ChinaWT/TPR/S/xx
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WorldTrade
Organization / RESTRICTED
WT/TPR/S/161
28 February 2006
(06-0737)
Trade Policy Review Body
TRADE POLICY REVIEW
Report by the Secretariat
PEOPLE'S REPUBLIC OF CHINA
This report, prepared for the first Trade Policy Review of the People's Republic 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 the People's Republic of China on its trade policies and practices. Parts of the report especially ChaptersIII and IV are without detailed comment from the authorities.
Any technical questions arising from this report may be addressed to Ms.RohiniAcharya (tel: 022 739 5874) and Ms. Zheng Wang
(tel: 022 7395288).
Document WT/TPR/G/161 contains the policy statement submitted by the People's Republic of 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 the People's Republic of China.

ChinaWT/TPR/S/161
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CONTENTS

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SUMMARY OBSERVATIONSix

(1)Economic Environmentix

(2)Trade and Investment Policy Frameworkx

(3)Trade and Trade-Related Reformsx

(4)Other Measures Affecting Tradexii

(5)Sectoral Policiesxiii

(i)Agriculture, forestry, and fisheriesxiii

(ii)Energyxiii

(iii)Manufacturingxiii

(iv)Servicesxiv

(6)Outlookxiv

I.Economic environment1

(1)Overview1

(2)Main Developments: Policy and Economic Performance4

(3)Macroeconomic Policies11

(i)Monetary and exchange rate policies11

(ii)Fiscal policy14

(4)Main Structural Reform Issues16

(i)Tax reforms16

(ii)Re-orientation of the economy from the state-owned to the private sector18

(iii)Labour market reforms18

(iv)Capital market reforms20

(v)Competition policy22

(5)Developments in Trade and Foreign Investment22

(i)Composition of merchandise trade22

(ii)Direction of merchandise trade24

(iii)Trade in services24

(iv)Foreign investment24

(6)Prospects28

II.trade policy regime: framework and objectives29

(1)Introduction29

(2)Institutional and Legal Framework30

(i)Institutional structure30

(ii)Legal structure and the legislative process34

(iii)Law enforcement37

(iv)Transparency37

(v)Centre–subnational relations and local barriers to internal trade39

(3)Formulation, Administration, and Implementation of Trade Policy40

(i)Main trade laws40

(ii)Agencies involved in trade policy implementation40

(4)Trade Policy Objectives43

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(5)Trade Agreements and Arrangements44

(i)WTO44

(ii)Regional agreements45

(iii)Bilateral agreements47

(iv)Unilateral preferences51

(6)Foreign Investment Regime51

(i)Recent developments in FDI policy51

(ii)Legislative framework and procedures52

(iii)Examination and approval procedure54

(iv)FDI incentives55

(v)International investment agreements57

Annex II.1:Restructuring of the State Council58

III.trade policies and practices by measure60

(1)Introduction60

(2)Measures Directly Affecting Imports62

(i)Procedures62

(ii)Tariffs63

(iii)Other charges affecting imports73

(iv)Customs valuation and rules of origin74

(v)Import restrictions75

(vi)Trading rights81

(vii)State trading82

(viii)Contingency measures83

(ix)Standards and other technical requirements88

(x)Government procurement94

(xi)Other measures98

(3)Measures Directly Affecting Exports98

(i)Procedures98

(ii)Export taxes99

(iii)Other tax measures affecting exports100

(iv)Export prohibitions, restrictions, and licensing102

(v)Other measures affecting exports108

(vi)Measures maintained by importing countries109

(vii)State trading and designated trading110

(viii)Export promotion and marketing assistance111

(4)Measures Affecting Production and Trade114

(i)Industrial policy114

(ii)Incentives115

(iii)Legal framework for business127

(iv)State-owned enterprises130

(v)The private sector136

(vi)Small and medium-sized enterprises137

(vii)Competition policy139

(viii)Corporate governance141

(ix)Intellectual property rights145

Annex III.1:The use of AVEs in China's tariff158

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IV.trade policies by SELECTED sectors161

(1)Introduction161

(2)Agriculture163

(i)Features and market developments163

(ii)Policy objectives and administration165

(iii)Policy instruments167

(3)Energy178

(i)Petroleum178

(ii)Electricity182

(4)Manufacturing189

(i)Overview189

(ii)Iron and Steel189

(iii)Textiles and clothing193

(iv)Automotive sector199

(v)Electronic and communications equipment industry204

(5)Services207

(i)Overview207

(ii)Commitments under the General Agreement on Trade in Services208

(iii)Financial services209

(iv)Telecommunications services229

(v)Transport236

REFERENCES247

APPENDIX TABLES255

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CHARTS

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I.ECONOMIC ENVIRONMENT

I.1Exchange rates and consumer price index, 1998-0412

I.2Product composition of merchandise trade, 1998 and 200423

I.3Direction of merchandise trade, 1998 and 200525

I.4Trade in services, 1998 and 200426

I.5FDI inflows by origin, 2000 and 200427

II.TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES

II.1Hierarchy of laws and regulations35

III.TRADE POLICIES AND PRACTICES BY MEASURE

III.1Bound tariff averages by HS section, 2002 and 200566

III.2Distribution of MFN tariff rates, 2001, 2002, and 200568

III.3Tariff escalation by 2-digit ISIC industry, 2001, 2002, and 200570

III.4Import prohibition and prohibition under processing trade by HS section, 200576

III.5Import licensing by HS section, 200579

III.6Anti-dumping cases, 1 January 2002 to 31 December 200485

III.7The structure of IPR administration and enforcement146

IV.TRADE POLICIES BY SELECTED SECTORS

IV.1Value added in services, 2000 and 2003208

TABLES

I.ECONOMIC ENVIRONMENT

I.1Selected macroeconomic indicators, 1998-052

I.2Sources of output and productivity growth, 1983-036

I.3Balance of payments, 1998-057

I.4Basic economic and social indicators, 1998-059

II.TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES

II.1Main department/agency involved in trade policy implementation42

III.TRADE POLICIES AND PRACTICES BY MEASURE

III.1Structure of MFN tariff in China, 2001-0565

III.2Summary analysis of the Chinese preferential tariff, 200571

III.3China's preferential rules of origin, 200574

III.4China's national standards, 2000-0490

III.5Government procurement by project, 2002-0494

III.6Government procurement by procurement method, 2003-0495

III.7Government procurement by procurement entities, 2002-0496

III.8Products subject to export licensing, 2005105

III.9Selected central government transfers and subsidies, 2001-04116

III.10Tax revenue, 1998-04118

III.11Excise (or consumption) tax120

III.12Business tax rates122

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III.13Income tax concessions and preferences for foreign-invested enterprises124

III.14Performance of SOEs, 2001-04131

III.15Tradeable and non-tradeable shares of domestically listed companies143

III.16China's membership of international intellectual property rights conventions, October 2005147

III.17The number of patents applied for and granted, 2000-04148

III.18Enforcement of intellectual property rights, 2001-04154

Annex Table III.1 Ad valoremequivalents compared to bound rates, 2002-05159

IV.TRADE POLICIES BY SELECTED SECTORS

IV.1Central institutions involved in agriculture policy-making and implementation166

IV.2Agricultural price subsidies, 1998-04174

IV.3Steel industry, 2000-04190

IV.4Textiles and clothing industry, 2001-04194

IV.5Automotive industry, 2001-04200

IV.6Performance of the banking sector, 2003 and 2004212

IV.7Basic telecommunications service providers, 2005229

IV.8The telecommunications sector in China, 1998 and 2001-05230

IV.9Registration requirements and application procedures in maritime transport services241

APPENDIX TABLES

I.ECONOMIC ENVIRONMENT

AI.1Merchandise exports by group of products, 1998-05257

AI.2Merchandise imports by group of products, 1998-05258

AI.3Merchandise exports by destination, 1998-05259

AI.4Merchandise imports by origin, 1998-05260

AI.5Trade surplus or deficit by country and region, 1998-05261

AI.6China's intra-industry trade with Chinese Taipei by WTO Tariff Study

Categories, 1998-04262

AI.7China's intra-industry trade with the world by WTO Tariff Study Categories, 1998-04263

II.TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES

AII.1China's administrative jurisdiction264

AII.2China's major trade-related laws and regulations, as at 11 October 2005265

AII.3Principal notifications under WTO Agreements, as at 24 October 2005270

AII.4Involvement in the WTOdispute settlement mechanism, as at 7 October 2005274

III.TRADE POLICIES AND PRACTICES BY MEASURE

AIII.1Summary analysis of China's MFN tariff, 2001-05277

AIII.2Inward duty, 2005278

AIII.3Quotas allocated to state-trading and designated trading enterprises (tonnes), 2002-05279

AIII.4Products subject to compulsory certification287

AIII.5Exports quotas allocated to state-trading enterprises, 2002-05284

AIII.6Subsidies as notified to the WTO286

AIII.7Products subject to government pricing or government guidance pricing under China's
Protocol of Accession290

AIII.8Service and utilities subject to government pricing or government guidance pricing
under China's Protocol of Accession293

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AIII.9Minimum capital and registration requirements for companies294

AIII.10Criteria defining large, medium, and small enterprises in China295

IV.TRADE POLICIES BY SELECTED SECTORS

AIV.1Tariff quota utilization in China, 2002-05296

AIV.2China's sector specific commitments in the GATS298

ChinaWT/TPR/S/161
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SUMMARY OBSERVATIONS

(1)Economic Environment

  1. China's economic reforms, which began in 1978, have gradually opened up the economy to both international trade and foreign direct investment (FDI) and allowed the emergence alongside the public sector of a private (non-public) sector, whose contribution to GDP reached nearly 60% in 2003. As a result, the economy has grown by an average of over 9% per annum since then, while GDP per capita increased from US$148 in 1978 to US$1,700 in 2005. Furthermore, the proportion of China's population living below the poverty line (US$2 per day) fell from nearly 73% in 1990 to 32% in 2003. The nearly nine-fold rise in GDP per capita since 1978 and dramatic drop in people living in poverty demonstrate clearly the value of integrating more liberal trade and foreign investment policies into broader macroeconomic and structural reforms in order to promote economic development. Ongoing reforms have been given added impetus by China's membership of the WTO in 2001; its commitments have provided a catalyst for reform, paving the way for continuing strong growth in the foreseeable future.
  2. Since 2001, real GDP growth has averaged almost 9% per year, driven mainly by exports and investment, especially as trade and investment reforms have increased China's integration into the world economy. Its total trade in goods alone accounted for around 64% of GDP in 2005 and 6.7% of global trade in 2004. Much of the trade is conducted by foreign-invested companies based in China as a result of more liberal FDI policies; these have attracted FDI (together with related technology) mainly to manufacturing as a platform for export. China is now one of the world's main destinations for FDI.
  3. The accumulation of capital, financed for the most part by domestic savings, has also been vital, accounting for much of the growth in GDP as well as in labour productivity, a key determinant of living standards. Gross domestic investment and gross national saving amounted to 39.3% and 42.9% of GDP, respectively, in 2004. The widening gap between China's saving and investment is reflected in its growing current account surplus, which increased from 1.3% of GDP in 2001 to 3.6% in 2004, and is estimated to have been at least 5% of GDP in 2005.
  4. Notwithstanding these remarkable achievements, a number of challenges remain. In particular, inequalities in the distribution of income have grown, especially between the urban and rural populations and between the coastal and inland regions. The Government is attempting to tackle this and other problems through structural reforms aimed, inter alia, at making the labour market more flexible, greater private sector participation and competition in the economy, and developing a more efficient capital market. China's proposals for its 11th Five Year Plan, which were approved in October 2005, emphasized the importance of a more balanced approach to development and the need to continue with these structural reforms.
  5. Until July 2005, China's currency, the renminbi (RMB), was pegged to the U.S. dollar, maintaining its stability in nominal terms against the U.S. dollar, but resulting in a certain degree of volatility in inflation. In July 2005, the RMB was revalued by 2.1% in relation to the U.S. dollar, and China moved to a managed floating exchange rate regime with respect to a basket of currencies. The move to a more flexible exchange rate could enable China to operate a more independent monetary policy and allow the market to play a greater role in determining interest rates and therefore in allocating resources.
  6. China is a moderately taxed country, with total tax revenues accounting for a little more than 15% of GDP in 2004. Fiscal policy has operated in a stabilizing fashion; the overall fiscal situation is seemingly sound with rapid growth of tax revenues and tight control over expenditure bringing the overall budget deficit down to around 1.3% of GDP and keeping the public debt stable at around 20% of GDP.

(2)Trade and Investment Policy Framework

  1. The economic reform process has necessitated a number of changes in China's trade and investment policy framework. A large number of trade-related laws have been reviewed and revised as part of China's accession to the WTO in 2001. Legislation includes laws enacted by the National People's Congress (the legislature), or its Standing Committee, and regulations issued by the State Council (the Executive). Ministries and government departments may issue rules to implement legislation. Local people's congresses and local governments have the authority to issue local regulations and rules until these are superseded by the same legislation at national level. The State Council also issues "interim provisions" under responsibilities delegated to it by the National People's Congress; these interim provisions relate mainly to economic and tax reform and may be replaced by laws after they are tested and when the authorities deem it appropriate. In addition to this overall hierarchy of legislation, policy is often implemented in the form of "trials". China's gradual reforms have often resulted in an overlap of policies and institutions. While new policies and institutions are continually being introduced to address the needs of the economy, old policies and institutions are only partially amended or dismantled, thus adding to the complexity of the overall legislative and policymaking framework.
  2. The gradual nature of China's reforms is also reflected in changes in its trade and FDI policies. Trade policy has gradually shifted away from direct intervention in the economy aimed at promoting import substitution and exports. Import barriers have been reduced and investment is permitted in a larger number of sectors, particularly if the investment involves high and environmentally sound technologies. As a result, there is significantly less intervention in the economy. However, the Government provides "guidance" to the economy reflecting, interalia, domestic supply considerations. In this regard, measures such as interim export taxes and VAT rebates are used to "manage" exports of products in short supply. FDI policy has largely directed investment into the manufacturing sector, particularly export processing activities.
  3. Since becoming a Member of the WTO in December 2001, China has been an active participant in the multilateral trading system. It provides at least MFN treatment to all WTO Members except El Salvador and the territories of some European Union members. At the same time, however, it is actively pursuing regional and bilateral free-trade agreements. China has signed Closer Economic Partnership Agreements with the Special Administrative Regions (SARs) of Hong Kong and Macao, a Framework Agreement with ASEAN countries, a free-trade agreement with Chile, and a preferential trade agreement with Pakistan, and is currently negotiating bilateral agreements with a number of other countries. It appears that all its bilateral agreement partners have recognized China as a market economy.

(3)Trade and Trade-Related Reforms

  1. Since beginning its programme of economic liberalization, and especially as a result of its accession to the WTO, China has carried out major trade and trade-related reforms. The average applied MFN tariff was reduced from 15.6% in 2001, just before China acceded to the WTO, to 9.7% in 2005; the average MFN duty rates for agricultural (WTO definition) and non-agricultural products were 15.3% and 8.8%, respectively, in 2005. The tariff is entirely bound and applied rates are generally at or close to bound rates; this lends a high degree of predictability to the tariff. The bound tariff rate averaged 10% in 2005 and is due to fall to 9.9% by 2010, when China completes implementation of its current commitments on bindings. China also extends bilateral trade preferences under the Bangkok Agreement, to ASEAN countries, to Pakistan, and to the SARs of Hong Kong and Macao. Unilateral preferences (zero rates of duty) are offered to 39 least developed countries for some products.
  2. Non-tariff measures have also been falling progressively as China implements its commitments under its Protocol of Accession. Import quotas as well as trading rights (the latter granted to certain qualifying traders) were discontinued at the end of 2004, while import prohibitions and licensing have been reduced progressively. The administration of the import licensing regime has also been simplified. China maintains import prohibitions, largely for health and safety reasons and under international conventions. It also prohibits imports of certain products only for processing and re-export purposes; such imports include some agricultural products, minerals, fertilizers, and other used and waste materials. Automatic as well as non-automatic import licences are used to regulate some imports. Non-automatic import licences are currently used mainly for imports that are restricted under international conventions. Automatic licences are used mainly for monitoring purposes and to ensure that trade in these products "does not fluctuate drastically". The number of tariff lines subject to automatic licences has increased slightly since 2002; they currently apply to around 16% of the tariff. Import quotas have been phased out. However, tariff rate quotas still exist for some agricultural products and fertilizers and state trading is used to manage imports of some products.
  3. China has taken steps to simplify its administration of other border measures, such as standards, sanitary and phytosanitary measures, and contingency measures. In 2005, 32% of standards were based on international standards; as a result of a recent review, 44% of current standards are to be revised to ensure their conformity with international standards, while 11.6% are to be abolished. The SPS regime and SPS inspection procedures for imports remain complex and not very clear; a large number of laws and regulations govern implementation in this area.
  4. Under the Law on Government Procurement, which covers purchasing by state organs and public and social institutions but not state-owned enterprises, procurement is expected to facilitate the achievement of state goals for economic and social development. Purchasing preferences also exist for "domestic goods, construction and services," although these may be purchased from foreigners under exceptional circumstances. China is an observer to the WTO's Government Procurement Agreement.
  5. Export barriers, while falling, have not tended to keep pace with reform to import measures and are used in part to ensure stability in domestic supplies of certain products. The export regime, which includes export taxes, export prohibitions, export licensing, and export quotas, remains complex. Export restrictions, including prohibitions and licensing, are maintained, inter alia, to avoid domestic supply shortages and to meet international obligations. Prohibitions are also announced from time to time on exports under the processing trade regime to discourage processing of certain products or to ensure their supply to domestic industry. China has global export quotas on some agricultural products, as well as on petroleum and some minerals, while destination specific quotas are maintained for exports of live cattle, swine, and fowl to the SARs of Hong Kong and Macao. Under memoranda of understanding signed with the European Union and the United States, China also maintains export restraints on certain textiles and clothing products; these restraints are due to remain in place until the end of 2007 and 2008, respectively. In addition, export of rice, maize, cotton, coal, crude and processed oil, tungsten ore and products, antimony ore and products, silver, and tobacco products are subject to state trading to,inter alia, ensure stable domestic supply of these products, prevent disruption in the international market, and protect exhaustible resources. Frequent changes are also made to VAT rebate rates and interim export tax rates to, inter alia, ensure adequate domestic supply of certain products.

(4)Other Measures Affecting Trade

  1. As trade barriers have been liberalized, domestic structural problems have become more evident.