- The Washington Times - Monday, January 5, 2009


A constantly expanding free-trade agreement between Hong Kong and mainland China has increased Hong Kong’s role as a major springboard for hundreds of American companies into the Chinese market. U.S. companies with regional headquarters in Hong Kong have increased by nearly 60 percent since 1996, reaching nearly 300 firms by June 2007. American companies that have established regional offices have increased from 226 in 1996 to 593 in mid-2007.

Nearly 400 other U.S. companies had opened local offices in Hong Kong by 2007. Altogether, the American presence in Hong Kong grew from 414 firms in 1996 to 1,285 in 2007.

“Hong Kong is … attractive because of its British legal system and a very strong rule of law,” said Marc Miles, a global economist who edited the 2004-06 editions of Heritage Foundation’s “Index of Economic Freedom,” which ranked Hong Kong the freest economy in the world. Hong Kong led Heritage’s 2008 rankings as well.

In 2003, six years after Hong Kong’s status changed from a dependent territory of the United Kingdom to a special administrative region of the People’s Republic of China, Hong Kong and China signed a free-trade agreement known as the Closer Economic Partnership Arrangement (CEPA).

CEPA, which is updated and expanded regularly, provides “greater access to China than what China agreed to in order to enter the World Trade Organization,” said Eddie Mak, the director-general of the Hong Kong Economic & Trade Office in Washington. Whereas the average tariff applied to goods entering China under WTO provisions is 9.8 percent, goods manufactured in Hong Kong enter the mainland duty-free.

CEPA provides a window of opportunity for Hong Kong-based businesses to gain greater access to the mainland market. This is especially true for Hong Kong businesses providing services, which today comprise more than 90 percent of Hong Kong’s gross domestic product.

For service providers, the preferential treatment includes relaxation of equity-share restrictions and reductions in entry thresholds, such as those that apply to sales volume and capital. CEPA also relaxes restrictions involving geographical location and business scope, said Arthur Char, the former assistant director-general of the Hong Kong Economic & Trade Office.

Notwithstanding the current downturn, Hong Kong’s long-term economic future remains bright.

“Hong Kong shows the benefits of being the freest economy on earth,” said Ian Vasquez of the Cato Institute, whose 2008 report, “Economic Freedom of the World,” ranked Hong Kong as the world’s freest economy for the 12th consecutive year. (The United States tied Australia for eighth place in 2008.) Hong Kong’s intensely capitalistic system has enabled it to “grow from a relatively poor territory to one of the most prosperous places on Earth,” Mr. Vasquez said.

The United States is one of the major sources of foreign investment in firms that benefit from CEPA, said Mr. Char. U.S. firms have provided more than $26 billion in inward direct investment in Hong Kong.

The United States is the largest foreign source of direct investment in the insurance market. For the financial-institutions sector (other than banks) and the wholesale, retail and import/export sectors, the U.S. presence ranks as the third-largest foreign investor. U.S. banks constitute the third-biggest foreign group by number.

To protect their intellectual property, companies can have design facilities in Hong Kong and manufacturing plants on the mainland. “The designs are protected by Hong Kong’s strict rule of law,” Mr. Miles said.

Hong Kong’s rule of law also has made it the arbitration center in that part of the world, Mr. Miles said.

“Accounting, insurance, banking and legal services are much easier to handle in Hong Kong than in China,” said John Tkacik, a senior fellow in Asian studies at the Heritage Foundation. If clients are foreign companies, auditing can be done remotely from Hong Kong without obtaining Chinese licenses and certificates.

“Our clients increasingly take advantage of CEPA when setting up investment and corporate structures,” said Basil Hwang, whose U.S.-based law firm, Dechert LLP, established an office in Hong Kong earlier this year.

“CEPA benefits, such as the ability of Hong Kong companies to establish service businesses in the mainland, often feature prominently in planning these structures and in advising clients on whether or not to involve Hong Kong in their structuring plans,” Mr. Hwang said. “We also considered the flexibility of opening offices in the mainland through CEPA’s concessions.”

Because CEPA is “blind” when it comes to the “nationality” of the owners of Hong Kong businesses, there has been an explosion of foreign corporations that have opened offices or expanded their operations in Hong Kong since CEPA became effective in 1994, said Daniel McAtee, a spokesman for the Hong Kong Economic & Trade Office.

Attitudes toward CEPA are not universally euphoric, however. A 2007 survey by the American Chamber of Commerce in Hong Kong (AmCham) found mixed feelings toward CEPA. After four years of existence, the report states, CEPA benefited only 22 percent of survey respondents. Of those who do find it helpful, 71 percent said the effects were “only moderate.”

Respondents said the greatest benefit from CEPA was improved access to mainland China, followed by the ability to set up wholly owned foreign enterprises and the reduced costs of business entry.

“It´s a very controlled sort of opening up, but it does advantage some of our members, so we´re quite in favor of it,” said Steve J. DeKrey, chairman of AmCham, which took part in discussions leading up to the initial launch of CEPA. “It´s really like a bilateral trade agreement but really within your own country.”

As CEPA continues to bring the economies of Hong Kong and mainland China closer over time, as it was intended to do, Hong Kong’s economic future appears to be as bright as its past. China also will continue to benefit, analysts say.

Classified as one of the four Asian tigers from the 1960s to the 1990s because of its rapid, trade-related economic growth, Hong Kong has few natural resources and arable land. Nevertheless, its nearly 7 million residents, who occupy less than 500 square miles, prosper in an economy whose per capita gross domestic product approached $30,000 last year.

The Hong Kong economy slipped into recession during the third quarter as global economic problems and the worldwide financial crisis adversely affected its exports and spending.

To help Hong Kong weather the global economic downturn, China’s premier, Wen Jiabao, promised in December that China will “increase the opening of mainland service industries to Hong Kong.”

Mr. Wen also said China would improve Hong Kong’s integration with the Pearl River delta in Guangdong province, where China’s economic miracle in manufacturing began 30 years ago. Thousands of companies and factories closed in Guangdong in 2008 as the world’s demand for its manufactured products declined amid recessions that have afflicted Japan, Europe and the United States.

Mr. Wen also committed China to “take measures to support Hong Kong’s domestic industries, especially small- and medium-size enterprises that are experiencing difficulties” and to “support Hong Kong’s financial stability and economic development.” The Chinese premier made the commitments during a December visit to the mainland by Hong Kong Chief Executive Donald Tsang.

After it became a special administrative region of the People’s Republic of China in 1997, Hong Kong continued to prosper under the “One Country, Two Systems” principle, which guaranteed, and has given, Hong Kong a huge degree of autonomy in trade and financial matters.

“The big question in 1997 was: Will the Chinese government destroy economic freedom in Hong Kong?” Mr. Vasquez asked. “In fact, economic freedom in Hong Kong is having a positive effect on China,” he answered. Indeed, the relationship between the mainland and Hong Kong has been reciprocal in an unforeseen way. “Mainland Chinese companies are now listing themselves on the Hong Kong stock exchange to improve their own transparency, which is what investors are looking for,” Mr. Vasquez said.

• Carrie Sheffield reported from Hong Kong, and David M. Dickson reported from Washington.

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