HONG KONG: Financial institutions (FIs), including banks and the local bourse operator, will receive limited benefits under the latest proposals to the Closer Economic Partnership Arrangement (CEPA) between Hong Kong and the mainland, analysts said.

Under the proposed new measures, which will be implemented under the free-trade CEPA, Hong Kong banks will be permitted to expand more easily in Guangdong province.

Local securities or brokerage houses will also be permitted to set up joint-venture firms on the mainland to provide investment advice there.

Another proposal, included in the sixth and latest supplement to the CEPA calls on mainland market regulators to "actively" explore ways to introduce index-tracking exchange-traded funds (ETFs) backed by portfolios of Hong Kong-listed stocks.

"Hong Kong banks will benefit from eased requirements for opening sub-branches," said Thomas Ng, investment strategist at Quam Securities Co Ltd.

"The measure will help reduce the cost for opening sub-branches there. However, it won't contribute much to banks' earnings in the short term," he said.

"The new regulation will apply to the Guangdong province only," he explained, adding that big banks that have strong financial resources should have already had enough operating outlets there while smaller banks may not be in a position to open more outlets.

Under the supplementary agreement signed over the weekend, which will take effect on Oct 1, Hong Kong banks can set up sub-branches in cities within the Guangdong province even if they did not have prior presence in those cities. They will be allowed to open sub-branches as long as they have been operating a branch within the province before the new regulation comes into effect.

Under current regulations, Hong Kong banks need to open a branch in a particular city before it can set up a sub-branch in that city.

"The new measure will provide a bigger operating platform for Hong Kong banks," said Pu Yonghao, head of Asia Research at UBS AG.

However, whether they will benefit significantly from the measure will depend on their market strategy and scales of operations, he said.

Guangdong, with over 60,000 small and medium-size enterprises, is the leading manufacturing hub on the mainland.

Kenny Tang, head of research at Redford Securities, expects Hong Kong banks to benefit from the new measure but does not see immediate contribution to earnings.

The Hong Kong Association of Banks (HKAB) welcomes the new measure, saying that it will accelerate the integration of Hong Kong's financial sector with that in Guangdong province.

(HK Edition 05/12/2009 page4)