Document Sample
 WORLD TRADE                                                               WT/TPR/S/199
                                                                           16 April 2008

 Trade Policy Review Body

                        TRADE POLICY REVIEW

                           Report by the Secretariat


         This report, prepared for the second Trade Policy Review of China, has been
         drawn up by the WTO Secretariat on its own responsibility. The Secretariat has,
         as required by the Agreement establishing the Trade Policy Review Mechanism
         (Annex 3 of the Marrakesh Agreement Establishing the World Trade
         Organization), sought clarification from China on its trade policies and practices.

         Any technical questions arising from this report may be addressed to
         Mr. Masahiro Hayafuji (Tel.: 022 739 5873).

         Document WT/TPR/G/199 contains the policy statement submitted by China.


Note:   This report is subject to restricted circulation and press embargo until the end of the first
        session of the meeting of the Trade Policy Review Body on China.
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SUMMARY OBSERVATIONS                                                                                 ix
        (1)   ECONOMIC ENVIRONMENT                                                                   ix
        (2)   TRADE AND INVESTMENT POLICY FRAMEWORK                                                  x
        (3)   TRADE POLICIES AND PRACTICES BY MEASURE                                                x
        (4)   TRADE POLICIES BY SECTOR                                                              xii
        (5)   OUTLOOK                                                                               xiv

I.      ECONOMIC ENVIRONMENT                                                                         1
        (1)   INTRODUCTION                                                                           1
        (2)   RECENT ECONOMIC DEVELOPMENTS                                                           4
        (3)   MACROECONOMIC POLICIES                                                                 9
              (i)   Monetary policy                                                                  9
              (ii)  Fiscal policy                                                                   11
        (4)   MAIN STRUCTURAL REFORM ISSUES                                                         13
              (i)    Environmental policies                                                         13
              (ii)   Tax reforms                                                                    13
              (iii)  Financial sector reform                                                        14
              (iv)   Labour market                                                                  16
        (5)   DEVELOPMENTS IN TRADE                                                                 17
              (i)    Composition of merchandise trade                                               17
              (ii)   Direction of merchandise trade                                                 19
              (iii)  Composition of trade in services                                               19
              (iv)   Foreign investment                                                             19
        (6)   OUTLOOK                                                                               22

II.     TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES                                               24
        (1)   INTRODUCTION                                                                          24
        (2)   INSTITUTIONAL AND LEGAL FRAMEWORK                                                     24
              (i)     Institutional structure                                                       25
              (ii)    Legal structure and the legislative process                                   27
              (iii)   Transparency                                                                  29
              (iv)    Centre–subnational relations and local barriers to internal trade             31
              (i)   Main trade laws                                                                 31
              (ii)  Agencies involved in trade policy implementation                                32
        (4)   TRADE POLICY OBJECTIVES                                                               32
        (5)   TRADE AGREEMENTS AND ARRANGEMENTS                                                     33
              (i)    WTO                                                                            33
              (ii)   Regional agreements                                                            33
              (iii)  Bilateral agreements                                                           35
              (iv)   Unilateral preferences                                                         38
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       (6)     FOREIGN INVESTMENT REGIME                                                          38
               (i)    Recent developments in FDI policy                                           38
               (ii)   Legislative framework and procedures                                        39
               (iii)  Examination and approval procedure                                          40
               (iv)   FDI incentives                                                              41
               (v)    Bilateral investment and tax agreements                                     42

III.   TRADE POLICIES AND PRACTICES BY MEASURE                                                    43
       (1)     INTRODUCTION                                                                       43
       (2)     MEASURES DIRECTLY AFFECTING IMPORTS                                                44
               (i)    Procedures                                                                  44
               (ii)   Customs valuation and rules of origin                                       46
               (iii)  Tariffs                                                                     47
               (iv)   Indirect taxes affecting imports                                            56
               (v)    Import prohibitions, restrictions, and licensing                            57
               (vi)   State trading                                                               59
               (vii)  Contingency measures                                                        60
               (viii) Standards and other technical requirements                                  63
               (ix)   Government procurement                                                      70
               (x)    Import-related financing                                                    73
       (3)     MEASURES DIRECTLY AFFECTING EXPORTS                                                73
               (i)    Procedures                                                                  73
               (ii)   Export taxes                                                                74
               (iii)  Tax rebates on exports                                                      74
               (iv)   Tax concessions under processing trade                                      75
               (v)    Export prohibitions, restrictions and licensing                             76
               (vi)   Measures maintained by importing countries                                  79
               (vii)  State trading                                                               79
               (viii) Export promotion and marketing assistance                                   79
       (4)     MEASURES AFFECTING PRODUCTION AND TRADE                                            81
               (i)   Taxation and tax incentives                                                  81
               (ii)  Direct transfers and non-tax subsidies                                       88
               (iii) Other industrial policies and measures                                       89
               (iv)  State-owned enterprises, privatization, and corporate governance             92
               (v)   Competition and consumer protection policy                                  100
               (vi)  Intellectual property rights                                                103

IV.    TRADE POLICIES BY SECTOR                                                                  109
       (1)     INTRODUCTION                                                                      109
       (2)     AGRICULTURE                                                                       111
               (i)    Features and market developments                                           111
               (ii)   Policy objective and administration                                        112
               (iii)  Policy instruments                                                         114
       (3)     ENERGY                                                                            118
               (i)    Introduction                                                               118
               (ii)   Key sub-sectors                                                            119
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        (4)   MANUFACTURING                                                                 128
              (i)   Iron and steel                                                          128
              (ii)  Textiles and clothing                                                   130
              (iii) Automotive sector                                                       132
              (iv)  Electronics and information industry                                    134
        (5)   SERVICES                                                                      135
              (i)    Overview                                                               135
              (ii)   Commitments under the General Agreement on Trade in Services           137
              (iii)  Financial Services                                                     137
              (iv)   Telecommunications                                                     163
              (v)    Transport services                                                     168
              (vi)   Distribution services                                                  175
              (vii)  Postal services                                                        179
              (viii) Legal services                                                         182
              (ix)   Accountancy services                                                   185
              (x)    Tourism                                                                187

REFERENCES                                                                                  189

APPENDIX TABLES                                                                             195
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I.1      Product composition of merchandise trade, 2004 and 2007                                         18
I.2      Direction of merchandise trade, 2004 and 2007                                                   20
I.3      Trade in services, 2004 and 2006                                                                21


III.1    Average applied MFN tariff rates 2005 and 2007 and final bound tariff,
         by HS section                                                                                   50
III.2    Distribution of MFN tariff rates, 2005 and 2007                                                 51
III.3    Tariff escalation by 2-digit ISIC industry, 2007                                                52
III.4    Anti-dumping cases, 1 January 2005 to 30 June 2007                                              62


IV.1     Composition of GDP, 2006                                                                       136



I.1      Basic economic and social indicators, 2004-07                                                    2
I.2      Selected macroeconomic indicators, 2004-07                                                       5
I.3      Balance of payments, 2004-07 (January-June)                                                      8


III.1    China's preferential rules of origin, 2007                                                      47
III.2    Structure of the MFN tariff                                                                     49
III.3    Summary analysis of China's preferential tariff, 2007                                           54
III.4    China's standards, 2002-06                                                                      64
III.5    Government procurement of goods, construction projects, and services, 2004-06                   70
III.6    Government procurement by procurement entities, 2004-06                                         71
III.7    Government procurement by procurement method, 2004-06                                           72
III.8    Tax revenue, 2004-06                                                                            82
III.9    Excise (or consumption) tax, 2007                                                               83
III.10   VAT, 2007                                                                                       85
III.11   Selected government transfers, 2004-06                                                          88
III.12   Tradeable and non-tradeable shares of companies listed in China, 2004-06                        95
III.13   Number of enterprises, 2004-06                                                                  96
III.14   Enforcement of intellectual property rights, 2004-06                                           107


IV.1     Textiles and clothing industry, 2005-06                                                        130
IV.2     Automotive industry, 2004-06                                                                   132
IV.3     Total assets of the financial system, 2003-06                                                  138
IV.4     Financing by the domestic non-financial secor, 2005-06                                         139
IV.5     Total assets of banking institutions, 2003-06                                                  140
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IV.6     Insurance premiums, 2001-06                                                                   152
IV.7     Overview of the stock market, 2000-06                                                         157
IV.8     Telecommunications statistics, 2001-06                                                        163
IV.9     Basic telecommunications service providers, 2005                                              164
IV.10    Law firms and representative offices, 2002-07                                                 183
IV.11    China's international tourism receipts and expenditures                                       187

                                            APPENDIX TABLES


AI.1     Merchandise exports by group of products, 2004-07                                             197
AI.2     Merchandise imports by group of products, 2004-07                                             198
AI.3     Merchandise exports by destination, 2004-07                                                   199
AI.4     Merchandise imports by origin, 2004-07                                                        200


AII.1    China's major trade-related laws and regulations, April 2008                                  201
AII.2    Principal notifications under WTO Agreements, as at 12 February 2008                          206
AII.3    Involvement in the WTO dispute settlement mechanism, March 2008                               209


AIII.1   Inward duty, 2007                                                                             211
AIII.2   Imports allocated to state-trading enterprises, 2005-07                                       212
AIII.3   Export quotas allocated to state-trading enterprises, 2005-06                                 213
AIII.4   Tax revenues allocated to different levels of government: central, local, and
         shared taxes, 2007                                                                            215
AIII.5   Special economic and other zones, 2006                                                        216
AIII.6   Selected competition-related legislation, 2007                                                217
AIII.7   China's membership of international intellectual property rights conventions, 2007            218
AIII.8   Patent and trade mark statistics, 2004-06                                                     219
AIII.9   Intellectual property rights cases dealt with by courts, 2006                                 220


AIV.1    Tariff quota utilization in China, 2004-06                                                    221
AIV.2    China's sector specific commitments in the GATS                                               223
AIV.3    Banking institutions in China                                                                 229
AIV.4    Registration requirements and application procedures in maritime transport service, 2008      230
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SUMMARY OBSERVATIONS                              of foreign direct investment (FDI) (together
                                                  with associated transfers of technology and
(1)     ECONOMIC ENVIRONMENT                      know-how), most of which is channelled into
1.       Continued trade liberalization has
remained an integral part of the China's long-    4.       Since China's previous Trade Policy
standing structural reform strategy, which is     Review, its monetary policy has largely been
aimed at establishing an outward-oriented         driven by the need to mop up excess liquidity,
"socialist market economy" that can deliver       reduce credit growth and investment, and
sustained economic growth and facilitate          consequently cool economic growth.          In
poverty reduction. The ongoing structural         addition to “sterilization” of capital inflows
reforms coupled with unabated export growth       and moral suasion ("window guidance"),
has resulted in real GDP growth rates in          monetary policy instruments used by the
excess of 10% since China's previous Trade        Peoples Bank of China (PBC) during the
Policy Review in 2006. As a result, it ranks as   period under review include increases in
world's third largest economy and the third       interest rates together with higher reserve
largest trader. GDP per capita rose from          ratios for banks. More specifically, the PBC
US$1,490 in 2004 to US$2,017 in 2006. The         has raised the benchmark one-year lending
number of people living on less than US$1 has     rate seven times (from 5.85% in April 2006 to
decreased to about 10% of the population.         7.47% in December 2007) and the required
The rapid rise in GDP per capita and decline in   reserve ratio 11 times (since January 2007).
people living in poverty demonstrate clearly      However, the PBC’s ability to use interest
the value of integrating more liberal trade and   rates as an effective instrument of monetary
foreign investment policies into broader          policy is relatively limited owing to China's
macroeconomic and structural reforms in order     exchange rate regime (which is now classified
to promote economic development.                  by the IMF as a "crawling peg").

2.       In 2007, real GDP growth in China        5.       With revenue increasing faster than
was 11.4%. The urban unemployment rate fell       expenditure since its previous Review, China's
to 4.0% in 2007. Nonetheless, inflation           fiscal position has strengthened. The fiscal
measured by consumer price index has              deficit fell from 1.3% of GDP in 2004 to 0.6%
recently been rising, reaching an eleven-year     in 2007. The sustained decrease in the fiscal
high of 7.1% in January 2008, largely due to      deficit has led to a decline in the level of
increasing food prices. The consumer price        public debt from 17.5% in 2005 to 16.3% of
index does not capture the full extent of         GDP in 2006.
inflation, however, as some of the prices
included in the index are controlled by the       6.       Notwithstanding China's rapid growth,
Government. Gross domestic investment and         its economy is characterized by a number of
gross national saving amounted to 44.9% and       imbalances.     In particular, there is the
54.4% of GDP, respectively, in 2006. The          imbalance in the sources of growth in the
widening gap between China's saving and           economy, which has been driven much more
investment is reflected in its growing current    by exports and investment than by
account surplus, which increased from 7.1% of     consumption, as reflected in China's growing
GDP in 2005 to 11.0% in 2007.                     current account surplus.      Moreover, the
                                                  efficient allocation of the vast amount of
3.       Since its previous Review, China's       investment within the economy has been
trade and investment reforms have increased       hampered by, inter alia, an underdeveloped
China's integration into the world economy.       capital market and by incentives and other
Its total trade in goods alone accounted for      forms     of      assistance  accorded      to
about 65% of GDP and 13% of global trade in       manufacturing. At the same time, the pace of
2006. China continues to be a major recipient     China's growth has exacerbated environmental
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problems, and income inequality has widened,      force on 1 July 2007. Four further agreements
especially between urban and rural residents.     are being negotiated.
In order to redress some of these imbalances,
the Government has taken a number of policy       10.      Although some aspects of China's
initiatives, which, in some instances, involve    trade policy regime remain opaque, it has
trade policy measures (such as taxes and          continued to adopt measures to increase the
reduced VAT rebates in respect of exports).       level of transparency of its trade and trade-
These measures tend to discourage exports and     related policies, practices, and measures.
increase the domestic supply of products          Since its previous Review, additional
concerned, and thus result in lower domestic      measures, such as the Regulation on Open
prices of these products than otherwise; this     Government      Information,    have     been
possibly assists downstream processing of         introduced with a view to enhancing
these products, without necessarily helping to    transparency. On 13 September 2007, the
improve the environment or reduce the current     National Corruption Prevention Bureau was
account balance.          Consequently, the       established. Since its previous Trade Policy
effectiveness of such trade policy measures in    Review, several new trade-related laws,
addressing the current account surplus and        including the Property Law, the Enterprise
environmental problems is questionable.           Income Tax Law, the Anti-Monopoly Law and
                                                  the Law on Enterprise Bankruptcy, have been
(2)     TRADE AND INVESTMENT POLICY               adopted.
                                                  11.     China has recently been moving
7.       The overall aim of China's trade         towards achieving a level playing field for
policy, which has remained unchanged since        foreign and domestic investors in China. Until
its previous Trade Policy Review, is to           the end of 2007, China had provided better
accelerate the opening of its economy to the      than national treatment in its taxation policies
outside world to introduce foreign technology     for foreign-invested enterprises (FIEs); since
and know-how, develop foreign trade, and          1 January 2008, a uniform enterprise income
promote "sound economic development".             tax rate of 25% has been applied to all
China aims to further strengthen the              enterprises (including FIEs) in accordance
multilateral trading system; at the same time,    with the Enterprise Income Tax Law, with
it has been intensifying its pursuit of           some exceptions such as lower rates granted
bilateral/regional free-trade agreements with     for investment in certain industries. It would
some of its trading partners.                     appear that all tax incentives now apply
                                                  equally to domestic firms and FIEs. Several
8.       China has continued to attach high       regulations and rules have been introduced or
priority to the multilateral trading system and   amended with a view to further liberalizing
has been participating in the Doha                foreign direct investment and establishing a
Development Agenda negotiations. China            more rules-based and predictable business
grants at least MFN treatment to all WTO          environment for foreign investors.
Members except El Salvador and some
territories of EC member states. China has        (3)     TRADE POLICIES AND PRACTICES BY
been a party to one dispute as a complainant              MEASURE
and nine disputes as a respondent since 2006.
                                                  12.      Since its previous Trade Policy
9.       During the period under Review, two      Review in 2006, China has, by and large,
free-trade agreements entered into force (the     continued to liberalize gradually its trade and
China – Chile FTA on 1 October 2006 and the       related policies. Nonetheless, trade and trade-
China – Pakistan FTA on 1 July 2007). The         related measures, both at the border and
Agreement on Trade in Services of the China-      internally, are still used as instruments of
ASEAN Free Trade Area also entered into           industrial policy.
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13.      The tariff remains one of China’s         16.      China's already complex export
main trade policy instruments. The overall         regime has become considerably more
average applied MFN tariff was 9.7% in 2007        restrictive. A variety of measures, including
(the same as in 2005). The average applied         export taxes, reduced rebates of VAT on
MFN tariffs for agricultural and non-              exports, and export prohibitions, licensing and
agricultural products were 15.3% and 8.8%,         quotas, are used to restrain, if not prohibit,
respectively (also the same as in 2005).           exports of a considerable and growing number
Preferential tariff rates are applied under        of products. Although some of these export
bilateral free-trade agreements to which China     restraints are implemented to meet China's
is a party; the tariff averages range from 3.5%    international obligations, many are intended
to 9.1%. In 2007, China unilaterally applied       to, inter alia, reduce exports of products using
preferential tariffs to 37 LDCs; the tariff        large amounts of natural resources and energy,
averages ranged from 9.0% to 9.5%,                 or to reduce China's large trade surplus in an
depending on the origin of goods. Tariff rate      attempt to reduce trade friction. For instance,
quotas on soybean oil, palm oil, and some          the number of tariff lines subject to interim
rapeseed oil were eliminated in 2006. Tariff       export duties was almost doubled in the last
revenue accounts for a minor source of total       two years, VAT rebate rates on exports of
tax revenue (3.3% in 2006).                        some 2,800 lines (HS 8-digit) were eliminated
                                                   or lowered in July 2007, and the number of
14.      Whereas the average applied MFN           lines subject to export quotas and licensing
tariff has remained largely unchanged, non-        requirements has increased.
tariff barriers have been reduced; for example,
the number of lines subject to automatic           17.      China has continued to use policy
import licensing has declined.          China’s    tools to channel resources into certain
institutional and procedural framework on          activities, with a view, inter alia, to promoting
contingency measures has remained largely          investment in high technology, encouraging
unchanged. Between 1 January 2005 and 30           innovation, and protecting the environment
June 2007, China initiated 39 anti-dumping         (by,     for    example,     reducing      energy
investigations. China has not taken any            consumption).       These tools include tax
countervailing      measures    or    safeguard    incentives, non-tax subsidies, price controls,
measures since its previous Review.                and various forms of "guidance" including
                                                   sector-specific "industrial policies". In April
15.      China has adopted measures to             2006, China notified the Central Government's
increase the alignment of its national standards   subsidies programmes to the WTO; these
with international norms. It has notified the      included income tax reductions and
WTO of a number of sanitary and                    exemptions granted to enterprises located in
phytosanitary (SPS) measures and technical         selected areas, engaging in certain activities,
barriers to trade. With a large number of laws     or involving foreign ownership (foreign-
governing SPS measures, the SPS regime             invested enterprises (FIEs)).
remains complex.        Under the Law on
Government Procurement, goods may be               18.     Reform of the public sector, including
purchased from foreigners only under               state-owned enterprise (SOEs), remains a
exceptional circumstances;         although, in    major challenge. Recent progress in the
practice, procurement from foreign suppliers       reform of SOEs by, inter alia, their
appears to occur routinely for some products.      reorganization,       corporatization      and
The law does not cover purchasing by state-        privatization, has improved their performance;
owned enterprises. China is an observer to the     by reducing state involvement or freeing-up
WTO Agreement on Government Procurement            resources once owned by the State, the reform
(GPA), and submitted its application for           has also helped the development of the private
accession to the GPA in December 2007.             (non-public) sector.      Nonetheless, SOEs
                                                   continue to play a dominant role in the
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economy (accounting for some 35% of GDP)            labour-intensive than manufacturing.        If
and enjoy monopoly positions in certain             sufficiently competitive, services have the
sectors.    By contrast, the private sector         potential in the long run to generate new jobs
continues to face constraints, including in         for surplus labour currently located in rural
access to finance. A main challenge to SOEs         areas.      Progress has been especially
is to raise their productivity through further      noteworthy in the financial services sector
reforms; private firms operating in China           (including banking), whose development is
(especially FIEs) are, by and large, more           essential for the establishment of a smooth-
productive than SOEs.                               functioning capital market, which can
                                                    contribute to a more efficient allocation of
19.      Corporate governance has been              investment across all sectors of the economy
improved not only because of the development        and thereby to improved productivity and
of the private sector and the corporatization of    growth.
SOEs, but also because of the entry into force
of the Law on Enterprise Bankruptcy, which          22.      One of the main changes concerning
applies to all enterprises (including SOEs) in      agriculture has been the shift from taxing the
China.      In addition, China's accounting         sector to supporting it. Most agricultural taxes
standards have been revised to further align        were eliminated in 2006, and farmers have
them with international practices. At the same      been provided with financial support (since
time, to promote competition in the economy,        2004). Nonetheless, agriculture's contribution
the Anti-Monopoly Law was promulgated and           to GDP has continued to decline (from 13.4%
is to enter into force on 1 August 2008. All        in 2004 to 11.8% in 2006). With agriculture
sectors of the economy, apart from certain          accounting for some 40% of total employment
activities related to agriculture, are covered by   in 2006, labour productivity is barely one-fifth
this law. However, the implementing details         of the level in the rest of the economy, and
of the Law have not yet been formulated.            there is still a considerable surplus of labour in
                                                    the sector. As a result, average rural incomes
20.      One of the major targets of the            have fallen further behind the urban average,
Eleventh Five-Year Plan is to ensure adequate       thus widening the gap between rural and urban
returns to investment in innovation by              living standards. The authorities are well
protecting intellectual property rights. Thus,      aware of the need to further develop rural
China is revising several pieces of legislation,    areas, raise productivity in the sector, and
including the Patent Law and the Trademark          improve farmers' welfare.           Against this
Law, to achieve an appropriate balance              background, the rural reform process has
between the protection of intellectual property     continued as stipulated in the Eleventh Five-
rights (IPR) and the promotion of competition.      Year-Plan         (2006-10)      through      the
The enforcement of IPR protection has been          implementation of a series of measures to
strengthened, although questions remain about       increase productivity including improved
the sufficiency of fines and criminal penalties     infrastructure, production technologies, and
to deter IPR violations.                            training (for farmers).         The plan also
                                                    encourages the movement of rural labour, and
(4)     TRADE POLICIES BY SECTOR                    reiterates the Government's intention to
                                                    continue increasing the support granted to
21.     China's ongoing reform of its trade         agriculture through direct transfers and
and investment regime remains an integral part      subsidies.
of its structural reform strategy. Having
concentrated much of its past efforts on            23.      Agricultural policy has traditionally
manufacturing, which tends to be capital-           been aimed at ensuring an adequate supply of
intensive, the Government's attention is now        food at stable prices. To meet this goal,
turning to services (and, to a lesser extent,       procurement, distribution and marketing
agriculture), which tend to be much more            restrictions are used in addition to measures
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such as price controls and import and export         energy-rich countries, and more recently
restrictions. China's average applied MFN            through the establishment of strategic oil
tariff on agricultural products (WTO                 reserves to stabilize domestic supply and
definition) remained unchanged at 15.3%              prices. China's markets for energy products
during the period 2005 – 2007. Although              are at different stages of reform. While the
tariff rate quotas (TRQs) on some edible oils        Government has, in general, adopted a more
were eliminated, those for some cereals, sugar,      liberal approach to economic policy, it regards
mineral and chemical fertilizers, and wool and       energy as a strategic commodity and has
cotton have been maintained. China continues         therefore adopted a gradual approach to
to use state trading to manage trade of some         reforming the sector. As a result, consumers
products.       Despite liberalization, direct       remain insulated from the global markets,
management remains an important instrument           while trade restrictions and regulatory barriers
of Chinese policy making. In particular, the         protect domestic producers from international
domestic prices of some products are subject         competition. However, it remains to be seen
to controls, principally to maintain the stability   whether such a gradual approach to reform
of supply and prices. Furthermore, to achieve        will be sufficient to address the challenges the
a high degree of grain self-sufficiency, and         sector faces, especially the compatibility of
thus food security, procurement of grain is, to      China's large and rapidly growing energy
some extent, controlled by the Government.           needs with protection of the environment.

24.      Since the previous Review, there have       25.      Reflecting   greater     liberalization
been no major changes in policies concerning         compared to other sectors of the economy,
China's energy sector, which continues to be         manufacturing, particularly by FIEs, and
characterized by a high level of state               resulting exports, has been the main driving
ownership, regulation and limited competition.       force behind China’s industrialization and
China is the second largest energy user in the       rapid economic growth in recent years.
world. Moreover, it emits the second largest         Manufacturing accounted for 92.4% of China's
amount of greenhouse gases, mostly due to the        merchandise exports in 2006; it is also the
use of coal, which continues to account for          source of much of China's processing trade,
some 70% of China’s energy production, and           which is dominated by FIEs. By developing-
to the increasing number of cars on the roads.       country standards, tariffs on manufactured
China’s rapid growth and the economy's high          goods are low, with a simple average applied
energy intensity is also putting considerable        MFN tariff of 9.7% in 2007 (9.8% in 2005).
upward pressure on world demand for energy,          Nonetheless, the allocation of the vast amount
particularly on oil, and thus energy prices.         of domestic investment has been distorted by,
While China's high energy intensity may be           inter alia, incentives and other forms of
partly explained by the share of industry            assistance accorded largely to manufacturing
(which tends to be relatively energy intensive)      (rather than services or agriculture), where
in GDP, it is also undoubtedly due to the            foreign-invested enterprises (FIEs) have
existing insufficiently market-oriented price        hitherto been favoured over domestic private
mechanism for oil, coal, electricity and natural     firms. A range of other measures also remain
gas, which sets artificially low prices and, as a    in place with a view to controlling domestic
consequence, leads to a waste of energy, to the      supplies for key industries and to assisting or
detriment of the environment. Hence, one of          managing their growth, although sectors
the key compulsory targets in the Eleventh           subject to government intervention (e.g. the
Five-Year Plan is a 20% reduction in energy          automobile industry) have been found less
intensity by 2010. China's energy policy is          efficient than those facing less government
also aimed at self sufficiency by                    intervention (e.g. computer manufacturing).
supplementing domestic supplies of primary           For example, VAT rebate rates were adjusted
energy through imports and by encouraging            during the period under review to, inter alia,
state-owned enterprises (SOEs) to invest in          reduce exports of certain products; as a
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Page xiv

consequence, the domestic prices of these            reforms. For example, institutional investors
products tend to be lower than would                 have been allowed to play an increasing role,
otherwise be the case, thereby possibly              by raising       the quota allocations in the
assisting their downstream processing. At the        qualified foreign institutional investor (QFII)
same time, rebate rates on some other products       programme, encouraging the development of
were increased.       Furthermore, the State         investment funds, and the participation of
"guides" investment into or out of certain           insurance companies and social security funds.
sectors or activities.      For example, the         Foreign investment is limited to 33% in joint-
Government             employs         various       venture (JV) securities companies and to 49%
measures/practices (including "guidance" to          in JV fund management companies.
banks as regards financing) to discourage            Restrictions on foreign participation also
investment in the sectors that are contrary to       remain in the insurance sector, where foreign
state policy, including "unchecked investment"       companies are not allowed to own more than a
in industries "with high energy consumption          50% equity interest (directly or indirectly) in a
and pollution", such as the coke, calcium            Chinese-foreign JV company undertaking life
carbide and iron alloy industries, or where          insurance. Other regulatory requirements add
production capacity is considered to be              to the difficulty in expanding foreign presence,
excessive.                                           such as geographical restrictions to carry on
26.      While the Government's intention is to
open the services sector further to private and      28.      Since 2006, China has issued various
foreign participation as a means of boosting         regulations       and      rules    concerning
growth and providing alternative employment          telecommunications, including: those aimed
to agriculture, the pace of liberalization has       at clarifying licensing requirement for foreign
been slower than that for manufacturing. As a        investment in value-added telecommunication
result, most services sectors are still subject to   business, and stipulation that e-mail service
a high degree of state control and, therefore,       providers must obtain approval or register
lack of competition.                                 before actually providing the service. Prices
                                                     have been liberalized considerably, except for
27.      China's capital market remains heavily      a few items, such as monthly rental charges
dependent on the banking system, which is            and local call charges, and foreign
still under-developed and relatively inefficient.    participation limitations exist.
Lack of access to external financing through
the capital market has resulted in domestic          29.       Limitations to foreign participation
private enterprises relying heavily on retained      still exist for maritime and air transport, legal
earnings (or funds raised from family and            and accounting, tourism, and postal services.
friends). Against this background, banking           As an important step in the reform of the
reform has continued, including the                  latter, the China Post Group Corporation was
introduction in December 2006 of a new               formally established on 29 January 2007,
regulation allowing foreign-funded banks             marking the formal separation of business
(FFBs) to offer RMB business to Chinese              activities from the administrative functions of
nationals, with no geographical restrictions.        the State Postal Bureau.
However, stringent qualification requirements
still apply to FFBs; these include high              (5)     OUTLOOK
minimum asset requirements on the sole or
controlling shareholder, high minimum paid-in        30.      With continuing strong growth in the
capital amounts, restrictions on the supply of       latter half of 2007, China's annual growth rate
credit-card services, and restrictions on the        was estimated at 11.4%, which was higher
business scope of foreign banks branches. The        than the average rate achieved during 2003-06.
stock market has developed quickly during the        Consequently, the Government's target of
period under Review, prompted by several             doubling GDP per capita in 2010 relative to
China                                                                              WT/TPR/S/199
                                                                                        Page xv

2000, as set out in its the Eleventh Five-Year      China's large current account surplus. Another
Plan, would appear to be within reach.              way of reducing China's high propensity to
Furthermore, with its vast human resources,         save would be by channelling savings into the
high rate of investment in physical and, to a       most profitable investments, thus improving
lesser extent, human capital, strong growth in      the productivity of capital in the economy as a
labour productivity, and increasingly market-       whole; this requires ongoing reform of the
oriented economy, open to international trade       capital market to render it more efficient (and
and foreign investment (and associated              improve the transmission, and thus operation,
technology), China has the potential to sustain     of monetary policy). In addition, impediments
its rapid growth in the foreseeable future,         to the efficient allocation of land, energy,
albeit at a somewhat slower rate as its             water and other natural resources, such as
economy matures and its labour force starts to      price controls, need to be gradually
shrink (largely as a result of its one-child        dismantled; this would help protect the
policy). In order to realize this potential,        environment, especially if supplemented by
however, China needs to continue to address a       market-based tax and non-tax instruments,
number of important social and economic             based on the "polluter pays" principle, for
challenges, including various economic              example, to correct market failure. There is
imbalances, which could jeopardize the              also the challenge of tax reforms that would
economy's stability and thus the achievement        render the tax system (especially the VAT and
of a "harmonious society".                          enterprise income tax) more neutral with
                                                    respect to economic decisions, so that it raises
31.      First, there is the challenge posed by     sufficient revenues in an administratively
widening income disparities among regions           simple and equitable way in order to meet
and between urban and rural areas, one of the       China's developmental needs, including
primary causes of which is wage differentials       expenditures     mentioned       above,   while
reflecting differences in labour productivity.      minimizing consequent distortions in the
A related challenge is the need to facilitate the   domestic allocation of resources and trade.
movement of surplus labour from relatively
low-productivity agriculture into other             32.      Although no forecasts of economic
activities, notably services, which tend to be      growth for 2008 were available from the
less labour-intensive than manufacturing.           authorities, the World Bank envisages a
Moreover, as growth in the labour force slows,      slowdown to 9.6% owing to decelerating
technological progress will assume much             exports and a weakening global outlook. Such
greater importance as a source of economic          a slowdown will bring the growth rate more
growth and productivity improvement, so that        into line with the Government's target of 8%,
China needs to continue to pursue its goal of       something that macroeconomic policies,
substantially raising expenditure on R&D as a       especially monetary policy, have hitherto
percentage of GDP (and improve protection of        proved ineffective in achieving. Such a
intellectual property). China also needs to         cooling of the economy could reduce
proceed with its plans to increase government       inflationary pressure and contribute to its re-
spending on social services, such as health and     balancing. Nonetheless, there remains the
education, and thus human capital, as well as       immediate issue concerning the ability of
basic pensions, thereby possibly reducing the       monetary policy to combat rising inflation. In
need for precautionary saving and thus raising      this regard, a more flexible exchange rate
consumption. These and other measures to            regime could enable China to operate a more
increase consumption would not only reduce          independent monetary policy, which would be
China's reliance on exports for growth, and         better suited to ensuring a low and stable rate
hence its vulnerability to economic slowdowns       of inflation, and therefore contribute to a
abroad, but would also narrow the gap               macroeconomic environment more conducive
between national saving and gross domestic          to sustained strong economic growth. A more
investment and therefore help to reduce             flexible exchange rate and thus more
WT/TPR/S/199                                                              Trade Policy Review
Page xvi

independent    monetary      policy    would    regime has become more flexible recently; in
complement structural reforms, especially       January 2008, the renminbi appreciated nearly
those concerning the capital market, and        1.6% in relation to the U.S. dollar, the largest
obviate the need for price controls and other   monthly increase since the July 2005 reform of
non-market measures to contain inflation.       the foreign exchange regime.
There are signs that China's exchange rate