Many Hurdles for Free Trade between Mainland and HK

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Last updated at: (Beijing Time) Tuesday, May 21, 2002

Many Hurdles for Free Trade between Mainland and HK

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The Chinese mainland and Hong Kong are expected to enjoy a honeymoon period as they are strengthening their trading relationship. But, before that, the two sides still see a long way ahead to sign the marriage contract of a free-trade area.

Analysts have warned it is too early to talk about a common currency between the two sides, with or without the added participation of Macao.

Zhang Yunling, director of the Institute of Asia-Pacific Studies under the Chinese Academy of Social Sciences, told Business Weekly: "The prospects of the mainland and Hong Kong forming a closer economic relationship are quite bright. But a comprehensive free-trade arrangement between them might still be challenged by lots of problems."

To cope with the challenges, Zhang suggested moving towards free trade gradually. It could begin with a smaller free-trade area between Guangdong Province and Hong Kong, and the categories could also be limited to certain industries to accumulate experience for a future wider free-trade arrangement.

It is reported that Anthony Leung, financial secretary of the Hong Kong Special Administrative Region (SAR) government, will soon arrive in Beijing to launch the third round of discussions with the central government's foreign-trade officials.

Hong Kong media quoted officials there as saying that the two sides might reach common ground on achieving the aim of a zero tariff rate between them.

The mainland and Hong Kong started talks on a free-trade area late last year but then changed the talks to a discussion on a closer economic partnership arrangement.

At last month's Boao Forum for Asia held in South China's Hainan Province, Leung told Business Weekly: "The closer economic partnership is a very complicated problem. We have to make it conform to the 'One China, Two Systems' principle as well as the rules of the WTO (World Trade Organization.)"

Products' place of origin

Moves toward free trade between Hong Kong and the mainland have also been impeded by problems such as the determination of products' place of production, an issue that has stalled the second round of talks.

Zhang said: "Hong Kong is a free-trade port with a zero tariff rate and, if a looser standard is set for place of production in the SAR, foreign commodities would rush en masse to the mainland through Hong Kong."

Insiders said that the mainland has proposed that, when more than 25 per cent of a product's elements are from Hong Kong, the product can be classified as being made in Hong Kong. Under the free-trade arrangement, such products can then enjoy the mainland's beneficial duty treatment. But much of the Hong Kong business community maintains that the standard is too high. According to Cheng Bifan, a senior researcher with the Hong Kong Policy Institute, Hong Kong businesses had hoped for a lower standard for place of origin to attract foreign manufacturers to establish their assembly factories on the island. These factories' products would then have been able to tap the massive mainland market.

The third round of talks will focus mainly on the problem of a product's place of origin, which experts believe can be solved through mutual compromise.

A common currency

As the free-trade process advances, it is predicted that a common currency can be implemented in Hong Kong, Macao and the mainland before 2010. Some mainland experts have claimed that, by that time, the renminbi might replace the Hong Kong dollar in the so-called greater China area, which also includes Taiwan Province.

San Feng, a financial analyst with China Economic Information Net, said he believed that a common currency could facilitate capital flow between these regions and further smooth mutual trade.

Cheng said that a common currency could help Hong Kong resist financial risks but he questioned the possibility of such a currency.

"The renminbi has a long road to travel before it can become fully convertible and replace the Hong Kong dollar," said Cheng.

He said he was also worried that, if the renminbi became freely convertible too quickly, this could worsen the current capital outflow, already a serious challenge to the mainland economy.

But Xie Duo - a senior currency policy analyst of the People's Bank of China, the central bank - said the trend for currencies within China was to evolve into a single currency, though he said it was not necessary to work out a timetable.

"The proposal for a single currency between the mainland and Hong Kong is indicative of the fact that the two sides can strengthen their co-operation in currencies and capital, but the real adoption of a common currency is possible only after the mainland capital market becomes mature enough," Xie told Business Weekly.

He said that the two sides' currency authorities have not yet considered combining their currencies.

Other obstacles

Besides the problems of products' place of origin and a common currency, other obstacles troubling the free flow of services between Hong Kong and the mainland are also impeding a wide free-trade arrangement. Even after the year 2006, when the protection period for China's financial and telecommunications sector ends according to the country's promises to the WTO, limitations will remain on foreign operations on the mainland. If the mainland opens its doors more widely to Hong Kong's service sector, Hong Kong can become a base from which foreign banks and telecoms firms can infiltrate the mainland market.

A Hong Kong business analyst, speaking to Business Weekly on condition of anonymity, said: "The fact is that a comprehensive free-trade area between Hong Kong and the mainland is hard to achieve. In the circumstances, we had better avoid such a formal designation and instead seek to solve the particular questions dampening our trade."

Source: Business Weekly

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