are allowed to form Sino-foreign joint ventures with equity shareholding limited to 50% on the mainland, to provide the following value-added telecommunication services, namely: internet data centre services, store and forward services, call centre services, internet access services, content services, and mainland IP based Virtual Private Network (MIVPN) services, as defined in the Telecommunications Business Classification.
In forming such joint ventures, HKSS are given the flexibility of either teaming up with mainland service suppliers in establishing entirely new entities, or opting to acquire the share of mainland enterprises in the corresponding sector. There are no geographic restrictions that are otherwise applied to foreign service suppliers, and the equity shareholding for HKSS is raised to the point of 50:50, as opposed to minority ownership as in the case of other Sino-foreign joint ventures.
Hong Kong thrives as a commercial hub and international financial centre, thanks in part to the city’s excellent telecom infrastructure. In the Global Information Technology Report 2013 by the World Economic Forum, Hong Kong ranked fourth in Asia and 14th in the world in the Network Readiness Index, indicating Hong Kong’s advanced position in telecom infrastructure, regulatory environment, and business readiness for using information technology. Besides, Hong Kong has developed into a key data centre market in Asia despite the common recognition that the city’s urban land is relatively limited. The growing use of cloud computing has also added to the demand for state-of-the-art cloud-centric data centres.
In support of Hong Kong developing as a regional service platform with strong yet cost-economical back-end support, while providing enhanced market access to the mainland market, CEPA allows HKSS to set up in Guangdong operational entities to provide online data processing and transaction processing services, as well as call centre services. Under Supplement X, HKSS are allowed to set up majority-owned operations in Guangdong Province, with equity shareholding limited to 55%, to provide online data processing and transaction processing services (i.e. OLTP) in relation to e-commerce business websites. OLTP are information systems that facilitate and manage transaction-oriented applications efficiently, particularly for data entry and retrieval transaction processing.
Apart from this, HKSS are allowed to set up wholly owned enterprises or equity joint-ventures in Guangdong’s Dongguan and Zhuhai to provide offshore call centre services on a pilot basis, in accordance with the mainland's Notice on Encouragement of Acceleration of Development of the Service Outsourcing Industry and Streamlining Approval Procedures for Provision of Pilot Offshore Call Centre Services by Foreign Capital. This CEPA measure provides additional location choices to the existing list of 21 model cities permitted to provide offshore call centre services, which resulted from a policy initiative in late 2010 aimed at accelerating China’s outsourcing industry.
Supplement X also allows contractual service providers employed by HKSS, in the mode of movement of natural persons, to provide online data processing and transaction processing services, offshore call centre services, and internet access services on the mainland.
As of the end of November 2013, 47 HKSS certificates had been issued in the sector of value-added telecommunications services, excluding distribution services for calling cards, where there was so far one HKSS certificate issued. Under CEPA, HKSS are allowed to distribute in Guangdong Province fixed/mobile telephone service cards that can only be used in Hong Kong, subject to the requirements stipulated in the concerned mainland-Hong Kong Memorandum of Understanding (MOU). Mobile satellite phone service cards, however, are explicitly excluded.
|Current scope of access||Access for Hong Kong under CEPA|
Social Services for the elderly and disabled
China's population is fast ageing, with estimates suggesting that people aged 60 or above had already surpassed 190 million or 14% of the population as of end-2012.[vi] The demographic shift to an older society is exercising a huge impact on society as well as the country’s economy, for example, raising the demand for elderly services. In this connection, CEPA provides preferential measures for HKSS to provide social services to the elderly on the mainland, also allowing them to run welfare units to provide rehabilitation services for disabled persons.
Compared with other foreign service suppliers, HKSS enjoy a great deal of flexibility in setting up units to provide social services on the mainland.[vii] Initially, they were only allowed to set up wholly owned private non-enterprises to provide elderly services and operate welfare agencies for persons with disabilities in Guangdong Province on a pilot basis. Since 2011 geographic restrictions have been removed, and HKSS have been further allowed since 2013 to set up wholly owned profit-making enterprises in providing such elderly and disabled services.
For private non-enterprise units defined under the Provisional Regulation Concerning the Registration and Administration of Private Non-enterprise Units promulgated by China’s State Council, they are community units set up by enterprises, public services units, social organisations, other community parties and individual citizens without state assets, and are engaged in providing non-profit services. HKSS are those holders of valid Licences of Residential Care Home for the Elderly issued by Hong Kong’s Social Services Department and subvented non-governmental organisations that have engaged in elderly service provision for no less than three years. Similarly, HKSS providing services for persons with disabilities must have engaged in rehabilitation services provision for no less than three years. Once qualified, HKSS are allowed to apply for operating residential institutions on the mainland to provide the concerned social services and are entitled to similar treatments granted to the mainland’s social agencies.
Supplement X broadens the scope of services that HKSS can provide in Guangdong by allowing them to set up wholly owned private non-enterprises operations to provide home care services for the elderly in Guangdong. Hiring contractual service providers to render welfare services to the elderly and disabled persons on the mainland in the mode of movement of natural persons is also permitted under Supplement X.
Preferential measures notwithstanding, there were no applications for HKSS certificates in the social services sector as of the end of November 2013.
|Current scope of access||Access for Hong Kong under CEPA|
Market research services
China’s market research industry has experienced rapid growth over the past two decades. While foreign service suppliers have continued to have a strong role in the provision of market research services, mainland companies have recently become more competitive and are capable of serving multinational companies which eye the fast expanding consumer market on the mainland.
With CEPA, HKSS are allowed to set up equity joint ventures with a majority shareholding on the mainland to provide a range of market research services, covering market analysis, customer opinions analysis, interview, telephone and mail survey, industry analysis, econometric modelling, and demographic analysis. However, public opinion polling does not fall within the scope of market research services. Supplement X makes it more flexible for HKSS by allowing them to set up contractual joint ventures to provide services related to market analysis, and consumer attitudes and preference analysis. As of the end of November 2013, no HKSS certificate had been issued in the market research services sector.
New service sectors under Supplement X
There are two new types of services added in the Supplement X package, namely duplicating services and after-death service facilities.
Alongside printing services, HKSS can now provide duplication services in the new sector under Supplement X, covering blueprinting, photocopying, mimeographing, photo-stating, and other duplication services apart from printing. Basically, there is no restriction on HKSS in the mode of commercial presence on the mainland, as they are allowed to set up wholly owned operations, equity joint ventures or contractual joint ventures. Besides, Supplement X also allows contractual service providers of HKSS to engage in duplicating services in the mode of movement of natural persons.
In comparison, HKSS intending to engage in printing services on the mainland are only allowed to form wholly owned operations to provide printing and binding services for packaging materials, and pre-press services such as proof-reading, design and typesetting for books. For the printing of publications and other printed matters, HKSS are only permitted to form majority-owned equity joint ventures of up to 70% shareholding, while a new provision under Supplement X allows them to form contractual joint ventures with the mainland partner to hold a dominant position.
There has been a surge in the number of applications for HKSS certificates in the printing service sector over the past two to three years, with 106 certificates issued as of the end of November 2013, with the sector ranking fifth among all types of service sectors by the tally of HKSS certificates. Conceivably, duplication services are likely to induce ample interest among Hong Kong companies with an expected rise in HKSS certificate applications.
Turning to the new sector of after-death service facilities, it actually falls outside the coverage of WTO’s Services Sectoral Classification List and may therefore be seen as specifically provided to HKSS by way of Supplement X, allowing them to invest in and operate funeral facilities (excluding crematoriums) and human ashes storage facilities on the mainland on a wholly owned or equity joint-venture basis.
Currently, China is the only country in the world with an elderly population of around 200 million, and the number of deaths in 2012 was estimated to be around 9.7 million. While the average cremation rate across the country remains largely stable at about 50%, large cities like Beijing, Tianjin and Shanghai have cremation rates close to 100%. As such, there is strong demand for funeral services, including in particular funeral facilities and human ashes storage facilities, the operation of which is now open to HKSS. Further, HKSS are given an added flexibility to tap into this market of great potential, as their contractual service providers are also allowed to operate after-death service facilities in the mode of movement of natural persons.
[i] Under Hong Kong legislation, 12 types of statutory healthcare professionals are required to be registered with the respective councils or boards before practising locally. They include medical practitioners, Chinese medicine practitioners, dentists, pharmacists, nurses, midwives, medical laboratory technologists, occupational therapists, optometrists, radiographers, physiotherapists and chiropractors.
[ii] According to the Rules of Implementation for the Regulations on the Administration of Medical Institutions (Order No. 35 of the Ministry of Health, People’s Republic of China), medical institutions are classified into the following: (1) integrated hospitals, Chinese medicine hospitals, integrated Chinese and Western medicine hospitals, nationality medicine hospitals, specialist hospitals, rehabilitation hospitals; (2) maternal and child healthcare centres; (3) community health service centres, community health service stations; (4) central health centres, township health centres, street health centres; (5) convalescent hospitals; (6) integrated outpatient clinics, specialist outpatient clinics, Chinese medicine outpatient clinics, integrated Chinese and Western medicine outpatient clinics, nationality medicine outpatient clinics; (7) clinics, Chinese medicine clinics, nationality medicine clinics, health centres, infirmaries, health care centres, health stations; (8) village health stations (centres); (9) first aid centres, first aid stations; (10) clinical test centres; (11) specialist disease prevention and treatment hospitals, specialist disease prevention and treatment institutes, specialist disease prevention and treatment stations; (12) nursing homes, nursing stations; (13) other medical institutions.
[iii] Products requiring CCC include the following: (1) electric cables and wiring, (2) electrical switches, protective devices and connection devices; (3) low-voltage electrical equipment; (4) small power motors; (5) electric tools; (6) electric welding machines; (7) household and similar electrical appliances; (8) audio and video apparatus; (9) information technology equipment; (10) lighting apparatus; (11) motor vehicles and safety accessories; (12) motor vehicle tyres; (13) safety glass; (14) agricultural machinery; 15) latex products; (16) telecom equipment; (17) medical devices; (18) fire service equipment; (19) security system products; (20) wireless local area network products; (21) decoration products; and (22) toys.
[iv] Hong Kong testing laboratories should apply for accreditation from the Hong Kong Accreditation Service (HKAS) under the Hong Kong Laboratory Accreditation Scheme in accordance with the Implementation Measures of the Certification and Accreditation Administration of the People’s Republic of China (CNCA) under CEPA. Subsequently, they will have to enter into cooperation agreements with the mainland’s CCC-designated certification bodies, and prior CNCA approval of the draft cooperation agreement is required.
[v] To support the development of services as a growth driver, China began its first national human resources service industry park in Shanghai in November 2010, followed by the building of another park in Chongqing in November 2011. These human resource service industry parks, jointly developed by the Ministry of Human Resources and Social Security and concerned municipalities, are expected to provide stronger support platforms for human resources development of the services sector, including executive search, human resources outsourcing, talent assessment, while helping create clusters, expand continuing professional and technical education, as well as incubate new businesses.
[vii] According to the Catalogue of Industries for Guiding Foreign Investment (2013), foreign investment is encouraged to set up operations on the mainland to provide elderly services, and are entitled to tax and other preferential policies applicable to the domestic operators.