RESTRICTED  WORLD TRADE  
ORGANIZATION  S/C/W/289 
5 November 2007 
 (07-4814) 
Council for Trade in Services Original:   English 
  
 
 
COMMUNICATION FROM THE UNITED STATES 
 
Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of
  
Accession of the People's Republic of China ("China")  
 
 
 The following communication, dated 2 Novemb er 2007, from the delegation of the United 
States is being circulated to the Members of the Council for Trade in Services.   
 
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Questions from the United States to China  
 
 I. DISTRIBUTION SERVICES:  SALES AWAY FROM A FIXED LOCATION 
1. China issued regulations in August 2005 governi ng sales away from a fixed location, or direct 
selling.   The United States supports China’s effort s to protect the public from fraud while opening its 
market to direct selling.  The United States notes that these efforts need not limit the growth of 
legitimate domestic and foreign direct selling operations.  
(a) Since the direct selling regulations became effective in December 2005, a number of 
companies, including foreign companies, have received direct selling licenses, although not always within the 90-day time period set forth in the direct selling regulations. What are China’s plans for speeding up the processing of domestic and foreign applications for direct selling licenses?   Will China be able to adhere to the 
90-day time period set forth in the direct selling regulations?  If not, please explain. 
(b) The United States understands that very few companies have been able to obtain 
licenses that would enable them to conduct direct selling in more than one province in China, which significantly restricts their ab ility to expand their businesses in China.  
Can China please explain why it imposes these restrictions on the geographic scope of licenses? 
(c) The direct selling regulations provide that a direct seller in a particular province must 
operate a provincial office in the provincial capital and a “service center” in each district where the direct seller sells products to consumers.  Can China please confirm that direct selling service centers do not require a business license, and that no more than one service center per district is re quired to comply with the direct selling 
regulations? What steps is the central government taking to ensure consistent 
provincial interpretation and implementati on of the service center requirements set 
forth in the direct selling regulations?  S/C/W/289 
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  (d) Article 7.2 of the direct selling regulations requires that foreign-invested companies 
have three years of direct selling experience in other markets to apply for a direct selling license in China, but does not im pose the same requirement on domestic 
companies.  Will China change the provisi on in question so that the same domestic 
experience requirements apply to both domestic and foreign companies?  
(e) In connection with last year’s transitiona l review before this Council, the United 
States explained that it was concerned that the direct selling regulations include a compensation cap for salespeople of 30 percent of sales revenue.  Based on international compensation practices, this cap would unnecessarily limit direct selling companies from sufficiently motivating thei r sales representatives.  Except for Korea, 
which has a compensation cap higher and more narrowly defined than that proposed 
by China, no country limits the income recei ved by direct sellers.    Despite this 
international practice, China claimed at l ast year’s transitional review that its 
compensation cap did not contravene any inte rnational practice, but it did not provide 
any information to support this claim.  Could China please explain the factual basis 
for its claim that its compensation cap did not contravene any international practice? 
(f) The direct selling regulations also do not allow for compensation based on services 
rendered. This effectively denies payment fo r marketing services, and is a significant 
departure from international practice, including the United Nations’ Consumer 
Product Code under which persons engage in direct selling may earn compensation 
from the sales of both products and services. On this point, too, China claimed that it 
had acted consistent with international practice.  Could China please explain the 
factual basis for that claim?  Will China consider amending its compensation restrictions to come into compliance with  internationally accepted practices regarding 
direct selling? 
II. DISTRIBUTION SERVICES: RETAIL SERVICES 
2. Although China has made progress in licensing fo reign retail outlets, foreign companies still 
report that they face extra burdens, compared with  domestic retailers, in expanding their operations.  
For example, the licensing pro cess led by China’s Ministry of Commerce (MOFCOM) for foreign 
retailers seeking to establish a new outlet is multi-la yered and slow-moving, requ iring approvals at the 
local, provincial and central government levels.  In  contrast, domestic retailers can quickly obtain 
licenses directly from the State Administration of Indu stry and Commerce.  Further, domestic retailers 
do not need to satisfy substantive requirements th at are imposed on foreign companies, such as an 
additional minimum capital requirement for each new st ore or a requirement that the location city for 
the new outlet have an urban commercial network plan  in place.  Can China please confirm that it will 
expedite MOFCOM’s review of fo reign retailers’ applications for new outlets and ensure that it 
applies the same substantive licensing requireme nts to both foreign a nd domestic retailers?  
3. China’s GATS commitment to allow foreign majo rity-owned chain store retailers with more 
than 30 outlets to sell motor vehicles phased in as of 11 December 2006.  However, it does not appear 
that China has issued regulations to implement this  commitment.  Can China please confirm that this 
right is being provided? 
III. DISTRIBUTION SERVICES:  CRUDE OIL AND PROCESSED OIL 
4. Can China please explain the steps that it has taken to fulfil its GATS commitments regarding 
wholesale and retail distribution of crude oil and processed oil?   S/C/W/289 
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  IV. DISTRIBUTION SERVICES:  FRANCHISING 
5. Has China conducted a review of the operation of MOFCOM’s Rules on the Administration 
of Commercial Franchising , issued on 31 December 2004?  If so, please describe the status of that 
review.  
V. EXPRESS DELIVERY 
6. The United States understands that the postal system reform plan was approved by the State 
Council in July 2005.  The plan reportedly contains  details on important issues such as the amount of 
a universal services fund tax required from operators, how the operating divisions of China Post will 
be managed and other details of interest to foreign companies.  When will China publish its postal 
system reform plan? 
7. Please provide an update on the status of China Post’s efforts to implement the State 
Council’s postal system reform plan, including sep arating the regulatory a nd operational functions, 
and setting up the National Postal Regulatory Auth ority.”   Please also explain how the Express Mail 
Service (EMS) will be affected by these changes.  
8. The United States understands that China has begun circulating a 9th draft of a new Postal 
Law.  Is that the most recent draft?  When will China make the draft publicly available for comment?  
What is the State Council’s timetable for issuing th e final draft of the Postal Law to the National 
People’s Congress? 
9. In connection with last year’s transitional revi ew before this Council, the United States asked 
several questions about the 8th draft of the Postal Law, but China did not respond to them.  Many of 
these questions appear to remain relevant to the 9th draft of the Postal Law.  The United States re-
states those questions below and asks that Chin a provide responses to them during the upcoming 
transitional review before this Council. 
10. The 8th draft of the Postal Law reportedly excluded foreign service providers entirely from the 
domestic express delivery market, while the 9th draft of the Postal Law reportedly removes this 
restriction?  Is that correct?  Please explain how th is restriction is consistent with the commitments 
that China made in the GATS Schedule accompanyi ng its Protocol of Accession with regard to 
courier services. 
11. The 8th draft of the Postal Law reportedly reserved the delivery of addressed letters weighing 
less than 150 grams to China Post.  The 9th draft of the Postal Law reportedly applies a similar 
restriction to the domestic express delivery ma rket, pursuant to which only China Post (and not 
foreign companies and domestic companies other th an China Post) can deliver items weighing less 
than 150 grams.  Is that correct?  If not, please expl ain the rationale for this restriction and how it is 
compatible with the commitments that China made in the GATS Schedule accompanying its Protocol 
of Accession with regard to courier services.  
12. The 9th draft of the Postal Law reportedly reserves the delivery of letters and other documents 
weighing 150 grams or more to China Post and other domestic companies in the domestic express 
delivery market, meaning that foreign companies can not deliver letters and other documents weighing 
150 grams or more.  Is that correct?  Please explain the rationale for this restriction and how it is 
compatible with the commitments that China made in the GATS Schedule accompanying its Protocol 
of Accession with regard to courier services. 
13. Please provide details on China’s plans for a universal services fund tax that reportedly has 
been included in the 9th draft of the Postal Law. What would the amount of this new tax be? What 
types of firms would it be imposed on, and how woul d this tax be calculated ? If this tax would be S/C/W/289 
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  imposed on private express delivery services companies, please explain China’s rationale for doing 
so. 
14.  In September 2007, China issued “express deliver y standards” with an effective date of 1 
January 2008.  China did not provide any formal opportunity for interested parties to provide comments on these standards before they were issued.   
(a) Are these standards mandatory or voluntary?   
(b) Can China confirm that it will delay implem entation of the standards until interested 
persons have an opportunity to provide their views?   
(c) Can China confirm that the standards will not discriminate against foreign express 
companies or impose undue burdens on their operations? 
15. Foreign express delivery companies have reported that China’s licensing process for trucking 
services is complicated and prolonged and serves as an impediment to the efficient supply of express 
delivery services.  Can China please describe any plan s it has to facilitate the granting of these 
licenses? 
VI. TELECOMMUNICATIONS 
16. In the GATS Schedule accompanying its Protocol of Accession, China made commitments 
with regard to foreign equity and geographical limitations in the telecommunications sector.  What 
specific measures has China issued and implemented to reflect the phased-in liberalization of these 
commitments to date?   Are these measures public?  Please identify them.  
17. Article 5 of the Regulation on the Administration of Foreign Invested Telecommunications 
Enterprises , issued by the State Council in Decree No. 333 on 11 December 2001 (effective 
1 January 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). As the United St ates has previously commented, this capital 
requirement is excessively high, both when viewed in relation to the norms in other economies and in the specific context of China's telecommunications market. During last year’s transitional review, 
China asserted (in document S/C/M/85 at para. 30)  that “such requirement was necessary both to 
guarantee the normal business operation and to safeguard the interests of users of telecommunication services, as the telecommunications industry was a capital-intensive industry involving economies of 
scale.”  While many operators do engage in capit al-intensive operations and take advantage of 
economies of scale, China appears to be restricting market entry through this requirement to a subset 
of the potential telecommunications market entran ts.  For example, resale-based operators, of which 
there are hundreds in many markets, operate su ccessfully with relatively little capital outlay.  
Similarly, operators offering services over high-sp eed Internet connections, such as VOIP, require 
little capital to operate.  Additionally, some comp anies forego economies of scale to provide niche 
services, such as leased line services or corporate data services, targeting a limited number of customers. Finally, even for capital-intensive  services, if relying on infrastructure located 
substantially outside of China (e.g., satellite-based se rvices, or submarine-cable based services), there 
would appear to be no reason to need to invest significantly in China to provide a broad range of 
services  In all these cases, the current high capitali zation requirement appears to be an arbitrary 
hindrance to legitimate and rational business models  that should be permitted based on China’s WTO 
commitments.  As the United States noted during last year’s transitional review, the fact that there has been little or no new entry in the basic telecommunica tions sector suggests that this high capitalization 
requirement is functioning as a market entry dete rrent, for both Chinese and foreign operators.  We 
understand that China is currently reviewing these requirements with a view to making them less  S/C/W/289 
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  burdensome, which would be welcome.  Does China expect revisions to these requirements to be 
implemented this year?  Please explain.  
18. In paragraph 314 of the Working Party Report accompanying China’s Protocol of Accession, 
China agreed to permit foreign app licants in any sector subject to joint venture requirements to freely 
choose a joint venture partner, even from outside the sector being applied for.  In response to a 
question at last year’s transitional review about why China prohibits partnering with non-incumbent 
operators, China stated that “the number of li censes for basic telecommunication services was limited 
due to the scarcity and availability of such scarce  resources as frequencies, numbers and rights of 
way.  In China, there were already six major national basic telecommunication service operators, and 
most of the frequencies and other scarce resources ha d already been allocated to these operators.”  
This response, however, raises the same concerns desc ribed above.  Many legitimate services, such as 
resale-based services, Internet-b ased services, niche-services, and services based on infrastructure 
located outside of China, can be provided without competing for scarce resources.    
(a) Even where scarce resources are implicated, as in the cases of rights of way, numbers 
or frequencies, what evidence does China have  to demonstrate that such resources are 
exhausted, particularly given the evidence that  incumbents continue to grow at a rapid 
rate?   
(b) Given that China has a duopoly in each major market segment, i.e., wireless, fixed, 
and satellite, it is hard to conceive of resource exhaustion, when major markets 
typically support dozens, even hundreds of operators in   certain segments.  Doesn’t China have significantly unused spectrum (i.e . over 100 megahertz) that has yet to be 
released to the market given government al concern over whether Chinese consumers 
are ready for 3G wireless services?   
(c) As the United States has previously noted, to  date, there have been no cases of China 
issuing licenses in the basic telecom sector  where the Chinese joint venture partner 
was not also an existing basic telecom licensee.  Although Chinese officials have 
justified preventing additional market entr y as prudent market management, designed 
to prevent “excessive competition”, how is su ch a policy consistent with (i) China’s 
commitment not to limit the number of market participants and (ii) China’s commitment to permit foreign companies free choice of joint-venture partners? 
19. Please provide an update on the number, nature  and foreign affiliation of both basic and 
value-added service suppliers now operating in China. 
20. In paragraph 309 of China’s Working Party Re port, China agreed that, upon its accession to 
the WTO, the organizations regulating services indu stries 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 telecommunica tions regulator that is separate from, and not 
accountable to, any supplier of basic telecommunicati ons and makes decisions on an impartial basis.  
What structural mechanisms within the Ministry of  Information Industry (MII) ensure that MII’s role 
in industrial promotion (e.g., for TD-SCDMA) does not conflict with its obligation to be impartial?  
How does China reconcile an obligation of its re gulator to be impartial with measure providing 
advantages for deploying TD-SCDMA (loans, more rapid approval of a standard, preferential test 
licenses, policy support, etc.)?  
21. China has repeatedly stated its commitmen t to licensing wireless technologies in a 
technology-neutral manner, letting operators  choose technologies solely on commercial 
considerations.  Does this commitment extend to  all wireless technologies, including wireless 
broadband technologies such as WiMax, or only est ablished “3G” technologies?  Please explain. S/C/W/289 
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  22. Please provide an update on China's draft telecommu nications law.  Is it still being circulated 
in draft form among China's ministries and agencies?   When will this draft law be circulated for 
public comment?  How will China provide a reasonable period for written comments to be submitted 
on the draft law?   
23. Is China planning on updating its domestic defin ition of value-added services?  If so, what is 
the timetable? 
24. We understand that  China allows Hong Kong-based satellite operators to sell satellite 
capacity (space segment) directly to broadcasters lo cated in China, who then use their own uplink 
facilities to distribute the programming throughout China .  At the same time, China prohibits 
operators of other WTO Members similar arrangeme nts, requiring them to contract through a 
domestic Chinese operator to reach their customers.   How does China see this policy as consistent 
with its MFN obligations under the GATS? 
25. China’s State Administration of Radio, Film and Television (SARFT) issued Notice No. 72 
on 24 July 2007. 
(a) This notice requires CCTV and provincial sat ellite TV and radio channels to move 
their channels from certain foreign operateted satellites to the domestic satellites 
Sinosat-3 and Chinasat 6 B satellites.  Si nce this measure appears to provide a 
preference for a domestic operator, how is this measure consistent with the national 
treatment obligations China has undert aken under the GATS with respect to 
international telecommunications services? 
(b) This Notice additionally requires certain  DTH TV channels and 34 foreign TV 
channels to be moved from a China-based sat ellite (Sinosat 1) to a satellite owned by 
Hong Kong based satellite operator APT.  Ot her foreign satellite operators, however, 
appear prohibited from carrying DTH signals.  How is this measure consistent with 
China’s MFN obligations under the GATS? 
VII. CONSTRUCTION SERVICES 
26. In September 2002, Ministry of Construction (M OC) and the Ministry of Foreign Trade and 
Economic Cooperation (now MOFCOM) issued the Rules on Administration of Foreign-Invested 
Construction Enterprises (known as Decree 113) and Rules on the Administration of Foreign-Invested 
Construction Engineering and Design Enterprises  (known as Decree 114). 
27. Decrees 113 and 114 create concerns for foreign firms by imposing new and more restrictive 
conditions than existed prior to Ch ina's WTO accession, when they we re permitted to work in China 
on a project-by-project basis pursuant to MOC rules.  In particular, these Decrees for the first time 
require foreign-invested enterprises to incor porate in China, and they impose high minimum 
registered capital requirements and technical personne l staff requirements that are difficult for many 
foreign-invested enterprises to satisfy.  Decree 113 al so limits the scope of projects (in terms of size 
and scale) permitted to foreign-invested enterprises in comparison with the rights enjoyed by domestic 
companies. 
28. Although China issued implementing rules for Decree 114 in late 2006 that address some of 
the concerns of foreign construction engineering and design enterprises, other aspects of these rules 
are troubling.   
29. In a related measure, Circular 200 impos es certain overly bur densome qualification 
requirements on foreign suppliers of project management services.   S/C/W/289 
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  30. The United States remains concerned about many  aspects of China’s regime for construction 
services and for construction engineering and desi gn services, including those described above, and 
how this regime conforms with China’s GATS obligati ons.  In connection with last year’s transitional 
review before this Council, the United States asked questions about some of these concerns, but China 
did not respond to them.  The United States repeat s those questions below and asks some additional 
questions and would request that China provide responses to them during the upcoming transitional 
review before this Council. 
(a) Under Decree 113, foreign-invested enterp rises are limited in the kinds of projects 
they can apply to undertake, raising na tional treatment issues since domestic 
enterprises face no such restrictions. Does China intend to broaden the scope of 
projects that foreign-invested  enterprises can undertake? 
(b) With regard to Decree 113, can China confirm that it will consider reducing the 
registered minimum capital requirements?  Will China also consider the financial 
strength of the parent company and/or bonding and other guarantee arrangements in 
lieu of the registered minimum capital requirements?   
(c) With regard to Decree 113, can China c onfirm that, similar to the practice under 
Decree 114, it will take into account project experience outside of China in qualifying 
companies to carry out certain “grades” of projects?  
(d) With regard to the implementing rules for D ecree 114, can China confirm that it will 
consider the experience of parent and aff iliated companies of the foreign enterprise 
when examining qualifications to carry out certain “grades” of projects?  Can China also consider further relaxation of the personnel requirements under Decree 114?  
Will China consider revising Decree 114 to  allow foreign companies to receive all 
classes of licenses without a trial period  under a smaller-scale license? Along with 
these changes, will China consider making the implementing rules for Decree 114 
permanent? 
(e) China does not allow foreign companies to  provide project management services 
without already holding construction enterp rise qualifications.  Could China provide 
information on how it might remove this overly burdensome aspect of its regime, 
either through revising Circular 200 or other measures?  
VIII.  LEGAL SERVICES 
31. While the United States acknowledges the steps China has taken toward opening the legal 
services sector, foreign firms continue to face onerous restrictions regarding market access and 
national treatment in China.  For example, despite  China’s explanation at past transitional reviews 
before this Council, the United States remains c oncerned over China’s imposition of a three-year 
waiting period before a foreign law firm can open each additional office in China, particularly 
because it includes an application process that coul d take as long as nine months and requires that 
market need be demonstrated.  Please describe wh ether China has any current plans to address this 
concern.  
IX. TRANSPARENCY 
32. In China’s Protocol of Accession and accompanying Working Party Report, Members 
recognized the overriding importance of transparen cy through a host of provisions.  Since China’s 
accession, China has made notable improvements in the transparency of its trade regime, particularly 
through the many notifications that it has made  to the WTO’s councils and committees as well as 
through its use of numerous official journals, othe r publications and the Internet to publicize new or S/C/W/289 
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  modified trade-related laws, regulations and other m easures.  Nevertheless, there remains much to be 
done to further improve transparency in China, as China itself has acknowledged.  Transparency is a 
critically important area, both from a governmental perspective and from a business perspective.   
33. In Section 2(C) of its Protocol of Accession, China specifically committed to establish or 
designate an official journal dedicated to the pub lication of all trade-related measures, including, inter 
alia, “all laws, regulations and other measures pertaining to or affecting trade in . . . services.”  The 
term “laws, regulations and othe r measures” is defined broadly as “laws, regulations and other 
measures of the central government as well as local regulations, rules and other measures issued or 
applied at the sub-national level.”   
34. During past transitional reviews, China has stated that its official journal was the China 
Foreign Trade and Economic Cooperation Gazette , now published by MOFCOM and known as the 
MOFCOM Gazette.  Until March 2006, however, only  trade-related measures issued by MOFCOM, 
either on its own or jointly with other ministri es or agencies, were published in the MOFCOM 
Gazette; trade-related measures issued by other mi nistries and agencies were not published in the 
MOFCOM Gazette.  In March 2006, China’s State Council issued a notice directing all central, 
provincial and local government entities to begin sendi ng copies of all of their trade-related measures 
to MOFCOM for immediate publication in its Gazette.   
(a) Please provide an update on the progress being made by central, provincial and local 
government entities in fulfilling the Stat e Council’s directive to send measures 
pertaining to or affecting trade in services to MOFCOM for publication in the MOFCOM Gazette.  As part of that up date, please identify the government entities 
that regularly send their services measures to MOFCOM for publication in the 
MOFCOM Gazette.  Please also describe the types of services measures (e.g. laws, regulations, rules, measures, notices, decisions, etc.) regularly being sent to MOFCOM for publication in the MOFCOM Gazette.   
(b) With regard to measures pertaining to or affecting trade in services, please describe 
any progress that China has made during the past year in implementing the 
commitment that it made in Section 2(C) of its Protocol of Accession to provide a reasonable period for public comment on new or modified measures before implementing them, except in certain specified instances.   
 
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