WORLD  TRADE  
ORGANIZATION  WT/TPR/S/199/Rev.1 
12 August 2008  
 
(08-3803) 
Trade Policy Review Body  
   
 
  
 
TRADE POLICY REVIEW 
 
Report by the Secretariat 
 
CHINA 
 
Revision 
 
 
 
 
This report, prepared for the second Trad e Policy Review of China, has been 
drawn up by the WTO Secretariat on its own responsibility.  The Secretariat has, 
as required by the Agreement establishing the Trade Policy Review Mechanism 
(Annex 3 of the Marrakesh Agreement Establishing the World Trade 
Organization), sought clarification from China on its trade policies and practices. 
 
Any technical questions arising from this report may be addressed to 
Mr. Masahiro Hayafuji (Tel.:  022 739 5873). 
 
Document WT/TPR/G/199 contains the policy statement submitted by China. 
 
 
 
 China WT/TPR/S/199/Rev.1 
 Page iii 
 
 
CONTENTS 
 
  Page 
SUMMARY OBSERVATIONS ix 
 (1) E CONOMIC ENVIRONMENT  ix 
 (2) T RADE AND INVESTMENT POLICY FRAMEWORK  x 
 (3) T RADE POLICIES AND PRACTICES BY MEASURE  x 
 (4) T RADE POLICIES BY SECTOR  xii 
 (5) O UTLOOK  xv 
I. ECONOMIC ENVIRONMENT 1 
 (1) I NTRODUCTION  1 
 (2) R ECENT ECONOMIC DEVELOPMENTS  4 
 (3) M ACROECONOMIC POLICIES  9 
 (i) Monetary policy 9  (ii) Fiscal policy 11 
 (4) M
AIN STRUCTURAL REFORM ISSUES  13 
 (i) Environmental policies 13  (ii) Tax reforms 13 
 (iii) Financial sector reform 14 
 (iv) Labour market 16 
 (5) D
EVELOPMENTS IN TRADE  17 
 (i) Composition of merchandise trade 17 
 (ii) Direction of merchandise trade 19  (iii) Composition of trade in services 19 
 (iv) Foreign investment 19 
 (6) O
UTLOOK  22 
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 24 
 (1) I NTRODUCTION  24 
 (2) I NSTITUTIONAL AND LEGAL FRAMEWORK  24 
 (i) Institutional structure 25 
 (ii) Legal structure and the legislative process 27 
 (iii) Transparency 29 
 (iv) Centre–subnational relations and local barriers to internal trade 31 
 (3) F ORMULATION , ADMINISTRATION , AND IMPLEMENTATION OF TRADE POLICY  31 
 (i) Main trade laws 31 
 (ii) Agencies involved in trade policy implementation 32 
 (4) T RADE POLICY OBJECTIVES  32 
 (5) T RADE AGREEMENTS AND ARRANGEMENTS  33 
 (i) WTO 33 
 (ii) Regional agreements 33  (iii) Bilateral agreements 35 
 (iv) Unilateral preferences 38 WT/TPR/S/199/Rev.1 Trade Policy Review 
Page iv 
 
 
    Page 
 (6) F OREIGN INVESTMENT REGIME  38 
 (i) Recent developments in FDI policy 38 
 (ii) Legislative framework and procedures 39 
 (iii) Examination and approval procedure 40 
 (iv) FDI incentives 41 
 (v) Bilateral investment and tax agreements 42 
III. TRADE POLICIES AND PRACTICES BY MEASURE 43 
 (1) I NTRODUCTION  43 
 (2) M EASURES DIRECTLY AFFECTING IMPORTS  44 
 (i) Procedures 44 
 (ii) Customs valuation and rules of origin 46 
 (iii) Tariffs 47  (iv) Indirect taxes affecting imports 56 
 (v) Import prohibitions, restrictions, and licensing 57 
 (vi) State trading 59  (vii) Contingency measures 60 
 (viii) Standards and other technical requirements 63 
 (ix) Government procurement 70  (x) Import-related financing 73 
 (3) M
EASURES DIRECTLY AFFECTING EXPORTS  73 
 (i) Procedures 73  (ii) Export taxes 73 
 (iii) Tax rebates on exports 74 
 (iv) Tax concessions under processing trade 75  (v) Export prohibitions, restrictions, and licensing 76 
 (vi) Measures maintained by importing countries 79 
 (vii) State trading 79  (viii) Export promotion and marketing assistance 79 
 (4) M
EASURES AFFECTING PRODUCTION AND TRADE  81 
 (i) Taxation and tax incentives 81 
 (ii) Direct transfers and non-tax subsidies 87 
 (iii) Other industrial policies and measures 89  (iv) State-owned enterprises, privatization, and corporate governance 91 
 (v) Competition and consumer protection policy 99 
 (vi) Intellectual property rights 102 
IV. TRADE POLICIES BY SECTOR 108 
 (1) I
NTRODUCTION  108 
 (2) A GRICULTURE  110 
 (i) Features and market developments 110 
 (ii) Policy objective and administration 111 
 (iii) Policy instruments 113 
 (3) E NERGY   117 
 (i) Introduction 117 
 (ii) Key subsectors 118 China WT/TPR/S/199/Rev.1 
 Page v 
 
 
    Page 
 (4) M ANUFACTURING  127 
 (i) Iron and steel 127 
 (ii) Textiles and clothing 128 
 (iii) Automotive sector 130  (iv) Electronics and information industry 133 
 (5) S
ERVICES  134 
 (i) Overview 134  (ii) Commitments under the General Agreement on Trade in Services 135 
 (iii) Financial services 136 
 (iv) Telecommunications 161 
 (v) Transport services 166 
 (vi) Distribution services 173  (vii) Postal services 178 
 (viii) Legal services 180 
 (ix) Accountancy services 183  (x) Tourism 185 
REFERENCES   189 
APPENDIX TABLES  195 WT/TPR/S/199/Rev.1 Trade Policy Review 
Page vi 
 
 
CHARTS 
    Page 
I. ECONOMIC ENVIRONMENT 
 
I.1 Product composition of merchandise trade, 2004 and 2007 18 I.2 Direction of merchandise trade, 2004 and 2007 20 
I.3 Trade in services, 2004 and 2006 21 
 III. TRADE POLICIES AND PRACTICES BY MEASURES 
 
III.1 Average applied MFN tariff rates 2005 and 2007 and final bound tariff, 
 by HS section 50 
III.2 Distribution of MFN tariff rates, 2005 and 2007 51 III.3 Tariff escalation by 2-digit ISIC industry, 2007 52 
III.4 Anti-dumping cases, 1 January 2005 to 30 June 2007 62 
 IV. TRADE POLICIES BY SECTOR 
 
IV.1 Composition of GDP, 2006 135  
 
TABLES 
 
I. ECONOMIC ENVIRONMENT 
 I.1 Basic economic and soci al indicators, 2004-07 2 
I.2 Selected macroeconomi c indicators, 2004-07 5 
I.3 Balance of payments, 2004-07 8  
III. TRADE POLICIES AND PRACTICES BY MEASURES 
 
III.1 China's preferential rules of origin, 2007 47 
III.2 Structure of the MFN tariff, 2007 49 III.3 Summary analysis of Chin a's preferential tariff, 2007 54 
III.4 China's standa rds, 2002-06 64 
III.5 Government procurement of goods, construction projects, and services, 2004-06 70 
III.6 Government procurement by entity, 2004-06 71 
III.7 Government procurement by method, 2004-06 72 
III.8 Tax revenue, 2004-06 81 III.9 Excise (or consumption) tax, 2007 82 
III.10 VAT, 2007 84 
III.11 Selected governmen t transfers, 2004-06 88 
III.12 Tradeable and non-tradeable shares of companies listed in China, 2004-06 94 
III.13 Number of enterprises, 2004-06 96 
III.14 Enforcement of intellectual property rights, 2004-06 106  
IV. TRADE POLICIES BY SECTOR  
 
IV.1 Textiles and clothing industry, 2005-06 129 
IV.2 Automotive industry, 2004-06 131 
IV.3 Total assets of the financial system, 2003-06 137 
IV.4 Financing by the domestic non-financial sector, 2005-06 138 
IV.5 Total assets of banking institutions, 2003-06 139 China WT/TPR/S/199/Rev.1 
 Page vii 
 
 
    Page 
IV.6 Insurance premiums, 2001-06 151 
IV.7 Overview of the stock market, 2000-06 156 
IV.8 Telecommunications statistics, 2001-06 162 
IV.9 Basic telecommunications service providers, 2005 162 
IV.10 Law firms and representative offices, 2002-07 181 
IV.11 China's international tourism receipts and expenditu res, selected years 185 
 
 
APPENDIX TABLES 
 
I. ECONOMIC ENVIRONMENT  
 
AI.1 Merchandise exports by group of products, 2004-07 197 
AI.2 Merchandise imports by group of products, 2004-07 198 AI.3 Merchandise exports by destination, 2004-07 199 
AI.4 Merchandise imports by origin, 2004-07 200 
 II. TRADE
 POLICY  REGIME:   FRAMEWORK  AND  OBJECTIVES 
 
AII.1 China's major trade-related laws and regulations, April 2008 201 AII.2 Principal notifications under WTO Agreements, as at 12 February 2008 206 
AII.3 Involvement in the WTO dispute settlement mechanism, March 2008 209 
 
III. TRADE POLICIES AND PRACTICES BY MEASURES 
 AIII.1 Inward duty, 2007 211 
AIII.2 Imports allocated to state-trading enterprises, 2005-07 212 
AIII.3 Export quotas allocated to stat e-trading enterprises, 2005-06 213 
AIII.4 Tax revenues allocated to different levels of government:  central, local, and 
 shared taxes, 2007 215 
AIII.5 Special economic and other zones, 2006 216 AIII.6 Selected competition-related legislation, 2007 217 
AIII.7 China's membership of international intellectual property rights conventions, 2007 218 
AIII.8 Patent and trade mark statistics, 2004-06 219 AIII.9 Intellectual property rights cases dealt with by courts, 2006 220 
 
IV. TRADE POLICIES BY SECTOR  
AIV.1 Tariff quota utilization in China, 2004-06 221 
AIV.2 China's sector specific commitments in the GATS 223 
AIV.3 Banking institutions in China, 2007 229 
AIV.4 Registration requirements and application procedures in maritime transport service, 2008 230 
 
 China WT/TPR/S/199/Rev.1 
 Page ix 
 
 
SUMMARY OBSERVATIONS 
 (1) E
CONOMIC ENVIRONMENT  
1. Continued trade liberalization has 
remained an integral part of the China's long-
standing structural reform strategy, which is aimed at establishing an outward-oriented "socialist market economy" that can deliver sustained economic growth and facilitate 
poverty reduction.  The ongoing structural 
reforms coupled with unabated export growth 
has resulted in real GDP growth rates in excess of 10% since China's previous Trade Policy Review in 2006.  As a result, it ranks as world's third largest economy and the third 
largest trader.  GDP per capita rose from 
US$1,490 in 2004 to US$2,017 in 2006.  The number of people living on less than US$1 has decreased to about 10% of the population.  The rapid rise in GDP per capita and decline in 
people living in poverty demonstrate clearly 
the value of integrating more liberal trade and foreign investment policies into broader macroeconomic and struct ural reforms in order 
to promote economic development.   
2. In 2007, real GDP growth in China 
was 11.4%.  The urban unemployment rate fell 
to 4.0% in 2007.  Nonetheless, inflation measured by consumer price index has recently been rising, reaching an eleven-year high of 7.1% in January 2008, largely due to 
increasing food prices.  The consumer price 
index does not capture the full extent of inflation, however, as some of the prices included in the index are controlled by the Government.  Gross domestic investment and 
gross national saving amounted to 44.9% and 
54.4% of GDP, respectively, in 2006.  The widening gap between China's saving and investment is reflected in its growing current account surplus, which increased from 7.1% of GDP in 2005 to 11.0% in 2007.  
3. Since its previous Review, China's 
trade and investment reforms have increased China's integration into the world economy.  Its total trade in goods alone accounted for about 65% of GDP and 13% of global trade in 
2006.  China continues to be a major recipient of foreign direct investment (FDI) (together 
with associated transfers of technology and know-how), most of which is channelled into manufacturing.   
4. Since China's previous Trade Policy 
Review, its monetary policy has largely been driven by the need to mop up excess liquidity, reduce credit growth and investment, and consequently cool economic growth.  In 
addition to “sterilization” of capital inflows 
and moral suasion ("window guidance"), monetary policy instruments used by the Peoples Bank of China (PBC) during the period under review include increases in interest rates together with higher reserve 
ratios for banks.  More specifically, the PBC 
has raised the benchmark one-year lending rate seven times (from 5.85% in April 2006 to 
7.47% in December 2007) and the required reserve ratio 11 times (since January 2007).  
However, the PBC’s ability to use interest 
rates as an effective instrument of monetary policy is relatively limited owing to China's exchange rate regime (which is now classified by the IMF as a "crawling peg").   
5. With revenue increasing faster than 
expenditure since its previous Review, China's 
fiscal position has strengthened.  The fiscal deficit fell from 1.3% of GDP in 2004 to 0.6% in 2007.  The sustained decrease in the fiscal deficit has led to a decline in the level of 
public debt from 17.5% in 2005 to 16.3% of 
GDP in 2006.  
6. Notwithstanding China's rapid growth, 
its economy is characterized by a number of imbalances.  In particular, there is the 
imbalance in the sources of growth in the 
economy, which has been driven much more by exports and investment than by consumption, as reflected in China's growing current account surplus.  Moreover, the efficient allocation of the vast amount of 
investment within the economy has been 
hampered by, inter alia, an underdeveloped capital market and by incentives and other forms of assistance accorded to manufacturing.  At the same time, the pace of 
China's growth has exacerbated environmental WT/TPR/S/199/Rev.1 Trade Policy Review 
Page x 
 
 
problems, and income inequality has widened, 
especially between urban and rural residents.  In order to redress some of these imbalances, the Government has taken a number of policy 
initiatives, which, in some instances, involve 
trade policy measures (such as taxes and reduced VAT rebates in respect of exports).  These measures tend to discourage exports and increase the domestic supply of products 
concerned, and thus result in lower domestic 
prices of these products than otherwise;  this possibly assists downstream processing of these products, without necessarily helping to improve the environment or reduce the current account balance.  Consequently, the 
effectiveness of such trade policy measures in 
addressing the current account surplus and environmental problems is questionable.   
(2) T
RADE AND INVESTMENT POLICY 
FRAMEWORK  
7. The overall aim of China's trade 
policy, which has remained unchanged since its previous Trade Policy Review, is to accelerate the opening of its economy to the outside world to introduce foreign technology and know-how, develop foreign trade, and 
promote "sound economic development".  
China aims to further strengthen the multilateral trading system;  at the same time, it has been intensifying its pursuit of bilateral/regional free-trade agreements with 
some of its trading partners.   
8. China has continued to attach high 
priority to the multilateral trading system and has been participating in the Doha Development Agenda negotiations.  China 
grants at least MFN treatment to all WTO 
Members except El Salvador and some territories of EC member states.  China has been a party to one dispute as a complainant and nine disputes as a respondent since 2006.   
9. During the period under Review, two 
free-trade agreements entered into force (the 
China – Chile FTA on 1 October 2006 and the China – Pakistan FTA on 1 July 2007).  The Agreement on Trade in Services of the China-ASEAN Free Trade Area also entered into force on 1 July 2007.  Four further agreements  
are being negotiated.  
10. Although some aspects of China's 
trade policy regime remain opaque, it has 
continued to adopt measures to increase the 
level of transparency of its trade and trade-related policies, practices, and measures.  Since its previous Review, additional measures, such as the Regulation on Open 
Government Information, have been 
introduced with a view to enhancing transparency.  On 13 September 2007, the National Corruption Prevention Bureau was established.  Since its previous Trade Policy Review, several new trade-related laws, 
including the Property Law, the Enterprise 
Income Tax Law, the Anti-Monopoly Law and the Law on Enterprise Bankruptcy, have been adopted. 
11. China has recently been moving 
towards achieving a level playing field for 
foreign and domestic investors in China.  Until the end of 2007, China had provided better than national treatment in its taxation policies for foreign-invested enterprises (FIEs);  since 1 January 2008, a uniform enterprise income 
tax rate of 25% has been applied to all 
enterprises (including FIEs) in accordance with the Enterprise Income Tax Law, with some exceptions such as lower rates granted for investment in certain industries.  It would 
appear that all tax incentives now apply 
equally to domestic fi rms and FIEs.  Several 
regulations and rules have been introduced or amended with a view to further liberalizing foreign direct investment and establishing a 
more rules-based and predictable business 
environment for foreign investors.   
(3) T
RADE POLICIES AND PRACTICES BY 
MEASURE  
12. Since its previous Trade Policy 
Review in 2006, China has, by and large, 
continued to liberalize gradually its trade and 
related policies.  Nonetheless, trade and trade-related measures, both at the border and internally, are still used  as instruments of 
industrial policy.   China WT/TPR/S/199/Rev.1 
 Page xi 
 
 
13. The tariff remains one of China’s 
main trade policy instruments.  All tariff lines are bound at ad valorem  rates, and applied 
MFN tariffs tended to be close to the bound 
rates, thereby imparting a high degree of 
predictability to China's MFN tariff.  In 2007, the average bound rate was 9.9%;  15.3% for agricultural products (WTO definition).  The overall average applied MFN tariff was 9.7% 
in 2007 (the same as in 2005).  The average 
applied MFN tariffs for agricultural and non-agricultural products were 15.3% and 8.8%, respectively (also the same as in 2005).  Preferential tariff rates are applied under  bilateral free-trade agre ements to which China 
is a party;  the tariff averages range from 3.5% 
to 9.1%.  In 2007, China unilaterally applied preferential tariffs to 37 LDCs;  the tariff averages ranged from 9.0% to 9.5%, depending on the origin of goods.  Tariff rate 
quotas on soybean oil, palm oil, and some 
rapeseed oil were eliminated in 2006.  Tariff revenue accounts for a minor source of total tax revenue (3.3% in 2006).  
14. Whereas the average applied MFN 
tariff has remained largely unchanged, non-
tariff barriers have been reduced;  for example, 
the number of lines subject to automatic import licensing has declined.  China’s institutional and procedural framework on contingency measures has remained largely 
unchanged.  Between 1 January 2005 and 30 
June 2007, China initiated 39 anti-dumping investigations.  China has not taken any countervailing measures or safeguard measures since its previous Review.   
15. China has adopted measures to 
increase the alignment of its national standards with international norms.  It has notified the WTO of a number of sanitary and phytosanitary (SPS) measures and technical barriers to trade.  With a large number of laws 
governing SPS measures, the SPS regime 
remains complex.  Under the Law on Government Procurement, goods may be purchased from foreigners only under exceptional circumstances;  although, in 
practice, procurement from foreign suppliers 
appears to occur routinely for some products.  The law does not cover purchasing by state-
owned enterprises.  China is an observer to the WTO Agreement on Government Procurement (GPA), and submitted its application for 
accession to the GPA in December 2007.    
16. China's already complex export 
regime has become considerably more restrictive.  A variety of measures, including export taxes, reduced rebates of VAT on 
exports, and export prohibitions, licensing and 
quotas, are used to restrain, if not prohibit, exports of a considerable and growing number of products.  Although some of these export restraints are implemented to meet China's international obligations, many are intended 
to, inter alia, reduce e xports of products using 
large amounts of natural resources and energy, or to reduce China's larg e trade surplus in an 
attempt to reduce trade friction.  For instance, the number of tariff lines subject to interim 
export duties was almost doubled in the last 
two years, VAT rebate rates on exports of some 2,800 lines (HS 8-digit) were eliminated or lowered in July 2007, and the number of lines subject to export quotas and licensing requirements has increased.     
17. China has continued to use policy 
tools to channel resources into certain activities, with a view, inter alia, to promoting investment in high technology, encouraging innovation, and protecting the environment 
(by, for example, reducing energy 
consumption).  These tools include tax incentives, non-tax subsidies, price controls, and various forms of "guidance" including sector-specific "industrial policies". In April 
2006, China notified the Central Government's 
subsidies programmes to the WTO;  these included income tax reductions and exemptions granted to enterprises located in selected areas, engaging in certain activities, or involving foreign ownership (foreign-
invested enterprises (FIEs)).  
18. Reform of the public sector, including 
state-owned enterprise (SOEs), remains a major challenge.  Recent progress in the reform of SOEs by, inter alia, their 
reorganization, corporatization and WT/TPR/S/199/Rev.1 Trade Policy Review 
Page xii 
 
 
privatization, has improved their performance;  
by reducing state involvement or freeing-up resources once owned by the State, the reform has also helped the development of the private 
(non-public) sector.  Nonetheless, SOEs 
continue to play a dominant role in the economy (accounting for some 35% of GDP) and enjoy monopoly positions in certain sectors.  By contrast, the private sector 
continues to face constraints, including in 
access to finance.  A main challenge to SOEs is to raise their productivity through further reforms;  private firms operating in China (especially FIEs) are, by and large, more productive than SOEs.    
19. Corporate governance has been 
improved not only because of the development 
of the private sector and the corporatization of SOEs, but also because of the entry into force of the Law on Enterprise Bankruptcy, which 
applies to all enterprises (including SOEs) in 
China.  In addition, China's accounting standards have been revised to further align them with international practices.  At the same time, to promote competition in the economy, the Anti-Monopoly Law was promulgated and 
is to enter into force on 1 August 2008.  All 
sectors of the economy, apart from certain activities related to agriculture, are covered by this law.  However, the implementing details of the Law have not yet been formulated.   
20. One of the major targets of the 
Eleventh Five-Year Plan is to ensure adequate returns to investment in innovation by protecting intellectual property rights.  Thus, China is revising several pieces of legislation, 
including the Patent Law and the Trademark 
Law, to achieve an appropriate balance between the protection of intellectual property rights (IPR) and the promotion of competition.  The enforcement of IPR protection has been strengthened, although que stions remain about 
the sufficiency of fines and criminal penalties 
to deter IPR violations. 
(4) T
RADE POLICIES BY SECTOR  
21. China's ongoing reform of its trade 
and investment regime remains an integral part of its structural reform strategy.  Having 
concentrated much of its past efforts on manufacturing, which tends to be capital-intensive, the Government's attention is now 
turning to services (and, to a lesser extent, 
agriculture), which tend to be much more labour-intensive than manufacturing.  If sufficiently competitive, services have the potential in the long run to generate new jobs 
for surplus labour currently located in rural 
areas.  Progress has been especially noteworthy in the financial services sector (including banking), whose development is essential for the establishment of a smooth-functioning capital market, which can 
contribute to a more efficient allocation of 
investment across all sectors of the economy and thereby to improved productivity and growth. 
22. One of the main changes concerning 
agriculture has been the shift from taxing the 
sector to supporting it.  Most agricultural taxes were eliminated in 2006, and farmers have been provided with financial support (since 2004).  Nonetheless, agriculture's contribution to GDP has continued to decline (from 13.4% 
in 2004 to 11.8% in 2006 ).  With agriculture 
accounting for some 40% of total employment in 2006, labour productivity is barely one-fifth of the level in the rest of the economy, and there is still a considerable surplus of labour in 
the sector.  As a result, average rural incomes 
have fallen further behind the urban average, thus widening the gap between rural and urban living standards.  The authorities are well aware of the need to further develop rural 
areas, raise productivity in the sector, and 
improve farmers' welfare.  Against this background, the rural reform process has continued as stipulated in the Eleventh Five-Year-Plan (2006-10) through the implementation of a series of measures to 
increase productivity including improved 
infrastructure, production technologies, and training (for farmers).  The plan also encourages the movement of rural labour, and reiterates the Government's intention to 
continue increasing the support granted to 
agriculture through direct transfers and subsidies. China WT/TPR/S/199/Rev.1 
 Page xiii 
 
 
23. Agricultural policy has traditionally 
been aimed at ensuring an adequate supply of food at stable prices.  To meet this goal, procurement, distribution and marketing 
restrictions are used in addition to measures 
such as price controls  and import and export 
restrictions.  China's average applied MFN tariff on agricultural products (WTO definition) remained unchanged at 15.3% 
during the period 2005 – 2007.  Although 
tariff rate quotas (TRQs) on some edible oils were eliminated, those for some cereals, sugar, mineral and chemical fertilizers, and wool and cotton have been maintained.  China continues to use state trading to manage trade of some 
products.  Despite liberalization, direct 
management remains an important instrument of Chinese policy making.  In particular, the domestic prices of some products are subject to controls, principally to maintain the stability 
of supply and prices.  Furthermore, to achieve 
a high degree of grain self-sufficiency, and thus food security, procurement of grain is, to some extent, controlled by the Government.   
24. Since the previous Review, there have 
been no major changes in policies concerning 
China's energy sector, which continues to be 
characterized by a high level of state ownership, regulation and limited competition.  China is the second largest energy user in the world.  Moreover, it emits the second largest 
amount of greenhouse gases, mostly due to the 
use of coal, which continues to account for some 70% of China’s energy production, and to the increasing number of cars on the roads.  China’s rapid growth and the economy's high 
energy intensity is also putting considerable 
upward pressure on world demand for energy, particularly on oil, and thus energy prices.  While China's high energy intensity may be partly explained by the share of industry (which tends to be relatively energy intensive) 
in GDP, it is also undoubtedly due to the 
existing insufficiently market-oriented price mechanism for oil, coal, electricity and natural gas, which sets artificially low prices and, as a consequence, leads to a waste of energy, to the 
detriment of the environment.  Hence, one of 
the key compulsory targ ets in the Eleventh 
Five-Year Plan is a 20% reduction in energy intensity by 2010.  China's energy policy is 
also aimed at self sufficiency by supplementing domestic supplies of primary energy through imports and by encouraging 
state-owned enterprises (SOEs) to invest in 
energy-rich countries, and more recently through the establishment of  strategic oil reserves to stabilize domestic supply and prices.  China's markets for energy products 
are at different stages of reform.  While the 
Government has, in general, adopted a more liberal approach to economic policy, it regards energy as a strategic commodity and has therefore adopted a gradual approach to reforming the sector.  As a result, consumers 
remain insulated from the global markets, 
while trade restrictions and regulatory barriers protect domestic producers from international competition.  However, it remains to be seen whether such a gradual approach to reform 
will be sufficient to address the challenges the 
sector faces, especially the compatibility of China's large and rapidly growing energy needs with protection of the environment.   
25. Reflecting greater liberalization 
compared to other sectors of the economy, 
manufacturing, particularly by FIEs, and 
resulting exports, has been the main driving force behind China’s industrialization and rapid economic growth in recent years.  Manufacturing accounted for 92.4% of China's 
merchandise exports in 2006;  it is also the 
source of much of China's processing trade, which is dominated by FIEs.  By developing-country standards, tariffs on manufactured goods are low, with a simple average applied 
MFN tariff (based on ISIC Rev.2) of 9.7% in 
2007 (9.8% in 2005).  Nonetheless, the allocation of the vast amount of domestic investment has been distorted by, inter alia,  
incentives and other forms of assistance accorded largely to manufacturing (rather than 
services or agriculture), where foreign-
invested enterprises (FIEs)  have hitherto been 
favoured over domestic private firms.  A range of other measures also remain in place with a view to controlling domestic output of key 
industries and to assisting or managing their 
growth, although sectors subject to government intervention (e.g. the automobile WT/TPR/S/199/Rev.1 Trade Policy Review 
Page xiv 
 
 
industry) have been found less efficient than 
those facing less government intervention (e.g. computer manufacturing).  For example, VAT rebate rates were adjusted during the period 
under review to, inter alia,  reduce exports of 
certain products; as a consequence, the domestic prices of these products tend to be lower than would otherwise be the case, thereby possibly assisting their downstream 
processing.  At the same time, rebate rates on 
some other products were increased.  Furthermore, the State "guides" investment into or out of certain sectors or activities.  For example, the Government employs various measures/practices (including "guidance" to 
banks as regards financing) to discourage 
investment in the sectors that are contrary to state policy, including "unchecked investment" in industries "with high energy consumption and pollution", such as the coke, calcium 
carbide and iron alloy industries, or where 
production capacity is considered to be excessive.   
26. While the Government's intention is to 
open the services sector further to private and foreign participation as a means of boosting 
growth and providing alternative employment 
to agriculture, the pace of liberalization has been slower than that for manufacturing.  As a result, most services sectors are still subject to a high degree of state control and, therefore, 
lack of competition.   
27. China's capital market remains heavily 
dependent on the banking system, which is still under-developed and relatively inefficient.  Lack of access to external financing through 
the capital market has resulted in domestic 
private enterprises relying heavily on retained earnings (or funds raised from family and friends).  Against this background, banking reform has continued, including the introduction in December 2006 of a new 
regulation allowing foreign-funded banks 
(FFBs) to offer RMB business to Chinese nationals, with no geographical restrictions.  However, stringent qualification requirements still apply to FFBs;  these include high 
minimum asset requirements on the sole or 
controlling shareholder, high minimum paid-in capital amounts, restrictions on the supply of 
credit-card services, and restrictions on the business scope of foreign banks branches.  The stock market has developed quickly during the 
period under Review, prompted by several 
reforms. For example, institutional investors have been allowed to play an increasing role, by raising  the quota allocations in the qualified foreign institutional investor (QFII) 
programme, encouraging the development of 
investment funds, and the participation of insurance companies and so cial security funds.  
Foreign investment is limited to 33% in joint-venture (JV) securities companies and to 49% in JV fund management companies.  
Restrictions on foreign participation also 
remain in the insurance sector, where foreign companies are not allowed to own more than a 50% equity interest (directly or indirectly) in a Chinese-foreign JV company undertaking life 
insurance.  Other regulatory requirements add 
to the difficulty in expanding foreign presence, such as geographical restrictions to carry on businesses.  
28. Since 2006, China has issued various 
regulations and rules concerning 
telecommunications, including:  those aimed 
at clarifying licensing requirement for foreign investment in value-added telecommunication business, and stipulation that e-mail service providers must obtain approval or register 
before actually providing the service.  Prices 
have been liberalized considerably, except for a few items, such as monthly rental charges and local call charges, and foreign participation limitations exist.   
29. Limitations to foreign participation 
still exist for maritime and air transport, legal and accounting, tourism, and postal services.  As an important step in the reform of the latter, the China Post Group Corporation was formally established on 29 January 2007, 
marking the formal separation of business 
activities from the administrative functions of the State Postal Bureau.   China WT/TPR/S/199/Rev.1 
 Page xv 
 
 
(5) OUTLOOK  
30. With continuing strong growth in the 
latter half of 2007, China's annual growth rate was estimated at 11.4%, which was higher 
than the average rate achieved during 2003-06.  
Consequently, the Government's target of doubling GDP per capita in 2010 relative to 2000, as set out in its the Eleventh Five-Year Plan, would appear to be within reach.  
Furthermore, with its vast human resources, 
high rate of investment in physical and, to a lesser extent, human capital, strong growth in labour productivity, and increasingly market-oriented economy, open to international trade and foreign investment (and associated 
technology), China has the potential to sustain 
its rapid growth in the foreseeable future, albeit at a somewhat slower rate as its economy matures and its labour force starts to shrink (largely as a result of its one-child 
policy).  In order to realize this potential, 
however, China needs to continue to address a number of important social and economic challenges, including various economic imbalances, which c ould jeopardize the 
economy's stability and t hus the achievement 
of a "harmonious society".   
31. First, there is the challenge posed by 
widening income disparities among regions and between urban and rural areas, one of the primary causes of which is wage differentials 
reflecting differences in labour productivity.  
A related challenge is the need to facilitate the movement of surplus labour from relatively low-productivity agriculture into other activities, notably services, which tend to be 
less labour-intensive than manufacturing.  
Moreover, as growth in the labour force slows, technological progress will assume much greater importance as a source of economic growth and productivity improvement, so that China needs to continue to pursue its goal of 
substantially raising expenditure on R&D as a 
percentage of GDP (and improve protection of 
intellectual property).  China also needs to proceed with its plans to increase government spending on social service s, such as health and 
education, and thus human capital, as well as 
basic pensions, thereby possibly reducing the need for precautionary saving and thus raising 
consumption.  These and other measures to increase consumption would not only reduce China's reliance on exports for growth, and 
hence its vulnerability to economic slowdowns 
abroad, but would also narrow the gap between national saving and gross domestic investment and therefore help to reduce China's large current account surplus.  Another 
way of reducing China's high propensity to 
save would be by channelling savings into the most profitable investments, thus improving the productivity of capital in the economy as a whole; this requires ongoing reform of the capital market to render it more efficient (and 
improve the transmission, and thus operation, 
of monetary policy).  In addition, impediments to the efficient allocation of land, energy, water and other natural resources, such as price controls, need to be gradually 
dismantled; this would help protect the 
environment, especially if supplemented by market-based tax and non-tax instruments, based on the "polluter pays" principle, for example, to correct market failure.  There is also the challenge of tax reforms that would 
render the tax system (especially the VAT and 
enterprise income tax) more neutral with respect to economic decisions, so that it raises sufficient revenues in an administratively simple and equitable way in order to meet 
China's developmental needs, including 
expenditures mentioned above, while minimizing consequent distortions in the domestic allocation of resources and trade.   
32. Although no forecasts of economic 
growth for 2008 were available from the 
authorities, the World Bank envisages a slowdown to 9.6% owing to decelerating exports and a weakening global outlook.  Such a slowdown will bring the growth rate more into line with the Government's target of 8%, 
something that macroeconomic policies, 
especially monetary policy, have hitherto proved ineffective in achieving.  Such a cooling of the economy could reduce inflationary pressure and contribute to its re-
balancing.  Nonetheless, there remains the 
immediate issue concerning the ability of monetary policy to combat rising inflation.  In WT/TPR/S/199/Rev.1 Trade Policy Review 
Page xvi 
 
 
this regard,  a more flexible exchange rate 
regime could enable China to operate a more independent monetary policy, which would be better suited to ensuring a low and stable rate 
of inflation, and therefore contribute to a 
macroeconomic envir onment more conducive 
to sustained strong economic growth.  A more flexible exchange rate and thus more independent monetary policy would 
complement structural reforms, especially those concerning the capital market, and 
obviate the need for price controls and other non-market measures to contain inflation.  There are signs that China's exchange rate 
regime has become more flexible recently;  in 
January 2008, the renminbi appreciated nearly 1.6% in relation to the U.S. dollar, the largest monthly increase since the July 2005 reform of the foreign exchange regime.