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Cablegate: China-Hong Kong: Cepa Implementation in Guangdong Not

VZCZCXRO2613
RR RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM RUEHNH
DE RUEHGZ #0033/01 0200710
ZNR UUUUU ZZH
R 200710Z JAN 10
FM AMCONSUL GUANGZHOU
TO RUEHC/SECSTATE WASHDC 1305
INFO RUEHOO/CHINA POSTS COLLECTIVE 0439
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1062
RUEHCN/AMCONSUL CHENGDU 0365
RUEHHK/AMCONSUL HONG KONG 0428
RUEHGH/AMCONSUL SHANGHAI 0364
RUEHSH/AMCONSUL SHENYANG 0374
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASH DC
RUEHC/DEPT OF LABOR WASHDC
RUEAIIA/CIA WASHDC 0407
RUEKJCS/DIA WASHDC 0403

UNCLAS SECTION 01 OF 03 GUANGZHOU 000033

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: ETRD ECON EFIN EINV PGOV CH HK
SUBJECT: CHINA-HONG KONG: CEPA IMPLEMENTATION IN GUANGDONG NOT
ACCELERATING SERVICE SECTOR LIBERALIZATION

REF: A) 09 HONG KONG 1898; B) 09 HONG KONG 1847

GUANGZHOU 00000033 001.2 OF 003


(U) This document is sensitive but unclassified. Please protect
accordingly. Not for release outside U.S. government channels. Not
for internet publication.

1. (SBU) Summary and comment: Numerous barriers continue to hinder
service sector liberalization as envisioned by the Beijing-Hong Kong
Closer Economic Partnership Agreement's (CEPA) sixth supplemental
agreement that took effect on October 1, 2009, according to
Guangzhou-based contacts in meetings with Guangzhou and Hong Kong
econoffs. Obstacles range from industry-specific barriers related
to licensing and local protectionism to general structural
weaknesses in local business rules and ineffective enforcement of
CEPA 6 through weak local offices of China's Ministry of Commerce
(MOFCOM). At the same time, contacts said the influx of Hong Kong
banks into China surged in 2009 and could be expected to continue
expanding in 2010, but this change had little to do with
implementation of the latest CEPA agreement and was mostly based on
unilateral mainland easing of previous restrictions. In other
fields, like accounting, contacts went further and expressed
ambivalence about cross-border business opportunities. Contacts
said the local market is attractive enough that Guangzhou
accountants and many lawyers are uninterested in possible expansion
that would lead into Hong Kong's market. Without increased focus on
these obstacles at the local level, it appears that generous praise
for the concept of CEPA 6 advancing mainland-Hong Kong service
sector integration will continue to ring hollow in south China. End
summary and comment.

Local Barriers Continue
-----------------------

2. (SBU) Guangzhou-based Director Ronald Ho of the Hong Kong Trade
and Development Council (HKTDC) told Guangzhou and Hong Kong
econoffs in a December joint meeting that although the CEPA 6
services agreement between Hong Kong and Beijing is an important
step towards greater economic integration, significant barriers
remain before the service industry can operate on both sides of the
border in the spirit of the agreement. Ho said industry-specific
barriers remain in areas throughout Guangdong Province for many
service sectors, including medicine, law, and architecture, mostly
in the form of insurmountable obstacles for Hong Kong individuals
and firms to acquire local operating licenses (ref A).

3. (SBU) The license problem is a combination of local officials who
lack understanding of their responsibilities under the CEPA
agreements, coupled with resistance from local service sector
businesses which often feel threatened by the possible entrance of
new Hong Kong competitors to their markets; they resort to local
protectionism, according to Ho. In the case of education services,
resistance from local officials in many areas of Guangdong Province
is more direct, as they fear "brain drain" if Hong Kong Universities
are allowed to recruit mainland students without any sort of
administrative backstop. Ho further explained that two types of
obstacles had sprung up in the education sector, one direct and one
indirect: Hong Kong Universities and other institutes of higher
education are seldom allowed to participate in local education fairs
in Guangdong Province, and students are forced to take an
all-or-nothing approach because the testing deadlines for Hong Kong
and the mainland are out of sync. Thus, students are unable to
weigh their options and make a balanced choice after the testing
results become available.

Structural Weaknesses Also Inhibit CEPA
---------------------------------------

4. (SBU) HKTDC Director Ho pointed to general structural weaknesses
in the mainland administrative system that also hinder full
implementation of CEPA 6 commitments on service sector integration.
Outdated and counter-intuitive local bureaucratic processes in many
areas of Guangdong Province inhibit the ability of modern service
industries from taking root. One example Ho cited was a Hong
Kong-owned convenience store chain that would like to open 1,000 new
stores in and around Foshan City, but tax and jurisdictional rules
restrict individual stores from registering as branches of a single

GUANGZHOU 00000033 002.2 OF 003


business entity. Basic supply operations to efficiently balance
inventories among different stores would trigger taxable
transactions whenever unsold goods are moved between stores in
different parts of the city, cancelling out the effects of modern
inventory control and making the business too costly for a new
entrant to the market. Ho speculated that as China's responsible
agency for the CEPA agreement, local representatives of MOFCOM
should be able to help local officials revise regulations and better
comply with Beijing's CEPA obligations, but he said the agency's
local branches are relatively weak in comparison to other elements
of local government, meaning that resolution at the local level is
difficult, if not impossible.

Cross-Border Banking Expanded Regardless of CEPA
--------------------------------------------- ---

5. (SBU) Hong Kong is more excited about CEPA than people in
mainland China, according to Guangzhou Branch President Lin
Chunxiang of China Mercantile Bank, a wholly-owned subsidiary of the
Industrial and Commercial Bank of China (ICBC). Lin said China
Mercantile was established in Shenzhen in 1993, and operates with
both onshore and offshore banking licenses in China, specifically
catering to ICBC banking clients on both sides of the Hong
Kong-mainland border. Lin told econoffs that Hong Kong banks
expanded quickly into Guangdong Province in 2009 due to long-term
reforms in mainland banking regulations, a trend he expects to
continue in 2010, but that the rapid expansion does not threaten
ICBC's banking businesses on either side of the border because
loyalty of the bank's customers remains high and the Guangdong
market is growing rapidly enough for each bank to enjoy success.

Guangzhou Accountants: Do We Need CEPA?
---------------------------------------

6. (SBU) According to Secretary General Jiang Jianping of the
Guangzhou Institute of Certified Public Accountants (GICPA), the
"Big 4" international accounting firms have worked in the mainland
since the 1980's and setup their first official offices starting in
2000, long before the initial CEPA agreement between Beijing and
Hong Kong. Jiang told econoffs that the Big 4 accounting firms
enjoy a market share of almost 50% in Guangzhou, with small- and
medium-sized firms handling the remaining smaller and less
international clients.

7. (SBU) Jiang commented that with each of the Big 4 firms tightly
bound to a local partner and the Guangzhou accounting market already
very mature, new competition from Hong Kong-based firms appears
unlikely in the near or medium term. When asked about mainland
accounting firms entering the Hong Kong market, Jiang said that a
successful strategy would be to grow with its major customers and
establish branches overseas as customer requirements expand.
However, Jiang cited the example of a mainland accounting firm that
failed in its effort to penetrate the Hong Kong market and expressed
doubt the new CEPA agreement would lead accounting firms to take
this risk, especially when the local demand for accounting services
continued to expand.

Some Lawyers Break Mold and Cross the Border
--------------------------------------------

8. (SBU) Junius Ho of Hong Kong-based K.C. Ho & Fong Law Firm told
econoffs his representative office in Guangzhou was unique as a Hong
Kong firm that has setup an office in Guangdong Province. The
firm's one-year-old offices in downtown Guangzhou are co-located
with Right Word Law Firm (Guangdong), and licensed lawyers from both
jurisdictions work together to support clients in both Hong Kong and
Mainland China. Ho expressed optimism for his firm's
first-to-market strategy but was reluctant to offer estimates of how
long it would take for the rest of the legal market to follow his
firm's example. As Director Rex Chang of the Hong Kong Economic and
Trade Office in Guangdong separately told econoffs, early CEPA
agreements already liberalized trade in goods, and manufacturing is
never going to return to Hong Kong, making the service sector the
only remaining area for economic integration. Integration will face
challenges and take time, but this is the future and issues will be
resolved over time, he said.

GUANGZHOU 00000033 003.2 OF 003

9. (SBU) Consulate General Hong Kong has cleared this joint
reporting cable.

GOLDBECK

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