To promote the common prosperity and development of SAR and the mainland, tighten trade and economic ties of the two parties with other countries and regions, starting from Jan. 25, 2002, representatives from the mainland and the Hong Kong SAR, through many rounds of consultations, finally reached the Mainland and Hong Kong Closer Economic Partnership Arrangement on June 29, 203 in Hong Kong (hereinafter referred to as ¡°CEPA¡±).

Vice Minister of Commerce of PRC An Min, on behalf of the central government, and Hong Kong¡¯s Finance Secretary Antony Leung signed on CEPA text and summaries of relevant consultations, the main contents of which are as below:

(1) The fundamental objective of CEPA is to: phase out or eliminate tariff and non-tariff barrier on all goods trade; gradually realize liberalization of service and trade, reduce or eliminate all biased measures; promote investment and trade facilitation.

The principle for implementation and future revision of CEPA is: in accordance with the guideline of ¡°one country, two systems¡±; in conformity with the WTO stipulations; in line with industrial the demand for structural restructuring and upgrading of both parties, conducive to stable and sustainable development; realizing mutual benefits, and complementary advantages, common prosperity; easiness comes difficulties, gradual pushing forward.

Both parties start implementing specific commitments on goods trade and liberalization of service and trade under CEPA as of Jan. 1, 2004; both parties will supplement and substantiate content of CEPA through constant expansion of mutual opening.

Both parties agree that Articles 15 and 16 of the Protocol on China¡¯s WTO Entry, and the content in Paragraph 242 of the Report of the Working Party Report on China¡¯s WTO Entry are no longer applicable to the trade between the mainland and Hong Kong.

(2) Hong Kong will proceed with zero tariffs on the imported goods made in the mainland.

The mainland will practice zero tariffs on the Hong Kong-made products of relatively big value under 273 tax items as of Jan. 1, 2004. The standards of place of origin for these 273 tax items will be settled through consultation prior to Jan. 1, 2004.

The mainland will practice zero tariffs on the imported goods made in Hong Kong other than the aforesaid 273 items no later than Jan. 1, 2006, which shall be subject to Hong Kong SAR Government¡¯s prior verification that the products are truly made in Hong Kong, and both parties¡¯ verification of the product list and confirmation of the standards of place of origin.

To ensure the implementation of the preferential measures for goods trade, both parties will strengthen and expand the content and scope of administrative mutual assistance, including formulating and implementing strict procedures for issuing certificates of place of origin, establishing examination and check and surveillance mechanism, taking measures like online connection of, and electronic data exchange between certificate issuing and inspecting authorities in the mainland and Hong Kong.

Neither party will practice non-tariff measures on the imported goods made by the other party that is not in line with the WTO regulations, and the mainland will not exercise tariff quotas on Hong Kong-made goods.

Neither party will adopt anti-dumping and anti-subsidy measures to the goods with the other party being the place of origin.

If the implementation of CEPA results in a sharp increase in the import of a certain products made by one party to the other, and causes serious damages or serious threat of damage on the same industry of that party, the latter may, after informing the other party, suspend preferential import policy on such products, and start consultation at the request of the other so as to

A. Major contents of the service sector to further open to Hong Kong as of Jan. 1, 2004.

Management Consulting

Hong Kong companies shall be allowed to set up solely funded enterprises in other management consulting service industries except law, accounting, auditing and verification services, etc. in the Mainland. Specific sum of registered capital shall follow provision under the mainland¡¯s Corporate Law.

Exhibition Service

Hong Kong companies shall be allowed to provide exhibition service in the mainland in the form of sole proprietorship.

Advertisement

Hong Kong companies shall be allowed to set up solely funded advertisement companies in the mainland.

Accounting Service

a. Annual time working in the mainland on part of Hong Kong accountants that have obtained the qualification for practice in the mainland and have practiced in the mainland shall be calculated by referring to that of the certified accountants in the mainland;

b. Period of validity of the ¡°Temporary Auditing Business License¡± applied by Hong Kong accounting firms that do temporary auditing in the mainland shall be extended to one year.

Architecture and Real Estate

a. Real Estate

a) Hong Kong companies shall be allowed to provide in the mainland, in the form of sole proprietorship, high-standard service of real estate projects that are their own or leased assets.

b) Hong Kong companies shall be allowed to provide in the mainland, in the form of sole proprietorship, real estate service based on rental or contract.

b. Professional Architectural Service

Hong Kong engineering consulting companies shall be permitted to set up solely funded companies in the mainland.

c. Construction and Related Engineering Service

a) Hong Kong companies¡¯ performance in Hong Kong and in the mainland shall serve as a judgement on whether they are qualified for establishment of construction enterprises in the mainland. But the number of the management personnel and technicians of the Hong Kong-funded enterprises in the mainland shall refer to the actual number of their staff in the mainland;

b) Hong Kong-invested construction enterprises in the mainland may contract to construct Chinese-foreign cooperative architectural projects without being restricted by the proportions of Chinese and foreign investors;

c) Hong Kong-funded enterprises that obtained construction qualifications in the mainland may bid for projects nationwide;

d) Hong Kong companies shall be permitted to acquire the mainland¡¯s construction enterprises and hold 100 per cent stakes thereof.

Medical Treatment and Dentists

a. The majority of medical workers employed by mainland-Hong Kong joint-ventured hospitals or clinics can be permanent Hong Kong residents;

b. The maximum period of time for Hong Kong SAR¡¯s qualified medical practitioners to practise temporarily in the mainland shall be extended to 3 years;

c. Permanent Hong Kong residents graduating from medical departments of Hong Kong University and Hong Kong Chinese University, and have obtained qualifications to practise medicine legally in Hong Kong (having completed 1-year internship in Hong Kong) may directly participate in qualification exams for doctors in the mainland, with diplomas from the 2 universities and certificates of medicine practitioner. The qualified ones will be conferred the Certificates of Doctors¡¯ Qualification of the mainland.

d. Permanent Hong Kong residents graduating from the departments of traditional Chinese medicine of Hong Kong University and Hong Kong Baptist Univeristy University, and have obtained qualifications to practise medicine legally in Hong Kong may enter for the examination of mainland doctor qualification after 1-year internship at Grade-3 mainland hospitals of traditional Chinese medicine and checked out right, or having practised medicine for 1 year with license in Hong Kong.

Distribution Service

a. Commissioned agency service and wholesale service (excluding salt and tobacco)

a) Hong Kong enterprises are allowed to provide commissioned agency and wholesale service in the form of sole proprietorship, and set up solely-funded foreign trade companies;

b) The access conditions for the establishment in the mainland of foreign trade companies and wholesale commercial enterprises by Hong Kong service providers will be lowered:

(i) Applications for establishment of foreign trade companies. Hong Kong investors¡¯ average annual trade volume with the mainland in the 3 years prior to the applications drops to not less than US$10 million, and the minimum registered capital of a company set up in the mainland drops to RMB20 million. In case of applying for establishment of foreign trade companies in the central and western regions, Hong Kong investors¡¯ average annual trade volume with the mainland in the 3 years prior to the applications drops to not less than US$5 million, and the minimum registered capital to RMB 10 million;

(ii) Applications for establishment of wholesale commercial enterprises. Hong Kong investors¡¯ average annual sales volume in the mainland in the 3 years prior to the applications drops to US$30 million, the value of their assets in the year prior to the applications drops to US10 million, and the minimum registered capital of a company set up in the mainland is cut to RMB50 million. In case of setting up wholesale commercial enterprises in the central and western regions, Hong Kong investors¡¯ average annual sales volume in the mainland in the 3 years prior to the applications drops to US$20 million, and the minimum registered capital to RMB30 million;

(iii) There is no regional limit on Hong Kong investment in establishment of commissioned agency and wholesale service in the mainland.

b. Retail Service (excluding tobacco)

a) Hong Kong investors are allowed to set up, in the form of sole proprietorship, retail commercial enterprises in the mainland;

b) Access conditions for Hong Kong investment in retail commercial enterprises in the mainland is lowered. Hong Kong investors¡¯ average annual sales volume in the mainland in the 3 years prior to their applications for establishment of retail commercial enterprises drops to US$100 million, the value of their assets in the year prior to the applications drops to US$10 million, and the minimum registered capital of a company set up in the mainland is cut to RMB10 million. The minimum registered capital of a retail commercial enterprise set up by Hong Kong investors in the central and western regions is cut to RMB6 million;

c) The regions where Hong Kong investors are allowed to set up retail enterprises are expanded to cities at prefectural level, and to cities at county level in Guangdong Province;

d) Hong Kong companies are allowed to set up solely funded retail enterprises in the mainland to engage in auto sales. But chain stores with over 30 branches will be dealt with in line with the mainland¡¯s WTO commitments;

e) Chinese citizens among permanent Hong Kong residents are allowed to set up private business within Guangdong Province in accordance with related Chinese laws and regulations, without undergoing the prior examination and approval procedures for foreign investment. The business scope shall be commercial retail sales, excluding franchised business, and the business areas shall not exceed 300 square meters.

c. Franchised Business

Hong Kong enterprises are allowed to engaged in franchised business in the form of sole proprietorship in the mainland. Regulations about franchised business will be promulgated separately.

Logistics

Hong Kong companies are allowed to provide relevant cargo distribution and logistics services in the form of sole proprietorship in the mainland, including transportation, storage, loading and unloading, processing, packing, distribution of general road freight, and related information processing service and relevant consulting service, domestic freight agency business, and logistics managed and operated by computer networks.
Freight Agency Service
a. Hong Kong companies are allowed to provide freight agency service in the form of sole proprietorship in the mainland;
b. The minimum registered capital of Hong Kong companies setting up freight agency enterprises (international freight agencies) in the mainland shall follow that of mainland enterprises.
Storage Service
a. Hong Kong companies are allowed to provide storage service in the form of sole proprietorship in the mainland;
b. The minimum registered capital of Hong Kong companies setting up storage enterprises in the mainland shall follow that of mainland enterprises.
Transport Service
a. Road Transport Service
a) Hong Kong companies are allowed to set up solely-funded enterprises in the mainland to engage in road transport;
b) Hong Kong companies are allowed to deal in freight ¡°direct express¡± between Hong Kong and provinces in the mainland;
c) Hong Kong companies are allowed to set up solely funded passenger transport enterprises in the western region of the mainland to deal with road passenger transport.
b. Seas Transportation Service
a) Hong Kong companies are allowed to set up enterprises in the form of sole proprietorship in the mainland, dealing in international ship management, marine cargo storage, international sea transportation container freight station and container yard businesses, and non-vessel operation;
b) Hong Kong companies are allowed to set up solely funded ship companies in the mainland, providing routine services such as cargo canvassing, issuance of bill of lading, carriage settlement, and signing of service contract, etc. to the ships they own or operate;
c) Hong Kong companies are allowed to deploy at their disposal the empty containers via the trunk liners, regular ships and ships in domestic ports, but must undergo relevant customs formalities.
Tourist Service
Hong Kong companies may construct, renovate and operate hotels, apartments and restaurant facilities in the mainland in the form of sole proprietorship. There is no regional limit on Hong Kong travelling agencies that set up joint-ventured travelling agencies in the mainland.
AV Service
a. Retail Service of Video and Recording Products
Hong Kong companies are allowed to engage in distribution service of AV products (including final-period film products) in the form of joint venture. The Hong Kong side may have controlling shares, but the proportion of the shares shall not exceed 70 per cent.
b. Film
a) Having passed censorship by competent authorities in the mainland, Chinese films shot by Hong Kong companies can be released in the mainland as imported films, without restrictions on quotas;
b) Jointly produced movies by Hong Kong and the mainland can be regarded as domestic movies to be released in the mainland;
c) As regards jointly produced movies by Hong Kong and the mainland:
(i) The Hong Kong side is allowed to increase the ratio of Hong Kong staff, but the ratio of mainland major characters shall not be lower than 1/3 of the major performers;
(ii) Whether taking place in Hong Kong or in the mainland, the scenario or major characters of films must relate to the mainland.
c. Cinema Service
Hong Kong companies are allowed to construct or renovate cinemas in forms of joint venture or cooperation in the mainland, and the Hong Kong sides are allowed to have controlling stakes.
Legal Service
a. The minimum annual period of time for all representatives of representative offices of Hong Kong law firms to stay in the mainland is shortened to 2 months;
b. The minimum annual period of time for all representatives of the Shenzhen and Guangzhou representative offices of Hong Kong law firms to stay in the mainland is eliminated;
c. Mainland law firms are allowed to employ Hong Kong law practitioners;
d. The 15 Hong Kong lawyers having obtained lawyer qualifications in the mainland are allowed to intern and practise in the mainland, and engage in non-litigation legal affairs;
e. Chinese citizens among Hong Kong permanent residents are allowed to take judicial exams, obtain legal professional qualifications in the mainland, and engage in non-litigation legal affairs;
f. Hong Kong law firms that have representative offices in the mainland are allowed to have joint operation with their mainland counterparts. A joint operation shall not operate in the form of partnership, and Hong Kong lawyers with a joint operation shall not handle domestic legal affairs.
Banking Industry
a. The requirement on the asset scale of Hong Kong banks and financial companies to enter the mainland market are lowered: the requirement on the asset scale of the banks that intent to set up branches and corporate institutions is also lowered to US$6 billion. Banks may choose to set up branches or corporate institutions, while financial companies can only establish corporate institutions;
b. Hong Kong banks that are to set up Chinese-foreign joint-ventured banks or financial companies in the mainland, or Hong Kong financial companies that are to set up Sino-foreign joint-ventured financial companies in the mainland may choose not to set up representative offices in advance;
c. The qualifications and conditions for branches of Hong Kong banks to apply for RMB business in the mainland are lowered:
a) The number of years of operation in the mainland is shortened from over 3 years to over 2 years;
b) Performance evaluation is based on the overall performance of many branches rather than the performance of a single branch.
Securities Industry
a. Hong Kong Trading and Settlement Co., Ltd. may choose to set up an office in Beijing, and shall follow the procedures for overseas securities institutions to establish offices in Beijing;
b. Hong Kong securities professionals may apply for occupational qualification in the mainland in line with relevant procedures.
Insurance Industry
a. Having obtained the actuarial certificate, Chinese citizens among Hong Kong residents may practise in the mainland without prior approval;
b. Groups of Hong Kong Insurance Company that have undergone consolidation or strategic merger may be approved to enter the mainland insurance market in accordance with the requirements on application for market access (the total assets of the group shall be over US$5 billion, and any of those Hong Kong insurers shall have a business history of over 30 years, and any of those Hong Kong insurers shall have a 2-year-old office);
c. Having obtained insurance professional qualification in the mainland, Hong Kong residents are allowed to practise in the mainland;
d. The ceiling proportion of stakes held by Hong Kong insurers in mainland insurers is increased from the existing 10 per cent to 15 per cent.
B. Criteria to define a ¡°Hong Kong Company¡±
Relevant Hong Kong enterprises shall meet the following conditions before they can enjoy the preferential treatments under CEPA:
a. Enterprises shall be registered and established in line with the Company Regulations of the Hong Kong SAR or other related regulations.
b. Enterprises shall engage in substantive commercial operation in Hong Kong SAR. The criteria for judgement are:
The business nature of an enterprise in the mainland shall be identical with that of its Hong Kong business, and be within the substantive business scope of its Hong Kong business.
During substantial operation, enterprises shall pay profit tax in Hong Kong.
The applicants shall have registered and engaged in substantive operation in Hong Kong for over 3 years (including 3 years), and the applicants in the industries of engineering, banking and insurance shall have registered and engaged in substantial operations in Hong Kong for over 5 years (including 5 years).
The business sites owned or leased by enterprises to conduct substantial operations in Hong Kong shall conform to the scope and size of business.
The number of employees of enterprises in Hong Kong shall account for 50 per cent (including 50 per cent) of the total employees.
C. Financial cooperation
a. The mainland supports State-owned solely-funded commercial banks and some shareholding commercial banks to move their international fund and foreign exchange trading centers to Hong Kong;
b. Mainland banks are encouraged to develop network and business activities in Hong Kong through merger and acquisition;
c. The mainland supports the practice of making use of and giving into fuller play Hong Kong¡¯s role as financial intermediary in mainland¡¯s financial reform, restructuring and development;
d. Both sides will strengthen cooperation and information sharing between financial surveillance departments;
e. Based on the principle of giving respect to market rules and improving surveillance efficiency, the mainland will encourage domestic insurance enterprises and other enterprises that meet the requirements, including private enterprises to go public in Hong Kong.
D. Travel cooperation
a. To further promote the development of Hong Kong tourism, the mainland will permit individuals in Guangdong Province to go travelling in Hong Kong. The practice will start with the 3 cities of Dongguan, Zhongshan and Jiangmen, and will be practised across Guangdong Province no later than July 1, 2004.
b. Both sides will strengthen cooperation in travel publicity and promotion, including mutual tourism promotion and overseas promotion based on the Pear River Delta;
c. Efforts shall be made to boost both sides¡¯ tourist service level through cooperation so as to safeguard the legal interests of tourists.
E. Mutual recognition of professionals¡¯ qualifications
a. Both sides encourage the mutual recognition of professionals¡¯ qualifications, and promote the exchange of professional talents;
b. Competent authorities of both sides will study, consult with and formulate detailed measures about mutual recognition of professional qualifications.
(4) Investment and trade facilitation mainly covers the following 7 sectors:
A. Trade and Investment Promotion
Mutual promotion in trade and investment, and cooperation in joint exploitation of international commodities and engineering market will be strengthened
B. Customs Clearance Facilitation
General information notification system will be set up at both customs. Efforts will be made to explore the feasibility of data connection, and development of e-customs clearance at ports, and tighten risk management of customs clearance through technical means at both ends to improve customs clearance efficiency.
C. Commodity Inspection and Quarantine, Food Safety and Quality Norms
Efforts will be made to strengthen bilateral cooperation in such sectors as examination and surveillance of electromechanical products, plant and animal inspection and quarantine and food safety, health quarantine surveillance, product verification and authentication and standardization management.
D. E-commerce
Efforts will be made to strengthen bilateral cooperation in research and formulation of e-commerce rules, standards and regulations, and corporate application, promotion and training, etc; and strengthen cooperation in e-government.
E. Transparency of Laws and Regulations
Both sides will strengthen cooperation in providing information to industrial and commercial enterprises of both sides to lay a foundation for the enhanced economic and trade exchanges between both sides.
F. SMEs Cooperation
Efforts will be make to strengthen information exchange between SMEs of both sides, organize exchanges and inspections between enterprises of both sides, and jointly explore the strategies and supporting policies for the development of SMEs.
G. Cooperation in Traditional Chinese Medical Industry
Efforts will be intensified in information sharing in the fields of legislation, development strategy and guideline for industrial development. The advantages of each side will be put into full play to promote the traditional Chinese medical industry to go into the international markets.
(5) The CEPA has 6 appendices. They are: the Arrangement on Zero Tariff to Goods Imported from Hong Kong as the Place of Origin, the Origin Rule Applicable to the CEPA, the Procedures for Issuance of Certificates of Origin and Cooperative Inspection Mechanism, the Mainland and Hong Kong¡¯s Commitments on Opening Service Trade Sector to Each Other, the definition of ¡°Service Providers¡± and Related Provisions, and the Measures for Trade and Investment Facilitation. The legal texts of the Appendices to the CEPA will be signed before January 1, 2004.