Guided by the principles of "one country, two systems," and "Hong Kong administrated by Hong Kong people," Hong Kong and the Chinese mainland have established all-around, multi-faceted and broad economic and trade cooperation ties under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA).
Economic and trade cooperation between the mainland and Hong Kong boosts the economy and comprehensive competitiveness of Hong Kong, further enhancing its status as the international finance, trade and transportation hub.
The mainland factor
So far, the "mainland factor" has been a major driving force behind Hong Kong's economic development.
The opening up and economic reform, as well as the rapid economic development on the mainland, has provided the Hong Kong manufacturing industry with new opportunities. From 1980 to 1996, the mainland economy grew 9.5 percent annually with 26.4 percent growth in foreign trade, a key factor conducive to the Hong Kong economy. For one thing, Hong Kong is an export-oriented economy and foreign trade has an important influence on its economic development. Trade volume between the mainland and Hong Kong jumped to 104.982 billion Hong Kong dollars in 1996 from a mere 28.195 billion in 1980, with an annual growth rate of 25.4 percent. Since then the Chinese mainland has become its biggest trading partner and re-export source and destination. In 1996, the re-export volume accounted for 84.8 percent of its total export volume. The mainland made up 57.7 percent of its re-export volume.
Second, processing trade between the mainland and Hong Kong has helped optimize the economic structure of Hong Kong. After the reform and opening up of the mainland, the cheap prices and favorable policies attracted the traditional manufacturing industry in Hong Kong to transfer to the mainland. Hong Kong's direct investment in the mainland reached $20.677 billion in 1996 from $1.88 billion in 1990, increasing nearly 49.1 percent year on year. Investment from Hong Kong accounted for nearly 50 percent of all foreign direct investment (FDI) on the mainland. Hong Kong has become the mainland's biggest FDI source.
Meanwhile, mainland companies have been entering the Hong Kong market, becoming its largest overseas investor, outnumbering even the United States and Japan. Mainland businesses are generally involved in Hong Kong's service industries including finance, retailing, transportation, storage, tourism and hotel. Chinese capital has become one of the most important factors safeguarding Hong Kong's prosperity and steady economic growth. From 1990 to 1996, Hong Kong maintained an economic growth rate of over 4 percent.
Thanks to CEPA
After the mainland resumed sovereignty over Hong Kong, economic and trade cooperation between the two entered a new era. The implementation of CEPA binds Hong Kong and the mainland closer and has become an important platform for their economic cooperation.
CEPA reflects the Central Government's strong support for the Hong Kong economy. In the first few years after Hong Kong returned to China (1997-2001), Hong Kong encountered huge development problems rising from Asian financial crisis and the slump in the world economy. During that time, Hong Kong suffered from declining real estate and stock markets, serious deflation and a high unemployment rate. In order to relieve the city from depression, the Central Government supported Hong Kong's proposal to establish a free trade zone between the two regions. The Chinese mainland and Hong Kong launched CEPA negotiation in January 2002. After many high-level negotiations, the two sides officially signed CEPA on June 29, 2003, and it was implemented from January 1, 2004. The open nature of the agreement allows for constant renewal and supplement when necessary. From 2004 to 2006, the Chinese mainland and Hong Kong signed three supplementary agreements each year, encouraging the mainland to be more open to Hong Kong markets.
CEPA mainly involves three aspects: trade in goods, trade in services, and the convenience of trade investment. The CEPA was designed to promote balanced trade, exploit particular advantages, and achieve common prosperity. As the first trade agreement between the two sides, CEPA shows the Central Government's determination and sincerity to support the long-term stability and development of Hong Kong.
The further implementation accelerates the free trade access of the two partners and has stimulated the rapid development of the service industry in Hong Kong.
The zero tariff policy of trade in goods promotes the competitiveness of products made in Hong Kong. Among all free trade agreements signed by the Chinese mainland, CEPA has the fastest and broadest tariff reduction. According to supplemental agreements to CEPA, from January 1, 2004, "made-in-Hong Kong" products have gained zero tariff treatment step by step. On January 1, 2006, free trade in goods between the two sides entered a new era, and all products originally made in Hong Kong now enjoy zero tariff treatment.
By the end of 2006, the mainland had imported goods worth of $870 million--subject to zero tariff--from Hong Kong, and a total of 620 million yuan was exempt from tariffs. The zero tariff policy greatly reduced the exporting cost on Hong Kong products, promoting its exporting competitiveness and stimulating the production of high added-value products and hi-tech products.