CEPA Will Help Macao Achieve Sustainable Development
As pledged at the time of its accession to the World Trade Organisation (WTO),
China will gradually open up its market in 2005. When foreign business
communities are busily preparing themselves for that moment, CEPA (Closer
Economic Partnership Arrangement) will give market access to Hong Kong and Macao
ahead of the schedule. The New York Times in the United States and the Financial
Times in the United Kingdom both published articles on CEPA, which prompted
foreign businessmen to look at CEPA and China’s WTO commitments more closely for
any contradictions that might exist.
Hong Kong signed its CEPA deal with the Mainland in July 2003 and Macao will
conclude its discussions and possibly sign the pact in October. The Closer
Economic Partnership Arrangement is scheduled to come into force in January
2004.
This edition of Macao Image highlights CEPA in its cover story, apart from
interviews with the Macao Government’s Secretary for Economy and Finance, Mr.
Francis Tam Pak Yuen, Chairman of the Board of Directors of the Industrial
Association of Macao, Mr. Ho Iat Seng,and several representatives of the
financial sector. The purpose is to introduce more details of CEPA to our
readers and to see what business opportunities it will bring to Macao.
What is CEPA?
The Closer Economic Partnership Arrangement (CEPA) embodies the important
preferential polices extended by the Central Government in Beijing to assist in
the economic development of Hong Kong and Macao. It has three areas under its
umbrella, namely trade in goods, trade in services and trade and investment
facilitation.
What is in CEPA?
Macao’s CEPA deal is basically identical to the one Hong Kong has signed, except
for some minor adjustments in view of Macao’s local conditions. As far as the
trade in goods is concerned , CEPA between the Mainland and Macao provides for
zero-import tariff access of 273 Mainland product codes from Macao to the
mainland market.
A total of eighteen sectors are included in CEPA’s trade in services, namely
management consulting services, convention and exhibition services, advertising
services, accounting services, construction and real estate, medical and dental
services, distribution services, logistics services, freight forwarding agency
services, storage and warehousing services, transport services, tourism
services, audiovisual services, legal services, securities, insurance, and
telecommunications. For these 18 sectors, entry barriers will be removed or
entry thresholds will be lowered. Businesses in Macao can enter the Chinese
market by setting up wholly-owned enterprises or take more than 50 per cent
stakes in joint ventures.
In terms of trade and investment facilitation, procedures in seven public
administration and business fields will be simplified, such as trade and
investment promotion and small and medium-sized enterprises’ co-operation.
What is the Difference between CEPA and WTO?
The WTO is a formal multilateral international trade regime, while CEPA is a
bilateral arrangement within one country similar to free trade area
arrangements. As demonstrated below, CEPA offers far more preferential policies
than China’s WTO commitments.
1. In management consultancy, with the exception of a handful of management
consultancy services, CEPA allows companies from Hong Kong and Macao to set up
wholly-owned branches on the mainland. China’s WTO commitments in trade in
services permit only joint ventures, and this restriction will be abolished only
six years after China’s accession.
2. In the retail sector, the WTO deal stipulates that foreign capital can only
operate in five special economic zones (Hainan, Shantou, Shenzhen, Zhuhai and
Xiamen) and six cities (Beijing, Dalian, Guangzhou, Qingdao, Shanghai and
Tianjin) through the setting-up of joint ventures. The number of stores allowed
to be set up both in Beijing and Shanghai shall not be more than four and the
number for each of the other cities not more than two. Two years following
China’s WTO accession, foreign investors are allowed to take majority
shareholdings in joint ventures. Joint venture retail stores may then be set up
in Chongqing, Ningbo and all the provincial capitals. CEPA allows enterprises
from Hong Kong and Macao to take part in the distribution services by running
wholly owned stores in all of the prefectures nationwide and all the counties in
the case of Guangdong Province. Chinese citizens among the permanent residents
of Hong Kong and Macao can run self-employed businesses in Guangdong Province.
3. In the real estate and construction industries, the WTO deal only allows
joint ventures with foreign capital taking the majority share. Three years after
China’s WTO accession, wholly-owned foreign enterprises can be set up with
certain restrictions on their business scope. CEPA provides for wholly-owned
branches of Hong Kong and Macao enterprises without any restrictions on their
business scope. The companies can bid for nation-wide projects. Enterprises from
Hong Kong and Macao can even acquire domestic construction firms.
Undoubtedly, CEPA grants early Mainland market access to Hong Kong and Macao and
gives more benefits to business communities in both places than to their foreign
competitors. For more information, please visit the official website of the
Macao Economic Services: www.economia.gov.mo .
CEPA will be launched soon. Related bureaux and other entities of the SAR
Government have held several rounds of consultations with the Ministry of
Commerce in Beijing on certain specific points, such as the definition of
principle of origin and the definition of “Macao companies”.
Source: Macao Image, No. 39
CEPA With the Chinese Mainland Will Help Macao
Diversify its Industrial Structure
CEPA is widely seen as a big gift from the Central Government to Hong Kong and
Macao. It gives enterprises in Hong Kong and Macao access to the Mainland market
two years ahead of the time China is scheduled to open up its market in line
with the WTO deal, so that the enterprises may adapt themselves to the Mainland
environment and seek out business opportunities there before foreign competitors
set in. Macao is a small economy that is heavily dependent on tourism and gaming
industries. As a result, the industrial structure is very much based on the
tourism and gaming sectors. There do not exist many big enterprises in Macao.
How can Macao’s enterprises seize the business opportunities resulting from CEPA?
Will foreign investors take advantage of Macao’s preferential policies? What
then does CEPA mean to Macao?
Diversifying the Industrial Structure
Mr. Francis Tam Pak Yuen, Secretary for Economy and Finance of the Macao
Government, believes that CEPA means different things to Hong Kong and Macao,
namely in the sense that CEPA is very helpful in diversifying Macao’s industrial
structure and achieving sustainable economic development in Macao.
Mr. Tam says that Macao has clearly defined its economic policy to have the
gaming and tourism sectors promote the overall economic growth and development
of the other industries. The granting of the new gaming concessions has cleared
all the uncertainties. Thus the gaming and tourism industries maintained
sustained growth before the SARS outbreak outside Macao earlier this year. The
gaming industry grew by 30 per cent in the first quarter this year. The sharp
fall in the number of tourists in the second quarter due to the regional SARS
epidemic caused the gaming and tourism industries to record negative growth. “We
have learned a profound lesson from this. We need to diversify the industrial
structure of Macao if we want to maintain economic stability,” Mr. Tam stressed.
As far as the trade in goods is concerned, Mr. Tam points out that 90 per cent
of the products manufactured in Macao are covered by CEPA’s list of 273
zero-import tariff product codes. Some of the goods on the list are currently
not produced in Macao, such as watches, clocks and cosmetics. According to Mr.
Tam, some investors outside Macao have indicated their interest in manufacturing
those products here. Mr. Tam believes that this can enrich Macao’s manufacturing
industry.
In an interview with Macao Image, Mr. Ho Iat Seng, Chairman of the Board of
Directors of the Industrial Association of Macao, underlined the fact that CEPA
was helpful both to the local business community and external investors. Mr. Ho
believes that with the Macao-Zhuhai Trans-Border Industrial Park and CEPA,
prospects for Macao will be even more promising.
Manufacturers are Keen to Produce Internationally Famous Brands
The “zero import tariff” will definitely add new dynamism to Macao’s
manufacturing industry. Macao’s manufacturing sector, which is mainly focused on
processing, does presently not comprise many local brands. So what are the
chances in the near future for locally manufactured products, labelled “Made in
Macao,” to enter the Mainland market? Mr. Tam admits that production costs in
Macao cannot by any means compete with those on the Mainland, so whether Macao’s
products can successfully be sold in the Mainland market or not will be
determined by branding, particularly of internationally known brands. According
to Mr. Tam, some manufacturers in Macao are already talking to international
brand owners about the setting-up of production facilities in Macao. “Zero
import tariff will be effective from January 2004, so manufacturers of these
types of products will benefit from it in just two months. And new manufacturers
can open plants promptly if conditions are met,” says Mr. Tam.
Mr. Ho provided Macao Image with an objective analysis of the strengths and
weaknesses of Macao’s manufacturing industry. He believes that the manufacturing
industry has the following advantages: Firstly, rents, salaries, transport costs
and other operational costs are lower in Macao than in Hong Kong. Secondly,
Macao has a sound industrial foundation. “The manufacturing industry used to be
the backbone of the local economy. It remains the biggest employer in Macao,
employing around 45,000 people generating an output value of more than MOP 20
billion last year. There are 1,100 factories in Macao holding manufacturing
licenses,” according to Mr. Ho. Thirdly, Macao is negotiating with Zhuhai to set
up a trans-border industrial park, which will benefit both cities. Negotiations
are entering the final stage, awaiting final approval from the Central
Government.
With regard to its weaknesses, Mr. Ho says that local conditions in Macao in the
past resulted in the fact that its industrial structure is “too simple,” with
the manufacturing industry taking up 90 per cent of the overall industry. This
has also resulted in a lack of professionals in other sectors, such as research
and development experts, quality control and marketing professionals.
CEPA is meant to open up the Mainland market. Most manufacturers in Macao do not
have their own brands, so co-operating with overseas brand owners is a good way
to access the Mainland market.
“Individual Travellers” will Increase Gaming Revenues
In the trade in services, Macao’s tourism sector can operate its own travel
agencies on the Mainland, according to CEPA. Thanks to the permits allowing
Mainland residents to travel to Hong Kong and Macao as individual travellers, a
policy that was launched in July 2003, more tourists from the Mainland are now
travelling to Macao, which has led to rising casino revenues. The Sociedade de
Jogos de Macau / SJM (Macau Gaming Company) recorded 25 per cent more revenue in
the first eight months of the year over the same period last year. SJM is
expected to pay at least MOP 9 billion in casino gross-revenue tax to the Macao
SAR Government this year.
When interviewed by Macao Image, Shen Xiao Qi, General Manager of the newly
set-up Macao Branch of the Industrial and Commercial Bank of China (ICBC), said
the signing of CEPA would speed up economic integration and the flow of people,
goods and capital between Macao and the Pearl River Delta, something that would
definitely benefit the financial industry. Mr. Shen says, “Before we came to
Macao, we did a survey in Jiangmen, Zhongshan and Zhuhai that have a lot of
investments from Macao. The branches of the Industrial and Commercial Bank of
China in these three cities combined have three hundred clients from Macao, and
most of our clients here in Macao are already clients of our bank on the
Mainland. It is very encouraging to see investment from Macao in industry and
real estate in the Pearl River Delta. We are confident that the Closer Economic
Partnership Arrangement between Macao and the Mainland will give us a bigger
role to play.”
In an interview with Macao Image on offshore businesses, Mr. Au Kwok On, HSBC
Chief Executive Officer Macau, said that Macao had been doing extremely well
following the granting of the new gaming concessions. Mr. Au pointed out that
different people will see and seize different business opportunities from CEPA
because they place CEPA in a different position in their overall strategy and
planning. He also thinks that investment decisions should be made quickly, with
due considerations given to their timing and feasibility, so that the size and
strength of a particular enterprise will not be the only thing that matters.
Mr. Au says, “ Investment decision puts a lot of emphasis on ‘atmosphere.’ Macao
has very good atmosphere. After the Government has built the framework, it is up
to the enterprises to take the initiative, rather than waiting for the
Government to tell them what to do.”
Source: Macao Image, No. 39
New Challenges and Opportunities for Macao’s SMEs
The Macau Small and Medium Enterprises Association held a “Forum on
Challenges and Opportunities brought about by CEPA to Macao SMEs” in August
2003. Scholars and experts from Guangdong Province, Hong Kong and Macao shed
light on the economic outlook and business opportunities after CEPA gets off the
ground.
Duty-free Entry into China
The most noteworthy part of Hong Kong’s and Macao’s CEPA deals provides for
duty-free access to the Mainland market of products made in Hong Kong and Macao.
Technical consultations are now being held on how to define a product. Some are
of the view that CEPA is of little substantial significance since with or
without it, all duties currently imposed by China will be removed in two years
time, i.e. in 2005, since China will have to fully open its market as it has
pledged to do on joining the WTO. However, one of the speakers at the Forum,
Pansy Yau, Assistant Chief Economist of the Hong Kong Trade Development Council
thinks differently. According to Ms. Yau, China has only pledged to cut the
average tariffs on manufactured products to 9.3 % in 2005, but it will keep its
high tariffs on consumer goods. So duty-free market entry promised by CEPA can
really help Hong Kong and Macao’s products to reach the Mainland market.
As to whether CEPA will encourage manufacturers from Hong Kong and Macao
manufacturers who moved their production plants to the Mainland to return to the
SAR’s, Mrs. Yau stressed that not everyone would choose to move back to Hong
Kong since it was still more expensive in terms of land prices and labour costs.
Ms. Yau said she believed that manufacturers who really needed zero-tariff
treatment might be drawn back, while those that compete mainly on low production
costs would not find it suitable to move back.
Mr. Stanley Au Chong Kit, Director General of the Macau Small and Medium
Enterprises Association, emphasised at the Forum that CEPA had given rise to
enthusiastic discussions and responses in Hong Kong, while the same enthusiasm
was not seen in Macao. Although Macao is constrained by the small size of its
industry, Mr. Au said he was confident that some manufacturers of famous brands
from Hong Kong would be attracted to Macao by its lower production costs and
sufficient imported labour force, once Macao signs its CEPA deal with the
Mainland.
Top-end Production Moves to Macao
Another speaker, Mr. George S K Leung, Chief Economist for the Greater China,
Economics & Investment Strategy of The Hong Kong and Shanghai Banking
Corporation Limited, compared Hong Kong with Macao. In the case of Hong Kong, if
the value added on a certain product were 30%, only when the tariff difference
was no less than 15% would it be attractive for manufacturers to move their
factories back to Hong Kong since production costs on the mainland are 50%
lower. Considering that Macao had the same zero-tariff market access to the
Mainland and lower production costs, manufacturers of famous brands or patented
goods might transfer their production base to Macao.
Mr. Leung concluded that zero-tariffs would not have a big impact on Hong Kong’s
manufacturing industry as it was estimated to generate benefits worth HK $ 750
million to HK $ 2 billion, a very small percentage of the economy which is
valued at about HK$1.3 trillion annually. The same benefits would mean much more
to Macao, given the smaller size of its economy and lower production costs. Mr.
Leung stressed, “To put it differently, it is most likely for top-end production
to move to Macao, while low-end production will be based on the Mainland. The
limited impact of the zero-tariff is the reason why Hong Kong’s manufacturing
sector’s response has been lukewarm..”
Mr. Leung said he believed that Macao could benefit more than Hong Kong from
CEPA: “ Firstly, Macao is a smaller economy. If Macao can make full use of its
advantages within the framework of CEPA and take in the manufacturing industry
moving out of Hong Kong, Macao can benefit more from CEPA. Secondly, easing the
restrictions on Mainland tourists to Hong Kong and Macao was designed to help
Hong Kong tackle its difficulties and generate more jobs for medium and
low-income people. At the end of the day, the impact of Macao will be ever more
beneficial. Macao’s tourism sector stands to benefit greatly even if only one in
three Mainland tourists heading for Hong Kong choose to visit Macao as well.”
Mr. Leung also underlined the great potential of Macao’s logistics industry.
Macao and Zhuhai are the gateway to western Guangdong, where the bulk of the
manufacturing industry of the Greater Pearl River Delta is based. Most of the
Greater Pearl River manufacturing industry is nowadays concentrated in the west
of Shenzhen. However, both Macao and Zhuhai are the gateways to western
Guangdong. If Macao can enter western Guangdong and support the area’s
manufacturing industry, this would greatly benefit its services sector.
Consequently, Macao has great potential to develop into a trade and logistics
platform to serve western Guangdong.
China has become a global production centre, accounting for 30% of the world’s
manufacturing. The US takes up 20 % of global manufacturing, which has fuelled
the growth of its financial and related service industries and the advancement
of New York as a global financial centre. Therefore, if the case of the US is of
any guidance, China’s booming manufacturing industry will also have insatiable
demand for services. With CEPA removing the obstacles for Hong Kong and Macao
enterprises to the Mainland market, they will be able to develop the service
sector in China and support the growth of the manufacturing industry there.
Beneficial to SMEs
Zero-tariff will make products made in Hong Kong and Macao more competitive on
the Mainland market. CEPA will also give a boost to the trade in services.
Another speaker, Mr. Ieong Tou Hong, Vice-President of the Macao Association of
Economic Sciences, underlined the benefit of CEPA to trade in services.
According to Mr. Ieong, China’s reforms and opening-up policies underwent two
stages. The first was in the 1970s, when China implemented the policy of
“limited opening-up” on a trial basis that was characterised by the restrictions
on which industries could avail themselves of foreign investments, how many
shares foreign investors could own, as well as the restrictions on the structure
of their enterprises and the duration of their operations. China entered the
second stage of reforms and opening-up when it became a WTO member. China will
further open up its market in line with the timetable set upon its accession.
Its policies will also be in line with international practices. CEPA covers more
areas than China’s WTO commitment. As a result, businessmen from Hong Kong and
Macao will qualify for more incentives than foreign investors. SMEs will benefit
in particular.
Mr. Ieong said, “The Mainland has a higher threshold for foreign investment than
before. For example, there are now more stringent requirements as to the scale
of the investment and the content of technology. The Guangzhou Economic and
Technology Development District has a minimum requirement of US $ 30 million for
any investor interested in moving into the district. This is beyond most of the
SMEs. Nevertheless, CEPA has fully accommodated the concerns and interests.”
Hong Kong’s CEPA deal with the Mainland covers 18 service industries, including
management counselling, advertising, and legal, accountancy and distribution
industries. Mr. Ieong said he believed that, compared with large-scale
infrastructure, high-tech and manufacturing industries, those requiring a high
degree of professional expertise are more suitable for SMEs.
Mr. Ieong said he believed that CEPA would bring both challenges and
opportunities to Macao’s businesses. He pointed out that the gaming industry,
the biggest contributor to Macao’s industrial structure (generating
approximately 40% of its gross domestic product) was barred from entering the
Mainland market, adding that enterprises in the manufacturing, construction and
retail and wholesale industries were most likely to tap the mainland market. Mr.
Ieong estimated that only about 35% of Macao’s enterprises in those three
industries were equipped to do so, because local enterprises as a whole needed
to upgrade their competitiveness. “There will be two-way investment in the
environment of an open market. Privately-owned enterprises on the Mainland will
also look for opportunities in Macao. Enterprises from the European Union and
other foreign countries can use Macao as a launch pad to the Chinese market. In
that process, SMEs in Macao can provide business support services, such as
market planning, accounting and legal services and logistical support, in a bid
to improve Macao’s industrial structure.”
Co-operation between Guangdong, Hong Kong and Macao will enter a new stage with
the implementation of CEPA and the completion of the planned bridge connecting
Hong Kong, Macao and Zhuhai. Mr. Ieong said that with CEPA, the Central Chinese
Government would open the Mainland market to Hong Kong and Macao ahead of the
WTO timetable, so that enterprises from the two SARs would have two years to
learn more about the market to better compete with domestic and foreign
enterprises.
Source: Macao Image, No. 39