RESTRICTED  WORLD TRADE  
ORGANIZATION  S/C/W/308 
26 October 2009 
 (09-5314) 
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 23 Oc tober 2009, from the delegation of the 
United States is being circulated to the Me mbers of the Council for Trade in Services.   
 
_______________ 
 
 
Questions from the United States to China  
  
I. DISTRIBUTION SERVICES:  SALES AWAY FROM A FIXED LOCATION 
1. In past transitional reviews before this Counc il, the United States has sought clarifications 
regarding regulations that China issued in August 2005 governing sales away from a fixed location, or 
direct selling.   The United States supports China’ s efforts 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 dir ect selling operations and would seek the following 
additional clarifications.    
(a) Since the direct selling regulations became effective in December 2005, a number of 
companies, including foreign companies, received direct selling licenses.  However, since July 2007, China has not approved any new applications for direct selling licenses, even though at least 16 domestic and foreign companies have applied.   The 
United States understands that the situati on may now be evolving in a more positive 
direction.  Can China confirm that it will co mplete expeditiously its review of these 
applications and approve an y qualified applicants?   
(b) The direct selling regulations provide that a direct seller in a particular province must 
operate a provincial branch in the provincial capital and a “service center” in each district where the direct seller sells produc ts to consumers.   This system seems 
unnecessary and overly burdensome.  As a first step to streamlining the regulations, 
would China consider changing its require ments from one service center in each 
district to one service center in each city , with approvals granted by city level 
authorities? 
(c) 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 impose the same or a similar requirement on domestic companies.  The United States notes China’s explanation during last year’s transitional review.  However, if China do es not have regulatory concerns that its S/C/W/308 
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  domestic companies should have three years of experience, why is it still applying 
this requirement to foreign direct sellers?   
(d) The United States remains 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 unnecessarily limits 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 receive d by direct sellers.    In addition, the 
direct selling regulations do not allow for compensation based on services rendered. This limitation effectively denies payment for marketing services, and is a significant 
departure from international practice, including the United Nations’ Consumer 
Product Code under which pers ons engaged in direct selling may earn compensation 
from the sales of both products and services. Will China consider amending its compensation practices to come into co mpliance with internationally accepted 
practices regarding direct selling? 
II. DISTRIBUTION SERVICES: RETAIL SERVICES 
2. The United States appreciates that, on 12 Se ptember 2008, China’s Ministry of Commerce 
(MOFCOM) issued a regulation providing that licen sing authority for foreign retailers seeking to 
establish a new outlet (or store) would be devolved from the central government level to the provincial government level.  This change has been  an important step in facilitating the approval of 
new outlets.  However, we will continue to monitor the situation on the ground. 
(a) Can China confirm that foreign retailers will no longer need to satisfy additional 
“informal” minimum capital requirements that  are not imposed on domestic retailers?  
(b) Can China confirm that it will apply any other requirements, including zoning 
requirements, on the same basis to foreign and domestic retailers?   
3. China’s GATS commitment to allo w majority foreign-owned chain store retailers with more 
than 30 outlets to sell motor vehicles was scheduled  to be implemented no later than 11 December 
2006.  However, it does not appear that China has i ssued regulations to implement this commitment.  
In connection with last year’s transitional revi ew before this Council, the United States sought 
clarification on this issue, but China did not provide a response.  Can China confirm that this right is being provided?  If not, why not? 
III. EXPRESS DELIVERY 
4. The United States is very concerned about Chin a’s Postal Law, which entered into force 
October 1, 2009.  Article 51 of the Postal Law prohibits “foreign businesses” from investing in or 
operating domestic express delivery of “letter articl es,” which China interpre ts to exclude such 
businesses from providing domestic express delivery of documents.  In contrast, Chinese domestic express delivery companies are allowed to provide a full scope of domestic express delivery services 
– both document and package delivery.   The United States also is concerned that China may not be 
enforcing the Postal Law and its related regulati ons and standards in a uniform manner, providing 
flexibility on certain aspects of its legal regime to Chinese domestic firms.   
(a) How does China define “foreign business” unde r Article 51’s exclusion of foreign 
businesses from the domestic “letter artic le” market.  Does it include Hong Kong 
companies?  Does it include joint ventures between a foreign company and a Chinese 
company?  S/C/W/308 
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  (b) Can China confirm that it will enforce other aspects of the Postal Law and its related 
regulations and standards in an equal fash ion with respect to domestic and foreign 
companies? 
(c) When does China intend to make public its dr aft regulations to defi ne the scope of the 
postal monopoly?  How will this monopoly be defined? 
(d) How does China intend to interpret the Po stal Law’s provision that establishes a 
Universal Postal Fund?  Can China conf irm that China will not require private 
companies to contribute to this Fund? 
IV. TELECOMMUNICATIONS 
5. On 15 September 2008, through State Council Decree No. 534, China reduced minimum 
registered capital requirements for foreign-inv ested telecommunications enterprises engaged in 
national or cross-provincial basic telecommunica tion services from RMB 2 billion ($292 million) to 
RMB 1 billion ($146 million).   The United States be lieves that this reduced capital requirement is 
still too high, both when viewed in relation to the norms in other economies and in the specific context of China's telecommunications market.  One of  the reasons that the United States believes that 
this level is too high is the fact that China has made commitments to permit resale of basic 
telecommunications services, a common business model that requires minimal investment – and is an important service option in its own right.  China asserte d at last year’s transitional review before this 
Council, however, that “it did not have a specific li cense for “resale” telecommunications service, so 
there was no need to design relevant market acce ss requirement.”  The United States would like to 
know China’s rationale for effectively precluding resale- based services by declining to institute such a 
license category and notes that, in the 2001 te lecommunications “catalogue” (MII Order 429), China 
did in fact include the licensing category “reselling of basic telecommunications services.”  Can China explain the rationale for subsequently eliminating this category, given its GATS commitments (e.g., 
Scheduling Guidelines, incorporated as part of China’s GATS Schedule), providing for the right of a foreign-affiliated suppliers to choose whether to su pply services on either a facilities or resale basis?  
Will China consider re-instituting this licensing categ ory, consistent with its GATS commitments?   
6. 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 a past transitional review before this  Council about why China prohibits partnering with 
non-incumbent telecommunications operators, China stated that “the number of licenses for basic 
telecommunication services was limited due to the scarcity and availability of such scarce resources 
as frequencies, numbers and rights of way.”  China went on to explain that most of the frequencies 
and other scarce resources had already been allocated  to existing operators.  This response, however, 
raises the same concerns described above.  Many legitimate services, such as  resale-based services, 
Internet-based services, niche-services and services b ased on infrastructure located outside of China, 
can be provided without competing for scarce reso urces.   Apart from acce ss to scarce resources, a 
subtext to China’s comments on policies affecting new market entry (evident in recent government-sponsored consolidation) appears to be a goal of ma naging the structure and number of participants in 
the market, guided by an economic needs analysis.    In connection with last ye ar’s transitional review 
before this Council, the United States asked the fo llowing questions about this issue, but China did 
not answer them.  The United States requests that  China answer these questions at this year’s 
transitional review.  
(a) Even where scarce resources are implicated, as in the cases of rights of way, numbers 
or frequencies, what evidence does China ha ve to demonstrate that these resources S/C/W/308 
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  are exhausted, particularly given the eviden ce that incumbents continue to grow at a 
rapid rate?   
(b) What measures has China introduced to ensure that scarce resources can be 
efficiently shared among competitors?  H as China introduced number portability or 
sharing access to physical infrastructure and rights of way? 
(c) Given that China has no more than two or three telecommunications operators in each 
major market segment, i.e., wireless, fixed and satellite, it is hard to conceive of 
resource exhaustion, when major markets t ypically support dozens, even hundreds of 
operators in certain segments.  Does Chin a not have significantly unused spectrum 
(i.e., over 100 megahertz) that has yet to be released to the market given the 
government’s concern over whether Chinese consumers are ready for 3G wireless 
services?   
(d) As the United States has noted above, to date, there have been no cases of China 
issuing licenses in the basic telecommuni cations sector where the Chinese joint 
venture partner was not also an existing basic telecommunications licensee.  
Although Chinese officials have justifie d preventing additional market entry as 
prudent market management, designed to prevent “excessive competition”, how is such a policy consistent with (i) China’ s commitment not to limit the number of 
market participants, (ii) China’s commitmen t not to employ an economic needs test 
and (iii) China’s commitment to permit fo reign companies free choice of joint-
venture partners? 
7. With regard to the issue of choice of partne r, China has an additional requirement which 
appears to be acting as a de facto  market access barrier:  a requireme nt, first instituted in 2000 (State 
Council Order 291, Article 10.1 and replicated in subsequent regulations), that basic 
telecommunications operators be controlled by a State-owned enterprise.  Can China explain the 
rationale for this requirement, which appears unpr ecedented in any WTO Member we are aware of 
(with the exception of Vietnam)?  Given that this requirement significantly limits the scope of entities 
with which a foreign supplier can pa rtner, can China explain how this requirement is consistent with 
paragraph 314 of the Working Party Report?  
8. China has repeatedly stated its commitmen t to licensing wireless technologies in a 
technology-neutral manner, letting operators  choose technologies solely on commercial 
considerations.  Please explain China’s process for allocating and assigning spectrum for 4G services, 
including wireless broadband services offered unde r the currently-available 802.16 standard 
(“WiMax”).  Please also describe any restricti ons China currently imposes on such services and 
technologies, and explain the basis for prohibiting operators from freely choosing their preferred 
technology.  
9. The United States notes that China has made the latest version of its draft 
Telecommunications Law public and has agreed to accept public comments on it.  When is this law 
expected to be finalized?    
10. China’s current regulations give the regulatory authority the right to periodically update 
China’s “catalogue” of telecommunications services.  Th is process could be a useful means for China 
to respond positively to interests of its trading part ners and to facilitate investment in new services 
also beneficial to China.  What is the process for proposing and implementing updates? When is the 
next update expected?  Is China open to accepting proposed updates from its trading partners?   Is 
China planning on updating its domestic definitio n of value-added services?  If so, what is the 
timetable?  S/C/W/308 
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  11. The United States understands that  China allows Hong Kong-based  satellite operators to sell 
satellite capacity (space segment) directly to broad casters located 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 from entering into similar arrangements, requiring them instead to 
contract through a domestic Chinese operator to reach th eir customers.  In connection with last year’s 
transitional review before this Council, the Unite d States asked the following questions about this 
issue, but China did not answer them.  The United States requests that China answer these questions at 
this year’s transitional review. 
(a) Please explain how this policy is consistent with China’ s MFN obligations under the 
GATS. 
(b) In the past, China has suggested th at Hong Kong operators’ services were 
“grandfathered” upon China’s accession to the WTO.  What evidence can China 
provide to demonstrate that these servi ces were supplied prior to China’s WTO 
accession?  What is the basis for China’s asser tion that China has a right to maintain 
this discrimination post-accession? 
12. 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-operat ed satellites to the domestic satellites 
Sinosat 3 and Chinasat 6B 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? 
V. CONSTRUCTION SERVICES 
13. The United States remains concerned about certain  aspects of China’s re gime for construction 
services and engineering and design services and how this regime conforms with China’s GATS 
obligations.    The United States appreciates China’ s responses during last year’s transitional review 
before this Council but would find helpful if Ch ina could provide more detailed information as 
requested below.   
(a) Under Decree 113, the Regulations on the Administration of Foreign-Invested 
Construction Enterprises , jointly issued by the Ministry of Construction and the 
Ministry of Commerce in September 2002, foreign-invested enterprises are limited in 
the kinds of projects they can apply to undertake, raising national treatment issues 
because domestic enterprises face no such r estrictions. Does China intend to broaden 
the scope of projects that foreign- invested enterprises can undertake? 
(b) With regard to Decree 113, can China provide an update regarding any efforts to 
reduce registered minimum capital requirements or to replace such requirements with financial instruments such as bank guarantees or insurance bonds?   S/C/W/308 
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  (c) The United States understands that under Article 17 of the Regulations on the 
Administration of Qualifications for Construction Project Surveys and Designs  
(MOC Decree 160) foreign-invested enterp rises should be allowed to apply for Grade 
A design qualifications in their initial applications.  However, the related Opinions on 
Implementation  (Circular 202) confuses these rights by imposing additional 
requirements.  Can China please confirm that it will modify its legal regime to 
guarantee access as promised under Decree 160? 
(d) The United States welcomes the implementi ng rules for Decree 114, set forth in 
Circular 18, the Implementing Rules for the Regulations on the Administration of 
Foreign-Invested Construction Engineering Design Enterprises , issued by the 
Ministry of Construction in January 2007.  China noted during last year’s transitional 
review that these elements are “transitional,” including improvements relating to personnel qualifications.  Can China confirm that it will make these changes 
permanent?   
(e) As a result of Circular 200, the Provisional Measures for Construction Project 
Management , issued by the Ministry of Construction in November 2004, China does 
not allow foreign companies to provide project management services without already holding construction enterprise or design enterprise qualifications.  Could China 
provide information on how it might remove  this overly burdensome aspect of its 
regime, either through revising Decree 200 or other measures?  The United States 
understands that Decree 155 of 2007 might provide a way forward if implementing 
rules were issued.  Can China confirm that it plans to issue such rules or otherwise 
provide improved access for foreign providers of project management services? 
VI. LEGAL SERVICES 
14. While the United States acknowledges the steps th at 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 an  additional office in China, particularly because it 
includes an application process that could take as l ong as nine months and requires that market need 
be demonstrated.    The United States notes China’s statement at last year’s transitional review before this Council that most applications had received re plies within less than nine months.  Can China 
elaborate on that report?   
VII. TRANSPARENCY 
15. The United States appreciates China’s decisi on to publish in advance for public comment, 
subject to specified exceptions, all trade and economic-related administrative regulations and 
departmental rules that are propo sed for adoption and provide a public comment period of not less 
than 30 days from the date of publication.  China indicated that it would publish these proposed 
measures on a single Chinese Government website mainta ined by the Legislative Affairs Office of the 
State Council. The United States appreciates China’s report during last year’s review of how this 
process is working in practice.  Can China provide an update of how this system is operating with 
regard to proposed measures that relate to the services sector? 
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