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CEPA 2015 – Free Trade with Guangdong in Financial Services

CEPA has moved to a new phase with the revelation of a subsidiary agreement aimed at achieving basically free trade in services between Guangdong and Hong Kong.

CEPA Liberalisation Measures in Guangdong

As a significant step toward service market reforms on the mainland and economic co-operation with Hong Kong, in 2011 the mainland government announced its intention to permit a basically free trade in services between the mainland and Hong Kong by the end of 2015, coinciding with the conclusion of the 12th Five-Year Plan.

In 2012, this commitment was followed by a bid by the Guangdong government to secure a basically free trade in services with Hong Kong a year before the end-2015 deadline. Against this background, the Central and Hong Kong governments signed a new agreement under the CEPA framework in December 2014. Known as The Agreement between the Mainland and Hong Kong on Achieving Basic Liberalisation of Trade in Services in Guangdong (“Guangdong Agreement”), it is scheduled to come into effect from March 2015.

A major feature of this Guangdong Agreement is it conforms more to international standards in terms of the pre-establishment national treatment and the implementation of a negative list. This is the first free trade agreement entered into by the Chinese mainland using this format. In general, the agreement sees Hong Kong companies accorded the same rights as mainland companies in Guangdong, aside from the exceptions laid down in the negative list. In addition to providing a negative list, the Guangdong Agreement also adopts a hybrid approach with positive listings for all cross-border services[1].

The Guangdong Agreement follows on from the adoption of 70 Guangdong pilot implementation measures[2] that already apply to Hong Kong services suppliers (HKSS) as a result of various CEPA Supplements (i.e. in terms of positive listings, with most of them related to a commercial presence). Another 27 liberalisation measures regarding cross-border services have also been stipulated under the positive list of the Guangdong Agreement.

With regard to investment facilitation, the investment projects of HKSS in the majority of services sub-sectors in Guangdong will be subject to the same authority and procedures as those applying to mainland investment projects. The establishment of a company and the related contract/articles of association will now be subject to record filing instead of prior approval.

On the whole, the breadth and depth of liberalisation under the Guangdong Agreement exceeds the previous CEPA measures. Without exception, they cover all sub-sectors of Hong Kong’s four pillar industries - finance, tourism, trade and logistics and professional services. To differentiate the Guangdong Agreement from other CEPA Supplements, it is designated as a subsidiary agreement, rather than a supplement. This is in light of the new hybrid approach and the focussed market access for HKSS in Guangdong.

The following table shows the liberalised sectors established under CEPA since its inception (Phase 1) through to the Guangdong Agreement (Phase 12). The boxes in yellow and orange show the newly added sectors under the Guangdong Agreement with, respectively, national treatment and reserved restrictive measures on the negative list for HKSS. Similarly, boxes in green and blue show the existing liberalised sectors with, respectively, national treatment and reserved restrictive measures for HKSS[3]. Sectors with liberalisation measures concerning cross-border services on the positive list of the Guangdong Agreement are in grey boxes.

Table: Service sectors benefitting from CEPA (Phase 1 to 12)
Table: Service sectors benefitting from CEPA (Phase 1 to 12)
Service sectors benefiting from CEPA with liberalisation measures under the Guangdong Agreement show

Free Trade in Financial Services with Guangdong

Given that the mainland’s capital account is not fully open, and the RMB not freely convertible, the Central government has always adopted a pragmatic approach to reforming the capital market on the mainland. In the early 2000s, China allowed overseas financial firms to acquire stakes in second-tier Chinese banks, and then brought in strategic foreign investors to first tier banks before their overseas listing. With little doubt, the financial sector has become a focal point of service liberalisation on the mainland and bilateral cooperation with Hong Kong in recent years, including financial reform measures being introduced in Shenzhen’s Qianhai. Along with CEPA and its Supplements, many liberalisation measures have been adopted nationwide in favour of HKSS, plus many more preferential measures in Guangdong. With the CEPA subsidiary agreement taking effect from March 2015, a new milestone has been reached in terms of CEPA implementation in light of the freer trade in financial services between Hong Kong and Guangdong.

Furthermore, the Central government has pledged to support Hong Kong when it comes to consolidating and enhancing its competitive advantages as an international financial centre, while helping it develop as an offshore RMB and an international asset management centre. After the ground-breaking RMB cross-border trade settlement in 2009, China adopted an RMB recycling mechanism through the RMB Qualified Foreign Institutional Investors (RQFII) scheme and most recently, the Shanghai-Hong Kong Stock Connect. This article will cover the Guangdong liberalisation measures for the financial sector with respect to the three sub sectors of banking, securities and insurance, and liberalisation measures for other services will be covered in subsequent articles.

Banking Services

In accordance with the CEPA provisions, Hong Kong banks have established hundreds of subsidiaries, branches and sub-branches on the Chinese mainland. These include a number of sub-branches set up in Guangdong in accordance with the Guangdong pilot implementation measure relating to cross-location sub-branching provisions.

Overall, a hybrid approach has been taken with regard to the liberalisation measures in the banking services sector specified under the Guangdong Agreement. On the positive list, the relevant agencies on both sides will affirm concluded co-operation agreements on the mutual recognition of banking professional qualifications via further promotion work. In keeping with Hong Kong’s role as an established offshore RMB centre, both sides are committed to developing Hong Kong as a more diversified offshore RMB product market with increased channels for two-way fund flows. The table below shows the access for HKSS under CEPA compared to non-CEPA service suppliers. Where it is not explicitly indicated, the concerned liberalisations for HKSS are reported as positive listings under the respective CEPA Supplements.

On the negative list of the Guangdong Agreement, it is stipulated that regulatory approval will be required for HKSS engaging or investing in banking business in Guangdong, including wholly foreign-funded banks, Chinese-foreign joint venture banks, state-owned commercial banks, joint-stock commercial banks, urban commercial banks, rural commercial banks, and rural co-operative banks. Further, approval will be required if HKSS seek any change in registered capital, the shareholding ratio of wholly foreign-funded banks or Chinese-foreign joint venture banks, as well as the operating capital of foreign bank branches in Guangdong.

In essence, the relevant eligibility and asset requirements under the Guangdong Agreement are consistent with those provided under the CEPA Supplements. The negative list, however, in terms of both format and content, provides a much more detailed description of what to expect in relation to the requirements at the pre-establishment stage. Furthermore, the Guangdong Agreement also contains a most-favoured treatment provision, which guarantees Hong Kong will continue to be the mainland’s most favoured partner, receiving an automatic upgrade in the event of the mainland government signing a more favourable trade agreement with another territory.

Currently, HKSS engaging in banking business on the mainland, including in Guangdong, are allowed to conduct RMB business as long as they have operated there for more than two years and been profitable for a one year pre-application period. Under the Guangdong Agreement, the negative restrictive measures state that wholly foreign-funded banks, Chinese-foreign joint venture banks or foreign bank branches engaging in RMB interbank lending and borrowing business need to seek regulatory approval.

The negative list also states that a wholly foreign-funded bank or Chinese-foreign joint venture bank can neither borrow nor lend more than twice its paid-in capital, while a foreign bank branch can neither borrow nor lend more than twice its RMB operating capital. The RMB portion of the total operating capital and reserves is set at no less than 8% of its RMB risk-weighted assets. Specifically, it also states that foreign bank branches set up by HKSS in Guangdong are not allowed to offer RMB services to Chinese citizens other than accepting time deposits of more than RMB1 million. Furthermore, they are not allowed to conduct RMB businesses in the capacity of an agent for issuance, payment and underwriting of government bonds or to act as a receiving and paying agent.

In all, CEPA is key to lowering the thresholds for HKSS to enter the mainland’s banking services market, including achieving freer trade in financial services with Guangdong, particularly in terms of setting an asset requirement of no less than US$6 billion compared to no less than US$20 billion for other non-CEPA banking operators. As of 31 January 2015, the cumulative number of HKSS certificates in the banking and other financial services, excluding insurance and securities, had reached a total of 10.

 Current scope of access Access for HKSS under CEPA
  •  A foreign bank intending to set up a branch on the mainland needs to satisfy the following requirements:
  1. having total assets of not less than US$20 billion at the end of the year prior to the application;
  2. having kept a representative office on the mainland for at least two years in an area where the foreign bank applies to establish its first branch.
  • A Hong Kong bank # needs to have total assets of no less than US$6 billion to establish a branch on the mainland.
  • For a Hong Kong bank to acquire an equity stake in a mainland bank, the total assets at the end of the year before the application are not less than US$6 billion.
  • For a Hong Kong bank to set up a wholly foreign-funded bank or a foreign bank branch on the mainland, it should have a representative office on the mainland for more than one year prior to the application #

    # Major qualifying criteria: (1) Hong Kong registered bank; and (2) engaged in substantive operations as stated below:
    • A bank will have satisfied the "substantial business operation" requirement if it has operated as a branch on the mainland for two years and been incorporated for three years or more in Hong Kong.
    • The requirement for establishing a representative office before setting up a joint venture bank is removed.
  •  An operational foreign-funded bank intending to apply for RMB business shall satisfy the following requirements:

(i) having opened for business on the mainland at least three years prior to the application; and

(ii) having been profitable for two consecutive years prior to the application

  • For a Hong Kong bank’s operating unit on the mainland to apply to conduct RMB business, it should have been operating there for more than two years and been profitable for one year prior to the application.
  • Profitability assessment for a Hong Kong bank's branch to apply for RMB business on the mainland is made on the basis of overall position of all branches instead of an individual branch.
  • A Hong Kong bank's operating institution on the mainland that is given approval to conduct RMB business to serve Hong Kong enterprises may provide services to enterprises on the mainland that are recognised as being owned by Hong Kong investors in accordance with the relevant rules and regulations, even if the investors in those enterprises are based in a place other than Hong Kong.
  • Under the negative list of Guangdong Agreement, effective from March 2015, foreign bank branches set up by HKSS in Guangdong are not allowed to offer RMB services to Chinese citizens other than accepting time deposits of more than RMB1 million.
  • Foreign banks can open sub-branches in cities where they already have a branch in operation.
  • A branch of a Hong Kong bank set up in Guangdong is allowed to apply to set up cross-location sub-branches within the province, thereby setting up a sub-branch in another administrative area without having to first establish a branch in that administrative area. ## 
  • The Guangdong-based branch of a wholly foreign-funded bank set up by a Hong Kong bank is allowed to establish cross-location sub-branches in Guangdong, thereby setting up a sub-branch in another administrative area without first having to establish a branch in that administrative area. ##

## With reference to the relevant mainland rules for establishing sub-branches

 
  • Any mainland-incorporated banking institution established by a Hong Kong bank can engage in the sale and distribution of mutual funds.
 
  • Any foreign banking institution established on the mainland by a Hong Kong bank can establish specialised institutions for providing financial services to small enterprises in accordance with the relevant mainland requirements.
 
  • Eligible Hong Kong banks are allowed to offer custodian services regarding settlement funds of customers of securities companies and margin deposits on futures transactions.
  • Hong Kong financial institutions are allowed to set up consumer finance companies in Guangdong on a pilot basis in accordance with the Measures for Administration of Pilot Consumer Financial Companies.

Securities, Futures and Fund Management Services

The negative list of the Guangdong Agreement does not provide HKSS with substantially more preferential market access than the liberalisation measures covered by the latest CEPA Supplement. By virtue of the CEPA liberalisation measures, HKSS can make effective inroads into the mainland’s securities market by establishing a commercial presence in Guangdong or elsewhere. They are allowed to establish one full-licensed joint venture securities company each in Shanghai, Guangdong Province and Shenzhen, with the aggregate shareholding of HKSS in the joint venture capped at 51%. The flexibility of entering into a joint venture with mainland partners other than securities companies is also restated in the Guangdong Agreement.

Moreover, HKSS meeting the establishment requirements for joint venture securities companies are allowed to set up one minority-owned joint venture securities firm in each of the “reform experiment zones” approved by the mainland authorities (e.g. the Pilot Free Trade Zones in Shanghai, Guangdong, Fujian and Tianjin), with an equity share of up to 49%. HKSS are also granted the right to set up joint venture securities investment advisory companies in those zones with an equity of more than 50%. This is an improvement on the 49% cap generally applicable on the mainland. In addition, HKSS meeting the establishment requirements for joint venture fund management companies are allowed to have equity shareholdings exceeding 50%. All of these expanded measures will give Hong Kong intermediaries first-mover advantage in the mainland's fast-growing market, including Shanghai. The Guangdong Agreement, on top of setting out the broad liberalisation measures on the negative list, also features detailed operational requirements. For example, it states that HKSS acquiring shareholdings in mainland-Hong Kong joint venture securities companies, fund management companies, futures companies or securities investment advisory institutions should make their capital contribution in a currency that is freely convertible.

The latest CEPA liberalisation measures, including those under the Guangdong Agreement, give much greater flexibility to HKSS intending to explore the mainland’s securities and the related markets. As of 31 January 2015, the cumulative number of HKSS certificates in the sector of securities and futures service stood at 15.

 Current scope of access Access for HKSS under CEPA
  • The mainland is committed to not opening its securities market to non-CEPA service suppliers by virtue of a similar agreement making reference to international standards and in the form of a negative list with pre-establishment national treatment, as in the CEPA Guangdong Agreement.
  • From March 2015, HKSS are allowed to form mainland-Hong Kong joint venture securities companies in Guangdong through joint capital contribution or shareholding acquisition in accordance with the qualification requirements under relevant regulations.
    • One full-licensed joint venture securities company each in Guangdong Province and Shenzhen Municipality, with the aggregate shareholding of the Hong Kong-funded institutions capped at 51%.
    • One new full-licensed joint venture securities company each in certain reform experiment zones for “piloting financial reforms” as approved by the mainland, with the aggregate shareholder of the Hong Kong-funded institutions capped at 49%.
  • Joint venture (JV) securities firms are allowed, with the foreign party holding no more than one third of the shares. They may engage directly, without going through mainland intermediaries, underwriting A-shares, and underwriting transactions of B-shares, and government and corporate bonds.
  • Hong Kong-funded financial institutions which satisfy the requirements for establishing foreign-invested securities companies are allowed to set up one full-licensed JV securities company each in Shanghai, Guangdong Province and Shenzhen, in accordance with relevant mainland requirements.#

# The maximum percentage of aggregate shareholding of the Hong Kong-funded institutions is 51%, and mainland partners are not restricted to securities companies.

  • Hong Kong-funded financial institutions that satisfy the requirements for setting up foreign-invested securities firms are allowed to set up one new full-licensed JV securities company in certain reform experiment zones for “piloting financial reforms” as approved by the mainland in accordance with the relevant mainland requirements.##

## The maximum percentage of aggregate shareholding of the Hong Kong-funded institutions should not exceed 49%, and the requirement for a single mainland shareholder to hold 49% of shareholding in the joint venture is removed.

  • Sino-foreign JV fund management companies are allowed, with the foreign party holding no more than 49% of the capital.
  • Qualified Hong Kong-funded financial institutions are allowed to set up JV fund management companies on the mainland with an equity shareholding exceeding 50%.
 
  • HKSS that satisfy the qualification requirements as foreign shareholders of foreign-invested securities firms are allowed to set up JV securities investment advisory firms in Guangdong with their mainland counterparts, after they have satisfied the requirements for establishing subsidiaries.
    • The JV advisory firm is a subsidiary of the mainland securities firm, with the business scope specifically focussed on securities investment advisory businesses.
    • Hong Kong securities firm can hold up to 49% of the total shareholding of such JV advisory firm, with no geographical restriction.
  • Hong Kong-funded securities companies are allowed to hold more than 50% shareholding in JV advisory companies set up in certain reform experiment zones for “piloting financial reforms” as approved by the mainland.
 
  • Hong Kong intermediaries# are allowed to set up minority JV futures brokerage companies on the mainland.
    • The business scope and capital required of the JV futures brokerage companies are the same as those for mainland companies.
    • The current minimum capital requirement for mainland futures intermediaries is RMB30 million.

# Intermediaries refers to intermediary agencies registered with the Securities and Futures Commission of Hong Kong (SFC)

 
  • Hong Kong professionals## applying to obtain the mainland’s securities and futures industry qualifications need only to undertake training and pass an examination pertaining to  mainland laws and regulations; examination of professional knowledge is not required.

## Professionals refer to Hong Kong permanent residents licensed by the SFC


Insurance Services

CEPA Supplements IV and VIII allow HKSS to set up wholly-owned operations on the Chinese mainland in order to provide insurance agency services to mainland insurance companies, as well as operating their own wholly-owned insurance agency companies in Guangdong (including Shenzhen). This was a pilot initiative adopted by Guangdong in line with its broader moves to establish an essentially free trade in services with Hong Kong in the lead up to 2015. While providing insurance agency services on the mainland, however, HKSS are not allowed to sell insurance products on the mainland on behalf of Hong Kong insurers.

A hybrid approach has again been adopted with regard to the liberalisation measures in the insurance services sector outlined in the Guangdong Agreement. The liberalisation measures on the negative list of the Guangdong Agreement essentially reiterate the liberalisation commitments under CEPA and Supplements IV and VIII, while also providing greater details on the relevant eligibility requirements. There is no change to the equity cap of 24.9% imposed on HKSS when investing in any mainland insurance company.

On the positive list, however, the mainland will encourage Guangdong insurance companies to cede their business to Hong Kong insurance or reinsurance companies, with RMB as the settlement currency. Similarly, Hong Kong insurance companies will be encouraged to continue upscaling their outward reinsurance business placements to the mainland (including Guangdong) reinsurance companies. In addition, the mainland will allow Guangdong insurance companies that fulfil regulatory requirements to appoint Hong Kong insurance companies to provide RMB insurance policies selling services in Hong Kong. In order to carry out their insurance business in a regulated manner, the insurance companies must strictly follow the requirements of the relevant insurance laws, regulations and codes, with a view to enhancing the mutual development of insurance markets.

In Hong Kong, there were 158 authorised insurers and 657 authorised insurance brokers as of end-2014. Under CEPA, Hong Kong’s insurance practitioners, including actuaries, can also gain easier access to the mainland market, alongside insurers and insurance brokers. As of 31 January 2015, there were 16 approved HKSS applications for the sector of insurance and insurance-related services.

 Current scope of access Access for HKSS under CEPA
  • The mainland is committed to not opening its insurance market to non-CEPA service suppliers by virtue of a similar agreement making reference to international standards and in the form of a negative list with pre-establishment national treatment, as in the CEPA Guangdong Agreement.
  • From March 2015, HKSS are allowed to form mainland-Hong Kong joint venture insurance companies with an equity cap of 24.9%, after meeting the relevant asset, pre-establishment, solvency margin criteria and maintain a reasonable governance system.
  • HKSS are allowed to set up wholly-owned insurance agencies in Guangdong or wholly-owned enterprises to supply agency services to mainland insurance companies, after meeting the relevant qualification criteria.
  • Market access conditions for foreign insurance companies:
  1. Total assets above US$5 billion;
  2. In operation for more than 30 years;
  3. Has had a representative office on the mainland for more than two years.
  • Hong Kong insurance companies are allowed to form groups through re-grouping and strategic mergers in order to enter the mainland market subject to the following market access conditions:
  1. Total assets above US$5 billion;
  2. One of the Hong Kong insurance companies in the group has been in operation for more than 30 years;
  3. One of the Hong Kong insurance companies in the group has had a representative office on the mainland for more than two years.
  • The equity ratio of foreign insurance companies in a mainland insurance company may not exceed 10%.
  • The equity ratio of Hong Kong insurance companies in a mainland insurance company may not exceed 24.9%.
 
  • Hong Kong insurance brokerage companies are allowed to set up wholly-owned insurance agency companies in Guangdong (including Shenzhen) on a pilot basis. The place of operation should be in Guangdong (including Shenzhen), and the applicant must fulfil the following criteria:
  1. The applicant’s insurance brokerage businesses in Hong Kong should be no less than 10 years;
  2. The average annual business revenue for the three years prior to application should not be less than HK$500,000 and the total assets as at the end of the year prior to application should not be less than HK$500,000;
  3. Within the three years prior to application, there must have been no serious misconduct and record of disciplinary action; and
  4. The applicant should have had a representative office on the mainland for more than one year.
 
  • Hong Kong insurance agency companies are allowed to set up wholly-owned enterprises on the mainland to provide agency services for the mainland insurers subject to the following requirements:
  1. The applicant should be a professional insurance agency in Hong Kong or Macau with more than 10 years’ experience of operation in the insurance agency business; 
  2. The average annual business revenues for the three years before application should exceed HK$500,000;
  3. The total assets as at the end of the year before application should exceed HK$500,000, and
  4. The applicant should have no serious misconduct and record of disciplinary action for the three years before the application.
  • After obtaining the mainland's professional qualifications in actuarial science, the foreign actuary needs to obtain approval from the China Insurance Regulatory Commission to practise.
  • Hong Kong residents with Chinese citizenship who have obtained the mainland’s professional qualifications in actuarial science are allowed to practise on the mainland without prior approval.
  • Hong Kong residents who have obtained the mainland's insurance qualifications and are employed by a mainland insurance institution are allowed to engage in the relevant insurance business.


[1]  Cross-border services are referred herewith to three modes of service supply, namely, cross-border supply, consumption abroad, and movement of natural persons. Together with commercial presence, they constitute the four modes of services trade classified under the WTO’s General Agreement on Trade in Services (GATS).

[2]  Together with the trade and investment facilitation measures, some 80 Guangdong pilot implementation measures have been introduced through the announcements of various CEPA Supplements.

[3]  The boxes in blue merely show that there are reserved restrictive measures under the negative list of the Guangdong Agreement for the concerned sector as a whole, while individual sub-sectors may attract national treatment in terms of establishing a commercial presence in Guangdong.

Content provided by Picture: Dickson Ho
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