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