WORLD TRADE  
ORGANIZATION  WT/REG162/1/Add.2 
13 January 2006 
 
 (06-0160) 
Committee on Regional Trade Agreements Original:   English 
  
 
CLOSER ECONOMIC PARTNERSHIP ARRANGEMENT 
BETWEEN CHINA AND HONG KONG, CHINA 
 
Addendum
 
 
 
 The following communication, dated 11 January 2 006, is being circulated at the request of the 
Delegations of China and Hong Kong, China. 
 
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SUPPLEMENT II TO THE MAINLAND AND HONG KONG CLOSER ECONOMIC 
PARTNERSHIP ARRANGEMENT* 
   To further enhance the level of economic a nd trade exchanges and cooperation between the 
Mainland
1 and the Hong Kong Special Administrative Region (hereinafter referred to as 
“Hong Kong”), and pursuant to:  
− the Mainland and Hong Kong Closer Economic  Partnership Arrangement (hereinafter 
referred to as “CEPA”) signed on 29 June 2003 and its Annexes signed on 
29 September 2003; 
 
− the Supplement to the Mainland and H ong Kong Closer Economic Partnership 
Arrangement (hereinafter referred to as “S upplement to CEPA”) signed on 27 October 
2004; 
 the two sides agreed to sign this Supplement II on fu rther liberalization of trade in goods and trade in 
services in the Mainland for Hong Kong, and on  financial cooperation between both sides. 
  
I. TRADE IN GOODS 
1. From 1 January 2006, the Mainland shall fu lly implement zero tariff on imported goods of 
Hong Kong origin
2.  Imported goods subject to zero tariff must  fulfill the rules of origin confirmed 
after consultation by both sides. 
                                                      
* The Annexes to this Supplement II have been submitted to the Secretariat for consultation by 
interested Members (office 1174). They are also available at www.tid.gov.hk/english/cepa/legaltext/cepa3.html  
and  www.mofcom.gov.cn . 
1In “CEPA”, the “Mainland” refers to the entire customs territory of China. 
2Imported goods do not include those prohibited by the Mainland’s rules and regulations and those 
prohibited as a result of the implementation of international treaties by the Mainland, as well as products that the 
Mainland has made special commitments in relevant international agreements. WT/REG162/1/Add.2 
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  The rules of origin for goods of Hong Kong orig in for which consultati ons were completed by 
both sides in 2005 are listed in Annex 1 of this Su pplement II.  Annex 1 of this Supplement II is a 
supplement to Table 1 of Annex 2 of “CEPA” – “Sch edule on Rules of Origin of Hong Kong Goods 
Subject to Tariff Preference for Trade in Goods”.   
 Both sides agreed to amend the detailed implem entation procedures in Article 5 of Annex 1 of 
“CEPA” – “Arrangements for Implementation of Zero Tariff on Trade in Goods” as follows: 
  “(1) Submission  
1. From 1 January 2006, Hong Kong manufacturers may submit lists of goods 
subject to zero tariff to the Hong Kong Trade and Industry Department. 
 
2. The Hong Kong Trade and Industry Depa rtment shall, prior to 1 March and 
1 September each year respectively, submit the list of goods verified and certified in accordance with relevant rules of the Hong Kong Special 
Administrative Region Government to the Ministry of Commerce. 
  (2) Consultation and Promulgation    The Ministry of Commerce shall confir m and then pass the list of goods to the 
Customs General Administration.  The Customs General Administration and the 
Hong Kong Trade and Industry Department sh all enter into consultation on the rules 
of origin for the relevant goods.  The two sides shall complete the consultations on the 
rules of origin before 1 June and 1 December  each year respectively, add the rules of 
origin of the relevant goods to Table 1 of Annex 2 of  “CEPA”, and promulgate them. 
 
 (3) Implementation 
   The Mainland shall, no later than 1 July  of the same year and 1 January of the 
following year respectively, release the rele vant imports on zero tariff basis in line 
with  “CEPA” upon presentation of the certificates of origin issued by the Hong Kong issuing authorities.” 
 
2. Article 5 of Annex 2 of “CEPA” – “Rules of Origin for Trade in Goods” is amended as 
follows: 
 “5. On the criteria for ‘substantial transformati on’ set out in Article 2 (2) of this Annex, 
the two sides agree on the following: 
 
 (1) the criteria for determining ‘subs tantial transformation’ may include 
‘manufacturing or processing operations’, ‘change in tariff heading’, ‘value-added content’, ‘other criteria’ or ‘mixed criteria’; 
 
1. ‘manufacturing or processing opera tions’ refers to the principal 
manufacturing or processing operations carried out in the area of one 
side which confer essential characteristics to the goods derived after the operations; 
 
2. ‘change in tariff heading’ refers to the processing and manufacturing 
operations of non-originating materials carried out in the area of one 
side and resulting in a product of a different four-digit tariff heading under the ‘Product Description and Harmonized System Codes’.   WT/REG162/1/Add.2 
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  Moreover, no production, processi ng or manufacturing operations 
will be carried out in countries or te rritories other than that side which 
will result in a change in the four-digit tariff heading; 
  
3. ‘value-added content’ refers to the total value of raw materials, 
component parts, labour costs and product development costs 
exclusively incurred in one side being greater than or equal to 30% of the FOB value of the exporting goods, and that the final manufacturing or processing operations should be completed in the area of that side.  The formula for calculation is as follows: 
 
  value of raw materials + value of component parts +    labour costs + product development costs   ------------------------------------------------------ x 100% ≥ 30% 
  FOB value of the exporting goods 
 
(i) ‘product development’ refers to product development carried 
out in the area of one side for the purposes of producing or processing the exporting goods.  Development expenses incurred should be related to  the exporting goods.  These 
expenses include fees payable for the development of designs, 
patents, patented technologies, trademarks or copyrights (collectively ‘these rights’) carried out by the manufacturer himself, fees payable to a natural or legal person in the area of one side for undertaking development of these rights, and fees 
payable for purchasing these rights owned by a natural or legal 
person in the area of one side.  The fees payable should be clearly identifiable under generally accepted accounting principles and the requirements of ‘Agreement on Implementation of Article VII of the General Agreement on 
Tariffs and Trade 1994’; 
(ii) calculation of the above ‘value-added content’ will be 
consistent with generally accep ted accounting principles and 
the ‘Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994’; 
4. ‘other criteria’ refers to methods agreed by both sides in determining  
‘substantial transformation’, other than ‘manufacturing or processing 
operations’, ‘change in tariff head ing’ and ‘value-added content’ as 
set out above. 
 5. ‘mixed criteria’ refers to the use of two or more of the above criteria 
in determining origin. 
 
(2) other additional conditions.  If the ‘subs tantial transformation’ criteria set out 
in paragraph (1) above are not adequate for determining origin, additional conditions can be used (such as bran d requirement, etc) upon agreement by 
both sides.” 
 
 WT/REG162/1/Add.2 
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  II. TRADE IN SERVICES 
 
1. From 1 January 2006, the Mainland shall furt her relax the market access conditions in the 
areas of legal, accounting, audiovisual, constructio n, distribution, banking, tourism, transport and 
individually owned stores on the basis of the commitments on liberalization of trade in services under 
“CEPA” and “Supplement to CEPA”.  The specific contents are detailed in Annex 2 of this 
Supplement II. 
2. Annex 2 of this Supplement II is a supplement  and amendment to Table 1 of Annex 4 of 
“CEPA” – “The Mainland’s Specific Commitments on Liberalization of Trade in Services for Hong Kong” and Annex 3 of “Supplement to CEPA” – “S upplements and Amendments to the Mainland’s 
Specific Commitments on Liberalization of Trade in Services for Hong Kong”.  In the event of 
conflict with the provisions of the other two in struments, the provisions of Annex 2 of this 
Supplement II shall prevail.  
3. “Service suppliers” as referred to in Annex 2 of  this Supplement II shall meet the relevant 
requirements of Annex 5 of “CEPA” – “Definition of  “Service Supplier” and Related Requirements”. 
 
III. FINANCIAL COOPERATION 
 
1. The Mainland shall allow qualified Mainland secu rities companies which belong to the pilot 
innovation type to set up subsidiaries in Hong Kong  in accordance with the relevant requirements. 
2. The Mainland shall allow qualified Mainland futu res companies to operate futures business in 
Hong Kong, including the se tting up of subsidiaries. 
 
IV. ANNEXES 
 
 The Annexes to this Supplement II form an  integral part of this Supplement II. 
 
 
V. COMING INTO EFFECT 
 This Supplement II shall come into effect on th e day of signature by the representatives of the 
two sides.  
 Signed in duplicate in Hong Kong, this 18th day of October, 2005 in the Chinese language. 
    Vice Minister of Commerce Financial Secretary 
 
 People’s Republic of China Hong Kong Special  
Administrative Region of the People’s Republic of China  
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