Closer Economic Partnership Arrangement in relation to Banking – Denise Loo
The Closer Economic Partnership Arrangement (“CEPA”), which comes into effect on 1 January 2004, is expected to act as a springboard for Hong Kong banks seeking to enter the booming Chinese market. By granting preferential treatment even more favourable than under China’s World Trade Organization (“WTO”) accession protocol, CEPA gives Hong Kong banks early market access to China. It also encourages Mainland banks to relocate their international treasury and foreign exchange business to Hong Kong. In the meantime, the rest of the world will have to wait until early 2007 for China’s banking market to be fully liberalized.
This article generally addresses some of the advantages afforded Hong Kong banks under CEPA. If you are seeking more detailed information about accessing the benefits of CEPA, then you should consult a professional in Hong Kong.
What Do Banks Gain From CEPA?
Mid-tier Hong Kong banks are now increasingly looking to Mainland China for their future, and for good reasons. Flattening interest rate margins, a comparatively stagnant economy and low loan demand are forcing Hong Kong banks to search for business alternatives to the crowded local market, where the top five banks control 65% of the business.
Banks qualify for CEPA if they are incorporated as Hong Kong companies, authorized under the Banking Ordinance to engage in the business of banking, and have had substantive Hong Kong operations for at least five years.
What do banks gain from CEPA? Quite a lot, especially the mid-tier banks. First, to open a branch on the Mainland, the global asset threshold has been lowered for CEPA qualified banks from US$20 billion to US$6 billion. Moreover, Hong Kong banks qualifying under CEPA no longer have to first establish a representative office; however, expansion is still limited to one branch per year. For some of the bigger players this is irrelevant since they are focused on wholesale-institutional banking and have little need for a wide branch network.