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Cablegate: Cepa's Service Sector Liberalization Measures

VZCZCXRO5242
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHVC
DE RUEHHK #1898/01 2810941
ZNR UUUUU ZZH
R 080941Z OCT 09
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 8710
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 HONG KONG 001898

SENSITIVE
SIPDIS

STATE FOR EAP/CM; EEB/IFD; EEB/TPP; INR/EAP; S/P STATE PASS
USTR FOR CHINA OFFICE

E.O. 12958: N/A
TAGS: ETRD ECON EFIN EINV HK CH
SUBJECT: CEPA'S SERVICE SECTOR LIBERALIZATION MEASURES
LARGELY FALL FLAT

REF: HONG KONG 1847

1. (SBU) Summary: EconOffs from Consulates General Guangzhou
and Hong Kong jointly met on September 28 with service sector
leaders in Hong Kong to discuss their investment plans in
China's Guangdong Province, especially as they relate to the
Closer Economic Partnership Arrangement (CEPA) between the
PRC and the Hong Kong government (HKG). The latest annual
supplemental agreements to CEPA aimed to ease the
cross-border licensing and movement of firms and
professionals engaged in the service sector, but leading
lawyers, doctors and accountants in Hong Kong say CEPA has
thus far had little impact on them. They say lower
prevailing rates of hourly billing in China limit the
attractiveness of that market, while professional exam
requirements in both Hong Kong and China continue to impede
licensing of service sector professionals. CEPA-related
service sector effects have been most noticeable in the
banking industry, where international and Hong Kong-based
banks use CEPA to significantly expand their retail branch
networks in China's Guangdong Province. Government officials
in Hong Kong and Guangdong are expected to complete by
year-end a joint framework for cross-boundary cooperation.
It will reportedly contain specific additional measures to
boost service sector integration. End summary.

2. (SBU) Comment: CEPA has expanded trade opportunities in
material goods. But with the exception of banking,
CEPA-related efforts to improve cross-border service sector
opportunities have thus far largely fallen flat. Doctors,
lawyers and accountants have mostly not crossed the border in
either direction. Service sector protectionism in Hong Kong
and China masquerades under the guise of licensing
requirements, while language differences, distrust and
divergent billing rates contribute to the service sector
integration challenge. Service sector integration can only
be achieved when significant numbers of firms and
professionals can become licensed to operate profitably on
both sides of the border. Additional efforts by the HKG, PRC
and Guangdong provincial governments will be required to
design, implement and enforce the measures necessary to
fulfill this CEPA service sector vision. End comment.

HK Law Professionals Barred from Local Practice in PRC
--------------------------------------------- ---------

3. (SBU) Law Society President Huen Wong said CEPA will
continue to have little near-term impact on Hong Kong-based
law firms and lawyers, as they remain barred from
establishing wholly-owned law offices and practicing PRC law
in the Mainland. Hong Kong's law firms and lawyers are
classified as foreign under PRC law and, like other foreign
entities, they may only establish "associations" in the
Mainland with a PRC firm. Only six Hong Kong-registered law
firms have established such associations with PRC firms in
the Mainland (two in Shanghai, one in Beijing, one in
Tianjin, and two in Guangzhou). Wong said, "None of the
associations are extensive." Law Society Vice President
Junius Ho said his law firm received approval in February
2009 to establish an association with a Mainland firm in
Guangzhou, largely to source business from Mainland firms
needing advice about Hong Kong law.

4. (SBU) PRC law firms, on the other hand, may establish
wholly-owned subsidiaries in Hong Kong that are authorized to
practice Hong Kong law after three years of continuous
operations here. In July 2009, China's largest law firm
(King and Wood) became the first PRC law firm to become fully
qualified to practice local law in Hong Kong. The company
will retain its status as long as Hong Kong-registered
lawyers account for at least half of the local subsidiary's
total staff of lawyers. According to Ho, a second PRC law
firm (Jun He) will become certified to practice Hong Kong law
here by March 2010.

CEPA's Small Impact on Hong Kong Accountants
--------------------------------------------

5. (SBU) Institute of Certified Public Accountants (ICPA)
President Philip Tsai said CEPA has had "little impact" on
the small and medium-sized practices (SMPs) that comprise the
bulk of ICPA's membership. The "Big Four" global accounting
firms have longstanding joint ventures with PRC accounting
firms that handle the international auditing and tax
consulting work required by large PRC firms. The less
lucrative profit potential offered by the PRC's smaller firms

HONG KONG 00001898 002 OF 002


has not yet attracted many Hong Kong-based accounting SMPs to
the Mainland, according to Tsai. He said, "The local market
in Guangdong must have sufficient demand for Hong Kong-style
services, before our members will set up shop there."

6. (SBU) Tsai said other factors have dissuaded Hong Kong's
CPAs from expanding into the Mainland. Local accounting SMPs
remain barred from owning equity stakes in PRC accounting
firms, and the Chinese Institute of Certified Public
Accountants (CICPA) exam requires further "modernization" to
better assess examinees' accounting skills. In addition, the
CICPA exam was offered only in Mandarin prior to 2009. This
acted as a "major impediment" to Hong Kong's CPAs, according
to Tsai, as "most speak English better than Mandarin."

Hong Kong Doctors Slowly Test Guangzhou Waters
--------------------------------------------- -

7. (SBU) Using CEPA-related liberalization procedures, Hong
Kong medical doctor Henry Leung and five local partners
submitted an application to Guangzhou municipal authorities
in March 2009 to establish the first-ever outpatient clinic
in Guangdong to be wholly-owned by Hong Kong investors. The
300 square meter medical and dental clinic is to be staffed
"mostly by local Guangzhou doctors," according to Leung. If
the operation attains sufficient profitability, the investor
group plans to open a chain of similar clinics in Guangdong
and eventually complete an initial public offering of shares.
The application for the first clinic has not yet been
approved. Leung said, "I've been in touch regularly with the
Hong Kong government's Trade and Investment Department, and
they've been talking with the Guangzhou authorities about our
pending application. We're not sure what has caused the
delay, but we hope to be approved soon."

8. (SBU) While CEPA has enabled Hong Kong-certified doctors
to practice in Guangdong, Hong Kong Doctors Union President
Henry Yeung said few Hong Kong doctors have crossed the
border. "There's less money to be made there," he said.
Movement of medical doctors in the other direction - from the
PRC to Hong Kong - remains severely limited. While many PRC
doctors are enticed by the potential for higher earnings in
Hong Kong, the local medical licensing exam is conducted in
English. Yeung said this poses a significant barrier to PRC
doctors, as "only one or two percent of them have the
necessary English skills to pass Hong Kong's exam." Yeung
noted that Hong Kong has a "surplus" of doctors and implied
that competition from PRC doctors would not be warmly
welcomed here.

Further Implementation Measures Under Design
--------------------------------------------

9. (SBU) Polytechnic University Research Fellow and Bauhinia
Foundation Research Centre Advisor Zhu Wenhui referenced
Leung's situation in a recent PRD integration analysis he and
his Bauhinia colleagues will soon provide to the HKG and
Guangdong provincial governments. According to Zhu, the two
governments will complete by year-end a "framework for
economic integration and cross-boundary cooperation," in
support of China's 12th five year plan. He said the
framework will "include mechanisms that assign CEPA-related
responsibilities to local officials, including the
establishment of reasonable decision-making timeframes and
other specific guidelines." Zhu said Bauhinia will also
suggest that PRC, HKG and Guangdong officials establish a
permanent secretariat to work full-time on economic
integration issues. The entity would act as a focal point
for policy-making, as well as address specific
integration-related challenges and complaints. Zhu's
comments echoed those of Bauhinia Chairman Anthony Wu to Hong
Kong Econoff on September 9, with regard to the need for
enhanced CEPA-related cooperation by municipal officials in
Guangdong (reftel).

10. (U) Consulate General Guangzhou has cleared this joint
reporting cable.
Williams

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