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