RESTRICTED  WORLD TRADE  
ORGANIZATION  S/C/W/243  
9 November 2004 
 (04-4760) 
Council for Trade in Services Original:   English 
  
 
 
COMMUNICATION FROM THE UNITED STATES 
 
Transitional Review Mechanism Pursuant to Paragraph 18 of the 
 
Protocol on the Accession of the People’s Republic of China (“China”)  
 
 
 The following communication, dated 5 Novemb er 2004, from the delegation of the United 
States, is being circulated to the Members of the WTO.  
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Questions from the United States to China concerning Services
 
 
I. DISTRIBUTION SERVICES 
1. In the Services Schedule accompanying its Protocol of Accession, China committed to 
open up its distribution services sectors, including wholesaling, commission agency, retailing and franchising services, to majority foreign-owned join t ventures by December 11, 2003, and to wholly 
foreign-owned enterprises by December 11, 2004.   In implementing these important commitments, 
China first issued the Regulations on the Administration of Foreign Investment in the Commercial 
Sector on April 16, 2004.  Among other things, these regulations app ear to have abolished onerous 
capital requirements.  Nevertheless, it is still not cl ear how these regulations will be implemented, as 
China has not yet issued necessary implementing rul es clarifying application procedures, including 
when approvals may be obtained from provincial authorities versus the Ministry of Commerce 
(MOFCOM) and permitted scope of activities.  Wh en does China intend to issue a draft of the 
necessary implementing rules for public comment? 
2. In the Services Schedule accompanying its Protocol of Accession, China committed to 
open up its direct selling services sector to wholly foreign-owned enterprises by December 11, 2004.  
The United States understands that China has been circulating a dr aft of the necessary implementing 
regulations among Chinese and select foreign enterprises in the direct selling services sector, but has not made this draft publicly available.  When do es China intend to issue a draft of these regulations 
for public comment? 
II. EXPRESS DELIVERY SERVICES 
3. In July 2003, China circulated draft amendments to its Postal Services Law , which generated 
two immediate concerns among U.S. companies.  First, the draft amendments purported to give China 
Post a monopoly over the delivery of letters under 500 grams, which would have constituted a new 
restriction on the scope of activities of existing foreign-invested express delivery companies, in 
apparent conflict with the horizont al “acquired rights” commitment that China made in its Services 
Schedule.  The provision creating a 500 gram restri ction was very similar to one that China had 
withdrawn from another measure in September 2002 following high-leve l U.S. engagement.  Second, 
the draft amendments did not address the need for an independent regulator.  S/C/W/243 
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4. In the ensuing months, China circulated a number of revised drafts of these amendments.  A 
November 2003 draft of the amendments again app eared to give China Post a monopoly on letters 
weighing under 500 grams, and it did not clearly separate China Post’ s regulatory and operational functions, while it apparently e xpanded the scope of China Post’s regulatory powers through the 
creation of a new Postal Service Regulatory Aut hority.  In addition, it created a new, more 
burdensome licensing process that appears to underm ine the agreed conditions of the entrustment 
process.  It also required express delivery compani es for the first time to make payments into a 
universal service fund. 
5. In April 2004, during high-level U.S.-China bilateral meetings, China committed that old 
problems, such as the weight restriction, would not become new problems.  However, a new draft of 
the Postal Services Law circulated in July 2004 continues to include the problematic provisions 
described above, including a  350 gram restriction, which, like the earlier 500 gram restriction, includes no accompanying price-based criterion, e.g. , a criterion that allows express delivery firms to 
deliver packages below 350 grams when the price charge d is at least three times greater than the price 
for a first class letter. 
(a) Please explain how the creation of a China Post monopoly on the delivery of letters 
under 350 grams does not conflict with Chin a’s WTO commitments,  particularly the 
horizontal commitment in China’s Services Schedule not to reduce market access by 
imposing conditions on owners hip, operation or scope of activities that are more 
restrictive than those in place on the date of China’ s accession. 
(b) Please explain why China is now considering this 350 gram restriction after it 
withdrew a similar restriction with the issuance of the Supplement Notice on the 
Engagement in Postal and Delivery Serv ices for Cross-border Letters and Materials 
of Letters in Nature in September 2002. 
(c) What is China’s timetable for issuing the draft amendments in final form? 
(d) Please explain China’s plans for separating China Post’s regulatory and operational 
functions.  
III. TRANSPORT SERVICES 
6. China's Civil Aviation Administra tion (CAAC) recently issued the Regulations on the 
Administration of the Transport of Dangerous Goods , which took effect on September 1, 2004.  These 
new regulations require carriers to obtain licenses to handle dangerous goods.  To the United States’ 
knowledge, CAAC did not discuss the new regulations w ith U.S. or other foreign interested parties, 
nor did it provide any period for public comment, befo re issuing them.  As a result, not only were 
foreign carriers unable to provide useful input, but they also were not in a position to prepare for the changes brought on by the new regulations.  Great er transparency during the formulation of the 
regulations would likely have ensu red more rapid compliance with th em, as firms would have been 
able to prepare for necessary adju stments in advance of implementation, promoting China’s goal of 
greater safety. 
7. CAAC has indicated that it will allow China E astern and Air China, both of which were 
licensed under prior regulations, to handle dangerous goods without new licenses until the end of this 
year.  Other airlines are not eligible for this grace period.  CAAC has indicated that it will consider 
applications for licenses under the new re gulations on a case-by-case basis.   
(a) What is CAAC’s rationale for not providi ng a grace period to airlines other than 
China Eastern and Air China?  S/C/W/243 
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(b) Will CAAC expedite its review of appli cations submitted under the new regulations? 
IV. TELECOMMUNICATIONS SERVICES 
8. Article 5 of the Regulation on the Administration of Foreign-Invested Telecommunications 
Enterprises , issued by the State Council in Decree No. 333 on December 11, 2001 (effective 
January 1 2002), provides that, for foreign-inv ested telecommunications enterprises engaged in 
national or cross-provincial basic telecommunication services, registered capital must not be less than 
RMB 2 billion ($241.2 million).  This capital requireme nt is excessively high, both when viewed in 
relation to the norms in other economies and in th e specific context of China’s telecommunications 
market.  A review of start-up capital requirements for basic telecommunications services providers around the world reveals essentially no capital requi rement in the United States, European 
Communities member states, Canada, Japan, Aust ralia, Argentina, Brazil or Chile.  Hong Kong 
requires only a performance bond.  India requires a bank guarantee ranging from $5 million to $80 million, depending on geographic scope.  Korea requires a $2.5 million performance bond or bank 
guarantee, while Singapore requires a performan ce bond, scaled according to business scope.  Only 
Chinese Taipei maintains capital requirements that ar e comparable to those in China, and Chinese 
Taipei has been scaling them back  following its accession to the WTO. 
9. China’s high capital requirement effectiv ely bars foreign investors from China’s 
telecommunications market and severely inhibits the long-term development of an economically 
efficient and competitive domestic telecommunica tions services market. For qualified foreign 
investors, commercial business models do not require a high capital expenditure or an investment in 
extensive new infrastructure. With a minimal need to build infrastructure, and given that China’s 
Services Schedule permits the provision of tel ecommunications services by resale, the capital 
requirements of new basic telecommunications servi ces ventures should be relatively low.  It is 
therefore unclear what purpose is served by these requirements other than to limit the number of 
participants in the market. 
10. Meanwhile, Article 5 of the Regulation on the Administration of Foreign-Invested 
Telecommunications Enterprises  provides that, for foreign-invest ed telecommunications enterprises 
engaged in national or cross-provincial value-a dded telecommunication services, registered capital 
must not be less than RMB 10 million.  Although th is capital requirement is not as high as that for 
basic services, China has taken other steps that limit market access in value-added services.  In 
its April 2003 Catalogue of Telecommunications S ervices, the Ministry of Information Industry 
(MII) reclassified several telecommunicati ons services (e.g., Customer Premise Network 
services) from the value-added category to the ba sic category, contrary to widely accepted 
international practice.  MII also placed restrict ions on what new services could be classified 
under the value-added category.   
11. Taken together, China’s high capital requirements and reclassification of value-added 
services are limiting the ability of U.S. and other foreign firms to access China’s 
telecommunications market.  
(a) Please explain China’s rationale for establishing the RMB 2 billion capital 
requirement for foreign-invested teleco mmunications enterprises.  How does China 
justify this high capital requirement in li ght of the very low capital requirements 
prevailing in Asia and around the world?  How is any capital requirement consistent 
with a commitment to permit resale? 
(b) Is China reviewing this high capital require ment to determine whether it is necessary 
and not overly burdensome?  If so, what  is the status of that review? S/C/W/243 
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(c) Please explain why MII’s Catalogue omits “c ode and protocol c onversion” from the 
list of  value-added services, particularly when China’s Services Schedule identifies it 
as an example of a value-added service. 
(d) Please explain how resale service will be licensed. 
12. In paragraph 309 of the Working Party Report, China agreed that, upon its accession to 
the WTO, the organizations regulating services industries in China would be independent of the 
services suppliers they regulate.  Section 5 of  the Basic Telecommunications Reference Paper 
also specifically calls for an independent tele communications regulator that is separate from, 
and not accountable to, any supplier of basic telecommunications and makes decisions on an impartial basis.  In the telecommunications sect or, however, China has not yet established an 
independent regulator, as MII is not struct urally and financially separate from all 
telecommunications operators and providers.  Pl ease provide an update on China’s plans for 
establishing an independent regulator in the telecommunications sector.   
13. The United States understands that China’s tel ecommunications law is circulating in draft 
form among China’s ministries and agencies.   
(a) When will this draft law be circulated for public comment? 
(b) Will China provide a reasonable period for written comments to be submitted on the 
draft law? 
14. In the Administrative Measures on Interna tional Telecommunications Gateways ,  issued by 
MII on June 21, 2002, China restricts the ownership,  construction and administ ration of international 
gateways to state-owned enterprises.  Please justify th is restriction in light of the commitments that 
China made in the Services Schedule accompanying its Prot ocol of Accession.  In its Services 
Schedule, China assumed market access a nd national treatment obligations in the  
telecommunications services sector and did not allow for any limitations on the ownership of the suppliers of these services, other than joint venture requirements. 
15. In the paragraph 314 of the Working Party Re port accompanying its Protocol of Accession, 
China committed that foreign service suppliers that were required to form joint ventures with Chinese 
entities to operate in China were fr ee to chose their joint venture partner, and that they could choose a 
partner from a sector outside the sector of operation of the joint venture.  Please confirm that this commitment applies to foreign service suppliers fo rming joint ventures in the telecommunications 
sector. 
16. In the Services Schedule accompanying its Protocol of Accession,  China undertook the 
obligations set forth in the Reference Paper.  Sec tion 4 of the Reference Paper requires China to make 
licensing criteria publicly available.  Please describ e where this information is available and the 
period of time normally required to reach a decision for various license applications.  
17. Since China’s accession to the WTO, how many applications has MII received from foreign 
carriers seeking to provide telecommunications servi ces in the Chinese market?  How many of these 
applications have been approved or denied?  What  criteria are used to evaluate these applications? 
18. Pursuant to Section 2 of the Reference Paper,  China agreed to ensure interconnection with 
major suppliers at cost-oriented rates and to  make publicly available the procedures for 
interconnection negotiations.  In addition, China agr eed to ensure that majo r suppliers make publicly 
available their interconnection agreements.  Please describe where this information can be found on 
an ongoing basis.  S/C/W/243 
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19. As part of its WTO telecommunications commitments in the Services Schedule 
accompanying its Protocol of Accession, China agr eed that “further liberalization of this sector, 
including with respect to the level of foreign equi ty participation, will be discussed during the new 
round of trade talks.”  China has not yet submitted an additional offer in the current round of talks.  
Does China intend to make a new offer by the curre nt deadline for new offers, now set for May 2005? 
V. CONSTRUCTION SERVICES 
20. In its WTO Accession Agreement, China schedul ed commitments for construction and related 
engineering services, agreeing, inter alia , to permit wholly-foreign owned enterprises to supply 
services by December 11, 2004, with certain restric tions on permissible projects.  Prior to China’s 
WTO accession, foreign firms have been able to  operate in China on a project-by-project basis 
according to rules set forth in Ministry of Construction (MOC) Decree 32.  MOC has now permitted 
foreign-invested construction firms to operate on a project-by-project basis using licenses 
obtained pursuant to Decree 32 until July 1, 2005; thereafter, they will need to qualify as 
construction firms under MOC Decree 113 or as construction design firms under MOC Decree 114.  
To obtain qualification certificates, foreign firm s must satisfy various requirements, including 
requirements relating to registered capital, staffing and residency. 
(a) Please explain MOC’s rationale for requiring high capitalization for foreign 
construction firms pursuant to Decree 113. 
(b) Please explain MOC’s rationale for requiring foreign technical staff of foreign-
invested construction firms to reside in China for at least three months each year (pursuant to Decree 113) and requiring foreign technical staff of foreign-invested 
design firms to reside in China for at least  six months each year (pursuant to Decree 
114). 
(c) Please confirm that MOC will consider a foreign construction firm’s global 
experience when reviewing and approving a pplications for Qualification Grades 
under Decree 113 and its implementing rules. 
(d) Please explain the rationale behind D ecree 114’s requirement that wholly 
foreign-owned construction design enterp rises hire one-fourth of their technical 
staff, and that joint ventures hire one-ei ghth of their technical staff, from 
abroad.  
 
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