RESTRICTED  WORLD TRADE  
ORGANIZATION  S/C/W/242 
9 November 2004 
 
 (04-4759) 
Council for Trade in Services Original:   English 
  
 
 
COMMUNICATION FROM THE EUROPEAN COMMUNITIES  
 
China's Transitional Review Mechanism 2004
 
 
 
 The following communication, dated 4 November 2004, from the delegation of the European Communities, is being circulated to the Members of the WTO. 
 
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1. The EC is transmitting comments and questions in  advance of the meeting of the Council for 
Trade in Services of end November, in order for the Chinese authorities to have sufficient time to 
provide complete replies. 
2. Once the information to be provided by Ch ina in accordance with paragraph 8 and 
paragraph IV.3 (a) of Annex 1A of  its accession protocol has been received, the EC might come back 
with additional questions. 
3. The EC’s comments and questions relate to the following items: legal services;  express 
delivery services; telecommunications; constructi on, architectural and engineering services; 
distribution;  financial services;  tourism. 
I. LEGAL SERVICES 
4. The EC welcomes the fact that China started to implement its WTO commitments in the area 
of the legal services and recognises the ongoing respec tive efforts, such as the approval for numerous 
foreign law firms to open their second offices in China.  However, there are two main issues that need 
to be addressed by Chinese authorities. 
(a) To remove the geographic and quantitative limitations, which are in practice 
introducing Economic Needs Test (ENT).  There are severe conditions imposed to 
foreign firms: need to start legal ser vices operation, feasibility study, 9 month 
examination approval period, 3 years of consecutive practice before establishing an 
additional office, 1 partner per office.  The level of those requirements is, it is felt by 
foreign service providers, overly burdensome.  More important, it constitutes an ENT, 
and should therefore be removed, in line with the commitments made by China.  
(b) To strike a clearer and more reasonable ba lance between the very broad definition of 
“Chinese legal affairs”, on which foreign law firms are not allowed to provide opinions, and the restrictive scope of “information on the impact of the Chinese legal environment”, the area of interest for the Eu ropean law firms. Any clarification that 
would delimit the precise ambit of “Chinese legal affairs” and lead to a logical 
interpretation of “information on the impact of the Chinese legal environment” would be welcome. S/C/W/242 
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II. EXPRESS DELIVERY SERVICES 
5. The EC would like to convey its deep concerns about a new draft for the revision of the 
Chinese postal law, dated July 19, 2004, which a ppears globally even more restrictive than the 
preceding draft, dated November 17, 2003, and raises  a number of question in regard to China’s WTO 
commitments, both specifically in the courier sector, and horizontally.  
 
(a) The proposed scope of the area reserved to China Post for addressed letters has been 
modified. The EC appreciates that the propo sed weight threshold has been reduced 
from 500 gr to 350 gr. However, express delivery of addressed letters weighing less 
than 350 gr now seems to be included in the reserved area. China’s current 
commitments under courier services, which cover express delivery, do not mention a 
threshold and express delivery operators ha ve until now been able to handle letters. 
Can China confirm that it will ensure, by the means it deems appropriate, that express delivery of letters weighing less than 350 gr  will not be in the scope of the monopoly 
and that it will provide a suitable definition of express delivery, for instance by 
adding a reasonable price criterion to the weight criterion used to define the 
monopoly ?  
(b) A new, wide-ranging provision (article 94 pa ragraph 2), would forbid the operation of 
delivering letters, printed matters and parcel s except in the form of express delivery 
service. China’s WTO commitments cover all courier services listed under CPC 
75121, which includes inter alia the handli ng of parcels and newspapers, periodicals, 
magazines. Furthermore, these commitments do not mention national treatment 
limitations other than foreign-equity caps. Can China confirm that article 94 paragraph 2 will be removed in  the final draft law?   
(c) The proposed provisions on licensing procedure for express delivery operators have 
also been modified. Whether the procedure w ill be centralised or decentralised is not 
clear from the text. Some proposed conditions for obtaining a licence have been 
added or rephrased in a way that could give greater discretion for the regulator. The impartiality of the regulator does not appear to be clarified, for example by granting its independence from China Post. China’ s current commitments provide, in the 
courier sector, for no less favourable cond itions of operations than upon China’s 
WTO entry. Furthermore, they are subject to the provisions of article VI whenever 
specific commitments have been undertaken. Can China confirm that it will ensure (i) 
that existing licences will be grandfathered  (ii) that the licensing procedure will be 
managed at central level for foreign or fo reign-owned operators (iii) that a review 
procedure of the decision of the regulator will be introduced and (iv) that the impartiality of the licensing procedure will be guaranteed, for instance by ensuring 
the independence of the regulator from all operators, including China Post and its 
subsidiaries ? 
(d) Several proposed provisions granting China Post and its subsidiaries a preferential 
treatment have been maintained or intr oduced, even for activities which could be 
understood as being outside the scope of  the universal service and opened to 
competition. They include exemption of business tax, State compensation of losses, 
specific liability regime, exemption from licensing for express delivery of addressed 
letters. China’s current commitments in  courier services do not mention national 
treatment limitations other than foreign-e quity caps. Furthermore, they are submitted 
to the disciplines of GATS article VIII. Can China confirm that it will ensure, in the 
final draft of the law, that foreign and fo reign-owned operators shall have no less  S/C/W/242 
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favourable treatment than China Post and its subsidiaries for their activities open to 
competition? 
6. In particular, and without prejudice of furthe r discussions, the EC will follow with attention 
three aspects of this reform :  
(a) the definition of the scope of the postal monopoly (or “reserved area”): in the interest 
of all operators, a clear definition of the scope of the postal monopoly is desirable. 
However, this definition should also ta ke into account the PRC’s current WTO 
commitments in postal and courier services and therefore should not be used to 
expand the scope of the postal monopoly; 
(b) the definition of the scope of universal service would also be welcome, while taking 
into account that it should not be confused with the definition of the reserved area;  
(c) the independence of the regulator from operato rs , which appears desirable in order to 
assure fair competition on the segments of the market which are liberalised.  
 
7. Can the PRC give information about the current  postal reform and notably on the three points 
mentioned above?   
III. TELECOMMUNICATIONS 
8. The EC thanks China for its explanations  about the regulatory requirements for the 
establishment by foreign investors of joint-ventur es in the telecom sector. However, these answers 
confirm that China imposes that there be a main Chinese partner and that the Chinese partner be a 
telecom operator, in contravention of its commi tments under the working party report. In many 
countries indeed, new entrants are operators comi ng from other sectors of the economy (otherwise 
only the incumbent can meet market entry requirements ) and they have shown to be able to master the 
development of the business. Why should it be different in China?  
9. Isn’t China de facto limiting the number of op erators to those already on the market by 
restricting the choice for JV partners to those operators? 
10. So long as the joint-venture itself has experien ced personnel, who can be local experienced 
personnel hired by the joint venture, it will be able to carry out its missions and serve adequately the 
consumer. Why should the Chinese partner have pe rsonnel experienced in the telecom sector, as per 
article 8 of the regulation on foreign-invested entreprises?  
11. China explained that one of the motives for its  regulation is “to ensu re the sound development 
of the telecom industry”. What does “the sound development of the telecom industry” mean? 
12. China explained that the justification for havi ng a main Chinese partner (holding more than 
30%) is to protect the interest of Chinese and fo reign investors. How does that concretely protect 
Chinese investors? How does that concretely protect  foreign investors, in particular how does it 
alleviate the risk of the foreign invest or as stated in the 2003 TRM exercise? 
13. Finally on the issue of joint-ventures, wh at is the rationale for the minimum capital 
requirements? How have they been computed? 
  S/C/W/242 
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14. Separately, the EC would like to know: 
(a) which administration manages the state shares in the Chinese operators (China 
Telecom, China Netcom, China Mobile, Chin a Unicom, China Satcom)? What are the 
specific regulations governing that manageme nt? This information was not provided 
last year. 
(b) what are the functions of local regulatory bodies apart from licensing functions? 
(c) what are the specific rules governing interc onnection? In particular, which operators 
are subject to those rules and how are opera tors subject to those rules identified? 
Which services are subject to interconn ection rules? Do these rules ensure 
transparency, non-discrimination, cost-orien tation? In the case of cost-orientation, 
how are the cost and interconnection rate computed? 
IV. CONSTRUCTION, ARCHITECTURAL AND ENGINEERING SERVICES 
15. The EC appreciates that China is taking into  consideration our deep concerns as regards 
regulations in these sectors, and has taken note of the changes to Decree 113, regulating the 
establishment in China of foreign invested cons truction companies, through the publication in 
September by the Ministry of Construc tion of a circular (Jian-Shi 2004-159). 
16. This circular represents an improvement, notab ly as it (a) allows foreign companies' global 
experience to be taken into account and (b) re moves constraints on the numbers of foreign 
professionals.   
17. However, there still are some questions that see m to be unanswered by this circular, notably 
as regards residency requirements. Could China confir m that it intends to bring its regulations in full 
conformity with its GATS commitments and abolish the minimum residency for foreign personnel of 
3 months a year, which is imposed in point IV.5 of Notice No. 73 for construction enterprises, and of 
6 months a year for construction and engineering design enterprises, which is imposed under Article 
16 of Decree No. 114 ?  In addition, excessive capital requireme nts represent a significant barrier for 
foreign construction companies. How does Chin a intend to solve this particular issue?  
18. In the field of foreign invested constructi on and engineering design enterprises, the EC 
understands that the Chinese authorities are work ing on the revision of Decree 114. Could China 
provide information on the timetable and contents of this revision?  
V. DISTRIBUTION 
19. The EC understands that the Chinese author ities have produced in 2004 new legislation 
affecting the distribution sector in order to impl ement the corresponding phase of market liberalisation 
in line with China’s GATS commitments. In particul ar, a text of “Measures for the Administration of 
Foreign Investment in the commercial sector” was a pproved in April 2004, being effective as of June. 
We have several questions about this legislation: 
(a) We understand that this law allows ex isting manufacturing foreign-invested 
enterprises to participate in the distributi on sector by applying for expansion of their 
business scope. Would China please confirm that this measure would apply to distribution of goods in general (rather than  to only products made by the Parent 
Companies)? 
(b) 
We have observed that this law affects, among others, distribution services of several 
products for service suppliers with more than 30 stores. The law indicates 49%  S/C/W/242 
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foreign ownership until December 2006 for distribution of books, pharmaceutical, and other products. Although this is in line with China’s GATS commitments on 
retailing,  wholesale/commission agents’ services should be authorised 100% foreign 
ownership as of December 2004. Would Ch ina please confirm this measure apply 
only to retailing services? 
(c) Establishing the split of competences be tween provincial and central authorities 
(MOFCOM), this law establishes that provincial authorities will be able to authorise 100% foreign-owned distribution companies up to 30 stores of maximum 3000 square meters, or 300 stores of maximum 300 square meters. Provincial 
authorities will handle these authorisations if the business scope excludes distribution 
by internet, television, telephone, mail order or vending machines. Would China 
please confirm that national service suppliers are subject to the same administrative procedures, i.e., that this measure be  applied on a national treatment basis? 
(d) Authorisations of 100% foreign-owned distribution companies are subject to specific 
administrative procedures and requirements. Would China please confirm that 
national service suppliers are subject to the same administrative procedures, i.e., that 
this measure be applied on a national treatment basis? 
(e) The law establishes that the business term of  foreign-owned companies should not be 
longer than 30 years (40 years in Central/Western China). Would China please confirm that national service suppliers are subject to the same limitations, i.e., that this measure be applied on a national treatment basis? 
(f) The law establishes that when foreign ser vice suppliers apply for opening new stores 
there would be a requirement that the exis ting registered capital has to be 100% paid 
in. Would China please confirm that national service suppliers are subject to the same 
condition, i.e., that this measure be applied on a national treatment basis? 
VI. FINANCIAL SERVICES 
20. Please refer to the comments and questions sen t on insurance, banking and securities services 
to the Committee on Trade in Financial Services.  
VII. TOURISM 
21. Our understanding is that the Regulations on Administration of Travel Agencies dated 
11 December 2001 establish an economic needs test  (ENT) for the authorisation of new travel 
agencies in article 11. This market access limita tion is not reflected in China’s GATS schedule of 
commitments. This has been raised to the atte ntion of the Chinese authorities in several occasions, 
including the 2003 TRM process. 
22. Would China please provide us with information about their plans for aligning the regulation 
of travel agencies with China’ s GATS commitments in the sector? 
VIII.  AIR TRANSPORT 
23. The EC would like to refer to China’s co mmitments under the GATS in relation to the 
provision of Computer Reservations Services (CRS),  and notes that a regulation is under preparation 
to cover this area. Further delay in the finalisati on and implementation of th is regulation will render 
the commitments ineffective, since the lack of legal framework is holding up applications from users 
of CRS services. In order for CRS providers to ge t certainty about the legal environment under which 
they are operating, and a guarantee on their scope of business and on non-discriminatory principles to S/C/W/242 
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be applied, the EC would like to hear from Chin a about the precise timefr ame for finalisation and 
entry into force of the CRS regulation.  
IX. FOREIGN TRADE LAW 
24. The EC takes note of China’s commitment, e xpressed notably in the Committee on Market 
Access of 22 September 2004, that the Foreign Trad e Law will be implemented in a way consistent 
with China’s obligations under the WTO Agreements. As a consequence, the EC would like to hear 
confirmation from China that, in particular, Article 49  of the Foreign Trade Law will not be applied to 
trade with WTO Members in services sectors committe d by China under the GATS, since Article X of 
the GATS does not permit safeguards measures but on ly mandates WTO Members to negotiate on the 
question of emergency safeguard measures. 
 
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