China WT/TPR/S/230 
 Page 1 
 
 
I. ECONOMIC ENVIRONMENT 
(1) CHINA 'S TRADE AND DEVELOPMENT POLICIES  
1. Since 1978, China has pursued a strategy of gr adual transition from a centrally planned to a 
market-based economy coupled with an "open door" policy that has involved substantial liberalization 
of its international trade and investment regimes.  This strategy has delivered sustained and rapid real 
economic growth averaging about 10% annually  between 1978 and 2008, and has seen GDP per 
capita increase fifteen-fold from around US$220 to US$3,400. 
2. Economic reforms began in the agriculture sector.  Linking remuneration to output and 
granting autonomy to farming households produced la rge increases in agricu ltural productivity, which 
has allowed China to liberalize agricultural imports  considerably and still compete effectively with 
overseas producers.  During this process exposure to  international trade has improved agricultural 
productivity further.  The reform also freed surplu s labour from agricultural activities, which has been 
a source of productivity increases in other sectors of the economy.   
3. Trade and investment liberalization played an  important role in extending China's reform 
programme to the manufacturing sector.  Special economic zones (SEZs) were separated from the rest 
of the predominantly state-controlled economy and la rgely freed from import and export restrictions.  
These attracted foreign direct investment (FDI) in manufactured export processing, provided China with access to imported technology and over seas marketing networks, and created new job 
opportunities and training for China's labour force.  The SEZs were expanded to  other kinds of zones 
specialized in high technologies, free-trade zon es, and bonded areas to encourage processing trade.  
Processing trade now accounts for around 40% of Chin a’s total international trade (imports and 
exports).  Foreign invested enterprises (FIEs) were at tracted to invest in the zones also by favourable 
tax incentives
1, although these incentives are being phased out  as China unified its enterprise income 
tax on FIEs and domestic enterprises in 2008.  FI Es currently account for more than 50% of China's 
foreign trade and around 84% of its processing trade. 
4. Beyond the SEZs, China has considerably reduced  its tariffs and other barriers to imports.  
China's simple average applied MF N tariff rate was cut from around 50% in the early 1980s to 15.6% 
in 2001 and to 9.5% in 2009.  In 2009, tariffs acc ounted for 2.5% of total tax revenue.  Import quotas 
were eliminated in 2005.  China’s export regime ha s also been simplified, but it remains complex and 
measures continue to be used to manage certain  exports.  Membership in the WTO has acted as a 
catalyst for trade policy reform in China, particular ly of import barriers, and provided China with the 
security of the rules-based trading system on wh ich to base its export growth.  Total merchandise 
exports and imports were e quivalent to 44% of GDP in 2009, up from less than 10% in 1978.  China 
considers its participation in regi onal and bilateral agreements to be  complementary to its membership 
in the multilateral trading system and to offer it additional ways of expandi ng and diversifying its 
trade. 
5. China's liberalization of trade and FDI h as stimulated competition in the economy and 
contributed to the improved competitiveness of dom estic producers.  Starting from the mid 1990s, the 
Government began to privatize and restructure st ate-owned enterprises (SOEs) and to facilitate the 
development of private enterprise.  FDI has encour aged both the emergence of the private sector and 
the scaling-back and restructuring of the SOEs.  Although the Government is still "guiding" the 
allocation of resources in the economy, the market is playing an increasingly important role and the 
private sector now accounts for more than 60%  of GDP.  
                                                      
1 WTO (2006). WT/TPR/S/230 Trade Policy Review 
Page 2 
 
 
6. China's dependence on export-led growth, particul arly as a global platform for exports of  
manufactured products, left it vulnerable to the eff ects of the global economic recession that began in 
late 2008.  In 2009, China's exports fell by 16% and its imports fell by 11%, reflecting the high 
import-intensity of its manufactured export sector (T able I.1).  Real GDP growth declined from 9.6% 
in 2008 to a year-on-year rate of 6.2% in the firs t quarter of 2009, the lowest rate in more than a 
decade.  
Table I.1 
Selected macroeconom ic indicators, 2005-09 
  2005 2006 2007 2008 2009 
Nominal GDP (Y billion)a 18,493.7 21,631.4 26,581.0  31,404.5  33,535.3 
Nominal GDP (US$ billion) 2,256. 9 2,712.9 3,494.0  4,519.5  4,909.0 
Real GDP (Y billion, 2005 prices) 18, 493.7 20,838.1 23, 789.3  26,081. 3  28,353.1 
Real GDP (US$ billion, 2005 prices) 2,256.9 2,613.4 3,127.1  3,753. 4  4,150.4 
GDP per capita (Y) 14,185.4 16,499.7 20,169.5  23,707.7   .. 
GDP per capita (US$) 1,731.1 2,069.3 2,651.3  3,411.8   .. 
National accounts (%age change)      
Real GDP 11.3 12.7 14.2 9.6 8.7 
Consumptionb 4.0 4.5 5.3 4.1  4.6 
Investmentb 3.9 4.9 5.1 4.1  8.0 
Net exportsb 2.5 2.2 2.6 0.8  -3.9 
Unemployment rate (%)c 4.2 4.1 4.0 4.2 4.3 
Prices and interest rates      
Inflation (CPI, %age change) 1.8 1.5 4.8   5.9   -0.7 
Lending rate (%, period average) 5.58 6.12 7.47  5.31   .. 
Deposit rate (%, period average) 2.25 2.52 4.14  2.25   .. 
Money and credit (%age change, end period)      
Money supply (M2) 18.0 15.7 16.7 17.8 27.7 
Credit to private sector (end period) 11.7 17.2 13.9 12.4  .. 
Exchange rate      
Yuan per US$ (period average)d 8.194 7.973 7.608  6.949  6.831 
Real effective exchange rate index (%age change)e  -0.2   2.1   5.0    8.5   .. 
Nominal effective exchange rate index (%age ch ange)   0.1   2.7   2.2    6.0   .. 
Fiscal policyf (% of GDP)      
Government balance -1.3 -0.8 0.6 -0.4 -2.8 
Total revenue 17.2 18.3 19.9 19.5  20.6 
Tax revenue 15.6 16.1 17.2 17.3  17.7 
Total expenditure 18.5 19.1 19.3 19.9  23.4 
Public sector total debtg 17.6 16.2 20.2 17.7 21.0 
Domestic debt  17.2 15.9  ..   ..   .. 
Saving and investment      
GDP by expenditure approach (Y billion) 18,869.2 22,165.1 26,309.8  30,686.0   .. 
Final consumption expenditure (Y bil lion) 9,782.3 11,059.5 12,879.4  14,911.3   .. 
Gross capital formation (Y billion) 8,064.6 9,440.2 11,091.9  13,361.2   .. 
Net export of goods and services (Y b illion) 1,022.3 1, 665.4 2,338.1  2,413.5   .. 
Savings (Y billion) 8,834.6 10,486.4 13,340.5  15,774.7   .. 
Table I.1 (cont'd) China WT/TPR/S/230 
 Page 3 
 
 
  2005 2006 2007 2008 2009 
Savings to expenditure approach GDP (%) 46.8 47.3 50.7  51.4   .. 
Investment to expenditure approach GDP (%) 42.7 42.6 42.2  43.5   .. 
Savings-Investment gap (% of GDP)   4.1   4.7   8.5    7.9   .. 
      
External sector (% of GDP, unless otherwise indicated)      
Current account balance  7.1 9.2 10.6 9.4   5.8 
Net merchandise trade  5.9 8.0 9.0 8.0   5.1 
Value of exports 33.8 35.7 34.9 31.7 24.5 
Value of imports 27.8 27.7 25.9 23.8 19.4 
Services balance -0.4 -0.3 -0.2 -0.3  -0.6 
Capital account 0.2 0.1 0.1 0.1  .. 
Financial account  2.6 0.2 2.0 0.4  .. 
Direct investment 3.0 2.2 3.5 2.1  0.7 
Balance-of-payments  9.2 9.1 13.2 9.3  8.0 
Merchandise exportsh (%age change) 28.5 27.2 25.8 17.6  -16.1 
Merchandise importsh (%age change) 17.6 19.7 20.3 18.7  -11.2 
Service exportsh (%age change) 19.2 23.6 32.8 20.4  .. 
Service importsh (%age change) 16.2 20.3 29.0 22.1  .. 
Gross official reservesi (US$ billion; end period) 821.5 1,068.5 1,530.3 1,949.3  .. 
Foreign exchangej (US$ billion; end period) 818.9 1,066.3 1,528.2 1,946.0 2,399.2 
Total external debt (US$ billion;  end period) 281.0 323.0 373.6 374.7  .. 
Debt service ratiok 3.1 2.1 2.0 1.8  .. 
.. Not available. 
a National GDP figures in Yuan billion reflect updated results from China's 2nd National Economic Census. 
b Contribution to annual growth in per cent.  Figures are taken from the National Bureau of Statistics of China, Statistical 
Yearbook 2009,  Table 2-20. 
c Registered unemployment in urban areas. d Exchange rate figures are taken from IMF (2010) , International Financial Statistics, February. 
e A positive increase in the real effective ex change rate means an appreciation of re nminbi relative to the other major currenc ies in 
the index. 
f Including central and local governments. g For 2005 and 2006, raw public sector debt figures are ta ken from the National Bureau of Statistics of China, Statistical Yearbook 
2007;   percentage figures for 2007 to 2009 are taken fr om IMF (2009), Public Information Notice No. 09/87. 
h Growth rates on merchandise and se rvice trade are based on US dollars. 
i Excluding gold, including SDRs a nd Reserve Position in the Fund. 
j Excluding gold, SDRs and Reserve Position in the Fund. 
k Debt service ratio refers to the ratio of  the payment of principal and interest of foreign debts to the foreign exchange rece ipts 
from foreign trade and non-trade services of the current year. 
Source:  National Bureau of Statistics of China, Statistical Yearbook (various issues);   National Bureau of Statistics online 
information.  Viewed at:  http://www.stat s.gov.cn/english/newsandc omingevents/t20100121_402615502.htm 
[22/01/2010];  and http://www.stats.gov.cn/e nglish/newsandcomi ngevents/t20100203_402619228.htm 
[10/02/2010];  Ministry of Finance online information.   Viewed at: http://www.mo f.gov.cn/mof/zhengwuxinxi/caiz 
hengxinwen/201003/t20100316_276816.html (in Chinese) [16/03/10].   State Administration of Foreign Exchange;  
and data provided by the authorities. 
7. Like other WTO Members, China in general resist ed a protectionist response to the effects of 
the global economic crisis (Table AI.1).  Since its last Review in 2008, China has maintained its long-
term strategy of gradually opening up its economy to international trade and FDI.   
8. The Chinese Government responded to the crisis  with expansionary fiscal and monetary 
policies and the introduction of a large economic st imulus package designed, collectively, to boost WT/TPR/S/230 Trade Policy Review 
Page 4 
 
 
domestic demand and help sustain economic growth in  the face of the shar p decline in external 
demand.   
9. In 2009, total Government revenue increased by  11.7% while total Government expenditure 
rose by 21.2%, leading to an increase in the budge t deficit from 0.4% of GDP in 2008 to 2.8% of 
GDP in 2009.  Part of the increase in budget expenditu re was directed to education, medical care, and 
social security.  In April 2009, the Government announ ced an additional three-year health care reform 
amounting to a Y 850 billion investment that aims to lay the foundation for equal access to essential 
health care for all in China by 2020.2  The 2009 budget also forecast  a central government debt to 
GDP ratio of no more than 20%.3  The central Government debt is around 60% of GDP when off-
budget government debt is included, such as debt  owed by policy banks, local governments, asset 
management companies, pension, and banks' non-performing loans.4 
10. Building on the strength of its fiscal positi on, China announced an economic stimulus 
package in November 2008 involving the injection of an additional Y 4 tr illion (13% of 2008 GDP) 
for investment in the economy in 2009-10.   
11. The People's Bank of China (PBC) announced a shift from a tight monetary policy to a 
moderately loose one in September 2008, to help stimulate domestic demand.  Since then, interest 
rates and reserve requirements have been cut se veral times and foreign exchange sterilization 
operations have been reduced.  A la rge part of the stimulus packag e is to be implemented through 
increased bank lending (only Y 1.18 trillion of th e package will come from the Central Government 
budget).  Moreover, in 2009, while  keeping benchmark lending costs unchanged, the PBC has been 
encouraging banks to provide loans, through, inter alia , "window guidance".  New bank lending 
increased rapidly in 2009, almost doubling from the previous year to Y 9.6 trillion.5  Conscious of the 
risks of excessively loose monetary policy contri buting to inflationary pressures and compounding the 
misallocation of credit in the economy, the PBC began to reduce monetary stimulus in 2010 by 
increasing the reserve requirement ratio.     
12. Between July 2005 (when China's exchange rate  reform started) and September 2008, the 
renminbi (RMB) appreciated by 21.4% against the U. S. dollar, 13.6% against the yen, and remained 
practically unchanged against the euro.6  Since then, the RMB has rema ined stable against the U.S. 
dollar, and depreciated against some major currencies (for example, the euro) in 2009.7   
13. In its most recent public evaluation of Chin a’s exchange rate, the IMF welcomed the 
important progress made in the past few years in increasing the market’s role in determining the 
exchange rate, as well as the consequent substantial real appreciation that has been achieved since the 
exchange rate reform in 2005.  Some IMF direct ors nevertheless supported the view that the RMB 
remains "substantially undervalued".  Looking ah ead, many directors considered that a further 
strengthening of the RMB would be part of a comp rehensive strategy to rebalance the economy by 
increasing the purchasing power of households and the labour share of income, and reorienting 
investment toward non-tradable sectors.  But a number of other directors pointed to the 
methodological difficulties of making exchange ra te assessments.  These directors generally 
                                                      
2 China Daily , "China outlines plans on health care reform in 2009", 24 July 2009. 
3 Central Government online information.  Viewed  at :  http://www.gov.cn/2009lh/content_ 1259827 
_2.htm (in Chinese) [20/10/09]. 
4 Standard Chartered, "Spend, spend, spend:  Our guide to China’s 2009-10 fiscal stimulus package", 
January 2009. 
5 In 2009, M2 rose by 27.7%. 
6 PBC (2008). 
7 The exchange rate has remained within a band of Y 6.81–6.87 to the U.S. dollar. China WT/TPR/S/230 
 Page 5 
 
 
considered that exchange rate appreciation w ould only play a supplementary role in supporting 
reforms to reorient the Chinese economy and should be pursued in a gradual manner, as and when 
conditions permit.8 
14. The PBC maintains that under Ch ina's "managed floating" exchange rate regime, the RMB 
rate is based on supply and demand of the market and is adjusted with reference to a basket of 
currencies.  Against the background of the global  economic recession, when, according to the PBC, 
many governments allowed their currencies to depreci ate in order to mitigate the negative impact of 
the crisis on their exports, China maintained a stable  RMB exchange rate.  The authorities state that in 
the future, China intends to further improve the managed floating exchange  rate regime based on 
supply and demand of the market and with reference to a basket of currencies, and to maintain the 
exchange rate of the RMB basically stab le at an adaptive and balanced level. 
(2) RECENT ECONOMIC AND TRADE DEVELOPMENTS  
15. Following the introduction of more expansi onary fiscal and monetary policies and the 
economic stimulus package at the end of 2008, fixe d asset investment in China rose by 30% in 2009, 
industrial output rose 11% and retail sales rose by almost 17%.  Real GDP growth rebounded from a 
year-on-year rate of 6.2% in the first quarter of  2009 to 7.9%, 9.1%, and 10.7%, respectively, in the 
second, third, and fourth quarters of the year.  Over all, China achieved real GDP growth of 8.7% in 
2009.  Investment accounted for 8.0 percentage  points of that total and consumption for 
4.6 percentage points, but the decline in net exports  dragged growth down by 3.9 percentage points.  
China's authorities consider that real GDP growth  of 8% is needed to prevent unemployment from 
rising.  The urban registered unemployment rate w as 4.3% in 2009, up from 4.2% in 2008, but this is 
not considered to be an accurate indicat or of China's true unemployment situation.9  China's recorded 
consumer price index (CPI) fell by 0.7% in 2009, bu t it began rising again at the end of the year, by 
0.6% and 1.9%, in November and Dece mber 2009, and 1.5% in January 2010. 
16. China's international trade was significantly aff ected by the global economic crisis and the 
sharp contraction of demand in its traditional export markets, but not as much as many other WTO 
Members.  In 2009 China's trade surplus fell by 34 %, yet at the same time it overtook Germany to 
become the largest exporter in the world.  Addi ng exports and imports together, China became the 
second largest trader in the world (after the United States), although it remains the third largest trader 
when counting the EU as one.  Its exports and imports of goods and services accounted, respectively, 
for 35% and 27% of GDP in 2008, down from the 38% and 30% in 2007. 
17. China's merchandise exports grew by 17% in 2008;  in 2009, they declined by 16% due 
mainly to the drop in external demand.  There is a sign of recovery, as exports rebounded by 21% 
year-on-year in January 2010.  Manufacturing prod ucts remain the dominant component of China's 
exports, accounting for 93% of the total (Table AI.2 ).  In 2009, exports of textiles and clothing 
declined relatively less than many other products, pa rtly reflecting the phase-out of export restrictions 
under China's bilateral agreements (with th e EU, the United States and South Africa).10  Their share in 
total exports increased, while the share of machinery products declined (Table AI.2). 
18. Of total exports, the share of processed e xports fell from 51% to 48%.  Under "processing 
trade", enterprises (mainly FIEs as they account for 84% of total exports a nd imports under processing 
trade) import inputs, assemble them in bonded areas in China, and export the assembled products.  In 
                                                      
8 IMF online information. Viewed at: http://www.imf.org/external/np/sec/pn/2009/pn0987.htm#P26_ 
395 [20/10/09]. 
9 Cai, Du and Wang (2009).  
10 WTO (2008).  WT/TPR/S/230 Trade Policy Review 
Page 6 
 
 
the first half of 2009, both e xports and imports under "processing trade" fell, reflecting the difficulties 
of FIEs after the outbreak of the global crisis in 2008.  Processing trade started to recover in the second half of 2009. 
19. China's merchandise imports increased by 18% in  2008;  in 2009, they declined by 11% but 
rebounded in January 2010 by 85.5% y ear-on-year.  Due to the fall in prices of primary products in 
2009, particularly mining products, their import value and thus their share in total imports declined 
(from 27% in 2008 to 25% in 2009), althoug h their import volumes continued to increase.
11  On the 
other hand, the share of manufactures in total impor ts continued to decline (Table AI.3).  In the 
second half of 2009, partly reflecting improved dom estic demand due to China's economic stimulus 
package, imports of machinery products  were declining at a slower rate. 
20. The main destinations for China's merchandi se exports remain the EU, the United States, 
Hong Kong SAR, and Japan (Table AI.4).  The ma in sources of its impor ts are Japan, the EU, 
Republic of Korea, Chinese Taipei, and the United St ates (Table AI.5).  China has particularly large 
bilateral trade deficits with some Asian econom ies such as Chinese Taipei , Korea, and Japan, from 
where it imports components for final assembly for export to, inter alia , the United States and the EU.  
As an export platform in the global production chai n, China continues to run large bilateral trade 
surpluses with the United States and the EU. 
21. In 2008, trade in services increased rapidly in va lue and as a share of total trade.  Services 
comprised 9.3% of China's total exports and 12.9% of its imports, up from 8.6% and 11.8%, 
respectively, in 2006.12  Although remaining in deficit, Chin a's exports of construction services, and 
of research and development increased rapidly in 2008, by 92%, and 57%, respectively.  Imports of 
construction services, computer related services, and communication services increased by around 40-50%.
13   
22. Foreign investment in services has been increasing fast, with the share of services in total FDI 
rising from some 20% in 2001, to more than 40% in  2009.  The authorities indicated that from 2001, 
when China joined the WTO, to the end of Se ptember 2009, more than 90,000 foreign-invested 
enterprises (FIEs) were set up in China to engage in  services, with an investment value of more than 
US$160 billion.   
23. China remains one of the biggest recipients of  FDI in the world.  In 2008, it attracted 
US$108 billion of FDI, up almost 30% from 2007.14  However, the pattern of FDI inflows changed 
during the year, as FDI began to decrease from Octobe r 2008 and continued to fall by 18% in the first 
half of 2009.15  The slowdown of FDI into China reflected not only the global financial crisis and 
hence the financial constraints for multinational co rporations in the originating countries, but also 
declining external demand for China's exports.   
                                                      
11 MOFCOM online information.  Viewed at: http ://zhs.mofcom.gov.cn/aarticle/Nocategory/ 200910/ 
20091006592498.html (in Chinese) [22/02/10]. 
12 WTO Secretariat calculation, based on SAFE onlin e information on balance of payments.  Viewed 
at:  http://www.safe.gov.cn/model_safe/tjsj/tjsj_d etail.jsp?ID=110500000000000000,37&id=5 (in Chinese) 
[10/02/10]. 
13 SAFE online information, BOP Table for 2008.  Viewed at:  http://www.safe.gov.cn/model_ safe/ 
tjsj/tjsj_detail.jsp?ID=110500000000000000,37&id=5 (in Chinese) [10/02/10]. 
14 UNCTAD (2009). 
15 China Daily , "China GDP grows 7.1% in first half 2009", 16 July 2009. China WT/TPR/S/230 
 Page 7 
 
 
24. China has become an important source of FDI.  In 2008, it ranked 13th in the world, and FDI 
from China reached US$52 billion, up by 132% from 2007.16  Outflows from China continued to rise 
in 2009 as exchange rate fluctuations and falling asset prices abroad due to the global crisis all created 
opportunities for Chinese companies.17 In 2008, the top three sectors for China's outward investment 
were: commercial services, financial services, and wholesale and retail services.  The Government 
encourages Chinese companies to inv est abroad, including in countr ies rich in natural resources.18  
(3) STRUCTURAL POLICIES  
25. China's transition from a centrally planned to  a market-based economy has brought important 
economic achievements, although it has been comple x and is producing various  economic imbalances 
along the way.  Managing and correcting these im balances represents a challenge for China's 
policymakers, both for domestic purposes and from an  international perspective because of China's 
size and the depth of its integration into the global economy. 
26. From the point of view of this Review, three features of China's current stage of economic 
development and reform stand out.  One is China's large and persistent surplus of domestic savings 
over domestic investment, which has as its internati onal counterpart China's current account surplus in 
its balance of payments.  The second is Chin a's heavy dependence on overseas demand for its 
manufactured exports to sustain economic growth.  The third is overcapacity in several of China's 
core industries, particularly in the face of curre nt reduced global demand for the output of those 
industries. 
27. There are two key reasons for China's high sav ing rate (51% of GDP relative to domestic 
investment at 43% of GDP).  One lies at the househol d level.  The lack of a social safety net covering 
education and healthcare as well as retirement pensi ons, particularly in view of China's aging 
population19, leads to a high level of precautionary saving at all income levels.  For example, rural 
families with annual income between Y 888 a nd Y 1,776 (roughly between US$130 and US$260) are 
estimated to save 17.5% of their income.20  SOEs have in the past fulfilled, in part, the role of social 
safety net for a large proportion of the population, but the importance of SOEs has been steadily 
declining. Therefore, there has been an increasing ne ed to establish a replacement social safety net.  
The second reason is the high enterprise saving rate.  This can be attributed mainly to China's 
underdeveloped capital market, which functions larg ely on the basis of bank lending, with the main 
banks still under state ownership.  As these banks ha ve traditionally favoured le nding to SOEs, private 
enterprises, which are playing an increasingly important  role in the economy, have had to rely on their 
own savings in the form of retained earnings or on savings from relatives or family members to 
finance their investment (Chapter III).21   
28. The structurally high propensity to save in  China at the household and enterprise level 
impedes efforts by the authorities to boost domestic demand so as to achieve a more balanced growth 
path for the economy, including increasing the cons umption of imported goods and services.  Some 
elements of the stimulus packages introduced over the past two years can help to reverse China's 
chronic savings surplus, for example, the long-term  investment in healthcare reform and increased 
                                                      
16 UNCTAD (2009). 
17 UNCTAD (2009). 
18 Bhaumik and Co (2009). 
19 The ratio of employed people to those over 65 years of age is projected to move from nearly 7:1 in 
2005 to approximately 4:1 in 2025 (OECD, 2005, p. 53). 
20 World Bank (2009b).   
21 The authorities argue that banks have traditionally favoured enterprises with good credit standing 
(including SOEs), and companies with not so good credit standing have lacked financing channels. WT/TPR/S/230 Trade Policy Review 
Page 8 
 
 
government expenditure on education and pension reform, as long as it is sustained.  However, much 
of the increase in government expenditure is likely to have only a temporary impact, so that a large 
part of the narrowing of the saving-investment gap in 2009, and concomitant reduction in the current 
account surplus to GDP ratio from 9.4% in 2008 to 5.8% in 2009 (Table I.1) could be reversed as 
fiscal stimulus is removed from the economy. 
29. At the enterprise level, further reforms to modernize China's capital market, including its 
stock and bond markets, are needed to create a mo re efficient allocation of savings in the economy 
and reduce the need for discretionary saving by priv ate enterprise.  Gradual reform of China's capital 
market has continued since its last Review.  In  the past, China's stock market had a split-share 
structure, with large volumes of non-tradeable shar es for listed SOEs and onl y around one third of the 
shares tradeable.  China began converting non-trad eable shares into tradeable shares from 2005.  By 
the end of 2010, about 87% of non-tradeable shares are to be floated, and the China Securities 
Regulatory Commission plans to have all shares floa ted in 2016.  China's corporate bond market 
remains small, with outstanding bonds valued at  only 3.5% of GDP.  China allowed short-term 
commercial paper to be traded in the interbank ma rket from 2005, and allowed the trading of medium-
term notes in 2008.  In 2007, a pilot programme began of trading longer-term bonds on China's two 
stock exchanges.  Currently, in surance companies can purchase corporate bonds and listed banks 
(including foreign banks) can participate in bond trading on the interbank market.22  However, small 
and medium-sized enterprises are still not allowed to issue corporate bonds, which obstructs their 
access to capital.23 
30. China has relied in part on manufactured exports  for the past 30 years to drive its high 
economic growth rate.  Foreign investors from China' s major trading partners have taken advantage of 
China's favourable investment climate and abun dant labour supply to reallocate part of their 
production to China, and they have helped to turn China into a pre-eminent global export platform for 
manufactured goods that is now a key lin k in international supply chains.   
31. In 2009, China's exports fell by 16% due to the cut in external demand, although in light of 
the severity of the global recession the impact will ha ve been surprisingly short- lived if indications of 
strong export growth picking up again in early 2010 are confirmed.  Nonethele ss, the cut in external 
demand has prompted a rethink in China of changing its development strategy.  President Hu Jintao 
has stated recently that China is to continue  opening its economy and to promote domestic demand.24  
The Chinese Government recognizes that this will require  long-term structural reforms to increase real 
incomes throughout all sectors of the economy an d to increase the propensity to consume out of 
income.  Further steps to liberalize the internal market and international trade can assist in this 
process.  The Government is also taking step s to diversify the economy by promoting the 
development of agriculture and increasing the role of the services sector in generating growth and 
employment and developing large- scale consumer-services industries.25  The State Council issued a 
document in March 2007 calling, inter alia,  for a three percentage point increase in the share of 
services in GDP between 2005 and 2010, with a view  to reaching 50% by 2020.  In 2009, services 
                                                      
22 Two foreign banks may even issue RMB-denominated bonds.  
23 The Company Law stipulates the minimum net asse t requirement for a company to issue corporate 
bonds:  Y 30 million for a stock limited company and Y 60 million for a limited liability company. 
24 China economy online information.  Viewed at:  ht tp://www.ce.cn/xwzx/gnsz/szyw/201002/04/ 
t20100204_20918093.shtml (in Chinese) [17/02/10]. 
25 It seems that some local governments in China have begun to focus more on the quality and the 
constituents of economic growth.  The Shanghai Municipal government, for example, has just announced that it 
will no longer rank its municipal districts by GDP growth rates ( Oriental Morning Post , 22 December 2009.  
Viewed at:  http://epaper.dfdaily.c om/dfzb/html/2009-12/22/content_178710. htm (in Chinese) [12/02/10]). China WT/TPR/S/230 
 Page 9 
 
 
accounted for 42.6% of GDP (up from 40.5% in 2005) (Table I.2).  Market deregulation and 
liberalization has a particularly key role to pl ay in achieving this objective (Chapter IV).   
Table I.2 
GDP by sector, 2005-09 
    2005 2006 2007 2008 2009 
GDP by industry at 1978 indices (annual %age change)      
Agriculture, forestry and fishing           5.2            5.0            3.7            5.4            4.2  
Industrya         11.6          12.9          14.9            9.9            8.3  
Construction         16.0          17.2          16.2            9.5          18.2  
Services         12.2          14.1          16.0          10.4            8.9  
 Transport, storage and communication         11.2          10.0          11.8            7.3            3.7  
 Wholesale and retail trade         13.0          19.5          20.2          15.9          12.3  
 Restaurants and hotels         12.3          12.6            9.6            9.6            5.2  
 Financial intermediation         13.8          25.9          27.6          13.3          13.4  
 Real estate         12.2          15.5          24.4            1.0          10.9  
 Other         11.9          10.8          11.3          11.0            7.5  
Share of main sectors in GDP (%)      
Agriculture, forestry and fishing         12.1          11.1          10.8          10.7          10.6  
Industrya         41.8          42.2          41.6          41.5          40.1  
Construction           5.6            5.7            5.8            6.0            6.7  
Services         40.5          40.9          41.9          41.8          42.6  
 Transport, storage and communication           5.8            5.6            5.5            5.2            5.1  
 Wholesale and retail trade           7.6            7.6            7.9            8.3            8.6  
 Restaurants and hotels           2.3            2.2            2.1            2.1            2.1  
 Financial intermediation           3.4            3.7            4.6            4.7            5.0  
 Real estate           4.6            4.8            5.2            4.7            5.0  
 Other         17.0          16.9          16.6          16.7          16.8  
a Including mining and quarrying, manufacturing,  and production and supply of electricity. 
Source: Data provided by the authorities of China. 
32. High household and enterprise savings in China ha ve kept capital costs low.  Input prices 
(such as energy, water, and land) have also b een kept low as the Government emphasized the 
development of manufacturing, especially heavy industry.26  Thus China's manufacturing tended 
towards over-investment and overcapacity.  The ab rupt reduction in external demand in 2009, 
however, highlighted the overcapacity of a number of China's core heavy manufacturing industries, 
such as steel, aluminium, and cemen t. Overcapacity and the consequent export pressure could lead not 
only to potential trade frictions but also more non-performing loans in the coming years.    
33. The privileged position of SOEs also contributed  to over-investment and overcapacity in the 
economy.  The role of SOEs has been strengthene d, if inadvertently and only temporarily, by the 
recent fiscal and financial stimulus measures that ha ve targeted public investment in infrastructure and 
generated increased demand for capital- intensive manufactured products.27  Although this increase in 
demand may provide temporary relie f from conditions of industrial overcapacity, it will clearly not 
correct the underlying structural problem.   
                                                      
26 European Chamber (2009). 
27 Standard Chartered (2009). WT/TPR/S/230 Trade Policy Review 
Page 10 
 
 
34. The Chinese Government is aware of this im balance between demand and supply in China's 
industrial production and, in September 2009, th e State Council announced measures to cut back 
expansion in certain key manufacturing industries.  State guidance of this kind is a second-best policy 
approach.  Structural reforms are needed to deal with the problem of over-investment and 
overcapacity in the economy.  Measures could incl ude stimulating domestic consumption, promoting 
the services industry, and reducing the role of the state in allocating resources by, inter alia,  
liberalizing and deregulating the domestic markets fo r capital and other inputs, allowing key prices to 
be market-determined, and placing state-owned and private enterprises on an equal footing in competing for resources (Chapter III).