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IV. TRADE POLICIES BY SECTOR 
(1) INTRODUCTION  
1. China's ongoing reform of its trade and investme nt 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 atte ntion is now turning to services (and, to a lesser 
extent, agriculture), which tend to be much more la bour-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 sub 
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. 
2. One of the main changes concerning agriculture  has been the shift from taxing the sector to 
supporting it.  Most agricultural taxes were eliminat ed in 2006, and farmers have been provided with 
financial support (since 2004).  Nonetheless, agricu lture's contribution to GDP has continued to 
decline (from 13.4% in 2004 to 11.7% in 2006).  With  agriculture accounting for some 40% of total 
employment in 2006, labour productivity is barely on e 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.  Ag ainst this background, the rural reform process has 
continued as stipulated in the Eleventh Five-Year Plan (2006-2010) 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 inten tion to continue increasing the suppor t granted to agriculture through 
direct transfers and subsidies.   
3. 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 im port and export restrictions.  China's average MFN 
tariff on agricultural products (WTO definition) remained unchanged at 15.3% during 2005–07.  
Although tariff rate quotas (TRQs) on some  edible oils were eliminated, those for some cereals, sugar, 
mineral and chemical fertilizers, and wool and cott on have been maintained.  China continues to use 
state trading to manage trade of some products.  D espite 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.   
4. 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 en ergy 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% China’s energy production, and to the increasing number of cars on the roads.  China’s 
rapid growth and the economy's high energy intensit y 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 (43% in 2006), it is also undoubtedly due to the insufficiently market-oriented price mechanism for oil, coal, electricity, and natural gas, which sets artificially low prices and, as a WT/TPR/S/199 Trade Policy Review 
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consequence, leads to a waste of en ergy, to the detriment of the environment.  Hence, one of the key 
compulsory targets in the Eleventh  Five-Year Plan is a 20% reduction in energy intensity by 2010.  
China's energy policy is largely aimed at self-suf ficiency;  it also allows to supplement 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 mark ets for energy products are at different stages of 
reform.  While the Government has, in general, a dopted 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, 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 sect or faces, especially the compatibility of China's 
large and rapidly growing energy needs with protection of the environment.   
5. Reflecting greater liberalization compared with 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 th e source of much of China's processing trade, which 
is dominated by FIEs.  By developing-country sta ndards, tariffs on manufactured goods are low, with 
a simple average applied MFN tariff of 9.7% in 2007 (9.8% in 2005).
1  Nonetheless, the allocation of 
vast amounts 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 favour ed over domestic private firms.  A range of other 
measures also remain in place with a view to controlling domestic production of key industries and 
assisting or managing their growth, although indu stries subject to government intervention (e.g. 
automobiles) have been found to be less efficient than those with less government intervention (e.g. 
computer manufactures).  For example, VAT rebate rates were adjusted during the period under review to, inter alia , reduce exports of certain products (e.g. highly polluting and highly energy-
consuming products);  as a consequence, the domestic  prices of these products tend to be lower than 
would otherwise be the case, thereby possibly assis ting their downstream processing.  At the same 
time, rebate rates on some other products were incr eased.  Furthermore, the State "guides" investment 
into or out of certain sectors or activities.  For example, the Government employs 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 heavy industries "with high energy 
consumption and pollution", such as the coke, ca lcium carbide, and iron alloy industries, or where 
production capacity is considered to be excessive.   
6. While the Government's intention is to open th e 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 fo r manufacturing.  As a result, most services sectors 
are still subject to a high degree of state control and, therefore, lack of competition.   
7. China's capital market remains heavily depende nt on the banking system, which is still under-
developed and relatively inefficient,.  Banks have lent mainly to SOEs  rather than to domestic private 
firms (partly due to the latter's lack of collateral) ;  moreover, 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 new regulation allowing foreign-funded 
banks (FFBs) to offer RMB business to Chinese nationals, with no geogra phical restrictions.  
However, stringent qualification requirements s till apply to FFBs; these include high minimum asset 
                                                     
 
1 The tariff for manufacturing is based on ISIC Rev.2.  In Chapter III, the tariff is based mainly on HS. China WT/TPR/S/199 
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requirements on sole or controlling shareholders, hi gh 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 
increasing the quota allocations  in the qualified foreign institutional investor (QFII) programmed, 
encouraging the development of investment funds, and the participation of insurance companies and 
social security funds.  Foreign investment is limite d to 33% in joint-venture (JV) securities companies 
and to 49% in JV fund management companies.  Rest rictions on foreign participation also remain in 
the insurance sector, where foreign co mpanies are not allowed to own more  than a 50% equity 
interest (directly or indirectly) in a Chinese-fore ign JV company undertaking life insurance.  Other 
regulatory requirements add to the difficulty in expanding foreign presence, such as geographical 
restrictions to carry out their business. 
8. Since 2006, China has issued various regulati ons and rules concerning telecommunications, 
including those aimed at clarifying licensing requi rement for foreign investment in value-added 
telecommunication businesses, and the stipulation th at e-mail service providers must obtain approval 
or register before actually providing the service.  Pr ices have been liberalized  considerably, except for 
a few items, such as monthly rental charges an d local call charges, and foreign participation 
limitations exist.   
9. Limitations on foreign participation still exist in maritime and air transport, legal and 
accounting, tourism, and postal services.  As an impor tant 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 f unctions of the State Postal Bureau.   
(2) AGRICULTURE   
(i) Features and market developments 
10. China has evolved into an industrialized economy in which the contribution of agriculture to 
GDP continues to decline;  it fell from 13.4% in 2004 to 11.7% in 2006.  At the same time, 
employment in the sector dropped slightly, from 42. 7% in 2004 to 39.9% in 2006 (latest year for 
which data were available).2  Consequently, labour productivity in agri culture is barely one fifth of the 
level in the rest of the economy, with the result th at average rural incomes have fallen further behind 
the urban average, thus contributing to the wide ning gap between rural and urban living standards.3  
Low labour productivity in agriculture reflects, inter alia,  its high labour intensity and the lack of 
mechanization.4  To raise labour productivity in agriculture , and therefore farm incomes, rural areas 
need to be further developed, farms mechanized, and more labour (especially surplus) shifted from 
agriculture to industry and services, where labour productivity and therefore earnings are on average 
much higher.     
11. Against this background, the rural reform proc ess has continued, and the Government intends 
to continue the reform to impr ove farmers' welfare and mitigate rural-urban disparities under the 
Eleventh Five-Year Plan (2006-10), which calls for the cr eation of a "new socialist countryside".  To 
facilitate the movement of labour, in 2006, the State Council promulgated Certain Opinions on 
Solving the Problems of Rural Workers, which called for the integration of the urban and rural labour 
markets.  According to the Opinions, all regions and departments concerned would have to eliminate 
                                                      
2 Data include employment in forestry and fishing. 
3 In 2006, per capita urban household income was Y 11,759 while rural household income was 
Y 3,587.  
4 China’s agriculture still has a high level of irrigation. WT/TPR/S/199 Trade Policy Review 
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any discriminatory regulations and restrictions in regard to hiring rural workers in urban areas, and 
remove the administrative approvals and administra tive fees charged to enterprises employing rural 
workers.   
12. In general, the land tenure system, by which the State owns all land, remains unchanged.  
However, China's Property Law of 2007 formalizes th e individuals' right to use the land.  Under the 
law, farmland continues to be owned by village  collectives, which extend contracts to individual 
households, but the law clarifies rural dwellers’ ri ghts and provides firmer legal guarantee of their 
land tenure rights.  According to the authorities, at present the majo rity of peasants have rural land 
tenure certificates, which grant them long-term gua ranteed rights to exploit agricultural land.   
13. In 2005, crops accounted for 50.8% of total agriculture production, while livestock and 
fisheries accounted for 32.2% and 10.4%, respectively.  Even though grain continues to be China's 
most important crop, there has been a shift in production from the traditional staples (i.e. rice and 
wheat) to corn and to other more profitable crops such as fruits and vegetables.5  This is in line with 
China's comparative advantage, the change in eco nomic policies, which allows farmers to choose 
what they plant, and also a response to changes in demand for food as incom es increase in China.  
There has also been a shift in focus from food to feed in line w ith changes in food consumption 
patterns, with demand shifting from staple products, to meat and other animal products.  Output of 
meat increased from 61.3 million tonnes in 2000 to 80. 5 million tonnes in 2006 (72.4 in 2004);  milk 
production increased during the same period, from 11.2 million tonnes to 33.0 million tonnes.  These 
changes in turn stimulated demand for feed grains, including corn.6   
14. Exports of agricultural products grew by 13.3%  and imports by 14.3% in 2006.  However, the 
contribution of agriculture to total trade (i.e. exports  plus imports) continued to  decline, reflecting an 
increase in trade in other areas.  China is a ne t importer of agricultural products:  imports of 
agricultural raw materials grew by 21.5% in 2006.  Imports of cotton, China's second most important agricultural import after oil-bearing crops (mainly s oybeans), continued to show impressive growth in 
2006 (more than 50%).  China is the world's largest producer and importer of cotton.  In 2006, some 20% (22% in 2004) of China's agricultural imports originated in the Unit ed States.  Fish and 
horticultural products, China's major agricultural export products, which in 2006 accounted for 27.5% 
and 27.3% of total agricultural exports respectively,  have also grown substantially since 2004 by 35% 
and 45.2%.  China's major market for agricultural exports continues to be Japan, which accounts for 
26.3% of total agricultural exports.
7 
(ii) Policy objective and administration 
(a) Policy formulation, and ins titutional and legal framework 
15. There seem to have been no changes to the institutions that formulate and implement 
agricultural policies.  At least 16 institutions are in  charge of agriculture-related issues;  coordination 
amongst these agencies is difficult because their functions often overlap.  
16. The main laws regulating the sector do not seem to have changed since 2004.  A new law was 
recently enacted to ensure the quality and safety of  agricultural products, protect public health and 
                                                      
5 The percentage change in production of 2006 over 2000 was -2.8% for rice compared to 176.9% for 
fruit (National Bureau of Statistics of China (2007)). 
6 Production of corn increased from 106 million tonnes in 2000 to 145.5 million tonnes in 2006 
(National Bureau of Statistics (2007)). 
7 UNSD Comtrade database (2006) (SITC Rev 3). China WT/TPR/S/199 
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promote the development of agriculture and the rural economy8 (Chapter III(4)(v)(b)).  However, 
specific decrees, notices and regulations are issu ed by the State Council and other administrative 
bodies of the Central Government on a yearly basis to implement specific policies. 
(b) Policy objectives 
17. The Government's key objective in the agricu lture sector, as announced in the Eleventh Five-
Year Plan, is to build a "new socialist countryside".  This will involve, inter alia , a substantial 
increase in financial support for agriculture and rural development aimed at increasing farmers' 
incomes (Box IV.1).  The plan al so calls for the establishment of a mechanism for the industrial sector 
to support agriculture, and for cities to support the countryside.  However, the traditional objectives of 
attaining food security, and of maintaining a stable  domestic production to protect farmers' interests 
have not been dropped.9   
Box IV.1:  Objectives fo r agriculture in China's 11th Five-Year (2006-10) Plan 
The key objective of the 11th Five-Year Plan as regards agriculture is to "build a new socialist countryside".  
The policies outlined in the plan are aimed at promoting agricultural development and raising farmers' 
incomes, by:  
Increasing productivity in th e agriculture sector through :  better land management;  improving the 
quality of livestock, poultry and aquatic products;  introduction of modern production technologies;  improving extension services;  and reform of the rural circulation system. 
Increasing farmers' incomes through:  the development of agric-industry;  trade promotion;  better 
managed agricultural enterprises;  the creation of co-opera tives;  a further increase in subsidies for grain, for 
cultivating improved crop strains, and for purchasing agricultural machinery and tools;  and the elimination 
of any remaining fees or charges imposed on farmers. 
Improving services in rural areas through:   increased investment in basic infrastructure to ensure an 
adequate supply of water, availability of  paved roads,  electrification of rural China, telephone and internet 
access, and creation of a rural healthcare system. 
Improving farmers education through:  enforcing  the nine-year compulsory education in rural areas;  
elimination of tuition and incidental fees;  and training for farmers. 
Increasing public and private in vestment in rural areas through :  an increase in transfers from the 
central to local governments;  and the development of an appropriate, stable, and effective financial system 
so that private funds ca n flow into agriculture. 
Deepening overall rura l reform through:  improvement of the household contract responsibility system;  
reform of public institutions at the town and townships levels;  and improvement of fiscal management systems at the county and township levels. 
Source:   11
th Five-Year (2006-10) Plan.  
 
18. In 2004, China entered a new era in its approach to agricultural policy, as it began to 
subsidize rather than tax agriculture.  China introdu ced direct subsidies to farmers, began to phase out 
agricultural taxes, started subsidizing seed and m achinery purchases, and increased spending on rural 
infrastructure.  The new policies reflect China’s ne w view of agriculture as a sector that has lagged 
behind.  During 2005 and 2006, exemptions of the agricultural tax were extended through the whole 
of China and finally eliminated, while subsid ies were made more widely available.  
                                                      
8 Agricultural Products Quality and Safety Law, 29 April 2006. 
9 State Council No. 1 Document 2007. WT/TPR/S/199 Trade Policy Review 
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(iii) Policy instruments 
(a) Border measures 
Measures affecting imports 
19. Agricultural products (WTO definition) are, w ith the exception of some poultry parts (HS 07), 
subject to ad valorem  applied tariff rates.  The average applied MFN tariff on agricultural products 
(WTO definition) has not changed since 2005, it re mains at 15.3%, the same level as the average 
bound tariff rate.10  Tariffs on grain (33.9%), sugar (29. 9%) and tobacco (26.9%) still benefit from 
higher than average protection.  Lower tariffs con tinue to apply to crops in which China has an 
apparent comparative advantage, such as fruits and animal products.  
20. Imports of agricultural products are subject to VAT.  The rate levied on agricultural products 
remains at 13%, 4 percentage points lower than th e general VAT rate.  Agricultural products produced 
and sold directly by small-scale farmers are still exempt from VAT. 
21. In 2007 tariff-rate quotas (TRQ) applied to grains , sugar, wool, cotton and some fertilizers, 
covering 45 tariff lines at the eight-digit level (down from 55 lines in 2005).11  In 2006, China 
eliminated the TRQs on vegetable oils (HS Chapte r 15 soybean oil, palm oil, and rapeseed oil) 
implementing a tariff only arrangement instead.  Im ports under TRQs, with the exception of sugar and 
cotton, remain low and quotas are generally unfilled (Table AIV.1) 
22. The quota allocation process is unchanged and is still managed by the same agencies 
(Chapter III(1)(iii)).12 
23. The Government still has some influence on im ports (and exports) through the state-trading 
system, which remains in place to  ensure the stable supply and price of specific products.  
Agricultural products subject to state trading compri se grains (corn, rice, and wheat), sugar, tobacco, 
and cotton.  Trade of vegetable oils was liberalized  in 2006 when the Tress were removed.  Chemical 
fertilizers are still subject to state trading.  With the exception of tobacco, the aforementioned 
commodities are also subject to TRQs.  China's TRQ system includes criteria for allocating part of the 
quota to a state-trading enterprise (STE) and part to a private enterprise; however, a substantial 
amount of the quota is still allocated to STEs  and remains largely unchanged since 2005.13  Imports of 
tobacco remain under state monopoly. 
24. Agricultural imports remain subject to licences  and import prohibitions.  Automatic licensing 
is in place to monitor imports;  non-automatic im port licences are to fulfil China's international 
obligations and to administer TRQs.  Goods imported under TRQs are subject to non-automatic 
licensing.  Automatic licensing covers some meat pr oducts, edible oils, and to bacco products (33 tariff 
lines at eight-digit level).  The general import prohi bition maintained under Ar ticle XX, which applied 
to products such as opium and ivory, has been extended to include, inter alia , human hair and bones.  
                                                      
10 Including available AVEs, the average applied MFN tariffs for agricultural products (WTO 
definition) and non-agricultural products in 2007 were 15.2% and 8.8%, respectively. 
11 The 45 lines are included  in HS Chapters 10 (wheat and meslin, maize, rice), 11 (cereal flour other 
than wheat and meslin, cereal groats), 17  (cane of beet sugar), 31 (mineral chemical fertilizer) and 51 (wool and 
waste of wool).  Though fertilizer is not an agricultura l product according to the WTO definition, it is mentioned 
in this section because of its  importance as an input.  
12 WTO (2006). 
13 Data provided by the authorities indicate that in 2007, STEs had the right to import 90% of the wheat 
quota, 60% of corn, 50% of rice, 70% of sugar, and 33% of cotton. China WT/TPR/S/199 
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A number of agricultural imports, including meat produc ts, raw hides and skins, plants used to make 
pharmaceuticals and perfumes, molasses, beverages (m ineral water, alcohol and spirits), and yarn 
waste (46 lines at the eight-digit level) are not granted bonded status to be used as inputs for exports under "processing trade". 
Measures affecting exports 
25. In 2007, bones and horn–cores, powder, and w aste thereof (HS 0506) and raw hides and skins 
of goats (HS 4103.1010) continued to be subject to export taxes of 40% and 20%, respectively.  
Deglutinated bones (HS 0506.9090) were subject to an interim export duty rate of 0% for 2007. 
26. The agricultural exports subject to state tr ading are cotton, rice, maize, and tobacco.
14  These 
products are still subject to export quotas;  part of these quotas, with the exception of tobacco, can 
also be exported by private enterprises, with appr oval.  The requirements for an enterprise to obtain 
approval were not made available to the Secretariat.  State trading for exports is in place to ensure a 
stable domestic supply of strategic commod ities and in turn ensure price stability. 
27. In 2007, general export prohibitions app lied to eight agricultural products.15  S o m e  
22 agricultural products (22 lines at the HS 8-digit level) including products of animal origin, 
beverages (e.g. mineral water and alcoholic spir its), raw fur skins, and silk-worm cocoons if 
processed "under processing trade" may not be expor ted.  According to the authorities, these 
prohibitions are in place to reduce exports of prod ucts using large amounts of raw materials, low 
value added goods, or energy-i ntensive and polluting products. 
28. China continues to impose global (i.e. irrespec tive of destination) and destination-specific 
export quotas.  It seems that the agricultural products subject to export quotas remain largely 
unchanged since the last review;  in 2007, global expor t quotas applied to cotton, grains (maize, rice, 
and wheat) and tea, some of which are still subject to state trading.16  Destination-specific quotas 
remain in place for exports of liv e cattle, live swine, and live chicke n to the Special Administrative 
Regions of Hong Kong and Macao.  Non-automatic licen ces are used to distribute these quotas.  Other 
exports, including meat products (31 tariff lines at th e HS eight-digit level) are subject to automatic 
licensing for statistical purposes. 
29. China has notified to the WTO that it did not  maintain or introduce any export subsidies 
during 2004-06.17 
30. Exporters of agricultural products are entitled to  VAT rebate at the time of exportation;  
rebates vary according to commodity and are often lower than the statutory VAT rate, which results 
on a levy on exports.  The VAT on agricultural goods is 13%, but the "usual" export rebate rate for 
agricultural goods is 5%.18  Export rebates for products containing agricultural inputs were increased 
in 2007 from 5% or 11% to 13% as to promote the use of agricultural products (Chapter III(3)(iii)). 
                                                      
14 Information provided by the authorities, since no notifications have been made by China in regards 
to state trading since 2003. 
15 These products are ivory, bezoar, musk, liquorice roots of the kind used in perfumes, some plants of 
medicinal use and, blackmoss (a seaweed). 
16 Coal, cotton,  maize and rice are still subject to state trading.  
17 WTO documents G/AG/N/CHN/6, 5 April 2005;  G/AG/N/CHN/10, 25 October 2006;  and 
G/AG/N/CHN/12, 14 September 2007. 
18 Information provided by the authorities. WT/TPR/S/199 Trade Policy Review 
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(b) Internal measures 
Taxation 
 31. China started to gradually phase out agricultural ta xes in 2004.  Since then, four taxes levied 
on agricultural products have been eliminated:  th e Agriculture Tax was eliminated in January 2006
19;  
the Special Agricultural Tax was replaced by a ne w tax, which is only levied on tobacco leaves20,  the 
Animal Husbandry Tax and the Animal Slaught ering Tax were eliminated in 2005 and 2006, 
respectively.21  At present, the taxes levied on agricultural  products are the tobacco leaf tax (20% of 
the purchase price for tobacco leaves), the VAT (13%),  the deed tax (levied when a land contract is 
transferred), and the tax on the use of cultivated la nd or farmland occupation tax (levied when arable 
land is used for non-agricultural purposes).  
32. Most of the fees and charges levied on farmers at the sub-provincial level have also been 
removed.  Since 2006, farmers have only had to pay fees for water and electricity;  village levies are 
still in place but are being reviewed.  Total levy  collection in 2006 amounted to Y 20 billion, down 
from Y 43.5 billion in 2004.   
33. Agricultural taxes were a major source of revenue for local governments.  Thus, to ensure that 
governments at county and township levels continue to have a stable source of revenue, transfers from 
the Central Government have increased as compensat ion for lower sub-national tax revenues.  Data 
provided by the authorities indicate that in 2006, th e Central Government transferred Y 75.1 billion to 
local governments, of which Y 41.9 billion was to compensate for the removal of the Agriculture Tax 
and the Special Agriculture Tax.  There have also been transfers from the pr ovincial and county levels 
to the townships.  The tax reform has been successf ul:  local governments have not had to impose fees 
to compensate for their reduced fi scal revenues, due to the efforts by governments at the different 
levels in regards to local public finance.  Howeve r, despite the removal of most taxes and fees related 
to agriculture, tax collection in the sector has c ontinued to rise, reaching Y 108.4 billion in 2006 up 
from Y 90.2 billion in 2004.  
34. According to the authorities, the agricultural ta x reform has created a fairer tax regime by 
reducing "farmers' burden", which in turn promotes the creation of a "harmonious society", and have 
also translated into an increase in farmers' disposable incomes.  The latter is in turn expected to 
stimulate investment in the sector, and consumption. 
Support to agriculture 
35. China has made no notifications to the WT O Agriculture Committee regarding the support 
given to the agriculture sector during the period under review22;  however, some agricultural support 
programmes were included in China's latest notification to the Committee on Subsidies and 
Countervailing Measures (Chapter III(4)(i) and (ii)).23  Support for agriculture has increased since 
                                                      
19 Decision to Nullify the Agricu lture Tax Regulations, President Order No. 46, 29 December 2005. 
20 On 17 February 2006, the State Council nullified by means of Order No. 459 the Regulations of the 
State Council on Levying Agriculture Tax on Proceeds from Special Agricultural Products, and a separate 
Provisional Regulations on Tobacco Leaf Tax was formulated (State Council Order No. 464 on 28 April 2006). 
21 Provisional Regulations on Animal Slaughtering Tax promulgated by the former Government 
Administration Council was annulled by State Council Order No. 459. 
22 In 2006, China notified the support given to agriculture during 1999-01 (WTO document 
G/AG/N/CHN/8, 31 March 2006).  More re cent notifications are not available;  according to the authorities, this 
is due to technical issues rega rding the existing Chinese data. 
23 WTO document G/SCM/N/123/CHN, 13 April 2006. China WT/TPR/S/199 
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2004:  total expenditure increased from Y 236 billion in  2004 to Y 317 billion in 2006, the latest year 
for which such data were available.  Support includes resources for agricultural production and for 
capital construction, science and technology promotion funds, and rural relief funds.  Expenditures on 
a "price subsidy" also increased from Y 79.6 billion in 2004 to Y 138.8 billion in 2006.24 
36. Direct subsidies for grain producers were intr oduced nationwide in 2004.  As this programme 
is administered at the provincial level, the amount of  the subsidies, the standards, and the procedures 
for granting the subsidies vary across the country.  In  2006, the total direct grain subsidy amounted to 
Y 14.2 billion up from Y 11.6 billion in 2004.25  The authorities believe that these subsidies have 
contributed to an increase in grain production a nd to narrowing the income gap between urban and 
rural areas.26  However, it would appear that they ha ve had only a minor impact on production and 
rural incomes.  Moreover, it is difficult to assess the overall impact of these programmes since they 
are applied in different ways in the different provinces and regions. 
37. Since 2004, subsidies have also been available to purchase improved crop strains, agricultural 
machinery, and tools.  In order to increase me chanization, the subsidy to purchase agricultural 
machinery and tools amounted to Y 800 million in 2006 (up from Y 300 million in 2005).  According 
to the authorities, in 2006, an additional subsidy (Y  12 billion) was granted for grain producers to be 
"compensated" for price increases of diesel, fertilizer, and other inputs.   
38. The State Council's No. 1 Document (2005) stated that China would continue to directly 
subsidize grain producers, increase subsidies to  farmers to purchase improved crop strains, 
agricultural machinery, and tools, and follow a mi nimum purchase price policy for rice and wheat in 
major producing areas.  In its 2007 No. 1 Document , the State Council reiterated its support for the 
agriculture sector. 
Price controls and marketing 
39. China has progressively liberalized the price of agricultural goods;  ho wever, the price of 
some commodities remains controlled and others ar e still considered "important reserve materials"27 
and thus subject to some sort of price control (Chapter III(4)(iii)(b)).  It seems that as of 2007, 
centrally set government prices apply only to tobacco, and a minimum procurement price scheme 
remains in place for rice and wheat in major producing areas.28  
40. China has liberalized most agricultural mark ets, but the Government still intervenes to 
stabilize the market, when deemed necessary.  As a r esult, some controls continue in the marketing of 
cotton, grain, and tobacco.  China's tobacco industr y is still subject to a state monopoly, with strict 
controls over production, marketing, and trade of tobacco products.  While the circulation of cotton 
has been substantially liberalized, it is still subject to controls.  For instance, in 2005 the NDRC issued 
a circular to strengthen the administration of the cotton market, regulating market access and 
                                                      
24 These "price subsidies" include subsidies to support  the prices of grains, cotton, and edible oil.  
25 In 2005, subsidies amount ed to Y 13.2 billion. 
26 Production of grain continued to increase, from 441.58 million tonnes in 2004, to reach 
442.37 million tonnes in 2006, the latest year for wh ich data were available (National Bureau of Statistics 
(2007)). 
27 The agricultural products considered key reserve ma terials are grain, cotton, sugar, and silkworm 
cocoons.  Chemical fertilizers are also  considered key reserve materials. 
28 Chinese Government online information, "2007 minimum price of wheat implementation plan".  
Viewed at: http://www.gov.cn/zwgk/2007-05/29/content-6 29212.htm (in Chinese) [20 February 2008];  and 
Ministry of Agriculture online information, "2007 minimum purchase price of early indica  rice implementation 
plans".  Viewed at: http://www.agri.gov.cngndt/t20 080207-969252.htm (in Chinese) [20 February 2008]. WT/TPR/S/199 Trade Policy Review 
Page 118 
 
 
prohibiting any further increase of cotton processing, in order to stabilize prices.  In addition, a cotton 
reserve system appears to have been put in place.  Purchases of cotton for the reserve are financed by 
the Agricultural Development Bank of China (ADBC).29  
41. In June 2004, China announced regulations desi gned to liberalize grain markets by reducing 
the state's dominant role.  The regulations seem to result from a steady rollback of the monopoly 
power of state-owned grain bureau over several years.   However, the regulations stipulate that the 
Government can intervene in grai n markets when prices are rising rapidly, and that government 
departments are responsible for ensuring that grai n supply and demand is balanced.  Thus, it would 
appear that the governors' grain responsibility syst em, established in 1995, is still in place.  Central 
and local authorities maintain grain reserves to en sure food security.  Local grain bureaux, in 
consultation with central or local governments, try to  stabilize markets by buying or selling as needed. 
(3) ENERGY  
(i) Introduction 
42. There have been no major changes in China' s energy sector since the previous review.  
China's rapid growth and the economy's high energy  intensity has translated into a high demand for 
energy to feed the growing industry, and to meet  growing consumer demand.  China is the second 
largest energy user in the world, accounting for some 15% of the world's energy consumption.30  Its 
energy consumption continues to be overwhelmingly dominated by fossil fuels, particularly coal, 
which accounted for 69.4% of the total in 2006.31  This makes China the wo rld's largest consumer of 
coal, accounting for more than 30% of global coal consumption.32  China is also the world's second 
largest consumer of petroleum products, which h as put considerable pressure on world demand for 
oil.  In 2006, oil provided 20.4% of China's energy consumption.  The other sources are  hydro-power, 
natural gas (3.0%), and nuclear and wind power (together 7.2%).33 
43. The increasing need for energy and environmental concerns has shaped China's energy policy.  
Traditionally, the policy had focused mainly on ensuri ng an adequate supply of fossil fuels to meet the 
growing domestic demand.  However, more recently , due to China's increasing reliance on imports to 
supply domestic demand and the growing concern about environmental issues34, policies have also 
focussed on diversifying energy sources, developing  renewable energy sources, reducing the energy 
intensity of the economy, and safeguarding the en vironment.  A Renewable Energy Law, which 
entered into force on 1 January 2006, provides fo r a series of incentives su ch as subsidies, tax 
incentives, and low-cost loans for the development of  renewable energy projects.  The Eleventh Five-
Year Plan (2006-10), sets compulsory targets, re quiring the entire country to reduce energy intensity 
by 20% by 2010.35  Energy consumption standards have also been set for each province.  In 2004, the 
NDRC had already formulated a Medium and Long Term Energy Conservation Plan to encourage 
energy conservation and reduce pollution.  The Ener gy Conservation Law of 1998 is being amended. 
                                                      
29 Information provided by the authorities. 
30 Andrews-Speed (2006). 
31 National Bureau of Statistics (2007). 
32 Khan and Frame (2007). 
33 National Bureau of Statistics (2007). 
34 China emits the second largest amount of greenhouse gases in the world, most of it due to the use of 
coal, which continues to account for so me 70% China’s energy production. 
35 The amount of energy consumed in 2006 to produce a yuan’s worth of output of goods and services 
needs to be reduced by 20% by 2010. China WT/TPR/S/199 
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44. One of the major problems in the energy sect or is that policy-making is piecemeal and 
uncoordinated, and implementation, supervision, and regulation are weak;  hence, they do not match 
the challenges facing the sector.36  Policy-making and the regulation of the energy sector is scattered 
between several institutions, including the NDRC, the Ministry of Land and Resources (MLR), 
MOFCOM, and the State Administration of Work Safety (SAWS).37  The Energy Bureau at the 
NDRC created in 2003, continues to be the central authority responsible for China's overall energy-
related matters.38  In an attempt to deal with instituti onal weaknesses in the sector, the National 
Energy Leading Group (NELG) was created in May 2005 as a high-level council and coordination body in charge of the energy sector.  The NELG reports directly to the State Council.  The National 
Energy Leading Group Office, in charge of the routine work of the NELG, is housed in the NDRC.
39  
The creation of this group seems to have had no impact on policy formulation and implementation. 
45. There is no comprehensive law and no real regulatory framework for the sector.  The 
legislative framework continues to be provided by  regulations and administ rative documents rather 
than by laws.  However, to foster  further development of the sector  and encourage private investment 
and competition, an appropriate legal framework woul d need to cover all areas of the energy sector 
and define the roles, rights, and obligations of the different players.  In 2006, the authorities started 
drafting an energy law, to regulate the oil, electricity, coal, and natural gas sub sectors.40 
46. Reform of the energy markets, including the pr icing mechanism, which seems to have stalled 
since 2005, is another of China's major challenges in this sector.  Market-based price signals to energy 
investors and users will help bring about needed ch anges in the capital stock and in usage patterns, 
and hence result in optimal use of resources.  At present, prices of energy products are providing the 
wrong signals to consumers because they do not  include the social costs of environmental 
externalities and because they favour increased suppl y over efficient use.  Moreover, measures such 
as capping of oil product prices in 2005, which prev ented international prices from affecting domestic 
markets, and not allowing the prices of coal and electricity to increase, do not provide correct signals to energy sellers, buyers, consumers, and inv estors, thereby increasing waste and misallocation. 
(ii) Key sub-sectors 
(a) Petroleum 
47. China has been the world's se cond largest oil consumer sin ce 2003, and demand for oil has 
continued to rise.  In 2005, total domestic c onsumption of crude oil was 300.9 million tonnes (up 
4.7% from 2004);  demand continued to increase in 2006.  However, domestic production of crude oil 
has not kept up with demand, hence the increase in imports of crude oil.  In 2006, China produced 
some 184.8 million tonnes of crude oil (up 1.9%  from 2005) and imported 145.2 million tonnes (up 
                                                     
 
36 SERC, Ministry of Finance, World Bank (2007). 
37 The Ministry of Land and Resources (MLR) is responsible for regulating mineral reserve exploration 
and exploitation.  MOFCOM deals with trade related is sues and the SAWS is responsible for safety related 
issues in the energy sector. 
38 In 2003, the Ministry of Ener gy, created in 1988 to oversee th e development of the coal, oil, 
electricity and nuclear energy sector s, was dismantled, and the Energy Bureau was set up.  The NDRC, through 
the Energy Bureau is in charge of national strategies and policies, of setting prices, and of approving overseas projects. 
39 Chen (2006), pp. 151-172. 
40 The drafting group comprising experts and offici als from15 different government entities, including 
SERC, NDRC and the Legislative Affa irs Office of the State Council, was set up on 24 January 2006. WT/TPR/S/199 Trade Policy Review 
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3.1%) accounting for 41.6% of domestic consump tion, 14.5% more than the previous year.41  Imports 
of crude and processed oil products accounted for 10.6% of total mercha ndise imports in 2006.42 
48. There have been no major changes with regard to the legislation and government agencies 
related to the oil sector since 2005.43 
49. Oil security continues to be at the core of Chin a's energy strategy.  This is to be attained 
through the further development of the domestic ma rket, increasing exploration efforts, developing 
alternative energy sources , building national oil reserves, and expanding outward investment (in the 
oil sector).  China started to build a strategic oil reserve (SOR) system in 2004, in an effort to better 
insulate the country from supply shocks or  steep international price fluctuations.44  The Eleventh Five-
Year Energy Plan (2006-10) indicates that Chin a will continue to expand its SOR by increasing 
government oil reserves (at central and provincial le vels), establishing a compulsory reserve system 
for enterprises, and encourage the development of commercial oil reserves.  The National Oil Reserve 
Centre (NORC) will be set up to manage the existing SOR.45  Securing future energy supplies is a key 
component of China's energy and foreign policy.  As a result, the Governme nt has encouraged state-
owned enterprises to secure production and explorati on rights abroad.  The 2007 Catalogue Guiding 
Outbound Investment lists the oil rich countries in which Chinese companies should try to invest.46 
50. There have been no changes to the major co mpanies operating in the oil sub sector since 
2005:  despite attempts to promote competition, four  companies continue to dominate.  The two major 
companies, PetroChina and China Petrochemical  Corporation (Sinopec), are both vertically 
integrated;  they compete with each other.47  They continue to operate alongside China National 
Offshore Oil Corporation (CNOOC), specialized pr imarily in offshore oil production, and China 
National Chemicals Import and Export Company (Si nochem Corp.).  PetroChina and Sincopec are 
listed in international stock markets.  A new state-owned company, Shaanxi Yanchang Petroleum 
Group Co., was created in 2005;  it did not upset the dominant position of PetroChina and Sinopec.  
China's first private-sector company, the Great Wall Petroleum Group, was also founded in 2005.48   
51. In 2005, the State Council issued guidelines allowing private companies to invest in 
previously restricted sectors dominated by SOEs, lik e the oil industry.  The Catalogue of Encouraged 
Foreign Investment Industries of 2007 also allows for foreign investment in this area.  It seems, 
however, that oil exploration continues to be dominated by SOEs.  Moreover, the procedures for 
obtaining approval, licence, and permission to explor e have not been provided to the Secretariat, and 
it seems that no new company has been gr anted the right to explore since 2005. 
                                                      
41 National Bureau of Statistics (2007) ;  and UNSD Comtrade database.  
42 In 2006, imports of petroleum and petroleum products  reached US$84.1 billi on, up 41.4% from 2005 
(UNSD, Comtrade). 
43 WTO (2006). 
44 A national oil reserve system equivalent to 90 days of net oil imports will be built over a period of 
10 to 15 years. 
45 Platts Commodity News,  "Chinese think-tank recommends 120-day strategic reserve", 20 July 2007. 
Viewed at:  http://www.u ofaweb.ualberta.ca/chinainstitute/n av03.cfm?nav03=62957&nav02=57484 
&nav01=57272 [22 October 2007]. 
46 Industry and Country Catalogue Guiding Outbound Investment (No. 3) of 2007, issued by Ministry 
of Foreign Affairs, MOFCOM, and NDRC.  Viewed at:  http://www.sdpc.gov.cn/zcfb/zcfbtz/2007tongzhi/ 
t20070227_118707.htm (in Chinese) [29 October 2007]. 
47 PetroChina is the listed arm of China National Petroleum Corporation (CNPC), formerly China's 
biggest oil producer.  PetroChina was established as a jo int-stock company with limited liability in 1999, as part 
of the restructuring of CNPC.  CNPC transferred most of  its assets and liabilities related to its exploration and 
production, refining and marketing, chemicals and natural gas businesses to PetroChina. 
48 Bahgat (2007). China WT/TPR/S/199 
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52. Private investment is allowed in oil refining, and wholesale and retail of oil products.  Foreign 
competition in the retail of crude and processed oil products has been allowed since 2004.  To 
promote foreign investment, petroleum refining w as included in the 2007 Catalogue of Encouraged 
Foreign Investment Industries.  The wholesale market, in compliance with WTO commitments, was 
opened to foreign competition in 2006.  In 2007, MOFCOM issued a series of administrative 
measures stipulating the requirements for "domestic private" and foreign enterprises to sell and store 
crude and processed oil.49  In 2007, 25 private companies were granted the right to sell and store oil 
products.50  However, despite the opening of the ma rket, private companies still face difficulties 
entering the market due to the strict technical require ments.  As a result, the role of SOEs in wholesale 
and retail business remains important;  most w holesale and retail companies are still wholly or 
partially owned by Sinopec and CNPC. 
53. Despite efforts to liberalize the sector, imports and exports of crude and processed oil 
products are still restricted;  they are still subject to state trading and automatic licensing.  Applied 
tariffs on crude and processed oil products have rema ined stable since 2005.  The specific tariff on 
crude petroleum (HS 27090000) was still 0 in 2007;  while tariffs on processed petroleum products 
remained at 5.8%.  Exports of crude oil and most exports of processed oil are subject to export quotas 
and state trading.  Imports of waste oils are prohibited (HS 27109100 and 27109900).  Some processed petroleum products (e.g. motor and aviati on gasoline, aviation kerosene, lamp-kerosene, 
and light diesel) cannot be imported under bonded st atus as inputs to be processed under "processing 
trade", other products such as fuel oils and lubri cating oils cannot be expor ted if processed  under the 
"processing trade" regime. 
54. The oil pricing mechanism has remained largely unchanged since 2005.  Crude and processed 
oil continue to be considered key reserve materi als of the State and as such are subject to price 
controls.  According to information provided by the authorities the price of crude oil is pegged to the 
international market.  The price of processed oil products is still mana ged by the NDRC and is 
indirectly pegged to international price of crude oil.  Processed oil products are priced based on the 
average price of international crude, plus "adequate " profit for refineries as determined by the NDRC, 
import tariffs and cost of transportation.  Oil co mpanies can change the final retail price by up 
to 8%.
51 
(b) Coal 
55. China relies heavily on coal as a source of energy:  in 2006, 76.7% of the energy produced 
was based on coal, compared with 11.9% based on crude oil.52  China's reliance on coal is because of 
                                                      
49 Measures for Administration of the Market of Processed Oil (Decree No. 23 of MOFCOM).  Viewed 
at: http://www.mofcom.gov.cn/aarticle/b /c/200612/2006120 3956011.html (in Chinese) [8 November 2007];  
Measures for Administration of the Market of Crude Oil (Decree No. 24  of MOFCOM).  Viewed  at:  
http://www.mofcom.gov.cn/aarticle/b/c/200612/200612039 56629.html (in Chinese) [8 November 2007];  
Guiding Manual for Enterprises Operating Processed Oil of 2007.  Viewed at:  http://english.mofcom.gov.cn/ 
aarticle/policyrelease/gazettee/200706/20070604761910.html [11 November 2007];  and the Guiding Manual for Enterprises Operating Crude Oil of 2007.  Viewed at:  http://english.mofcom.gov.cn/aarticle/ 
policyrelease/gazettee/ 200706/20070604762554.html [19 November 2007]. 
50 Ministry of Commerce, Announcement No. 49, 29 May 2007;  Announcement No. 57, 11 June 2007;  
and Announcement No. 61, 31 July 2007. 
51 Chinaview,  "Fuel price cuts spark debate on controls", 15 March 2007.  Viewed at: 
http://news.xinhuanet.com/english/2007-03/15/c ontent_5849414_1.htm [1 November 2007].   
52 National Bureau of Statistics (2007). WT/TPR/S/199 Trade Policy Review 
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its relative abundance in comparison to other fuels.  China is the world's largest producer of coal, 
accounting for 37% of world production.53   
56. China had in the past encouraged the opening of  small-scale coal mines to meet the demand 
of the growing economy.  However, the prolifera tion of illegal coal mines led the Government to 
change its policy in order to avoid an oversupply, maintain a stable supply, and avoid the "excessive" 
competition that state-owned mines would have from the private ones.  Despite the Government's mandate to close all illegal small-scale mines, many remain;  in 2006, 16,500 such mines were in 
operation.  The aim is to close some 6,500 small mines by the end of 2010.  Moreover, during 2007 
and 2008 the NDRC will not approve any projects with  production capacity of less than 30,000 tonnes  
and will encourage the development of large coal mines.
54  The creation of six to eight major coal 
producers over five years to replace the small mines is also envisaged.  In accordance with the targets 
set in the Eleventh Five-Year Plan (2006-10) each of th ese giants is expected to be able to produce at 
least 100 million tonnes of coal annually.  The plan also calls for the modernization of the industry, 
while ensuring industrial safety and environmental protection.55 
57. The coal industry in China is regulated, inter alia , by the Coal Law of 1996, which has been 
under revision since 2005.56  The revised law will take into account safety and environmental issues, 
and will specify the criteria to open a mine. 
58. The Energy Bureau at the NDRC, is responsib le for designing the medium and long-term 
development policies for the coal industry.  The Mi nistry of Land and Resources (MLR) is in charge 
of regulating the industry, for example, approving and issuing permits and licences for prospecting 
and exploitation.  No information was provided to  the Secretariat regarding the requirements and 
procedures for obtaining permits and licences.   
59. Apart from the price of "coal sold to electric ity generating companies" (CE), which is still 
administered or negotiated, other coal prices we re liberalized in 1993.  The Government has 
historically set coal prices to be used by power-pla nts at a much lower level than the "market price" so 
that electricity retail tariffs in turn remain low.   Since 2001, the NDRC has attempted to liberalize the 
price of CE.  However, the price of electricity h as remained under tight control, and hence there has 
been continuous disagreement between buyers (ele ctricity companies) and sellers (coal producers) 
regarding the price of CE.  In 2002, negotiations were introduced to set the price of CE in "coal 
ordering meetings";  they had little success.57  As a result, in 2004, the Government introduced a 
maximum limit within which the price of CE could fluctuate.58  More recently, it would appear that 
the NDRC allowed electric companies to change thei r prices (within a limit) when the price of CE 
changed. 
                                                      
53 Eleventh Five-Year Plan of Coal Industry, issued by NDRC in January 2007.  
54 Government news,  "China speeds up closure of small coal mines", 5 June 2007.  Viewed at:  
http://www.gov.cn/english/2007-06/05/conten t_637427.htm [1 November 2007]. 
55 Government news,  2 May 2006, "China aiming to build five to seven big coal groups".  Viewed at:  
http://english.gov.cn/2006-05/02/content_273030.htm [1 November 2007]. 
56 Other laws and regulations that regulate the pros pecting and exploitation of coal resources include: 
Mineral Resources Law (1 January 1997), Management Statutes of Exploration Blocks on Mineral Resources 
(12 February 1998), Management Statutes of Exploration of Mineral Resources (12 February 1998), and 
Measures for the Administration of Transfer of Mineral Exploration Rights and Mining Rights 
(12 February 1998). 
57 At the beginning of the year, the Government invites most of the big coal companies and coal 
consumers, including power, steel, and petrochemical companies, to a "coal ordering meeting" to agree on the 
amount of coal to be purchased during the year and its price.  
58 For instance, the 2005 CE price could increase  by only 8% from the September 2004 price. China WT/TPR/S/199 
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60. Tariff protection on coal products is low, with an average tariff of 0.8% in 2007; however 
imports are subject to automatic licensing.  Export s continue to be contro lled through state trading 
and, as such, are subject to quotas and non-automatic licensing.  Most coal products cannot be imported under bonded status as inputs for exports under "processing trade". 
(c) Electricity 
61. China remains the second largest electricity pr oducer in the world.  In 2006, its total 
generating output reached 2,865.7 billio n KWh, an increase of 14.6% from 2005.
59  Despite China's 
efforts to further develop hydropower, and altern ative energy sources (such as nuclear power), and 
cleaner energy sources (such as natural gas), the coun try continues to rely h eavily on coal for power 
generation and has not changed substa ntially since 2000.  In 2006, some 83% of total electricity was 
generated with coal, followed by hydropower, whic h accounted for some 15%.  The contribution of 
nuclear power in China's fuel mix remained low in  2006, at just 1.92%.  Demand for electricity has 
continued to grow due to China's fast economic gr owth and because of the use of energy-intensive 
technologies in the industrial sector.  In 2006, th e latest year for which data were available, 
consumption of electricity grew by 14.6%.60  According to information provided by the authorities, 
supply of electricity has been able to keep pace with demand, and shortages have disappeared.  The 
authorities estimate that this trend will continue, w ith both supply and demand expected to grow by 
11% in 2007.  However, according to a report re leased by China's Electricity Council (CEC) in 
July 200761, power shortages increased across China in the first half of 2007 due to the unprecedented 
surge in demand for electricity.62 
62. The authorities noted that the key components of the reform programme approved in 2002, 
i.e. the unbundling of generation and transmission, the separation of transmission from distribution, 
the introduction of a competitive system for grid access, and the introduction of competition at the 
retail level, have "generally" been attained or p ilot projects are in place to gradually carry out these 
reforms.  To ensure the success of the 2002 refo rm, these four key aspects have been included as 
targets of the Eleventh Five Year Plan (2006–10).  Moreover, in April 2007, the State Council issued 
a plan to implement the electricity reform, to  push forward with unbundling of generation and 
transmission, establish power markets, strengthen the role of regulators, and reduce government 
involvement in the sector.63 
Regulation 
63. The sector continues to be regulated, inter alia , by the Electricity Law of 1995, the 
Regulations for Administration of Electricity Indu stry (2005), Regulation on Electricity Supervision 
(2005), and the Electric Power Regulations.64  Since 2005, the SERC has formulated a series of 
                                                      
59 National Bureau of Statistics (2007). 
60 National Bureau of Statistics (2007). 
61 The China Electricity Council (CEC), established in 1988 with the approval of the State Council, is 
the most influential industrial organization in the electric ity sector.  At present CEC, administered by the State 
Electricity Regulatory Commission (SERC), has around 1,440 power organizations as members. 
62 China Knowledge,  "Power shortages affect functioning in the economy", 27 July 2007.  Viewed at: 
http://www.chinaknowledge.com/n ews/news-detail.aspx?id=9466 [3 November 2007]. 
63 Implementing Opinions on Further Deepening Electricity System Reform in the Eleventh Five-Year 
Plan.  Viewed at:  http://www.chinapow er.com.cn/article/1073/art1073603.asp  (in Chinese) [28 August 2007]. 
64 Laws and regulations viewed online (in Chinese) at: http://www.serc.gov.cn/opencms/export/ 
serc/flfg/gjfl/news/document000001.html;  http:// www.serc.gov.cn/opencms/export/serc/flfg/gjfl/news/ 
document06.html;  http://www.serc.gov.cn/opencms/expo rt/serc/flfg/xzfg/news/document000002.html;  
http://www.serc.gov.cn/ opencms/ ex port/ serc/ flfg/ gjfl/news/docume nt03.html  [1 November 2007]. WT/TPR/S/199 Trade Policy Review 
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complementary rules and regulations to improve electricity supervision.65  Not much progress seems 
to have been made in revising the Electricity Law of 1995, which has been in the process of revision 
since 2003. 
64. The bodies that regulate the industry have not changed since the last review of China.  The 
State Electricity Regulatory Commission (SERC), a nd the Energy Bureau of the NDRC continue to be 
responsible for regulating the sector.  The Energy  Bureau formulates the development plan for the 
sector, while SERC is in charge of regulating the el ectricity market, formulating laws and regulations, 
proposing tariffs and adjustments to the NDRC, as we ll as ensuring orderly and fair competition in the 
sector. 
Generation, transmission, and distribution66 
65. Generation, transmission, and distribution of electricity continues to be dominated by state-
owned enterprises.  Though new generation and grid companies have been cr eated in accordance with 
the 2002 reform plans,  they are all majority stat e owned and under the direct ownership and control 
of the State-owned Asset Supervision and Admini stration Commission (SASAC), which is currently  
responsible for 157 large SOEs, including the Stat e Grid Company (SGC) and the five generating 
groups.67 
66. China has been trying to increase competition in  power generation since 2002, when the latest 
electricity reform programme was launched.  Howeve r, approximately 90% of China's electricity still 
seems to be produced by state-owned or state-c ontrolled enterprises, despite the number of small 
power plants in operation throughout China.68  These plants appeared as a result of the power 
shortages that have been affecting the high-growth  belt in China and have in turn triggered huge 
investments in relatively small, inefficient, a nd polluting generating capacity.  According to the 
current environmental policies, during the Eleven th Five-Year Plan period (2006-10), many of these 
small power plants will be replaced by bigger more environmentally friendly companies.  The 
Government continues to determine the amount of electricity that each generator is to produce69, and 
approves the price at which generators need to sell. 
67. There have been no significant changes in th e transmission and distribution of electricity 
since the previous Review of China.  The separati on of transmission and distribution has not yet taken 
place.  There are six state-owned regional networks in charge of transmission and distribution:  all 
except that covering Southern China are subsidia ries of the State Grid Power Company.  The 
Southern Power Grid Company (CSG) covers five  provinces in the south and is linked with Hong 
Kong, China and Macao, China.  There is no co mpetition among the two companies, since their 
markets are clearly defined by region.  All power grids are state-owned.  The State Grid Power Company is responsible for the operation and development of inter-regional grids. 
                                                     
 
65 These include:  the Regulations on Electric ity Business Licensing (1 December 2005), the 
Management Statutes of Permits for Electrical Operation on Network (1 March 2006), the Network Operating 
Rules (Tentative) (1 January 2007), the Rules on Power Grid Interconnection Dispute Settlement (1 January 2007), and the Measures fo r Regulation of Grid Enterprise's Full Acquisition of Renewable Energy 
Generating Electricity (1 September 2007). 
66 This section is based on SERC, Ministry of Finance, World Bank (2007). 
67 These are Huaneng Power Investment Group, Datong Power Group, Huadian Power Group, Guodian 
Power Group, and China Power Investments Group.  
68 At present, there are about 4,000 power plants with a generating capacity of more than 6,000 kw. 
69 SERC, Ministry of Finance, World Bank (2007). China WT/TPR/S/199 
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68. Under each of the regional grid companies, ther e are provincial grid companies that own and 
operate their own transmission lines and distributi on networks and are responsible for supplying 
electricity to the end-users.  They continue to have monopolies over distribution and electricity sales 
within a specified area in accord ance with the Electricity Law. 
69. Electricity trading in China remains low and is mainly carried out under the direction of the 
Government, which approves prices and amounts traded .  Most of the trading continues to take place 
between the generators and the provincial electric ity companies, which act as single buyers and own 
most of the transmission and part of the distribution grids within the province.70  Some inter-
provincial trade exists and is arranged by the re levant provincial electricity companies and the 
regional grid company.  Inter-regional trading is f easible;  however, there are only a few generators 
that sell electricity outside their own regions, and this needs to be approved by the NDRC.  SERC is 
in charge of developing regional electricity markets;   two pilot projects to develop regional electricity 
markets, one in the north-eastern region of China and one in eastern China were launched in 2007. 
Pricing of electricity 
70. Electricity prices, including the rates at whic h the power-generating enterprises sell to the 
network/grid (on-grid tariffs), the rates charge d by a power network/grid to sell to another 
network/grid (transmission and di stribution tariffs), and end-users tariffs are still controlled by the 
Government.  In 2005, the NDRC, the price setting au thority, issued a notice and several regulations 
to reform electricity tariffs; the reform is in progress.71 
71. China has implemented several pilot projects wh ereby prices for access to the grid are being 
set through a bidding process, and the aim is to establish a "competitive" pricing system to set on-
grid-tariffs throughout the country.  While this syst em is put in place, the on-grid tariffs set by NDRC 
prior to 2005 will not be changed.  However, on-grid tariffs for power plants that had no agreed tariffs 
with the NDRC prior to 2005, will be determined on the basis of the economic life span of the project, 
and according to the principles of "reasonable" co mpensation and "reasonable" actual benefits.  Once 
the "competitive" pricing system is in place and a "competitive" regional power market is established, 
the on-grid tariffs for companies participating in the "competitive" market will consist of the capacity 
charge, which is to be determined by the NDRC, and the energy charge, which is to be determined by 
the market.  The on-grid tariff for electricity generation companies that do not participate in the "competitive" market will be determined by the NDRC on the basis of their economic life span.  
72. Transmission and distribution tariffs continue  to be fixed by the NDRC and take into 
consideration factors such as reasonable compensati on of cost, reasonable determination of returns, 
and fair sharing of the burden. 
                                                     
 
70 The provincial governments determine the monthly and annual amounts that can be traded, and the 
daily schedule of generation is made by the provincial electricity company consistent with the limit. 
71 NDRC online information, Notice on the Printing and Issuing of the Implementing Measures for the 
Reform of  Electricity Tariffs.  Viewed (in Chinese only) at:  http://txt.newhua.com/txt/10945.htm;  Provisional Measures for the Administration of the Electricity On Grid Tariffs.  Viewed (in Chinese only) at:  
http://news.xinhuanet.com/zhengfu/2005-04/11/content_2813032.htm;  Provisional Measures for the 
Administration of the Tariffs for the Transmission and Distribution of Electricity.  Viewed (in Chinese only) at:  http://news.xinhuanet.com/zhengfu/2005-04/11/content_2813048.htm;  Provisional Measures for the 
Administration of Electricity End Us ers Tariffs.  Viewed (in Chinese only) at: http://www.chinacourt.org/ 
flwk/show1.php?file_id=100968;  and HG.org website, "China:  Electricity Tariff Reform".  Viewed at: 
http://www.hg.org/ articles/article_805.html. WT/TPR/S/199 Trade Policy Review 
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73. Electricity tariffs for end-users are sti ll government set.  The NDRC has committed to 
introduce a mechanism that will allow tariffs to floa t in accordance with the price paid by grids to 
generators;  this is not yet in place.  End user ta riffs are determined taking into account the cost of 
electricity generation, the electricity loss during tr ansmission, electricity transmission price, and the 
"cost of government fund".72  Since 2005, the price of electricity  has been adjusted to reflect the 
increase in the price of coal:  the NDRC has allowe d electricity companies to change their prices 
(within a limit) when the price of coal for electricity  (CE) changes.  Electricity tariffs still vary by 
region and end-user (i.e. large and medium-size industries, households, businesses, and agricultural 
users).  In 2005, the average electricity retail tariff across the country was about Y 0.485/KWh 
(Y 0.471/KWh in 2004).73  
Measures for environmental protection 
74. Three quarters of the electricity generated in China is based on the use of coal, and the 
electricity industry has long been  a major polluter.  The environmental problems attributed to the use 
of coal as a source of fuel have become more appa rent to the authorities.  In response to the growing 
concerns, the Government is taking measures to switch from coal to other, cleaner, sources of energy 
while fulfilling the energy reduction goals set in the Eleventh Five-Year Plan (2006-10).  The SERC 
will only grant licences to electricity generators a nd power projects that use environmentally friendly 
technologies.  SERC will also strengthen superv ision over the existing generators and work in 
cooperation with departments in charge of closi ng down small thermal power stations.  During the 
first half of 2007, China shut down 156 small coal-fi red energy-guzzling generation units and plans to 
replace them with big power generators.  According to the NDRC, if all small units were replaced by 
large ones, the country would save 90 million tonnes of coal per year.74  Although coal will remain the 
mainstay of China’s energy supply, because of its price75, diversification of the mix of energy forms, 
sources, and suppliers can generate import ant environmental and security benefits. 
75. In 2007, to further encourage the use of cl ean and renewable energy, the State Council 
approved a document stipulating a schedule to access the grid.  Access will be granted to the 
generating companies according to stipulated en ergy conservation standards, environmental 
protection standards and economic principles.76  For example, companies using wind, power and bio-
fuels as source of energy could be given priority to access the grid. 
(d) Natural gas 
76. Historically natural gas has not been an important  fuel in China, but as it is a cleaner source of 
fuel, China has promoted its use and its share in the energy mix is increasing.  In 2006, natural gas 
consumption increased by 58.5 billion cubic meters (bcm), up 20% from the previous year.77  China's 
                                                      
72 No information was provided to the Secretariat on the "cost of government fund". 
73 In 2005, tariffs were Y 0.484/KWh for large indu strial users, Y 0.652/KWh for regular industrial 
users, Y 0.448/KWh for household users, Y 0.816/KWh for business users and Y 0.375/KWh for farming 
(information provided by the authorities).  
74 Xinhua News,  18 July 2007. Viewed at: http://news. xinhuanet.com/english/2007-07/18/content 
_6392857.htm [1 November 2007]. 
75 The cost advantage of coal remains the prime c onsideration for its use.  Even cheap renewable 
resources are, at present, still more expensive than coal  (FT.Com, "Asian energy focus shifts to renewables", 
8 November 2007). 
76 The Scheduling Approach for Energy-saving Power Generation (Tentative), State Council, 
2 August 2007.  This Approach was formulated by the NDRC along with the State Environmental Protection 
Administration (SEPA) and SERC. 
77 Xinhua News,  10 April 2007.  Viewed at: http://news.xinhuanet.com/english/2007-04/10/content_ 
5959783.htm [1 November 2007]. China WT/TPR/S/199 
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target is to increase the share of natural gas in total primary energy consumption to 5.3% by 2010, 
from 2.9% in 2005.78  This will involve large increases in domestic gas production and in imports.  
Total gas output rose to 60 bcm in 2006 (from 26.2 bcm in 2000).79  According to the Eleventh Five-
Year Energy Plan, production of natural gas should reach 92 bcm by 2010.  However, to achieve this 
goal, there is a need for increased inv estment and new technologies in the sector. 
77. The country's largest natural gas reserves ar e located in China's western and northern 
provinces.  However, demand for natural gas is in the rapidly growing eastern and southern parts of 
China, hence one of the industry's major challe nges is to build new pipelines and upgrade existing 
ones so that natural gas can be transported acros s provinces.  The West-East Pipeline Project from 
Xinjiang to Shanghai became operational in 2004 an d the NDRC approved another project to build a 
second west to east pipeline.  The second pipeline would cross 13 provinces and transport gas imported from Central Asia to the Pear l River and Yangtze River delta areas.
 80 
78. As with oil, the natural gas se ctor in China is dominated by the three large state-owned oil 
and gas holding companies:  CNPC, Sinopec, and CNOOC.  CNPC operates primarily through its 
chief subsidiary PetroChina, and all three companie s operate numerous local subsidiaries.  CNPC is 
the country's largest natural gas player, in terms of production and sales, with some 75.6% of the 
market share in 2006.81 
79. There is no specific law to regulate the natural g as industry.  The subsector is regulated by the 
Mineral Resources Law 82, the Regulations for Safety Protec tion of Petroleum and Natural Gas 
Pipelines83, and the Measures for the Administration of Gas in Urban Areas.84  I n  a n  a t t e m p t  t o  
increase investment in the sector, in 2005 the Go vernment started drafting a specific law, which 
would clarify, inter alia, the development goals, the pricing me chanism, and the taxation system 
applied to the subsector.  The draft law has not yet b een finalized, but this has been included as one of 
the Eleventh Five-Year Energy Plan targets. 
80. Until recently, natural gas was used primarily as feedstock in chemical fertilizer production 
and an energy source at oil and gas fields.  However, an August 2007 NDRC directive on the 
utilization of natural gas is aimed at avoiding shorta ges of natural gas, optimizing the use of natural 
gas, and improving energy efficiency while reduci ng gas emissions.  The industries allowed to use 
natural gas in China will have to follow this directiv e, which stipulates that na tural gas can be used as 
household fuel and industrial fuel for electricity ge neration, and to produce chemicals, and ranks these 
activities in the categories preferred, permitted, restri cted, and forbidden.  The use of natural gas as 
household fuel appears in the preferred category, wh ile its use to produce methanol and electricity are 
forbidden activities.85 
                                                      
78 China View,  9 April 2007.  Viewed at:  http://news.xinhuanet.com/english/2007-09/04/content_ 
6661083.htm. [4 September 2007]. 
79 Despite the rapid increase in natural gas produc tion, gas-fired thermal power in 2006 accounted for 
only 1.7% of the country's total installed electricity generating capacity. 
80 Xinhua News,  28 August 2007.  Viewed at: http://www.chinanews.cn/technology/2007-08-28/ 
38934.html [1 November 2007]. 
81 Information provided by the authorities. 
82 Issued in March 1986 and modified in August 1996. 
83 Effective 2 August 2001. 
84 Effective 1 January 1998. 
85 China Daily , 4 September 2007.  Viewed at: http://www.chinadaily.com.cn/bizchina/2007-09/04/ 
content_6080128.htm [13 February 2008]. WT/TPR/S/199 Trade Policy Review 
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81. Up to 2005 the price of natural gas in China was tightly controlled by the Government and 
once set, prices were reviewed only occasionally.  This pricing system did not encourage the development of the gas industry, since set prices di d not take into account co sts of production and/or 
the alternative use of resources.  As a result, the industry did not adapt to a rapidly changing economic 
environment.
86  A government-adjusted price mechanis m for natural gas was introduced in 
December 2005.  As a result of this reform, Chin a's natural gas producers were classified into two 
unspecified groups and different benchmarks were adopted to set factory prices.  These benchmarks 
are adjusted each year in  accordance with the price of other fuel s, and producers may increase prices 
within a limit, usually of 8%.87   
(4) MANUFACTURING  
(i) Iron and steel  
(a) Market structure 
82. In 2006, the iron and steel industry accounted for 2.9% of GDP and 1.6% of total employment 
in China.  The industry accounted for 2.7% of merc handise imports in 2006, an d 3.4% of merchandise 
exports.   In 2006, there were 17 companies with an annual output of over five million tonnes of crude 
steel (11 in 2005):  SOEs accounted for 43% of gross output while foreign investment plays a 
relatively small role, accounting for about 13%.  In 2006, the volume of steel production grew by 
19.7% and iron production by 19.7%. 
83. There appears to have been "over-investment" in  China's steel industry;  for example, fixed-
asset investment increased by 96% in 2003, though in  2006 it decreased for the first time in five years, 
by 2.5%.  The Government has adopted a number of measures to curb investment in the sector by, for 
example, monitoring total production volume, cl osing down obsolete production units,  adjusting 
export taxes on steel, and setting differential electricity rates.88     
(b) Regulatory framework and restructuring 
84. The NDRC plans and implements policies on th e overall industrial development of China's 
steel industry;  China Iron and Steel Associati on (CISA), a business association established in 1999, 
functions mainly as a bridge between its me mbers (i.e. producers) and the Government.89  The CISA 
established internal rules and regulations in accord ance with relevant national policies;  it also 
participates in relevant international activ ities on behalf of China's steel industry. 
85. Under the Steel Industry Development Policy,  which has remained unchanged since its 
adoption in 2005, the Government aims to achieve  "reasonable" production capacity by consolidating 
the industry, expanding the proportion of high-v alue-added products, saving energy, and reducing 
                                                      
86 Chen (2003). 
87 People's Daily , 27 December 2005.  Viewed at:  h ttp://english.peopledaily.com.cn/200512/27/ 
eng20051227_230963.html [13 February 2008]. 
88 Since June 2004, iron and steel manufacturers have been classified by the Government into three 
categories: "to be eliminated", "to be restricted" and "to be encouraged";  differential electricity rates have been 
applied accordingly, to promote the restructuring of the industry.  For example, from 1 January 2008, power 
tariff for manufacturers in "to be eliminated" categor y are Y 0.2/Kwh, compared  with Y 0.05/Kwh for 
manufacturers in "restricted" categories (Notice on Furt her Implementing Differential Power Tariff issued by 
the State Council on 17 September 2006).  
89 Enterprises with production capacity of 1 million tonnes or above may join the CISA;  smaller steel 
producers may join local iron and steel associations, whic h are also members of the CI SA.  It would appear that 
FIEs can join the CISA. China WT/TPR/S/199 
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pollution.  The policy supports the expansion of key existing steel makers, as "in principle" new 
projects will not be approved, and some small-scale producers are to be closed down or acquired by large ones. 
86. The policy also encourages the use of domesti cally produced equipment or technology, and 
emphasizes efforts to produce such  equipment locally.  The Govern ment provides assistance in the 
form of tax refunds, discounted interest rates, a nd funds for research and development to major iron 
and steel projects using newly developed domestic e quipment.  Under Article 18 of the Steel Industry 
Development Policy, enterprises are encouraged to  use domestic equipment and technology and to 
reduce imports;  though, according to the authorities,  no specific measures have been implemented.  
The Government also provides assistance to domest ic equipment manufacturers to export technology 
and metallurgy equipment, for example, in the form of export credit.        
87. Rules and requirements for foreign and domestic investment in the industry have remained 
largely unchanged since 2006.
90   
(c) Import and export measures 
88. The simple average applied MFN tariff on Ch ina's iron and steel (ISIC 371) imports was 
5.0% in 2007 (5.1% in 2005).  Imports of iron ore are regulated under the Measures on the Iron Ore 
Import Licensing Administration (effective 1 Marc h 2005), under which "autom atic" import licences 
are granted only to enterprises satisfying certain requirements.91  The importer needs to satisfy the 
Iron Ore Importer Qualification Standards (2007), set by the CISA and the China Chamber of Commerce of Metals, Mineral and Chemicals of Im porters and Exporters (CCCMC);  the Standards 
entered into effect in February 2007.  In orde r to obtain an "automatic" import licence, importers 
(steel manufacturers) must have certain facilities to  control pollution, which vary according to scale of 
production;  meet relevant national standards on po llutant discharge;  have registered capital of 
Y 20 million;  a bank credit line (i.e. maximum amount of loan  banks are willing to provide to the 
enterprise) of Y 400 million;  and iron ore imports in 2005 of at least 0.7 million tonnes.  
89. In order to discourage exports, the Government  has reduced VAT rebate rates for iron and 
steel exports:  in September 2006, VAT rebates app licable to certain finished steel products were 
reduced from 11% to 8%;  and in July 2007, rebate s were eliminated for some 553 items (including 
iron and steel products regarded as highly energy consuming, highly polluting, and consuming large 
amount of raw materials);  and were reduced for 2, 268 items that the authorities considered prone to 
trade friction (including some steel products).
92 
90. Export licence requirements have also been app lied to reduce exports of some steel products 
(83 tariff lines at the HS eight-digit level) since 20 May 2007 (Chapter III(3)(v)). 
                                                      
90 They include:  examination and approval by the NDRC;  and self-owned capital of no less than 40% 
of the registered capital for steel manufacturers.  In addition, cross-region investment by domestic iron and steel enterprises is permitted if their previous year's output of common steel was 5 million tonnes, or 500,000 tonnes 
for special high alloy steel;  for foreign enterprises, the requirement is at least 10 million tonnes of common 
steel during the previous year, or at least 1 million tonnes  of special high alloy steel.  FIEs can participate in the 
reform and relocation of existing enterprises, but may not take controlling stakes. 
91 WTO (2006), p. 193. 
92 Central Government online information.  Viewed at:  http://www.gov.cn/zwgk/2007-06/19/content 
_653655.htm. WT/TPR/S/199 Trade Policy Review 
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(ii) Textiles and clothing  
(a) Market structure 
91. China remains the world's largest textiles a nd clothing (T&C) producer.  The T&C sector 
employed around 20 million people in  2006 (up from 19 million in 200 4).  In 2006, 39,400 firms had 
an annual turnover above Y 5 million, an increase of  9.57% over 2005.  Domestic private and foreign 
enterprises are still important in exports and imports of textiles and clothing products (Table IV.1).  
No data were made available to the Secretariat on the shares of SOEs, FIEs or domestic private enterprises in total output (for firms with annual turnover above Y 5 million). 
Table IV.1 
Textiles and clothing industry, 2005-06 
(US$ billion and per cent) 
 2005 2006 
Imports and exports (US$ billion) 134.6 165.1 
Import 17.1 18.1 
Export 117.5 147.1 
 (Per cent) 
Share of SOEs in total trade 28 23.1 
Share in total exports 29.7 24.3 
Share of collective-owned enterp rises in total trade 8.1 6.65 
Share in total exports 8.8 7.05 
Share of FIEs in total trade 38.9 36.99 
Share in total exports 34.3 32.7 
Share of domestic private ente rprises in total trade 24.97 33.2 
Share in total exports 27.3 35.9 
Source: Data provided by the authorities.  Import and export  data are from UNSD, Comtra de database (SITC Rev.3). 
92. The textiles and clothing industry continues to  face several constraints.  There is little 
technological innovation in the industry:  the ratio of  R&D expenditure to total sales is less than 1%, 
and China has yet to establish its own well-known brands  in the international market.  There are also 
shortages of key inputs, for example electricity and cotton.  In 2007, imports of cotton subject to 
TRQs amounted to 2.46 million tonnes, in-quota imports accounted for 894,000 tonnes.  Out-of-quota 
imports of cotton were subject to a sliding tariff ra nging between 6% and 40%;  the rate depending on 
import prices (Chapter III(2)(iii)).  The China Na tional Textile & Apparel Council (CNTAC), which 
is the national textile-related industr ies federation, claimed that, the us e of the sliding tariff increased 
the cost of imported cotton and hence reduced pr ofits for producers of textiles and clothing.93 
(b) Regulatory framework and recent reform  
93. Various government agencies are responsible for regulating the textiles and clothing industry.  
In April 2006, the NDRC, MOFCOM and eight ot her government department s issued a circular 
setting out targets to accelerate the restructuring of the textile industry94, i.e. to raise labour 
productivity by 60% between 2006 and 2010, and to re duce energy and water intensity by 20%.  In 
June 2006, the CNTAC and the NDRC issued the Deve lopment Guidelines of the Textile Industry in 
                                                      
93 CNTAC (2007b), p. 7. 
94 NDRC online information.  Viewed at:  http://www.sdpc.gov.cn/zcfb/zcfbtz/tz2006/t20060530 
_71196.htm [20/11/07]. China WT/TPR/S/199 
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the Eleventh Five-Year (2006-10) Period95, which propose upgrading technology and increasing the 
production of high-quality produc ts, developing energy-saving techniques, and promoting the 
development of the industry in central and western China.96    
94. In 2006, the Government allocated Y 1.36 billion to improve productivity in the T&C 
industry97;  Y 560 million were to promot e innovation and the rest to support enterprises that invest 
abroad.  The Government continues to encourage en terprises to invest abroad, in particular in 
developing and least developed countries. 
(c) Import and export measures 
95. Although 75% of the sector's total output was consumed domestically in 2006 (up from 70% 
in 2005), China remained the largest exporter of te xtiles and clothing products in the world.  Exports 
of textiles and clothing reached US$147.1 billion in 2006, up some 25% over 2005.  On the other 
hand, imports increased quite slowly.  In 2006, im ports of textiles and clothing increased by 5.8%, to 
US$18.1 billion. 
96. Tariffs on textiles and clothing have remained largely unchanged since the previous Review 
of China.  The simple average applied MFN tariff rate for te xtiles (ISIC 321) was 10.9% in 2007, the 
same as in 2005;  the average rate for clothing (ISIC 322) was 16.0% in 2007 from 15.8% in 2005.  
This was attributed partly to changes in the HS nomenclature, and partly to the tariff increase on 
2 lines at the HS 8-digit level.  The applied MF N rate for belts (HS 4203. 3010) and bandoliers (HS 
4203.3020) both increased from 0%  in 2005 to 10% in 2007. 
97. China has reduced VAT rebate rates on exports  of textiles and clothing twice since its 
previous Review, in an effort to reduce the growin g trade surplus.  They were lowered from 13% to 
11% for textile products in Sept ember 2006;  and in July 2007 fro m 13% to 11% on clothing, and 
from 7% to 5% on fabrics.  As a result of these me asures and the appreciation of the exchange rate, 
T&C exporters' profits may decline;  it was estimate d that, a one percentage point appreciation of the 
RMB would reduce profits for the entire T&C industry by Y 7.2 billion98, and a two percentage points 
reduction in VAT rebate would cost th e industry Y 4.8 billion in profits. 
98. Other trade-related measures that affect Chin a's exports of textiles and clothing products 
include the memoranda of understanding (MOUs) it has signed with the European Communities, and 
with the United States.  Under these MOUs, growth  of Chinese textiles and clothing exports to these 
markets is restricted (Chapter III(3)(v)).  Under a 2006 MOU signed with South Africa (in effect until 
2008), South Africa may impose unilateral import restri ctions on 31 categories of textiles and clothing 
products originating in China. After signing the MOUs, MOFCOM issued the Measures for the 
Administration of Textiles Exports (Pr ovisional), effective 18 September 2006.99  Under these 
Measures, MOFCOM, the General Administration of  Customs, and the AQSIQ compiled a Catalogue 
                                                      
95 China apparel online information.  Viewed  at:  http://www.efu.com.cn/data/2006/2006-06-
28/154599.shtml (in Chinese) [13 February 2008]. 
96 Production of textiles and clothing is relatively concen trated in the eastern part of China, particularly 
Fujian, Guangdong, Jiangsu, Shandong and Zhejiang provin ces, as well as Shanghai;  the eastern part of China 
accounts for 73% of total employment, 82% of turnov er, 88% of total exports, and more than 90% of FDI in the 
textiles and clothing sector in China (CNTAC (2007a)). 
97CCPITTEX online information, 31 January 2007. Viewed at: http://www.ccp ittex.com/eng/texInfo/ 
8831.html  [13 February 2008]. 
98 CNTAC (2007b), p. 8. 
99 The measures are based on the Interim Measures for the Administration of Textiles Exports, issued 
on 19 June 2005, and revised later to become effective on 22 September 2005.   WT/TPR/S/199 Trade Policy Review 
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of Textiles Products Subject to Interim Export Ad ministration, which lists textiles and clothing 
exports subject to restrictions imposed by countr ies or regions unilaterally, and those subject to 
temporary quantitative control under bila teral agreements (Chapter III(3)(v)). 
(iii) Automotive sector   
(a) Market structure 
99. China is the world's third largest automobile manufacturer, after the United States and Japan.  
In 2006, the automotive sector accounted for 7.3%  of total manufacturing value added (up from 4.0% 
in 2004), and it absorbed 7.7% of the total manufact uring workforce (2.8% in 2004).  In 2006, China 
had about 100 vehicle manufacturers and around 4,500 au to parts manufacturers (Table IV.2).  FIEs 
accounted for around 75% of cars produced in China, and 52% of cars sold domestically in 2006.100  
Data provided by the authorities indicate that 95% of  cars produced in China in 2006 were sold in the 
domestic market. 
Table IV.2 
Automotive industry, 2004-06 
 2004 2005 2006 
Production (million vehicles)    
Automotivea  5.1 5.7 7.3 
Cars (sedans) 2.3 2.8 3.9 
Sales (million vehicles)    
Automotive 5.1 5.8 7.2 
Cars (sedans) 2.3 2.8 3.8 
Share of imported motor vehicles to total 
domestic sales (%) 3.4 2.8 3.2 
Number of firms  102 103 103 
a Includes buses, trucks, and cars.  
Source: Information provided by the Chinese authorities. 
(b) Regulatory framework 
100. China's policy in the automotive sector seems to be largely unchanged since its previous 
Review.  The Industrial Policy for the Automotive I ndustry, revised in 2004, remains in place;  all 
"greenfield" investment projects are subject to approval.101  There is a 50% foreign-ownership 
restriction in vehicle manufacturing, including comple tely built up units, automobiles for special use, 
agricultural transport vehicles, and motorcycles.102 
                                                      
100 Pway online information. Viewed at:  http ://bbs.pway.cn/dv_rss.asp?s=xhtml&boardid=19&id= 
55264&page=2 (in Chinese) [13 February 2008]. 
101 The Industrial Policy for the Automotive Industry aims to support manufacturer's efforts to improve 
domestic production of auto products, and promote domestic research and technology development.  
Enterprises' R&D expenditures are tax deductible provided they comply with the technological policy.  Under 
Article 62 of the policy, local governments "should not implement discriminative policies on automobiles not produced locally nor adopt measures that may result in discriminative consequence". 
102 If approved by the State Council, this limit may be relaxed for vehicle manufacturers intending to 
export and located in an export processing zone;  the policy does not stipulate a maximum equity limit for such cases.    China WT/TPR/S/199 
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101. Producers must register with the provincial  departments of the NDRC or the MOFCOM, 
including for:  the expansion of existing productio n facilities for automobiles, agricultural transport 
vehicles, and automobile engines;  investment to pr oduce their spare parts;  and investment to produce 
motorcycles and engines.  Projects that must be verified by the NDRC or the State Council include:  
new investment in automobile, agricultural transport vehicle, and automobile engine production;  and 
expansion by existing automotive manufacturers in to different types of products.  The minimum 
capital requirement for new entrants is Y 2 billion,  and an R&D institution must be established with 
investment of no less than Y 0.5 billion.103  When establishing a foreign-invested automotive 
manufacturing joint venture, the place of origin of technology must be registered with the competent 
authorities (e.g. the provincial departments of the MOFCOM or the NDRC). 
102. Although it has been the Government's inte ntion to introduce standard, nationwide 
administrative and registration fees, car registration fees vary by region.  In  some cities, such as 
Shanghai, there are quotas for the number of licences;  licences can be issued through auction, which 
tends to raise licence fees. 
103. Substantial investment in the automotive sector in recent years has apparently created excess 
capacity.104  Thus, in December 2006, the Notice on Opin ions to Restructure the Auto Industry was 
issued to, inter alia,  curb investment in the automotive sector and develop more "environmentally 
friendly" auto manufacturers.  The notice sets out new requirements for capital, technology, profit, and debt thresholds;  these are in addition to those stipulated in the Industrial Policy for the 
Automotive Industry.  For example, to obtain approv al to open a new factory in another location, a 
company's sales in the previous year must have reached 80% of its approved production capacity;  if 
there was no approved production capacity, the previous year's sales must be higher than a specified minimum threshold. 
(c) Import and export measures 
104. In 2006, 3.2% of vehicles sold in China were imported (3.4% in 2004).  The simple average 
applied tariff (including interim duties) for moto r vehicles (ISIC3843) was 13.5% (14.8% in 2005).  
Imports of vehicles are permitted only through four  coastal ports, two terrestrial, and Xingjiang 
Alashankou.  The importation of used vehicles, parts, and components is prohibited.  
105. Importers of motor vehicles or key spare part s must apply to MOFCOM or its designated 
provincial departments for an automatic import licence.  The licence is used for statistical purpose;  it is issued within ten working days of receipt of th e application, and valid for six months within the 
calendar year. 
106. Imports of automotive products must obtain a China Compulsory Certificate (CCC) mark and 
are subject to random inspection at the border.  An  Inspection and Quarantine Certificate for Entering 
Commodities and a Car Attaching Inspection Certificate is  issued by the Customs to each vehicle;  the 
inspection certificate is needed to sell the car and to register it.  
107. Under the MOFCOM's 2005 Automobile Trade Polic y, FIEs are encouraged to engage in 
automobile trade.  To establish an FIE, foreign i nvestors must meet the general foreign investment 
requirements set out in the relevant laws and regu lations, and obtain approval from the State Council 
                                                     
 
103 Article 47 of the Industry Policy for the Automotive Industry specifies more detailed requirements 
for new investment projects (WTO (2006)). 
104 Tian (2007) found that China's automobile industry, which is subject to entry barriers and high 
tariffs to promote economies of scale, is less efficient than its computer industry, which operate in a largely 
laissez-faire market environment. WT/TPR/S/199 Trade Policy Review 
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after completing an examination at the provincial level.  Article 39 of the Trade Policy prohibits 
unfair trade with regard to imports of automob iles and parts;  the competent authorities under the 
State Council may implement anti-dumping, counter vailing, and safeguard measures, establish a 
warning system, and conduct investigations into th e competitiveness of the automobile industry.   
108. Exporters of completely built up units, in cluding passenger vehicles, business vehicles, 
chassis, and "components in complete form", must  apply for licences from local departments of 
MOFCOM (Chapter III(3)(v)(b)).    
(iv) Electronics and information industry 
(a) Market structure 
109. In 2004, China became the world's largest exporte r of electronic products;  these exports grew 
from US$207.5 billion in 2004 to US$364 billion in 2006 (the latest year for which data were 
available).  The value of China's imports of electronic products also grew significantly, from 
US$180.9 billion in 2004 to US$287.7 billion in 2006.   Exports and imports of electronic products 
accounted for 37.6% and 36.3% of total merchandise exports and imports, respectively, in 2006.  
Imports of electronic and information products i nvolved largely electronic components of computers 
(such as hard disk drives) as well as integrated circ uits and semiconductors, which were needed for its 
exports of computer and related equipment.105   
110. Between 2004 and 2006, value added in the elect ronics and information industry grew at an 
annual average of 25%.  Value-added was 5.25% of GDP in 2005, and in 2006, the industry accounted for 12.4% of total employment in manufacturing (up from 6.4% in 2004).  Relatively 
hi-tech FIEs and medium and low-tech domestic fi rms coexist;  the latter specialize in components 
supplied to the FIEs.  FIEs' accounted for 85.7% of exports of electronic and information products in 
2006, up from 73.5% in 1999;  during the same period,  their sales in the domestic market increased 
from 39.2% to 55.7%. 
(b) Regulatory framework and foreign investment 
111. The Ministry of Information Industry (MII) administers the electronics and information 
industry.  The Government seeks to attract FDI in the subsector and to foster technological 
development, and, in this context, issued th e Guidance for Key Fields of High Tech Industries 
Developed by the State with Priority on 23 January 2007.  In addition, the 2007 Catalogue for the Guidance of Foreign Investment Industries incl udes 35 electronics and communications equipment 
categories in the "encouraged" category, compared with 30 in 2004.
106   Additionally, a number of 
incentives and subsidies are in place, including  subsidized bank loans and tax reductions 
(Chapter III(4)(i) and (ii)).107  Incentives provided by the Central Government are apparently 
complemented by additional incentives provided by  local governments;  however, no information on 
such incentives was made ava ilable to the Secretariat. 
                                                      
105 China has the largest trade surplu s in computers and related equipment, particularly data processing 
machines;  video cameras and recorder s;  TV receivers;  and telephones. 
106 Only "the ground receiving apparatus of sate llite TV and its key components, and tax-POS" are 
listed in the "restricted" category. 
107 According to the authorities, there is no corresponding investment or subsidy programme for IC 
projects approved by the Governmen t;  preferential tax treatment for IC products designed in China and 
produced abroad was eliminated in October 2004.   China WT/TPR/S/199 
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112. The Government has been encouraging FDI in the subsector through income tax exemptions 
as well as VAT and tariff concessions;  after the entry into force of the Enterprise Income Tax Law on 
1 January 2008, FIEs will continue to enjoy pref erential income tax treatment during a transitional 
period.  Furthermore, there are no minimum capital or technology requirements for foreign investment 
in the industry.  Against this background, around 15% of total FDI, on average, has been invested in 
the electronics industry since 1999, making it the top recipient of foreign capital in China. 
113. In addition, the Government has adopted sev eral measures to assist development in the 
industry, in particular to improve the technol ogical capabilities of domestic  enterprises.  These 
include, tariff exemptions for imported equipment by sci entific research or educational institutions.   
114. According to the MOU between China and the United States, tax reductions on integrated 
circuits industry were withdrawn in April 2005. Other measures in Policies for Encouraging the 
Development of Software and Integrated Circu it Industry are still effective.  The Government 
provides support for the innovation of core technologi es, such as integrated ci rcuits, core components, 
and software through the Electronic Industry Development Fund (EIDF).108  In the Eleventh Five-
Year Plan, the IC industry is identified as one of the core sectors that will receive priority.  
115. At present there are 54 economic and technological development zones (ETDZs).  In addition, 
the National Electronic and Telecommunication Indus try Base (NETIB), instituted in 2004 to promote 
clustering of the industry, allows companies to  take advantage of economies of scale, thereby 
increasing their competitiveness.  There are nine such  clusters in operation;  they accounted for 60% 
of total output of "above-scale" electronics and information industry firms in 2006. 
(c) Import and export measures 
116. The simple average applied MFN tariff rate (inc luding interim duties) for electrical machinery 
apparatus, appliances, and supplies (ISIC 383) rose from 9.1% in 2005 to 9.7% in 2007, due to 
China's changes in HS nomenclature.  The authoriti es state that the tariff av erage rose because, under 
the HS 2007, some non-zero-rate tariff items were fu rther classified into more specific ones, resulting 
in a rise in the number of non-zero-rate tariff items.   
117. To enhance the competitiveness of Chinese enterp rises, the Government provides assistance, 
such as export credit insurance from SINOSURE at favourable conditions, to selected exporters in 
certain sectors.  In addition, export loans are provided by the EXIM Bank. 
(5) SERVICES  
(i) Overview 
118. The tertiary sector in China accounted for about 39% of GDP in 2006, the most recent year 
for which data are available.109  In 2006, the major services activities included wholesale and retail 
trade;  transport, storage and postal services;  real estate;  and financial intermediation ( Chart IV.1 ).  
The share of services in GDP remains small compar ed with other developing countries, where the 
average participation in GDP is some 52%.  Th e development of the services sector has been 
                                                      
108 Innovation funds and science and technology funds accounted for 4.4%  of total budgetary 
expenditure. 
109 The tertiary sector refers to all economic activities other than the primary sector (agriculture, 
forestry, animal husbandry and fishery) and the secondary sector (mining and quarrying, manufacturing, 
production and supply of electricity, water and gas, and co nstruction).  Data from National Bureau of Statistics 
(2006). WT/TPR/S/199 Trade Policy Review 
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identified as a priority in the Eleventh Five -Year Plan for National Economic and Social 
Development.110  Chinese authorities expect the services' contribution to GDP to increase to 43.3% 
in 2010, and to 50% in 2020, and employment in the sectors to increase from 31.4% in 2005 to 
35.3% in 2010. 
Secondary industy
48.9Chart IV.1
Composition of GDP, 2006
Source :    National Bureau of Statistics, China Statistical Yearbook 2007.Per cent
Transport, storage &
communication
5.7
Wholesale &
retail trade
7.2
Restaurant & hotels
2.3Other
16.1 Real estate
 4.5
Financial 
intermediation
3.6
Primary industy
11.7Tertiary industy
39.3
 
119. In 2006, China's total exports of goods a nd services reached US$91.4 billion (an increase of 
24% over the previous year), while total imports amounted to US$100.3 billion (an increase of 21%).  
China's services exports represented 9.4% of tota l exports, while services imports represented 12.6% 
of total imports.  China's exports  and imports of services accounted for 3.3% and 3.8% of world 
services exports and imports, respectively.111 
120. The services sector has been gradually liberalized , but continues to be characterized by state 
involvement through SOEs, and there are still signi ficant restrictions on foreign investment and 
private-sector activities.  In liberalizing services, China has tended to follow closely its commitments 
under the GATS rather than liberalize autonomously, but  in some sectors it h as also maintained or 
erected entry requirements that are considered hi gh or cumbersome, discouraging foreign suppliers 
from gaining market access. For example, the num ber of suppliers in telecommunications is still 
limited;  foreign equity limitations are preval ent in banking, insura nce, securities, and asset 
management; and excessive capital requirements con tinue to restrict market entry for foreign 
suppliers in banking and insurance. 
                                                      
110 See the outline in NDRC online information.  Viewed at:  http://en.ndrc.gov.cn/hot/t20060529 
_71334.htm. 
111 WTO International Trade Statistics (2007).  The da ta on trade in services is taken from the balance 
of payments.  However, these data underestimate trade in  services, as their coverage is more limited in scope 
than that of the GATS (for example, commercial presence (mode 3) is not included in the balance of payments). China WT/TPR/S/199 
 Page 137 
 
 
(ii) Commitments under the General Ag reement on Trade in Services 
121. In the GATS, China made specific commitments in 9 of the 12 large sectors contained in the 
classification list generally used:  business servic es;  communication services;  construction and 
related engineering services;  distribution services;  educational services;  environmental services;  
financial services (Table AIV.2);  tourism and travel related services;  and transport services.112  No 
commitments were made in health-related and soci al services;  recreational, cultural and sporting 
services;  or other services not included elsewhere.   
122. In its horizontal commitments schedule, market-access limitations with regard to commercial 
presence (mode 3) include minimum equity requirement s on market access for foreign equity held in a 
joint venture (at least 25% of the registered cap ital of the joint venture).  The establishment of 
branches by foreign enterprises is unbound unless othe rwise indicated in the specific commitments;  
representative offices of foreign enterprises are permitte d to establish in China, but may not engage in 
any profit-making activities, except as indicated in China's specific commitments.  There are also 
limitations with regard to owners hip of land by enterprises and individuals:  70 years for residential 
purposes;  50 years for industrial, education, scien ce, culture, public health, physical education, and 
"comprehensive utilization" (multi-utilization of  land, according to the authorities) and other 
purposes;  and 40 years for commercial, tourism, and recreational purposes.   Market access for natural 
persons is unbound, except for the temporary stay  of managers, executives, and specialists of a 
corporation from a WTO Member as intra-corporate transferees of a representative office, branch or 
subsidiary (initial stay of three years);  employees of  an FIE (the shorter of three years or length of 
contract);  and salespersons negotiating the sale of services (90 days).   
123. With regard to national treatment, China has scheduled a horizontal limitation under mode 3 
that covers all existing subsidies to domestic serv ice suppliers in audiovisual, aviation, and medical 
services.  The presence of natural persons (mode 4) is unbound, except for persons permitted entry 
into China as listed above.113 
124. In its Article II (MFN) exemptions, China lists  maritime transport (international transport, 
freight and passengers);  the parties concerned may,  through bilateral agreements, establish entities to 
engage in business in China, "subject to Ch inese laws on joint ventur es and on foreign-capital 
enterprises for ships owned or operated by carriers of  the parties to the agreement".  In addition, 
China has listed cargo-sharing agreements with Alge ria, Argentina, Bangladesh, Brazil, Thailand, the 
United States, and Zaire (section (v)(b)).114 
(iii) Financial services  
(a) Overview 
125. In spite of the significant improvements made since reform began in 1979 (Box IV.2), the 
structure of China’s financial sector is still unba lanced, with a significant predominance of banks over 
other types of financial institutions.  In terms of  market capitalization, the Chinese stock market was 
relatively small, representing roughly 43% of GDP  in 2006, although the situation seems to be 
improving.  By contrast, the ratio of total ba nk credit to GDP in China reached almost 150%.  
Commercial banks' dominance of the sector is eviden t from their participation in the system's total 
assets (Table IV.3). 
                                                      
112 WTO document GATS/SC/135, 14 February 2002. 
113 The other two modes are cross-border supply (mode 1), and consumption abroad (mode 2). 
114 WTO document GATS/EL/135, 14 February 2002. WT/TPR/S/199 Trade Policy Review 
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Box IV.2:  Banking reform 
Before the reform process initiated in 1979, China's fi nancial sector – and the whole allocation of resources 
– was organized to serve the Govern ment's production and in vestment plans. Because of state ownership, 
equity markets were non-existent;  and the People's Bank of China (PBC) was virtually the only bank, 
performing both central bank and commercial bank functions. The PBC was the only deposit-taking and 
lending institution. It was also instrumental in channelling investment to state-owned enterprises and priority sectors.  Essentially, SOEs' surpluses were remitted to the Government , and then reallocated to 
priority sectors and firms through a credit plan administered by the PBC in accordance with Government's 
decisions.  Financial reform proceeded in roughly five stages.  In the first stage, from 1979 to 1985, the banking system was restructured, by breaking-up the mono-banking system and separating the PBC's 
central bank functions from its commercial bank functions.  The first separate banking institutions were 
established, the so-called Big Four:  the Agricultura l Bank of China (ABC), the Bank of China (separated 
from the PBC), the People's Construction Bank of Ch ina (later the China Construction Bank, CCB), and the 
Industrial and Commercial Bank of China (ICBC).  St ate-owned banks, rather than the PBC, became 
responsible for providing capital to SOEs.  In the second stage, from 1986 to 1992, the banking system continued to diversify through the introduction of new products and the opening of new commercial banks, 
and, most importantly, the first stock markets – Shanghai and Shenzhen – were established.  Non-bank 
financial institutions, including stock market intermediaries and securities management companies, started to appear.  In the third stage, from 1993 to 1997, the financial system continued to expand and diversify, 
with the establishment of new comm ercial banks.  The most important  development was the enactment in 
1995 of the Law on the People's Bank of China, a nd the Law on Commercial Banks, which provided the 
legal frameworks for the operations of the PBC as central bank, and for the organization of commercial 
banking, respectively.  In 1994, three policy banks were established in order to perform policy-lending 
functions:  China Development Bank, Export-Import Bank of China, and China Agricultural Development 
Bank.  By 1994, problems with non-performing loans (NPLs) had become apparent.  It was during the 
fourth stage of reform (1998-2002) that the first moves were made to resolve the problem of NPLs, with the establishment in 1999 of four state-owned asset ma nagement companies, one for each of the Big Four, 
with a view to relieving them of the NPL burden.  The fifth reform phase started towards 2003.  New 
regulatory structures have been established (the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission), and a plethora of 
reforms have been introduced ahead of the impact of WTO commitments. 
Source: Chiu, Becky, and Mervin K. Lewis (2006), Reforming China's State-owned Enterprises and 
Banks , Edward Elgar.
 
 
Table IV.3 
Total assets of the financial system, 2003-06 
(Share of total assets, per cent) 
  2003 2004 2005 2006 
Policy banks 7.2 7.2 7.5 7.6 
Commercial banks 70.7 71.8 73.2 73.4 
State-owned commercial banks (SOCBs) 54.3 53.8 53.9 52.8 
Joint-stock commercial banks 10.0 10.9 11.5 11.9 
City commercial banks 4.9 5.1 5.2 5.6 
Rural commercial banks 0.1 0.2 0.8 1.1 
Foreign banks 1.3 1.7 1.8 2.0 
Rural cooperative banks .. .. 0.7 1.0 
Rural credit cooperatives 9.0 9.2 8.1 7.5 
Urban credit cooperatives 0.5 0.5 0.5 0.4 
Post savings bank 3.0 3.2 3.5 3.5 
Non-bank financial institu tions 3.1 2.6 2.6 2.3 
Insurance companies 4.0 2.7 3.9 4.3 
Securities companies 1.9 1.7 .. .. 
Fund management companies 0.6 1.0 .. .. 
.. Not available. 
Source: CBRC (2006), Annual report;   CSRC (2004 and 2005), Annual reports ;  and PBC (2006), China Financial 
Stability Report 2006,  for data on insurance companies in 2005;  and PBC (2007), China Monetary Policy Report 
Fourth Quarter,  for data on insurance companies in 2006. China WT/TPR/S/199 
 Page 139 
 
 
126. The banking sector also plays a predominant ro le as a source of financing for the non-
financial sector.  In 2006, a total of Y 3,987.4 billi on worth of funds was raised by the non-financial 
sector, of which 82% was financed through bank lo ans, and 18% through the issuance of government 
securities, and corporate bonds and equity (Table IV.4).   
Table IV.4 
Financing by the domestic non-financial sector, 2005-06 
 Volume 
(Y billion) Share 
(%) 
 2005 2006 2005 2006 
Financing by domestic non-financ ial sector 3,067.7 3,987.4 100.0 100.0 
Bank loans 2,461.7 3,268.7 80.2 82.0 
Equities 105.3 224.6 3.4 5.6 
Government securities 299.8 267.5 9.8 6.7 
Corporate bonds 201.0 226.6 6.6 5.7 
Source: People's Bank of China (2007), China Monetary Policy Report, Fourth Quarter. 
127. Another notable feature of the financial sect or is the high degree of state ownership and 
control.  The most important banks in the system  (i.e. the Big Four State-owned commercial banks, 
the three policy banks, and the Postal Savings Bank), as well as most other financial institutions (e.g. 
credit cooperatives, non-bank financial companies, a nd insurance companies) are either state-owned 
or state-controlled (e.g. through the SOEs).  Only foreign banks and foreign insurance companies can 
be said to be truly non-state-owned or controlled. 
128. Assets of the banking and insurance sectors are also highly concentrated:  the largest four 
banks and six insurance companies account for 54% and 85%, respectively, of banking assets and 
insurance premiums.   
(b) Banking 
Market structure 
129. At end December 2006, China's banking sector comprised 19,797 banking institutions, which 
had 183,897 outlets and 2,732,394 staff115 (Table AIV.3);  74 foreign banks from 22 countries and 
regions had opened 200 branches and 14 locally incorporated institutions in 25 cities.116 
130. China's banking sector has grown rapidly in recent years.  Between 2003 and 2006, total 
banking assets grew at an average of around 17% annually.  By end 2006, total bank assets were 
Y 43.95 trillion, up by Y 6.48 trillion over 2005.  A bout 55% of the banks' assets are held by the Big 
Four SOCBs, while the 12 joint-stock commercial banks and the RCCs account for 12% and 8% of 
total bank assets (Table IV.5). 
                                                      
115 These institutions included:  3 policy banks and 5 state-owned commercial banks (SOCBs), 
12 joint-stock commercial banks, 113 city commercial bank s, 78 urban credit cooperatives (UCCs), 19,348 rural 
credit cooperatives ( RCCs), 13 rural commercial banks, 80 rural cooperative banks, 1 postal savings bank, 
54 trust companies, 70 corporate finan ce companies, 6  leasing companies, an d 14 subsidiaries of foreign banks. 
116 In addition, 186 foreign banks from 41 countries and regions had opened 242 representative offices 
in 24 cities. WT/TPR/S/199 Trade Policy Review 
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Table IV.5 
Total assets of banking institutions, 2003-06 
(Y trillion and %) 
 Total assets (Y trillion at year end) Percentage of total assets 
 2003 2004 2005 2006 2003 2004 2005 2006 
Total assets (Y trillion at year end) 27.64 31.60 37.47 43.95 .. .. .. .. 
Policy banks 2.12 2.41 2.93 3.47 7.7 7.6 7.8 7.9 
SOCBs 16.05 17.98 21.01 24.24 58.1 56.9 56.0 55.2 
Joint-stock commercial banks 2.96 3.65 4.47 5.44 10.7 11.6 11.9 12.4 
City commercial banks 1.46 1.70 2.37 2.59 5.3 5.4 5.4 5.9 
Rural commercial banks 0.04 0.06 0.30 0.50 0.1 0.2 0.8 1.1 
Rural cooperative banks .. .. 0.27 0.46 .. .. 0.7 1.0 
Rural credit cooperatives 2.65 3.08 3.14 3.45 9.6 9.7 8.4 7.8 
Urban credit cooperatives 0.15 0.18 0.20 0.18 0.5 0.6 0.5 0.4 
Foreign banks 0.40 0.58 0.72 0.93 1.4 1.8 1.9 2.1 
Non-bank financial institutions 0. 91 0.87 1.02 1.06 3. 3 2.8 2.7 2.4 
Post Savings Bank 0.90 1.08 1.38 1.61 3.3 3.4 3.7 3.7 
.. Not available. 
Source: CBRC (2007), Annual Report 2006, (Appendix 8-1). 
131. Banks have historically been the principal provider of financing for enterprises and the 
primary choice for the deposit of domestic savings.  Bank loans accounted for 82% of total financing 
in 2006 with the remaining 18% rai sed through bond and equity issuances.117  The principal source for 
commercial banks' assets has always been househol d savings, which in 2006 represented about 48% 
of total deposits in banking institutions.118   
132. Based on rapid growth in total deposits vis-à-vis  total loans, overall liquidity in the banking 
sector has improved over the past few years.  While  total deposits in the banking institutions was 57% 
higher in 2006 than in 2002, total bank loans were only 40% higher.119  As a result, the loan-to-deposit 
ratio dropped from 77% in 2002 to 67% in 2006.  A ccording to the authorities, the reason for the 
excess liquidity is the enduring surplus in in ternational payments, which increased from 
US$30.4 billion in 2002 to US$177.5 billion in 2006.120  Capital inflow, mainly through FDI, also 
increased during the same period, from US$49.3 billion to US$78.1 billion. 
133. Detailed aggregate data on the sectoral breakdow n of lending were not made available to the 
Secretariat.  However, it would appear that, despite the banks' recent push towards retail lending, manufacturing and real estate (including property and construction loans, and mortgages) remain 
among the largest exposures.
121   
134. Low profitability remains one of the main weakn esses in the sector.  While the average rate of 
net return on total assets (ROA) and net return on e quity (ROE) of the Big Four was 0.9% and 14.9%, 
respectively, in 2006, earnings fell short of the le vel required to sustain in ternal capital generation 
necessary to match the sector's growth  rates.  After the reform, the profitability as well as the ability to 
                                                      
117 In the first half of 2007, bank loans accounted for 89.2% of total domestic financing;  the remaining 
10.8% was accounted for by stocks and bonds. 
118 CBRC (2007), Appendix 8-3. 
119 According to data in CBRC (2007), Appendix 8-3. 
120 The surplus continued to grow in 2007, reaching US$18.57 billion in the first nine months. 
121 Fitch Ratings, "Chinese Banks – 2006 Ratings Season Review & 2007 Outlook", 
13 December 2006. China WT/TPR/S/199 
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withstand risks have been improved, as their rele vant indicators have reached the standards required 
by Chinese banking regulatory authorities.  The income portfolios of banks have improved and 
become more diversified as banks  have expanded their product offeri ng;  fee-based income accounted 
for 17.5% of banks' total income in 2006, up from 14% in 2003.  
135. Capital adequacy levels have improved, due pa rtly to reform, restructuring, domestic and 
overseas initial public offerings (IPOs), the presence of  institutional investors, and an increase in the 
issuance of capital instruments.  At end 2006 , 100 commercial banks, whose assets accounted for 
77.4% of total commercial bank assets, met th e capital adequacy ratio (CAR) of 8%.122  
136. The Big Four have always dominated China' s banking sector, and have been the primary 
source of funding for China’s SOEs;  as a result, they  continue to be burdened with large NPLs.  Asset 
quality has improved in recent years, although it continu es to be a principal concern.  At the end of the 
first quarter 2007, the ratio of NPLs over total lo ans of major commercial banks reached an all-time 
low of 7.1%, down from almost 25% in 2002;  about 46% of the current stock of NPLs comes from loans to the agriculture sector.
123  However, these figures, which reflect the NPLs resident in banks' 
balance sheets, differ from the "total problem lo ans", which include the NPLs that have been 
transferred off the SOCBs' balance sheets and placed  with state-owned asset management companies.  
These "NPL carveouts" no longer represent a direct dr ag on banks' performance, but remain a broader 
issue and a contingent fiscal liability for the Govern ment.  In addition, a large proportion of loans in 
banks' balance sheets are "special mention" loans.   While rated one categor y above substandard, these 
loans (7.8% of commercial bank loans according to pr ivate sector estimates) form a grey area between 
normal and non-performing loans, and presumably would be the first place asset quality deterioration 
would become apparent in the event of  less favourable economic conditions.124 
Regulatory framework 
137. The main legislation regulating the sector incl udes:  the Law on the People's Bank of China, 
the Law on Commercial Banks, and the Law on Regul ation and Supervision of the Banking Sector 
(most recently amended on 31 October 2006).  In a ddition, guidelines have been issued to improve 
corporate governance and management of banks.125  
138. Commercial banks in China are subject to a multi-layered regulatory framework, in place 
since 2003, involving the People's Bank of China (PBC) (e.g. for fixing interest rates, and regulating and supervising interbank transac tions), the China Banking Regulatory Commission (CBRC, for most 
aspects of banking activities), the China Secur ities Regulatory Commission (CSRC, for conducting 
                                                     
 
122 At end 2003, only eight banks, accounting for just 0.6% of the total banking assets, met the 
minimum CAR of 8%. 
123 CBRC (2007), Annual Report 2006, Appendix 8-8. 
124 Fitch Ratings, 13 December 2006, "Chinese Banks – 2006 Ratings Season Review & 2007 
Outlook".  
125 These include, inter alia:   the Guidelines on th e Corporate Governance of Joint Stock Commercial 
Banks and the Guidelines on the Internal Control of Commercial Banks.  The Regulations on Administration of 
Foreign Financial Institutions and its Implementing Rules determine the rules under which foreign and foreign-
funded banks may operate in China, while the Administrative Rules Governing the Equity Investment in Chinese Financial Institutions by Overseas Financial Ins titutions regulate equity investment by foreign financial 
institutions. A "foreign financial institution" is a comme rcial bank incorporated outside the territory of the 
People's Republic of China, following the approval or auth orization by the financial supervisory authority of the 
country, whereas a "for eign-funded legal entity" is a wholly foreign-funded bank, a Sino-foreign joint-equity 
bank, a wholly foreign-funded finance company or a Sino-foreign joint-equity finance company referred to in 
the Regulation (Article I of the Rules for Implementi ng the Regulations Governing Foreign funded Financial 
Institutions).  WT/TPR/S/199 Trade Policy Review 
Page 142 
 
 
fund custodian business), the China Insurance Regulatory Commission (CIRC, for conducting 
bancassurance business), and SAFE (e.g. for regulati ons dealing with forei gn exchange business).  
Additionally, the Ministry of Finance oversees the management of SOCBs' NPLs by the asset 
management companies established to that effect (see below).126   
139. The CBRC is the primary authority responsible fo r the regulation and s upervision of banking 
institutions, as well as overseas operations of local institutions.127  Its main regulatory and supervisory 
responsibilities have remained largely the same during the review period.128  Banking institutions in 
China are regulated and supervi sed on a consolidated basis. 
140. According to the Law on the People's Bank of China, the PBC is responsible not just for 
formulating and implementing monetary policy as described in Chapter I(3)(i), but also for 
maintaining financial stability.129  The PBC has also kept some broad supervisory powers, beyond the 
normal macro-prudential control of the financial sector.130   
Licensing requirements and procedures 141. The Law on Commercial Banks and the CBRC Rules on the Implementing Procedure for 
Administrative Licensing (issued on 12 January 2006) define the business scope, and set out licensing 
and other requirements for domestic-funded commercia l banks.  It would appear that the licensing 
                                                     
 
126 In addition to the regulators, there are associa tions (for example, the National Association of 
Banking Industry and National Association of Finance Companies) that, according to  the authorities, ensure 
industrial self-discipline, business cooperation, and innovation. 
127 In 2003, the CBRC took over supervisory and regul atory functions previously performed by the 
PBC. The PBC currently maintains regulation of monetary po licy and financial liquidity.  It sets the interest rate 
bands for loans and deposits as well as banks' reserve re quirements.  It also appears to monitor and regulate the 
credit expansion of a large portion of the banking system. 
128 The main regulatory and supervisory respon sibilities of the CBRCs are:  formulating and 
promulgating rules and regulations for banking institutions;  authorizing the establishment, changes, termination, and business scope of banking institutions ;  approving products and services offered by banking 
institutions within their business scope;  conducting fit and proper tests for directors and senior managers of 
banking institutions;  conducting off-site surveillance and on-site examination of the business operations and 
risk profile of banking institutions;  compiling and publishing statistics and reports of banking institutions;  and 
guiding and overseeing the activities of the self-regula ted organizations of the banking sector, which must 
submit their articles of association to the CBRC for filing (the Law on Banking Regulation and Supervision (enacted on 27 December 2003, and amended on 31 October 2006)). 
129 The PBC's main functions and responsibilities include:  formulating and implementing monetary 
policy, by inter alia  fixing "benchmark interest rates", setting reserve ratios for commercial banks, extending 
loans to commercial banks, and conducting open market operations;  issuing renminbi (RMB) and controlling its 
circulation;  supervising and administering inter-ba nk lending and the inter-bank bond market;  controlling 
foreign exchange and supervising the inter-bank foreign exchange market;  holding, administering, and managing the State's foreign reserves;  and engaging in relevant international banking operations in its capacity 
as the central bank of the State.   Under Article 4 of the Law on Anti-money Laundering, the anti-money-
laundering authorities of the State Council are responsibl e for the administration and supervision work on this 
issue. 
130 The PBC has the power to inspect and supervise:  the implementation of regulations on reserve 
requirements;  activities related to special loans grante d by the PBC;  implementation of foreign exchange 
regulations;  implementation of regulations on inter-bank lending and the inter-bank bond market;  
implementation of regulations aimed at controlling clearing;  and implementation of the regulations against money laundering.  In addition, the PBC has specific powers concerning the inspection and supervision of 
banks.  In that regard, it may propose that inspection and supervision of specific institutions be conducted by 
the CBRC, and it may even conduct such inspection on its ow n if the situation of a specific financial institution 
may increase overall systemic risk. China WT/TPR/S/199 
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requirements and procedures have remained unchanged since 2006.  The establishment of a 
commercial bank requires CBRC approval and the issuance of an operating licence.131  The licensing 
procedure comprises two steps:  the applicant must submit a written application, along with a feasibility study, and "other documents" that may be  specified by the CBRC;  the applicant will then 
be called upon to complete the application,  by providing the required information.
132  If the 
establishment is approved, the CBRC issues a banking perm it.  The applicant must then register with 
the State Administration of Industry and Commerce (SAIC) and obtain a business licence.133  T h e  
expansion of the branching network domestically or overseas also requires CBRC approval, and the 
issuance of a licence by SAIC.134 
142. Approval by the CBRC is required to changes, inter alia,  to the institution's name, the amount 
of registered capital, the location of the head offi ce or any branch, the scope of business (including the 
introduction of new products or services), shareholde rs with 5% or more of the bank's shares, the 
articles of association.135  A change in senior management must also be notified to the CBRC, and the 
qualifications of the new management approved.136  For an SOCB, a board of supervisors must be 
established, inter alia,  to oversee its operations and its asset- liability ratio and to maintain and 
increase the value of state-owned assets.137  The Law on Regulation and Supervision of the Banking 
Sector sets out specific time limits for certain decisions.138  
                                                      
131 Under the law, commercial banks may engage in some or all of the following business operations:  
taking deposits from the general public;  granting short-, medium- and long-term loans;  handling domestic and 
foreign settlements;  acceptance and disc ounting of negotiable instruments;  issuing financial bonds;  acting as 
an agent for the issue, honouring, and underwriting of government bonds;  buying and selling government and 
financial bonds;  interbank lending;  buying and selling foreign exchange, and acting as an agent for the 
purchase and sale of foreign exchange;  the business of bank cards;  providing letter-of-credit services and guaranty;  acting as an agent for the receipt and payment of money, and acting as an insurance agent;  providing 
safe deposit box services;  and other business operations  as approved by the banking regulatory authority under 
the State Council (Article 3 of the Law on Commercial Banks, including th e amendment of 27 December 2003). 
132 The required information includes:  a draft of the articles of association of the company;  certificates 
of the qualifications of the director;  an investment verification certificate issued by a statutory investment 
verification organization;  a list of the names, capital contributions, and shares of shareholders;  credit worthiness certificates and relevant information on share holders with 5% or more of the company's shares;  and 
business policies and plans, and other documents as specified by the CBRC. 
133 Articles 14-16 of the Law on Commercial Banks. 
134 The same procedure applies for opening each add itional branch.  A branch must have sufficient 
operating funds for the scale of its business.  The sum of operating funds allocated to all the branches must not 
exceed 60% of total capital of the head office.  The applying bank must have maintained a favourable balance in 
the three most recent accounting years, and fulfil other regulatory requiremen ts, i.e., that the capital adequacy 
ratio be no lower than 8%;  that the balance of equ ity investments do not generally  exceed 50% of net assets; 
and that the balance of year-end assets in the year prio r to the application is at least Y 100 billion. Additionally, 
the applying bank must have lawful and sufficient sources of foreign exchange funds; must have a good 
corporate governance structure and a sound and effective internal control system; and its main prudential 
supervisory indices must meet the supervisory requirements. 
135 Other matters requiring approval of the CBRC include changes in operating funds of local branches 
of foreign banks or of foreign-invested or joint-venture banks, or the transfer of assets by headquarters to foreign financial institutions in China. 
136 Article 24 of the Law on Commercial Banks. 
137 Article 18 of the Law on Commercial Banks. 
138 For example, decisions regarding the establishment of banks must be made within six months of 
CBRC's receipt of the application;  decisions on the introduction of new pr oducts or services must be taken 
within three months;  and decisions regarding the fit and proper test of directors and senior managers must be taken within 30 days (Article 22 of the Law on Regulation of and Supervision over the Banking Industry). WT/TPR/S/199 Trade Policy Review 
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143. Since the previous Review of China, there h as been no change in the minimum registered 
capital requirement to establish banks, or to the capita l adequacy ratio (CAR).  According to the law, 
minimum registered capital is Y 1 billion for a commercial bank, Y 100 million for an urban commercial bank, and Y 50 million for a rural commercial bank.
139  In addition, the CAR may not be 
lower than 8%.140  Other requirements include:  the ratio of loans outstanding by a commercial bank 
to related parties must be no more than 10% of th e banks total net capital (15% if the borrower is a 
group);  and inter-bank borrowing must be no more than 4% and lending no more than 8% of the 
total.141 
144. Commercial banks may need further authori zation to supply specific services, such as 
derivatives and wealth management, in accordance w ith prudential principles and depending on the 
capacity of individual banks.  A separate licence is required for all these services.  For example, 
according to the Provisional Administrative Rule s Governing Derivatives Activities of Financial 
Institutions, commercial banks (including branches of foreign banks) seeking to conduct derivative 
business must obtain prior approval from CBRC, by meeting various prudential requirements, including detailed requirements on the composition of  trading teams and qualification requirements of 
professionals involved in the supply of these services.  According to the Provisional Administrative 
Measures on Personal Wealth Management Business  of Commercial Banks, commercial banks must 
apply for approval from the CBRC before they can provide certain personal wealth management 
services with guaranteed incomes.
142   
145. Commercial banks in China are generally prohi bited from trading and underwriting equity 
securities, unless they establish a separate subsidia ry for that purpose.  Nonetheless, commercial 
banks are allowed, within their business scope, to underwrite and deal in government bonds and bonds 
issued by financial institutions, underwrite and d eal in short-term commercial papers issued by 
qualified non-financial institutions in the inter-ban k bond market;  and deal in qualified corporate 
bonds in the inter-bank bond market.  They can also act as agents in transactions involving securities, 
including bonds issued by the Government, corporat e entities and financial institutions;  provide asset 
management advisory services to institutional and indi vidual investors;  act as financial advisors in 
connection with large infrastructure project s, mergers and acquisitions, and bankruptcy 
                                                      
139 Article 13 of the Law on Commercial Banks. 
140 Furthermore, the ratio of outstanding loans to deposits may not exceed 75%, of the balance of 
floating assets to floating liabilities may not be lower than 25%, and the ratio of outstanding loans granted to the same borrower to the balance of the capital of the comm ercial bank may not exceed 10 % (Article 39 of the Law 
on Commercial Banks). 
141 Further details are given in the Rules on Commerc ial Banks' Connected Transactions with Insiders 
and Shareholders (CBRC Decree No. 3 of 2004) and the Rules on Monitoring Indicators and Assessments on 
Assets/liabilities Ratio Management at Commerc ial Banks (CBRC Circular No. 450 of 1996). 
142 Furthermore, the Provisional Administrative Measures on Commercial Banks Conducting Offshore 
Client Wealth Management Services (enacted by CBRC,  SAFE and the PBC), which entered into force on 
17 April 2006, authorize commercial banks having obtained the relevant business qualification from CBRC to 
conduct investment in certain financial products outsid e China, on behalf of both domestic institutions and 
China's residents.  To apply for these services, the co mmercial bank must already have a foreign exchange 
business qualification.  SAFE will, upo n application, grant each qualifying commercial bank a foreign exchange 
quota for its offshore client wealth management business,  within which the bank may invest in foreign exchange 
financial products with foreign exchange purchased with RMB.  Any investment by clients who invest directly 
with their own foreign exchange (as opposed to RMB-pur chased foreign exchange) is not counted within the 
quota.  Investment in offshore fixed income products, as well as stocks and high-risk products, is governed by 
the Circular Concerning the Offshore Client Wealth Management Services by Commercial Banks, and the 
Circular on the Adjustment in the Scope of Offshore Wealth Management Services of Commercial Banks, issued by CBRC on 21 June 2006 and 10 May 2007, respectively. China WT/TPR/S/199 
 Page 145 
 
 
reorganizations;  and act as custodian for investme nts funds, including securities investment funds and 
corporate annuity funds.143   
146. Commercial banks in China are not permitted to underwrite insurance policies, but may act as 
agents to sell insurance products;  it was not clear  to the Secretariat whether banks can establish 
separate insurance companies.  Commercial banks pr oviding insurance agency services are required to 
comply with any applicable rules issued by the CIRC, the regulator for China's insurance industry.  
They must obtain licences from the CIRC befo re conducting agency insurance business.144  I n  
accordance with the Notice Regardi ng Standardization of Agency Insurance Business Conducted by 
Banks issued by the CIRC and the CBRC on 15 June  2006, these licences are required for all tier one 
branches of commercial banks conducting such business.  
147. China has been gradually promoting the estab lishment of fund management companies owned 
by commercial banks on a trial basis.  So far, the Industrial and Commercial Bank of China, China 
Construction Bank, and the Bank of  Communications have established  fund management companies.  
A second group of banks, selected on a trial basis to be allowed to establish fund management 
companies, include China Merchants Bank, Bank of China, Shanghai Pudong Development Bank, 
Agriculture Bank of China, and China Minsheng Bank Corporation. 
148. In general, commercial banks in China ar e prohibited from making domestic investments 
other than in debt instruments issued by the G overnment and financial in stitutions, commercial paper 
and corporate bonds issued by qualified non-financ ial institutions, and certa in derivative products. 
Unless otherwise specifically decided by the Stat e Council, commercial banks are prohibited, in 
China, from engaging in trust investment business, s ecurities operations, investing in real estate other 
than for their own use, and making equity invest ments in non-banking fi nancial institutions and 
entities. Commercial banks cannot supply financial leasing services directly, but by establishing a 
separate subsidiary.145 
Foreign banks 149. In order to comply with the final stage of its GATS schedule of commitments, China adopted 
the Regulations on Administration of Foreign-funded Banks, and the Rules for Implementing the 
Regulations on Administration of Foreign -funded Banks, which entered into force on 
11 December 2006.
146  In addition, foreign investment in Ch inese financial institutions is regulated by 
                                                      
143 Under the Administrative Measures on Qualifications for Securities Investment Fund Custodianship 
effective January 2005, a commercial bank may apply for th e qualification to engage in fund custodian business 
of securities investment funds, if, among other requirement s, the bank has year-end net assets of not less than 
Y 2 billion for each of the last three fiscal years, and its capital adequacy ratio meets the relevant regulatory 
requirement. The fund custodi an must ensure the separation of its custodian business from its other businesses 
and the independence of its fund assets. The CSRC and the CBRC are jointly responsible for examining and approving the qualifications and supervising the activities of fund custodians. In addition, the senior manager to 
be appointed for a commercial bank's fund custody department must meet certain qualifications and be approved 
by the CSRC. 
144 Pursuant to the CIRC’s Interim Measures on the Administration of Ancillary Agency Insurance 
Business. 
145 Under Article 9 of the Rules Governing Financial Leasing Companies, which entered into force on 
1 March 2007, banks wishing to supply these services must, inter alia , apply for a licence, have been profitable 
for the last two consecutive years, and their total assets  at the end of the previous year must be at least 
Y 80 billion. 
146 The term "foreign-funded bank" includes:  a wholly foreign-funded bank, funded solely by a foreign 
bank or jointly with any other foreign financial institution;  a Chinese-foreign joint-venture bank, jointly funded by a foreign financial institution with a Chinese company or enterprise;  a branch of a foreign bank;  and a WT/TPR/S/199 Trade Policy Review 
Page 146 
 
 
the Administrative Rules Governing the Equity I nvestment in Chinese Financial Institutions by 
Overseas Financial Institutions.   
150. Only foreign commercial banks that have mainta ined a representative office in China for at 
least two years prior to the application, and have total assets of not less than US$10 billion at the end 
of the year preceding the application, can apply for the establishment of a wholly foreign-funded bank 
(subsidiary).  The same asset requirement app lies for the establishment of a Chinese-foreign 
joint-venture bank.  A foreign bank wishing to estab lish a branch must have total assets of not less 
than US$20 billion at the end of the year preceding the application, and must have maintained a representative office in China for at least two years in the area where it applies to establish its first 
branch.  It was not clear to the Secretariat wh y the minimum asset requirements are higher for the 
establishment of branches than for locally incorporated entities, taking into account that branches are 
not allowed to conduct retail business.   In addition, foreign financia l institutions wishing to establish 
any type of operational foreign-funded bank must  have persistent profit-earning capacity and good 
reputation;  have experience in international fi nancial activities;  have in place an effective 
anti-money-laundering system;  and be subject to su pervision – and have th e application approved – 
by its home country regulator.   
151. The minimum registered and paid-in capital for the establishment of a wholly foreign-funded 
bank or a Chinese-foreign joint-venture bank is Y 1 billion.  Branches opened by wholly foreign-
funded banks or Chinese-foreign joint-venture bank s in China must be allocated Y 100 million as 
operating capital.  Total operating capital allocated from a wholly foreign-fu nded bank or a Chinese-
joint venture bank to all its branches must not repr esent more than 60% of the parent bank's aggregate 
capital.  A branch of a foreign bank must be allocated Y 200 million as operating capital.  
152. Wholly foreign-funded and Chinese-foreign jo int-venture banks may engage in the same 
business operations as domestic commercial banks, both in local and foreign currency.  Nonetheless, 
branches of foreign banks cannot supply bank cards;  they may only receive time deposits of not less 
than Y 1 million each from Chinese ci tizens within China.  Operational foreign-funded banks wishing 
to engage in local-currency business must have had th eir business in China for at least three years, and 
have been profitable for two consecutive years, prior to the application.   
153. Foreign equity participation in domestic fina ncial institutions is restricted. Under the 
Administrative Measures on Equity Investments of  Overseas Financial Institutions in Chinese 
Financial Institutions
147, no single foreign financial institution may own more than 20% of the equity 
of a Chinese financial institution.148  In addition, if the combined equity investment of all foreign 
financial institutions in a non-listed Chinese financ ial institution is equal to or exceeds 25%, the non-
listed Chinese financial institution w ill be regulated as a foreign-funde d financial institution;  if the 
combined equity investment of a ll foreign financial institutions in a listed Chinese financial institution 
is equal to or exceeds 25%, the listed Chinese financ ial institution will continue  to be regulated as a 
Chinese financial institution.149  Foreign financial institutions that  the CBRC deems as related parties 
are counted as one financial institution when calcula ting such entities' equity interest in China's 
commercial banks.  
                                                                                                                                                                     
representative office of a foreign bank. The first thr ee categories are referred to by the regulations as 
"operational foreign-funded banks".   
147 The term "Chinese financial institutions" referred to in the Rules comprise the Chinese commercial 
banks, urban and rural credit co-operatives, trust and investment companies, financial leasing companies, 
finance companies affiliated to enterprises, and other Chinese financial institutions chartered by the CBRC that 
are legally incorporated within the territory of the People's Republic of China 
148 Article 8. 
149 Article 9.  China WT/TPR/S/199 
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Lending, interest rates, and non-interest income 
154. Lending and deposit-taking by banks have been deregulated since 2004, but some constraints 
remain.  In the case of lending, the Law on Commerc ial Banks requires commercial banks to take into 
consideration "the needs of the national economic and social development", and follow the "guidance 
of the industrial policies of the State".  Acco rdingly, in addition to the sector-specific lending 
provided by policy banks, the PBC and other admi nistrative authorities encourage commercial banks 
to adapt their lending to specific borrowers in lig ht of relevant government policies. Lately, for 
instance, the PBC has been encouraging financial in stitutions to direct their lending towards small and 
medium-sized enterprises, job creation, student loans, migrant workers, and non-public sectors.150 
155. In accordance with the Law on Commercial Banks , interest rates are also to be set by 
commercial banks "in accordance with the upper and lo wer limits for interest rates prescribed by the 
People's Bank of China".  Interest rates for RMB-de nominated loans and deposits were historically set 
by the PBC.  The PBC has been gradually liberaliz ing interest rates since 2004, allowing banks wider 
discretion in determining interest rates on RM B-denominated loans and those offered on RMB-
denominated deposits.151  Currently, market-based interest ra tes are allowed in the money and bond 
markets, and commercial banks may charge lending rates above the be nchmark (but not below 90% of 
the benchmark), and offer  deposit rat es below (but not above) the benchmark.152  According to the 
authorities, future efforts will focus on the developmen t of the basic interest rate system in China’s 
money market, applying market-based measures to de termine the interest rates of deposits, improving 
the interest rate formation mechanism, and gradua lly improving Central Bank indirect instruments of 
monetary policy.  
156. Currently, there are no restrictions on interest  rates for foreign-currency-dominated loans, 
foreign-currency-denominated depos its over US$3 million, or foreign- currency-dominated deposits of 
less than US$3 million with a maturity of more than  one year.  However, a maximum interest rate has 
been set for certain foreign-currency-dominated deposits  of less than US$3 million with a maturity of 
                                                      
150 PBC (2007). 
151 The current policy is based on the establishment of  benchmark rates, as well as a lower and upper 
limit around these rates. Banking institutions must set th eir rates within the limits.  Different ceilings apply to 
loans provided to different types of enterprises and extende d by different types of financial institutions.  Prior to 
2004, commercial banks' and urban cred it cooperatives' interest rates on loans to SOEs, as well as rates on loans 
by policy banks and those specified by the State Council, could not be higher than the benchmark rate. The upper limit for loans by commercial banks and urban credit cooperatives to large enterprises and to SMEs was 
110% and 130% of the benchmark rate, respectively;  the upper limit for rural credit cooperatives' loans was 
150%.  The lower limit of the lending rates of all financial institutions was 90% of the benchmark rate. Deposit rates had to be fixed at the benchmark level.  On 1 January 2004, the PBC decided to raise interest rates and 
widen the floating band of lending rates by increasing the upper limits:  the lending rate upper limit was raised 
to 170% of the benchmark for commercial banks and urba n credit cooperatives;  and to 200% for rural credit 
cooperatives.  In October 2004, the PBC eliminated the upper limit on lending rates charged by commercial 
banks (the upper limit of urban and rural cooperatives was raised to 230% of the benchmark), and the floor on 
deposit rates offered by all financial institutions.  Th erefore, since 29 October 2004, commercial banks have 
been able to charge lending rates above the benchmark (but not lower than 90% of the benchmark), and offer 
deposit rates below – but not above - the benchmark.  
152 Mortgage loans have been subject to a different policy.  Prior to March 2005, the PBC fixed a 
preferential interest rate for residential mortgage loans,  which was lower than the benchmark rates of other loans 
with similar maturity.  On 17 March 2005, the PBC el iminated the preferential interest rates on mortgage 
lending, and allowed banks to charge rates 10% lower than the benchmark  (as for other types of credits). The 
lower limit for mortgage loans was reduced from 90% to 85% of the benchmark rate on 19 August 2006. 
Together with the rise on down payment for mortgage loans from 20% to 30%, the rise in mortgage rates allowed the PBC to influence the real estate market, where prices were believed to be rising too fast in 2005. WT/TPR/S/199 Trade Policy Review 
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one year or less.  The foreign currencies involved include: U.S. dollars, yen, euros, and Hong Kong 
dollars. 
157. Non-interest income is also regulated.  Unde r the Interim Measures for the Management of 
the Service Prices of Commercial Banks, certain servi ces are subject to regulated prices:  basic RMB 
settlement services (e.g. bank drafts, bank accepta nces, promissory notes, checks, entrusted 
collection);  and other commercial bank services de termined by the CBRC and the State Development 
and Reforming Commission, based on the competitive situation in the market.  Fees for other products and services are to be determined by banks based  on market conditions.  Regulated prices will be 
based on costs and allow for "slight profits". 
Recent reforms 
158. China's history of heavy state involvement in and control over the banking sector has resulted 
in significant governance and financial problems.  Poor asset quality and weak profitability and 
capitalization have been among the most significant.
153  Restructuring the banking sector and dealing 
in particular with these problems have been th e major focus of Chinese authorities since the mid-
1990s.  The key measures undertaken include:  the establishment of policy banks (to relieve SOCBs 
from directed lending and industrial policy objectives) ;  significant injections of capital into SOCBs;  
and the transfer of NPLs from SOCBs to state-owned asset management companies (AMCs).   
159. Since 1998, recapitalization of SOCBs has amounted  to US$93 billion.  In August 1998, the 
Government recapitalized the Big Four SOCBs th rough the issuance of Y 270 billion in government 
bonds (US$33 billion), which led to a more-than- doubling of their capital base. Another round of 
recapitalization took place betwee n 2003 and 2005. In that period, the PBC injected some 
US$60 billion capital out of its foreign reserves into three of the Big Four SOCBs (China Construction Bank, Bank of China, and Industrial  and Commercial Bank of China). A state-owned 
investment company (Central Huijin Investment Corporation Limited (Huijin)) was established in 
2003 to channel foreign exchange reserves from the P BC into these three commercial banks.  In June 
2004, the Bank of Communications received a capital injection of Y 34 billion (US$4 billion) through 
a transaction involving Huijin as well as the Ministry  of Finance and other shareholders, the National 
Social Security Fund, and a foreign bank (HSBC), which acquired a 19.9% stake in the bank.
154  
Huijin has recently been reported as planning to in ject US$40 billion into the Agriculture Bank of 
China155, and US$20 billion into the China Development Bank.156  When the recapitalization of 
China's banks is completed, it will represent the la rgest injection of fiscal or quasi-fiscal funds into 
any banking system in history.157   
160. In addition to capital injections, restructuring is being accomplished through the disposal of 
NPLs, arguably one of the most important problems in the Chinese banking system.  In order to deal with these NPLs, the Ministry of Finance established four asset management companies (AMCs), one 
                                                     
 
153 Testimony of Michael Petit, Managing Director, Standard & Poor's Asia-Pacific Corporate & 
Government Ratings, at the US-China Economic & Security Review Commission, 22 August 2006. 
154 Ma (2006). 
155 China View online information, "China may inject US$40 billion into Agricultural Bank", 
5 August 2007.  Viewed at:  http://www.chinaview.cn. 
156 China View online information, "CDB to go commercial", 6 August 2007.  Viewed at:  
http://www.chinaview.cn.  According to the authorities, at the time of writing, the reform plan for the 
Agriculture Bank of China and the China De velopment Bank was still under consideration. 
157 World Bank (2005). China WT/TPR/S/199 
 Page 149 
 
 
for each of the Big Four SOCBs.158  The AMCs are wholly state-owned non-bank financial 
institutions; each with registered capital of Y 10 billion (approximately US$1.2 billion).  The AMCs' 
resources came from the Ministry of Finance's capit al injections, from PBC credit, and from the ten-
year bonds issued by the AMCs to their respective SOCBs.159  Initially, during 19 99 and 2000, some 
Y 1.4 trillion (US$170 billion) of NPLs were tran sferred from the Big Four SOCBs to the AMCs;  
transfers in 2004 and 2005 have been estimated at Y 1.2 trillion.160  It is difficult to estimate the 
amount of unresolved NPLs, as the AMCs genera lly report only amounts disposed of from the 
original 1999-00 transfers.  At end 2006, Y 1.2 trilli on of the original transfer loans appear to have 
been resolved, leaving large amount still on the banks.161 
161. Estimates of NPLs vary:  according to CBRC, NPLs of all commercial banks amounted to 
Y 1.25 trillion (7.1% of total loans) at end 2006;  acc ording to data provided by the authorities, they 
totalled Y 1.26 trillion (6.4% of total loans) at en d-July 2007.  Nonetheless, the improvement in 
banks' asset quality has taken place in a period of rapi d loan growth, massive injections of capital, and 
NPL carve-outs in the Big Four.  According to inde pendent estimates, NPL ratios might be higher if 
adjusted for the above-average loan growth in recen t years.  The large number of "precautionary" or 
"special mention" loans lying on  Chinese banks' balance sheets also raise concerns.  Rated one 
category above substandard, while these loans can be  considered as performing thus far, they might 
pose a material risk to bank capital.162   
162. These clean-up measures (recapitalization and NPLs carve-outs) were taken in preparation for 
the introduction of foreign strategic investors in Ch inese banks and, subsequently, for the listing of 
these banks in stock markets.  The purpose of the st rategy has also been to diversify ownership, 
improve corporate governance, and f acilitate transfers of know-how.163  The strategic investors must 
be major international banks with substantial comme rcial expertise;  own less than 20% of shares;  
and cooperate in one or more non-core banking services, such as credit cards, investment banking, 
wealth management, and information technology.164   
163. Since 2004, foreign strategic investors have acquired shares of four of the five largest 
SOCBs.165  Foreign strategic investors have also been attracted to the smaller joint-stock and city 
commercial banks.166  By end 2006, 29 foreign financial institutions had invested a total of 
                                                      
158 China Cinda AMC for the China Construction Bank; China Great Wall AMC for the Agriculture 
Bank of China; China Orient AMC for the Bank of China; and China Huarong AMC for the Industrial and 
Commercial Bank of China.  In August 2005, a fifth AMC, Huida Asset Management (majority-owned by China Cinda) was established to resolve the PBC's NPLs. 
159 Ma and Fung estimated that the sources of AMC's resources were distributed as follows: 83% from 
the 10-year bond issued by the AMCs to their respect ive SOCBs, 14% from PBC credit, and the remaining 3% 
from capital injections by the Minist ry of Finance (Ma and Fung (2002)). 
160 Price Waterhouse Coopers (2006). 
161 Price Waterhouse Coopers (2007b). 
162 FitchRatings (2006).  About half of the current stock of NPLs is concentrated on the balance sheet 
of the Agricultural Bank.  At end 2005, special mention loans were estimated at 11% of large banks' total loans 
(some US$120 billion), excluding the Agricultural Bank , which does not report "special mention" data. 
163Ma (2006). 
164 Leigh and Podpiera (2006). 
165 HSBC acquired a 19.9% stake in Bank of Communications in the biggest transaction so far; 
Goldman Sachs, Allianz, and American Express acquire a combined 8.88% stake in Industrial and Commercial 
Bank of China;  the Royal Bank of Scotland, UBS, and Temasek Investment acquired a 16.61% in Bank of China; and Bank of America and Temasek Investment acquired a 14.1% share in China Construction Bank. 
166 For example, among the joint-stock commercial bank s, Citigroup acquired a 5% stake in Shanghai 
Pudong Development Bank, and led a consortium that acquired 85% of Guangdong Development Bank (of which 20% belongs to Citigroup);  Deutsche Bank acquired  9.9% of Huaxia Bank, and has been authorized by WT/TPR/S/199 Trade Policy Review 
Page 150 
 
 
US$19 billion in 21 Chinese commercial banks, of  which US$16 billion to the four SOCBs.167  The 
participation of strategic investors was a critical st ep in the preparations for the international public 
offering (IPOs) of the major SOCBs on the Hong Kong Stock Exchange.168  In all, at end 2006, the 
major SOCBs had raised almost US$47 billion.169 
164. The year 2006 marked a key step in the furthe r opening-up of the banking sector.  The State 
Council promulgated the Regulation on the Ad ministration of Foreign-funded Banks in 
November 2006, followed by the CBRC's Rules for Implementing the Regulations on the Administration of Foreign-funded Banks (see Regulat ory framework).  As a result, geographic and 
customer restrictions on RMB business, as well as other non-prudential restri ctions on foreign bank 
operations, were lifted on 11 December 2006.  In  September 2007, six operational foreign-funded 
banks were allowed to conduct re tail business, and nine foreign banks were in the process of 
converting branches into subsidiaries.   
165. Improving corporate governance has also been a fo cus of reform in recent years.  Based on 
the Guideline on the Corporate Governance Reform s and Supervision of the Bank of China and 
Construction Bank of China (implemented in April 2004), the CBRC issued the Guideline on the 
Corporate Governance Reforms and Supervision of State-owned Commercial Banks on 16 May 2006.  
This further enhanced requirements on corporat e governance and internal control and set up a 
quantitative benchmark based on seven parameters c overing:  operational performance (net return on 
total assets; net return on equity; and expen se-revenue ratios), asset quality (NPL ratios), and 
prudential operations (capital adequacy ratios, large exposure concentration, coverage ratio of loan-
loss provisions).
170 
166. Reforms have also been introduced into rura l credit cooperatives, including changes to the 
corporate structure and management based on three models.  As a result, 27 provinces (regions and municipalities) established integrated provincial credit cooperatives; Beijing and Shanghai changed 
the Rural Credit Cooperatives into rural commerc ial banks;  and Tianjin established a rural 
cooperative bank with separate legal entities at  the municipal and district (county) level.
171  
167. A significant development during the review peri od was the reform of the postal system, and 
the establishment of the China Postal Savings Ba nks (CPSB). Established on 31 December 2006, the 
CPSB is a wholly owned subsidiary of the China Postal Group.  At end 2006, it had a deposit base of 
Y 1.7 trillion with over 36,000 outlets throughout the country, more than two thirds in rural areas. 
                                                                                                                                                                     
the shareholders to increase to 20%; and Standard Ch artered acquired 19.9% share of Bohai Bank (see Leigh 
and Podpiera (2006) for more details). 
167 Among the foreign institutional investors, 18 banking institutions account for 62.1% of total 
investment;  three investment banks account for 10.4%;  and eight other types of institutions account for 27.6%.  
The overseas investors are from the Un ited States (6), Germany (5), the UK (4), Singapore (3), international 
financial institutions (2), the Netherlands (2), Hong Ko ng China (2), Australia (2), Switzerland (1), France (1) 
and Canada (1) (CBRC (2007);  and Leigh and Podpiera (2006)). 
168 The IPOs of Bank of China in 2005 and Industrial Commercial Bank of China in 2006 were dual 
IPOs, involving both the Hong Kong Stock Exchange (for H shares) and the Shanghai Stock Exchange (for 
A shares). 
169 This consists of: US$21.9 billion to the ICBC;  US$13.6 billion to the BOC;  US$2.16 billion to the 
BOCom;  and US$9.2 billion to the Construction Bank of China.  City commercial banks are expected to follow 
suit, and raise capital through listing (Xinhua, 19 June  2007, "China's first city -level commercial banks 
set to go public".  Viewed at: http://bgt2.mofcom .gov.cn/aarticle/workaffair /200706/20070604805272.html 
[14 February 2008]). 
170 See CBRC (2007) for more detailed information on the seven parameters.  
171 Besides the three modes for the establishment of  provincial credit cooperatives, rural credit 
cooperatives can be transferred into integrated corporations, ru ral cooperative banks or rural commercial banks. China WT/TPR/S/199 
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Although supervised as a commercial bank by the CBRC, it will continue to use the national postal 
network as the basis for its operations.  It is expect ed to provide basic financial services, including 
retail and fee-based services, to town and v illage communities and rural residents.    
168. As part of its policy to support rural areas, the CBRC relaxed the market entry policy for 
banking institutions in rural areas through the Guid elines on Adjusting the Market-entry Threshold for 
the Banking Institutions in Rural Area, of December  2006.  Investors (including foreign) are thus 
encouraged to invest in rural financial services by establishing village and township banks, lending 
companies, and rural funding cooperatives; while  existing commercial banks and rural cooperative 
banks are encouraged to set up branches in under- banked rural areas.  This policy is aimed at 
improving the coverage of banking out lets in rural areas.  The reform of the Agricultural Bank and the 
creation of the CPSB are part of this policy.172   
169. Other regulatory initiatives in 2006, aimed at  promoting innovation in the rural banking 
sector, included the Guidelines on Rural Coopera tive Financial Institutions' Lending to Small 
Enterprises, the Guidelines on Corporate Group Loan s by Rural Cooperative Financial Institutions, 
and the Guidelines on Banking Ins titutions Carrying out Agency Business in Rural Areas.   
170. The current rules on capital adequacy were introduced in February 2004 and revised in 
July 2007 by the CBRC (Rules Governing Capital Ade quacy of Commercial Banks).  They are based 
on the 1988 Basel Capital Accord (Basel I). Chinese  authorities have decided to implement the new 
Basel Capital Accord (Basel II) gradually. Th e CBRC divided commercial banks into two groups, 
subject to different requirements.  The "new capita l accord banks" (i.e., large commercial banks that 
play an active role in other countries' or regi ons' financial markets, and whose overseas business 
accounts for a substantial share in their total business activities) will start to implement Basel II at end 
2010, and no later than the end of 2013. Other co mmercial banks, including foreign bank subsidiaries 
in China, may apply to implement  Basel II on a volunt ary basis.  Otherwise, they will remain subject 
to the current capital requirements.173  
171. Measures dealing with electronic banking have on ly recently been introduced, in an effort to 
enhance risk management and security standard s in the sector.  Under the CBRC Administrative 
Measures on Electronic Banking Business and the Guidelines on Electronic Banking Security Evaluation of January 2006, all ba nking institutions applying to establish an e-banking business are 
required to have sound internal control and risk management system and should not have any major 
incidents relating to their primary information ma nagement and operations processing systems in the 
year prior to application. In addition, all banking institutions conduc ting e-banking business must 
adopt security measures to protect highly confidentia l data and the security of transaction information 
and to prevent the unauthorized use of e-banking accounts.   
172. Taxation of the banking system changed significan tly upon entry into force of the Enterprise 
Income Tax Law on 1 January 2008;  a unified tax ra te of 25% has been applied to domestic banks 
and operational fore ign-funded banks.
174  The business tax rate is  5%, and is assessed on gross 
income from interest and fees, minus income from financial institutions and agency fees on 
                                                      
172 As decided in the financial working conference in early 2007, the Agriculture Bank is to be oriented 
to agriculture, rural areas and peasantry, should operate under commercial considerations, and should seek a 
proper chance to be listed in the stock market. 
173 CBRC (2007). 
174 Previously, China's banks had been penalized by the tax system, including corporate income tax and 
a business tax.  The income tax rate was 33% although banks providing only foreign currency business are taxed 
at a rate of 15% (Ernst and Young (2003)). WT/TPR/S/199 Trade Policy Review 
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government bonds.175  Banks are allowed to deduct 1% of the balance of loans from income before 
taxation.  In addition, all write-off loan s can be deducted before taxation.    
173. According to the authorities, a report on meas ures for the implementation of a deposit 
insurance mechanism, drafted by an ad-hoc work ing group, is before relevant ministries and 
committees for comments. 
(c) Insurance 
Market overview 
174. The number of insurance companies has increase d notably in the last two years:  from 
80 companies at end 2004 to 113 at end 2006, among which there were 7 insurance groups176 and 
106 insurance companies (59 domestically-funded, including nine insurance asset management 
companies, and 47 foreign companies from 15 c ountries).  In addition, 133 foreign insurance 
companies from 20 countries (regions) had established 195 representative offices in China.  By the end of 2006, there were 2,110 insurance agencies ( 367 of which were established that same year), and 
303 insurance brokers, of which 5 are foreign-owne d or joint-ventures with foreign investment.  
Between 2005 and 2006, ten new domestic insurance companies (including insurance asset 
management companies) and eight foreign insuran ce companies were allowed to enter the market.
177 
175. China's insurance market showed strong growth between 2001 and 2006, to reach 
Y 510.2 billion.  Life premiums represent almost thr ee quarters of total premiums (Table IV.6).  In 
spite of the impressive growth, the market remains underdeveloped in terms of insurance density and 
penetration.  Insurance expenditure in 2006 was only US$53 per capita (US$34.1 on life, and 
US$19.4 on non-life insurance), which places China in the 70th worldwide;  the penetration rate was 
just 2.7% (1.7% for life and 1% for non-life), putting China in 47th position.178 
Table IV.6 
Insurance premiums, 2001-06 
(Y billion and % of total) 
 2001 2002 2003 2004 2005 2006 
Non-life 68.5 
(32.5) 78.0 
(25.5) 86.9 
(22.4) 112.5 
(26) 128.3 
(26) 150.9 
(29.6) 
Life (including health and accident) 142.4 
(67.5) 227.4 
(74.5) 301.1 
(77.6) 319.4 
 (74) 364.9  
74) 359.3 
(70.4) 
Total 210.9 305.4 388.0 431.8 493.2 510.2 
Source:  National Bureau of Statistics of China (for 2001-05);  and International Herald Tribune  for 2006 "Chinese 
 Insurance market expanded 14% in 2006", 22 January 2007). 
176. The insurance premiums of foreign compani es grew by 74.9% between 2005 and end 2006, to 
reach Y 25.9 billion, accounting for about 5% of the national market share.  Total assets of foreign 
insurance companies at end 2005 amounted to Y 86.3 billion, accounting for 4.38% of the total assets 
of the sector (up from 1.96% in 2001).  Alt hough their market share accounts for only about 5%, 
                                                      
175 WTO (2006). 
176 The six holding companies are China People's Insurance Holding Company (PICC);  China Life 
Insurance (Group) Company;   China Reinsurance (Gro up) Company;  China Insu rance Holding Company;  
China Pacific Insurance (Group) Company Limited;  a nd China PingAn Insurance (Group) Company Limited. 
177 Data provided by China Insurance Regulatory Commission (CIRC). 
178 Swiss Re (2007). China WT/TPR/S/199 
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foreign insurance companies' total income would acc ount for 27.4%, if the foreign-invested share in 
Chinese insurance companies were  taken into consideration. 
177. Despite an increase in competition in recent y ears, the Chinese insu rance market remains 
highly concentrated. According to official informa tion, the market share of the three largest life 
insurance companies fell from 83.2% in 2004 to 71.6% in 2006, while the share of the three largest 
non-life companies fell from 79.9% to 67.25%.  The life and non-life markets continue to be 
dominated by China Life and China People's Insu rance Holding Company (PICC), whose market 
shares in 2006 were 45.3% and 45.1%, respectively.179  The Chinese authorities expect that 
concentration will decrease in coming years, due  to increased competition and the entry of new 
players. 
Legislative and regulatory framework 
178. The insurance market continues to be re gulated by the China Insurance Regulatory 
Commission (CIRC) under the State Council.  The CI RC is responsible for registering new insurance 
providers, as well as new products and activities.   
179. The main legislation administering insuran ce services is the Insura nce Law, enacted in 
June 1995 and updated in  October 2002.  It regulates all co mmercial insurance activities in China 
(excluding social security insurance).180  In addition, CIRC has issued several rules and regulations 
governing the conduct of insurance activities.  Unde r the law (Article 7), all insurance companies 
providing insurance services in China must be regi stered, and all legal pe rsons (including natural 
persons) or organizations in Ch ina requiring coverage in China must purchase insurance services from 
an insurance company register ed and established in China. 
180. Insurers may engage in property insurance (i nsurance against loss or damage to property, 
liability insurance, and credit insurance) or persona l insurance (including life insurance, health, and 
accident and injury insurance).181  They may not concurrently provi de property and pe rsonal insurance 
services, although an insurance company engaged in  property insurance may, upon approval from the 
CIRC, provide short-term health and accidental injury insurance.182  At end 2006, there were 
38 property insurance companies that were allowed to supply short-term hea lth and accident insurance 
services.183  Subject also to approval, insurance co mpanies may engage in outward and inward 
reinsurance with respect to the di rect insurance business for which they have received authorization. 
According to Article 103 of the Law, if an insuran ce company needs to buy reinsurance, it must give 
priority to insurance comp anies established in China.184  However, compulsory cession was 
eliminated on 1 January 2006.185   
181. Licensing procedures consist of two steps.186  The applicant must submit a formal written 
application containing the name, registered capital, and scope of business foreseen;  a feasibility study 
                                                      
179 Economist Intelligence Unit (2006a), London. 
180 The Insurance Law covers insurance contracts relating to people and property;  insurance 
companies, agents, and brokers;  insurance sector supe rvision and regulations;  and legal responsibilities of 
agents.  
181 Chapter IV of the Insurance Law. 
182 Article 92 of the Insurance Law. 
183 Data provided by CIRC. 
184 According to the authorities, to "give priority" m eans to give the priority of offering reinsurance 
contracts. 
185 CIRC Gazette No. 109 regarding compulsory cession. 
186 Articles 74 to 78 of the Insurance Law. WT/TPR/S/199 Trade Policy Review 
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report;  and other documents that may be requ ested by the CIRC.  If the applicant passes the 
preliminary examination, it must submit a "complet ed formal application form" together with other 
documents, such as the articles of association of th e insurance company; a list of shareholders and 
their respective shares; and the qualifications of pr oposed senior management.  The decision on this 
formal application must be made within six months of submission.  Once the licence has been 
obtained from CIRC, the insurance company must register and obtain a business licence from the 
State Administration for Industry and Commerce.  Th is must be completed within six months of 
issuance of the insurance business licence. 
182. When deciding to grant a licence, the CIRC must  take into account the sustainable, sound, 
and fast development of the insurance industry;  the need for fair competition; and China's economic 
and regional development.  As a result, companies applying to provide services in central, western, 
and north-eastern China or in agriculture, health, and pensions are given priority. 
183. Under the Insurance Law, an insurer may estab lish either as a limited liability company or a 
wholly state-owned company;  it must have a mi nimum of Y 200 million in registered capital (of 
which 20% must be deposited with an approve d guarantee fund), qualified management, a sound 
organizational structure, and sufficient facilities.187  An insurance company wishing to establish a 
branch inside or outside China's territory must seek the approval of CIRC and obtain a licence to carry on insurance business for such a bran ch office.  If a company wishes to open its first branch in a 
province, autonomous region or municipality, other than its place of domicile, it must increase its registered capital by not less than Y 20 million.  A company with registered capital of Y 500 million 
and "sufficient solvency" does not need to further increase its registered capital when establishing 
additional branches.  Any changes in an insurer' s activities must first be approved by the CIRC.
188 
184. Some insurance products and rates are subject to  approval. Regulatory approval is needed for 
forms and rates for products having a "bearing on th e interests of the public" (e.g. public security 
liability insurance products), for compulsory in surance products, and for newly developed life 
insurance products. In the case of all other produ cts, forms and rates must be submitted to the 
regulatory authority just for the record.  
185. Supervision and inspection continues to be carri ed out through a combination of on-site and 
off-site regulations, as stipulated in Chapter V of the Insurance Law and Chap ter VIII of the Rules on 
Administration of Insurance Companies.   
Foreign insurance companies 
186. Since the previous Review in 2006, there have been no significant changes to requirements 
concerning the establishment and operations of fore ign insurance companies, which are governed by 
the Regulations on Administration of Foreign-funde d Insurance Companies and the Detailed Rules for 
Implementation of Regulations on Administrati on of Foreign-funded Insurance Companies. 
187. In order to obtain a licence, foreign companies must fulfil the following requirements:  no less 
than 30 years of experience in the insurance busin ess;  no less than two years since the establishment 
of a first representative office in China;  no less than  US$5 billion in gross assets at the end of the year 
prior to application;  a sound supervision system in the home country;  adequate solvency by the 
standards established in the home country;  approval of  the application by the authorities in the home 
                                                      
187 Articles 70, 72, 73, and 79. 
188 Changes in activities include the formation of branch offices, a change in the name of the company 
or the business premises, and changes in registered capital, scope of the business or in investors holding more than 10% of the company's shares. China WT/TPR/S/199 
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country;  and other prudential conditions estab lished by the CIRC, including sound corporate 
governance, a good risk management system, comple te internal control, effective management 
information system, and good performance, includi ng no record of illegal behaviour.  Minimum 
registered capital of a joint-venture insurance co mpany is set at Y 200 million;  and 20% of actual 
paid-up capital should be set aside as guarantee.  Foreign insurers wishing to set up wholly owned 
branches in China must deposit no less than Y 200 million as operating capital;  after establishment, 
branches are required to submit 20% of their cap ital as a guarantee to be deposited in a bank 
designated by the CIRC.  An additional capital re quirement of Y 20 million is requested for each 
additional branch.  If the minimum capital of a join t-equity or wholly owned insurance company is 
Y 500 million, and its solvency is adequate, no incr ease of registered capital is required for the 
establishment of additional branches.  This requireme nt also applies to fore ign branches of insurance 
companies seeking to open additional branches in Chin a.  Foreign insurance companies are allowed to 
enter the market as 100% foreign-owned subsidia ries for non-life insurance and up to 50% foreign-
owned for life insurance.189 
188. Corporate legal persons may invest in insuran ce companies;  however, with the exception of 
insurance shareholding and insura nce companies approved by the CIRC, such investment should not 
exceed 20% of the company's shares.  In addition, total shares held by overseas shareholders should 
be less than 25% of total shares;  if this shar eholding exceeds 25% the company becomes a "foreign 
invested insurance company" and is subject  to the laws regulating such companies.190 
Brokers and agents 
189. The Rules on the Administration of Insurance Brokerage Institutions regulate insurance and 
reinsurance brokerage business.  According to the Rules, foreign or domestic insurance brokers may 
establish as partnerships, limited liability compani es, and joint-stock limited companies.  The 
minimum registered capital requirement is Y 5 million for partnerships and limited liability 
companies, and Y 10 million for joint-stock limited co mpanies.  They must also submit 20% of their 
capital as a guarantee or to purchase professional liabilit y insurance.  In addition, the senior managers 
and staff are subject to qualification requirements,  including a local written examination to obtain a 
"Qualification Certificate for Insurance Industry Personnel", unless the staff has at least three years management experience;  no less than two persons in  senior management (or equivalent to at least 
half of the brokerage's employees) must obtain the Qualification Certificate. 
190. After one year of establishment insurance brokera ge institutions may set up three branches in 
the province, the autonomous region or the municipality
191 of their domicile;  and three additional 
branches in areas other than their domicile.  When est ablishing a branch in an area for the first time, a 
company must add Y 1 million to registered capital.  This is not required for further branches in the 
same area, nor for brokerage institutions with regi stered capital or capital contribution of at least 
Y 20 million.  Insurance brokers' licences must be renewed every two years.  No foreign equity 
limitations apply for the establishment of insurance brokerage institutions. 
191. According to the Rules on the Administration of  Insurance Agency Institutions, domestic or 
foreign insurers may establish as partnerships, lim ited liability companies, or joint-stock limited 
companies.  The minimum registered capital requi rement is Y 500,000 for partnerships and limited 
liability companies, and Y 10 million for joint-stock limited companies.  Insurance agencies can only 
operate in the area in which they are established;   there are no quantitative limitations on the number 
of additional branches they can open in that ar ea;  however, there is a Y 100,000 minimum capital 
                                                      
189 According to CIRC, there are no pl ans to eliminate this foreign equity limitation on life insurance.  
190 Chapter I, Section 5 of the Regulations Governing Insurance Companies. 
191 In this paragraph, the municipality refers to the one directly under the Central Government. WT/TPR/S/199 Trade Policy Review 
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requirement for the establishment of each branch.  Th is additional capital is not required if the agent's  
minimum capital is Y 2 million or more. 
Reinsurance services 
192. Under the Regulations on the Administration of  Reinsurance Business, which apply to both 
domestic and foreign insurance companies, direct insurance companies esta blished in China must 
provide a right of first refusal for 50% of thei r reinsurance programmes with domestically admitted 
reinsurance companies. 
Insurance asset management companies 
193. The Provisional Regulations on the Administ ration of Insurance Asset Management 
Companies allow foreign and domestic insurance co mpanies to establish insurance asset management 
companies;  they must be established either as li mited liability companies or as companies limited by 
shares.  In order to establish an insurance asset company, non-life companies must have total assets of 
at least Y 5 billion, while life insurance companies and insurance holding groups must have at least 
Y 10 billion.  Companies must have engaged in  the insurance business in  China for at least 
eight years.  
(d) Securities 
Market overview 
194. The main components of China's capital market  are the equity market, the bond market, and 
the futures market.  The reform of state-owned enterprises' (SOEs)  ownership, corporate governance, 
and financing mechanisms has accompanied the r ecent development of China's stock markets.  
China's secondary stock market comprises two exch anges established at the end of 1990 (Shanghai 
and Shenzhen).192  Over the years, China’s exchanges have developed into an integrated marketplace, 
with 145 members in Shanghai and 177 members in Shenzhen controlling more than 3,000 business 
branches all over the country.     
195. Shenzhen Stock Exchange has had a NASDAQ- like small and medium-sized enterprise 
(SME) board since May 2004, which is open to gr owing SMEs with outstanding businesses, and to 
innovative high-tech start-ups;  it is run semi-inde pendently, with its own index, trade code, and 
supervisory system.  Companies that seek listi ngs on the SME board are subject to the same 
requirements as for the main Shanghai and Shenzhen exchanges (e.g. entrants are required to show a 
three-year profit record).  At end 2006, 102 compan ies were listed on the SME board, raising a total 
amount of Y 18 billion.  Market capitalization of the SME board amounted to Y 201.53 billion, 
accounting for 11.33% of total market capita lization of the Shenzhen Stock Exchange. 
196. Since their inception, both stock exchanges have been among the world's fastest growing 
equity markets.  More than 1,400 companies are listed on the two exchanges (60% at Shanghai and 
40% at Shenzhen), with a combined market  capitalization of US$4,475 billion at end 2007.193  
Together, these two stock markets are now Asia's se cond largest, after Japan, and roughly on par with 
                                                      
192 Both exchanges are non-profit legal entities gove rned by a board of directors, and employing a 
membership system.  Only full members are allowed to  trade on the exchange, and only securities-related 
businesses can apply for membership.  Both exchanges have modern trading infrastructure.  Stock trading is 
order-driven and fully automated with electronic trading, and the computer systems allow for high volume 
trading (up to 60 million deals a day in Shanghai and up to 20 million deals in Shenzhen). 
193 World Federation of Exchanges (2007 and 2008). China WT/TPR/S/199 
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the Hong Kong SAR.  While the performance of the two markets was poor between 2000 and 2004, 
gains were impressive between 2005 and 2006, when market capitali zation increased by 220.6% in 
Shanghai, and by 97.1% in Shenzhen, and betw een 2006 and 2007, when market capitalization 
increased by 302.7% in Shanghai and by 244.2% in Shenzhen.194  Growth continued in the first half of 
2007, with Shanghai growing by 335.2% and Shen zhen 199.2%.  Total market capitalization 
increased from 36% of GDP in 2003 (the lowest leve l in the decade) to around 43% of GDP in 2006 
(Table IV.7).  Tradeable stock market capitaliza tion (see below) was much lower, amounting to only 
12% in 2005.  According to the authorities, after the reform, all corporate stocks have already been 
transformed to tradeable shares, subject to certain  "lock-up" period, during which major shareholders 
cannot sell shares. 
Table IV.7 
Overview of the stock market, 2000-06 
Market capitalization 
(Y billion) Market capitalization to GDP (%) 
Year Number 
of listed 
companies 
(A & B 
shares) Total 
capital 
raised  
(Y billion) Number of 
stock 
investment 
accounts 
(millions) Total Tradeable Total Tradeable 
2000 1,088 210.31 58.01 4,809.09 1,608.75 53.79 17.99 
2001 1,160 125.23 66.50 4,352.22 1,446.32 45.37 15.08 
2002 1,224 96.18 68.82 3,832.91 1,248.46 37.43 12.19 
2003 1,287 135.78 69.93 4,245.77 1,317.85 36.38 11.29 
2004 1,377 151.09 72.11 3,705.60 1,168.90 23.18 7.31 
2005 1,381 188.25 73.36 3,243.00 1,063.10 17.64 5.78 
2006 1,434 559.93 78.74 8,940.39 2,500.36 42.69 11.94 
Source:  CSRC (2004), Annual Report ;  National Bureau of Statistics China;  and data provided by the authorities. 
197. The fast expansion of the market has been brought about by an unprecedented stock boom, 
which has given rise to various market malpractices .  In the first half of 2007, the CSRC reportedly 
fined 16 listed companies and two brokerage firms,  warned 134 individuals, and banned 46 people 
from entering the stock market. 
198. The Chinese stock market used to be character ized by a split-share structure, with large 
volumes of non-tradeable state-owned and legal person shares.195  As a result, only around one third 
of shares listed in both exchanges were subject to trading196, which put public investors in an inferior 
position relative to the holders of non-tradeable shar es in making corporate policies and disposing of 
firms' profits and assets.  In 2004, the G overnment initiated a reform, and more than 
1,000 state-owned listed companies initiated a gradua l conversion of their non-tradeable shares into 
A shares, which are tradeable.  As a result, ther e are currently three types of shares:  A shares, 
B shares, and overseas-listed shares (Box IV.3).  
199. Additionally, China's stock market has few ins titutional investors.  There are about 50 active 
fund managers, fewer insurers, and almost no pens ion funds in a market dominated by retail 
                                                      
194 World Federation of Exchange (2008). 
195 "State shares" were shares in SOEs held by gove rnmental agencies.  They were not allowed to be 
traded on an open market.  Legal person shares were shares of a joint-stock company owned by another company or institution with a legal person status. The legal person shares could be held indirectly by the State if 
the shareholders were state-owned co mpanies.  The transfer and trading of legal person shares was also 
restricted. 
196 As a consequence, the ratio of tradeable market capitalization to GDP was less than 12% in 2005.   WT/TPR/S/199 Trade Policy Review 
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investors.197  Of the 76.5 million accounts opened with the China Securities Depository and Clearing 
Corporation (CSDCC), only 380,000 belong to institutional investors.198 Nonetheless, according to the 
authorities, market capitalization by mutual funds, commercial insurance institu tions, social security 
funds, enterprise annuity, and qualif ied foreign institutional investors (QFII) has been expanding 
rapidly, currently accounting for 40% of all tradeable share. 
Box IV.3:  Types of shares in the Chinese market 
A-shares  are denominated in local currency , can be freely traded and transf erred in domestic markets, and 
were originally reserved for Chinese individuals an d legal persons. But since 2002, qualified foreign 
institutional investors (QFIIs) have been allowed to in vest in A-shares, though no single QFII may hold 
more than 10% in a listed compan y, and aggregate ownership of sh ares by QFIIs cannot exceed 20%. 
QFIIs must keep their investments in China for at l east a year, after which the principal can be remitted 
back in instalments of 20%.  Applications to qualify as QFII must be approved by the CSRC, while the SAFE is responsible for approving the investment limits. According to the Provisional Rules on QFIIs 
Investments in Domestic Securities, of 2002, applicants must, inter alia :  (i) be categorized as fund-
management companies, securities companies, insurance firms or other fund-management institutions, including commercial banks;  (ii) have managed at least US$10 billion in securities in the last fiscal year 
prior to approval; and (iii) be located in a coun try whose securities regulator has signed an MOU on 
cooperation in the regulatory field with the CSRC.   A total of 37 MOUs have been signed with 
33 jurisdictions.  The Provisional Rules also set specific requirements for applicants, depending on their 
core business.  Fund-management comp anies must have been in business fo r at least five years; securities 
companies and insurers for at least 30 years, and have  paid-in capital of at least US$1 billion; commercial 
banks must be among the 100 largest in the world. In addition, the rules allow banks with a paid-in capital 
of at least Y 8 billion (including foreign banks with an op erating history of at least three years in China) to 
act as custodians for QFIIs.  State shares and legal pers on shares were turned into  A-shares as a result of 
the split-share structure reform.  
B-shares  are domestically listed shares of China-incorporated companies, denominated in U.S. dollars in 
Shanghai and HK dollars in Shenzhen. They were originally reserved for foreign investors, but in February 2001 Chinese individuals and legal persons w ith foreign currency account s were also allowed to 
own them.  
Overseas-listed shares  are shares issued by Chinese companies listed on securities markets outside 
Mainland China. There are basically four categories:  H-shares, N-shares , L-shares, and S-shares. H-shares 
are shares of Chinese companies (mainly restructured  SOEs), offered and traded on the Hong Kong Stock 
Exchange.  They are denominated in RMB, but subscr ibed and traded in HK dollars. They may only be 
purchased and traded by Hong Kong local investors or international investors.  N-shares are issued – 
mostly in the form of American De pository Receipts – to foreign investors in U.S. stock exchanges.  
Dividends are declared in RMB but paid in U.S. dollars.  L-shares are issued on the London Stock 
Exchange according to an MOU signed between the relevant U.K. and Chinese authorities in 1996.  
S-shares are offered on the Singapore Stock Exchange. 
Source:   Information provided by the Chinese authorities.  
 
200. The Chinese bond market emerged in 1981, with th e issuance of bonds by the Government.  It 
has grown rapidly but remains fairly illiquid and dominated by government bonds.  There are 
basically four categories of bonds in the market:  government or treasury bonds (T-bonds);  central 
bank bonds; financial institutions  bonds (F-bonds); and enterpri se bonds (E-bonds). Government 
bonds or T-bonds are issued by the Ministry of Finance, and are used to finance the 
                                                      
197 See KPMG (2006). 
198 "China's Capital Markets: Review and Expectation", presentation by Mr. Shang Fulin,Chairman, 
CSRC, at the London School of Economics, on 17 No vember 2006.  Viewed at:  http//www.lse.ac.uk/ 
collections/LSEPPublic LecturesAndEvents/pdf/20061117_Shang.pdf [19 February 2008]. China WT/TPR/S/199 
 Page 159 
 
 
Government's fiscal and investment policy.  T- bonds adopt mainly two forms – voucher government 
bonds and book-entry government bonds – which differ in the way they are distributed and traded. Voucher bonds are sold directly to individual inv estors through selected banks, and are not tradeable 
in the secondary market; book-entry bonds are issu ed to members of the bonds underwriting group by 
auction, and are subsequently traded in the interban k market, at exchanges, or in the over-the-counter 
market. Central bank bonds are issued by the People's Bank of China (PBC) to financial institutions in 
the interbank market.  Financial institutions bonds  are issued by policy banks (policy banks F-bonds) 
and by commercial banks (comme rcial banks F-bonds). Enterpri se bonds (E-bonds) are issued by 
corporations, and mainly traded on the stock market. 
201. Currently, China's bond market consists of thre e main markets: the interbank market, the 
bank-counter market, and the exchange market (Shan ghai and Shenzhen).  The interbank market is the 
most important platform for block trading of bonds among financial institutions, representing 90% of 
total traded volume.  It is also the platform fo r open market operations conducted by the PBC. The 
major participants in the inter-bank bond market ar e the PBC and institutional investors, such as  
commercial banks, securities companies, insurance comp anies, securities investment funds, and credit 
cooperatives. Non-financial institutions may entrust commercial banks to trade on their behalf in the 
inter-bank bond market.  Certain commercial bank par ticipants have been allowed to set up counters 
at their branches, where individual investors are allowed to buy and sell bonds.  This constitutes the 
so-called bank-counter market, which is still in its infancy.  The ma jor products in the inter-bank bond 
market are T-bonds, financial bonds, and a small amount of central bank bills.  In order to increase the 
liquidity of these markets, several E-bonds can also be traded in the interbank market.  Data provided 
by the authorities indicate that at end 2007, outsta nding public debt (issued domestically and abroad) 
amounted to some Y 5,207 billion.  
202. Major participants in the exchange market ar e securities companies, insurance companies, 
securities investment funds, trust and investment companies, credit cooperatives, other non-financial 
institutional investors, and individual investors.  The PBC does not trade in this market, and 
commercial banks can have access only through th e establishment of fund management companies.
199  
The major products in the exchange market ar e T-bonds, corporate bonds, and a small amount of 
convertible bonds. 
203. The Chinese bond market, particularly the corporate segment, remains small and 
underdeveloped.  While it represented 27% of GDP in October 2006, most Chinese bonds are issued 
either by the Government or by government-own ed policy banks.  Only 6%, including commercial 
paper, are issued by non-financial enterprises (inc luding SOEs).  The corporate bond market provides 
only 1.4% of the total financial needs of corporatio ns in China (about 85% is financed by banks and 
about 14% by equity).200  The CSRC plans to allow more "qua lified" companies to issue corporate 
bonds.  The new Company Law eliminates the quota restriction on the bonds a company can issue.  
204. Trading of futures started in  1993;  currently, the futur es market has three exchanges.201  A 
total of 12 products are traded in the three exchanges.202  By and large, trading in agricultural products 
tends to dominate;  soybean, wheat, and copper futu res are the most actively traded products.  At 
present, only Chinese citizens and corporations organi zed and registered in China may trade in these 
                                                      
199 CSRC (2005). 
200 Hale (2007). 
201 These are Shanghai Futures Exchange (SHFE), Zhengzhou Commodity Exchange (ZCE), and 
Dalian Commodity Exchange (DCE). 
202 Corn, soybean, soy meal, and soyb ean oil are traded in the DCE; co pper, aluminium, natural rubber, 
and fuel oil are traded in the SHFE;  and strong gluten wheat, hard white winter wheat, cotton, and white sugar 
are traded in the ZCE. WT/TPR/S/199 Trade Policy Review 
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markets.  Trading must be through authorized broke rage firms.  Transactions in overseas futures have 
to be approved by the CSRC, and can only be used for hedging;  such transactions can only aim at 
sterilization. To date, 31 enterprises have been a llowed to conduct overseas futures transactions.  
205. China Securities Depository and Clearing Cor poration (CSDCC), established in March 2001, 
and under CSRC supervision, is the sole supplier of  securities registration and transfer;  securities 
depository services;  and securities payment, clearin g, and delivery.  The CSDCC's two subsidiaries, 
in Shanghai and in Shenzhen, pe rform these functions for securities tr aded in those exchanges.  For 
bonds not traded in these two exchanges, these se rvices are ensured by the China Government 
Securities Depository Trust & Clearing Co. Ltd (CGS DTC).  Commercial banks acts as sub-custodian 
in the interbank market. 
206. At end 2006, there were 108 securities brokerage  firms, 57 fund management companies, 
183 futures brokerage firms, and 108 securities investment consultancy entities.203  At mid 2007, 
seven sino-foreign joint-venture securities companies had been established, all but one after China's 
accession to the WTO;  and there were 27 sino-fore ign joint venture fund management companies. 
Regulatory and legislative framework 
207. Securities and futures markets continue to be re gulated by the CSRC.  Its principal functions 
have remained unchanged since Chin a's previous Trade Policy Review.  The main legislation is the 
Securities Law, most recently revised in  October 2005, effective 1 January 2006.204  Under the revised 
law and Measures on the Administration of Stock Exchanges, stock exchanges are self-regulatory 
legal entities, providing space and facilities for, as well as organizing and superv ising, the trading of 
securities.205   
208. Under the revised law, a securities company must  take the form of a limited liability company 
or a joint-stock limited company, and must be appr oved by the CSRC to engage in securities business.  
A securities company may engage in any or all of  the following activities:  securities brokerage; 
securities investment consultancy;  financial consu ltancy related to securities trading and investment;  
securities underwriting;  securities business on its own account;  securities asset management;  and 
any other securities business.  Under the amendmen ts, securities companies are no longer barred from 
providing client financing and secu rities financing services, which must be approved by the CSRC 
and comply with the relevant regulations.  Secur ities companies, including sino-foreign joint ventures, 
cannot engage in the development and distributio n of derivatives products, which are reserved to 
banks;  trust and investment companies;  finance companies;  financial leasing companies;  legal 
persons of auto financing companie s;  and branches of foreign banks.206   
                                                      
203 "China's Capital Markets: Review and Expectation", presentation by Mr. Shang Fulin, Chairman, 
CSRC, at the London School of Economics, on 17 No vember 2006.  Viewed at:  http//www.lse.ac.uk/ 
collections/LSEPPublicLecturesAndEvents/pdf/20061117_Shang.pdf [19 February 2008]. 
204 Other major legislation includes the Company Law, the Securities Investment Fund Law, and 
various regulations dealing with securities offering and listing; securities and futures trading; corporate 
governance, mergers and acquisitions of listed companie s; market intermediaries; and securities investment 
funds (Central Government online in formation.  Viewed (in Chinese) at:  http://www.gov.cn/ziliao/flfg/ 2005-
10/28/content_85556.ht m [5 December 2005]). 
205 Article 95 of the 1999 Securities Law stipulated that stock exchanges were non-profit legal entities.  
Under the revised Securities Law, it appears that st ock exchanges are no longer non-profit driven.  
206 The Interim Measures for the Management of the Dealings of Derivative Products of Financial 
Institutions, enacted by the CBRC, effective 1 March 2004. China WT/TPR/S/199 
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209. Requirements for establishing a securities co mpany have remained largely unchanged.207  
CSRC approval is required, for which an applicant must, inter alia :  be organized as a non-profit legal 
person;  have minimum capital of Y 200 million;  have a place and facilities as required by the services of securities registration, custody, and settle ment;  and have managers  and practitioners with 
the securities-practice qualification.  Securities registration and clearing institutions' functions include:  
the establishment of securities accounts and settlement  accounts;  the custody and transfer of 
securities;  the registration of securities holders;  the settlement and delivery of securities;  the distribution of securities rights and interests;  a nd the handling of any inquiry relating to these 
operations.  The Law foresees that the registration an d settlement of securities must be centralized.   
210. The amended Securities Law provides for a defin ition of public issuance of securities, which 
is when securities are issued without a designated target, or for a designated group consisting of more than 200 persons.  Advertisements, public enticemen t or other public methods can only be used for 
public issuance of securities.   
211. Under the Securities Law, a qualified sponsor (a  recommender) must be hired when securities 
are issued. Companies may only issue new shares if  they meet specific requirements, for example 
having a sound, well-operating structural organization,  in good financial condition, and no record of 
regulation violation or serious legal infringement in the prior three years.  Companies wishing to issue corporate bonds must meet specific  requirements,  such as minimum net assets of Y 30 million (for 
joint-stock limited companies) or Y 60 million (for limited-liability companies).
208   
212. A securities investor protection f und was established in September 2005.209 A state-owned 
company – China Securities Investors Protection F und Corporation Ltd – runs the fund, aimed at 
protecting stock investors from cases of brokera ges' bankruptcy or regulatory takeover for 
mismanagement and misappropriation. The fund does not  cover losses caused by traders' poor trading 
decisions or normal market risks.  The fund's capital comes mainly from:  stock trading commission from the Shanghai and Shenzhen stock exchang es; the brokerages; interest generated from 
subscriptions to share and bond issues; liquidated assets from failed securities houses; donations;  and 
other legal sources.  The PBC is said to have contri buted Y 10 billion to the fund.  According to the 
Circular on Issues Related to the First Payment of  Securities Investor Protection Fund by Securities 
Companies, securities companies mu st pay the China Securities Investor Protection Fund Corporation 
Ltd between 0.5% and 5% of their revenues.  The ra tios for individual companies are to be set by the 
CSRC, based on their risk management  and other financial conditions.  
213. The Rules on the Establishment of Securiti es Companies with Foreign Shareholding govern 
the establishment and operation of joint-venture securities companies.
210  Minimum capital 
requirements are as defined by the amended Securities Law, and can reach up to Y 500 million, 
                                                      
207 See WTO (2006). 
208 Other requirements include:  an  accumulated bond balance no higher than 40% of the company's net 
assets;  average distributable profits over the last three ye ars sufficient to pay the one- year interest on corporate 
bonds;  investment of raised funds in compliance with the industrial policies of the State;  and the yield rate of 
the bonds no higher than the interest rate set by the Government. 
209 Article 134 of the amended Securities Law further st ates that "The state shall establish the securities 
investor protection fund. The securities investor protection fund shall be composed of the capital as paid by securities companies and any other capital as lawfu lly raised. The specific measures for financing, 
administration and use of the foregoing fund sh all be formulated by the State Council." 
210 China Daily  online information (Biz Guide).  Viewed at:  http://bizchina.chinadaily.com.cn/ 
guide/law/law12.htm [5 December 2005].  The business sc ope of these joint ventures is currently limited to 
underwriting of stocks (including A, B, and H-shares) and bonds (including government and corporate bonds);  
brokerage business in only B and H-shares;  and brokerage and proprietary trading of bonds (including government and corporate bonds). WT/TPR/S/199 Trade Policy Review 
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depending on business scope (see above).  Foreign equity in these joint-ventures has been limited to a 
minority shareholding of 33%.  In principle, fore ign suppliers can enter China's securities markets 
through the establishment of a new joint-venture wi th a Chinese partner or by taking a stake in an 
existing securities firm.  However, in August 200 5, CSRC imposed a moratorium on new securities 
licences, including for joint-ventures.  According to  the authorities, the moratorium is based on 
prudential considerations;  in December 2007, CS RC resumed licensing of new securities firms.     
214. The Measures for the Administration of Secur ities Investment Fund Management Companies 
regulate the establishment of domestically owned a nd sino-foreign joint venture asset management 
companies.211  A foreign shareholder in these compani es must:  (a) be a financial institution 
established according to the law of its country of orig in;  (b) be located in a country that has "perfect 
securities laws and regulatory systems", and the secur ities regulatory institution must have signed an 
MOU on securities regulatory cooperation with the CS RC, and have kept an effective regulatory 
cooperation relationship;  and (c) must have a mi nimum paid-up capital in convertible currency equal 
to Y 300 million, even if it is not a major shareholde r.  Foreign shareholding is limited to 49%, as per 
China's GATS schedule of commitments.212  
Recent reforms 
215. Recent reforms have included:  converting no n-tradeable shares into tradeable ones;  
improving the quality of listed companies;  applying administrative measures to regulate securities companies;  facilitating the development of instituti onal investors;  and promoting the creation of new 
products, with a view to tackling some of the most significant shortcomings of China's capital 
markets, such as the lack of sound corporate governance in both listed companies and brokerage 
firms;  the high proportion of non-tradeable shar es; the insufficient development of institution 
investors;  the limited number of investment products;  the lack of product innovation;  and the 
insufficient development of the bond and futures markets.    
216. According to official information, at end 2004, non-tradeable shares of listed companies 
accounted for 64% of total capital stock, and stat e-owned shares accounted for 74% of non-tradeable 
shares;  the reform of non-tradable shares (the so -called split-share structure reform), initiated in 2005 
has been completed. 
217. After an experimental reform on the basis of the Circular on Issues concerning the Pilot 
Reform of the Split Share Structure Reform of Listed Companies, and the Circular on Issues concerning the Pilot Reform of the Split Share St ructure Reform of the Second Batch of Listed 
Companies
213, on 4 September 2005, the CSRC issued the Administrative Measures on the Split Share 
Structure Reform of Listed Companies. The measur es stipulate that:  holders of non-tradeable share 
should compensate holders of tradeable share as a precondition of floating their shares on stock exchanges;  non-tradeable shares w ill be locked-up for 12 months after the individual company's 
reform scheme takes effect and, holder's of non-tradeable share cannot sell more than 5% of the total 
shares of a listed company within another 12 mont hs, and not more than 10% within 24 months; and 
                                                     
 
211 Under the measures, minimum registered capital of Y 100 million is required to establish a fund 
management company. Principal shareholders, defined as those having no less than 25% of total registered capital in the investment fund management company, must have minimum registered capital of Y 300 million;  
other shareholders must have registered capital and net assets of no less than Y 100 million. 
212 Although not explicitly mentioned in the measures , Article 10 states that "proportion of capital 
contribution of or proportion of equity owned by the foreign party of a Sino-foreign joint venture fund 
management company may not exceed those in the commitment made by the state securities industry for 
opening to the outside world accu mulatively (including those held  directly and indirectly)". 
213 Issued on 29 April 2005 and 31 May 2005, respectively. China WT/TPR/S/199 
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the companies should obtain the approval of reform  schemes from at least two thirds of holders of 
tradeable share before implementation.  Accordin g to the authorities, the reform transformed non-
tradeable shares held by major shareholders in a lis ted company to tradeable shares;  after a lock-up 
period defined in respective reform plans, major shar eholders can decide whether to sell their shares 
in the secondary market or to continue to hold them.  Investors' confidence resumed in 2006, as a 
result of the split-share structure reform.  After a do wnturn of more than four  years, the number of 
investors increased by 5.13 million in 2006, and the fund balance of client transaction settlements at 
the end of the year exceeded Y 1 trillion.  By the e nd of 2006, the market value of tradeable shares 
reached Y 2.5 trillion. 
(iv) Telecommunications 
(a) Market structure 
218. China's telecommunication sector continued to gr ow during the overview period, and prices 
have been further liberalized.  Penetration rat es of fixed line services increased from 15.1 lines per 
100 persons in 2001 to 28.1 in 2006;  the corr esponding figures for mobile telephones were 11.5 
and 35.3 (Table IV.8).  There has also been a signi ficant increase in the use of Internet services.  
Overall, telecommunication services prices fell by about 53% between 2001-06.  Over the same period, the average charge rate per minute (ARP U/MOU) of China Mobile was reduced by 60%.
214  In 
2005, the average price of fixed local telephony was Y 0.18-0.22 for the first three minutes, and 
Y 0.01-0.11 for an additional three minutes.  According to the authorities, no data were available on average prices of leased circuits or Internet services. 
Table IV.8 
Telecommunications statistics, 2001-06 
  2001 2002 2003 2004 2005 2006 
Main telephone lines (million)  180.4 214.2 262.7 311.8 350.4 367.8 
Main telephone lines per 100 inhab itants 15.1 17.5 21.1 24.1 27.0 28.1 
Mobile service subscribers (m illion) 145.2 206.0 270. 0 334.8 393.4 461.1 
Mobile service subscribers per 100 i nhabitants 11.5 16.1 21.0 25.9 30.3 35.3 
Public telephones (million) 3.5 9.9 15.6 22.2 26.8 29.6 
Public telephones per 1,000 inhab itants 2.7 7.7 12.2 17.1 20.6 22.6 
Internet users (million) 33.7 59.1 79.5 94.0 111.0 137.0 
Internet users per 100 inhabitants 2.6 4.6 6.2 7.2 8.5 10.5 
Broadband subscribers (million) .. .. .. .. .. 50.85 
Broadband subscribers per 100 inhabitants .. .. .. .. .. 3.85 
.. Not available. 
Source:  ITU, World Telecommunication Development Report  (various issues);  ITU online information.  Viewed at:  
www.itu.int/ITU-D/ict/statistics/;  National Bureau of Statistics, China Statistical Yearbook  (various issues);  and 
data provided by the authorities. 
219. At present, China has six nationwide basic telecommunications service providers (Table IV.9) 
and about 22,000 providers of valu e-added services.  Of the six basic providers, China Telecom and 
China Netcom accounted for 62% and 33%  of the market, respectively, for fixed-line services at end 
2006;  the mobile service providers are China Mobile and China Unicom (with about one third of the 
market in 2006).  The State remains the majority  owner of all the basic telecommunication service 
                                                      
214 China Mobile (Hong Kong) Ltd (2006). WT/TPR/S/199 Trade Policy Review 
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providers215;  however, private participation and foreign i nvestment has been allowed gradually.  Four 
companies (China Mobile, China Netcom, China Te lecom and China Unicom) have been listed in 
different stock exchanges.  Foreign investment  is around 25% in China Mobile, 25% in China 
Netcom, 22% in China Unicom, and 17% in China Telecom. 
Table IV.9 
Basic telecommunications service providers, 2005 
Service  Providers  
Fixed-line service China Telecom, China Netcom, China Unicom, China TieTong  
Mobile telephone service China Mobile, China Unicom  
Data China Telecom, China Mobile, China Netc om, China Unicom, China Satellite, China TieTong 
(formerly China Railcom) 
IP telephony China Telecom, China Mobile, China Ne tcom, China Unicom, Chin a Satellite, China TieTong 
Satellite service China Satellite 
Source: Information provided by the authorities. 
(b) Regulatory structure and policies 
220. The telecoms sector is regulated by the Mini stry of Information Industry (MII), which 
formulates and implements telecommunications policy subject to State Council approval of 
"important" strategic policy documents;  for example, detailed collection measures for 
telecommunication resource fees, and price standards for important telecom services.  The MII sets tariffs and tariff caps for basic services, and supervises their implementation.
216  Internet activities and 
services are regulated, supervised, and administered by several departments, inter alia , the  ministries 
and agencies dealing with the press, publications, e ducation, health, drug administration, and industry 
and commerce.   Telecommunication services that convey radio and television programming are 
regulated by the State Administration of Radio, Film and Television (SARFT). 
221. China does not yet have a telecommunications law, although the Government has indicated 
that the relevant bodies are working on drafting one .  The Regulations on Telecommunication issued 
in September 2000 (State Council Directive 291) provi de the overall legal framework for the sector.  
The regulations stipulate, inter alia,  the separation of the Government from the business of providing 
telecommunications services;  the requirement fo r a licence for basic telecommunications and value-
added services;  the process of negotiating in terconnection between networks for new service 
providers;  the management of service tariffs;  and the standards for the  quality of services.  Other 
basic rules governing the sector include the Regulati ons for the Administration of Foreign Invested 
Telecom Enterprises and the Administrative Measu res for Telecommunications Business Operating 
Permits, which entered into force in 2002. 
222. Several new regulations relating to the sector ha ve been issued since 2005.  These include the 
"Criterion on Telecommunication Services  (2005)", which lay out technical and quality-of-service 
standards, and the criteria that service suppliers must meet.217  The MII also issued the Notice 
                                                      
215 These assets are held by the State-owned Assets Supervision and Administration Commission 
(SASAC) on behalf of the country, despite the Regula tions on Telecommunications (issued in 2000), which 
stipulate the separation of the Government from the business of providing telecommunication services. 
216 In addition, the relevant provincial telecommunications administration authorities are responsible 
for supervising and managing prices on local telecom services in cooperation with the local authorities in charge 
of pricing;  they are also responsible for the approval and registration of telecom pricing in the region, 
supervising the market, and dealing with violators.  
217 MII Decree No. 36, March 2005.  Viewed at:  http://www.mii.gov.cn/art/2005/12/17/art_ 
5241656.html (in Chinese) [18 December 2007]. China WT/TPR/S/199 
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Strengthening the Administration of Foreign In vestment in Value-added Telecommunications 
Services in July 2006, which clarifies that the pr ovision of unlicensed value-added services in China 
by foreign services suppliers is not allowed.218  Internet services are regulated by different measures 
and regulations issued by MII, including the M easures for the Administration of E-mail Service on 
Internet219,  the Regulations on Electronic Certification Se rvice (2005), and various rules related to the 
recording of IP addresses, issued in 2005.220  
223. Since 2006, there have been no new entrants in  the mobile services sector, including third 
generation (3G)  services, for which licences have not been issued. 
Interconnection 
224. The process for interconnection is set out main ly in the Regulations on Telecommunications 
(State Council Directive No. 291 of 2000), the Re gulations on the Interconn ection between Public 
Telecommunication Networks (Decree No. 9 of MII),  Measures on Supervision and Administration of 
Communications Quality between Public Teleco mmunications Networks (2005), and Measures on 
Settlement of Interconnection and Apporti onment of Relay Expense between Public 
Telecommunications Networks (2003).  The MII M easures on Settlement of Calling Charges between 
Telecommunications Networks regulate interconn ection between telecommunication operators, and 
require fees to remain below certain levels.  Servi ce providers may negotiate any charges that are not 
set out in the regulations;  MII or the releva nt provincial telecommunications administration 
authorities may intervene  when the parties are unable to agree.  According to the authorities, the MII 
has settled several interconnection disputes where ope rators have been unable to reach agreement. 
225. A dominant carrier must not refuse requests for interconnection from other 
telecommunications service operators, and interconne ction agreements must be filed with the MII.221  
If the operators are unable to reach a mutual ag reement within 60 days of one party expressing 
willingness to negotiate, either party can appl y to the MII or the relevant provincial 
telecommunications authority for mediation.  If agreement cannot be reached within 45 days of a request for mediation, the mediation authoriti es can solicit expert opin ions and determine a 
compulsory interconnection scheme.  Apparently, only China Telecom can be defined as a dominant 
carrier;  while MII is considering how to define "d ominant carrier", no definition has been established 
yet. 
Foreign investment and licensing 
226. Foreign investment in the sector is regulated by the Provisions on Administration of Foreign 
Invested Telecommunications Enterprises (Dec ree No. 333 of the State Council, issued 
December 2001 and effective on 1 Jan uary 2002).  Under these provisi ons, foreign participation is 
allowed up to 49% for basic telecom services and up to 50% for value-added telecom services;  there 
                                                     
 
218 According to the notice, foreigners need to establish a foreign-invested telecommunications 
enterprise in China prior to obtaining a telecommunications service operation licence. 
219 MII, Decree No. 38 , March 2006. 
220 Regulations on Putting IP Address on Records, issued  in February 2005 by MII, went into effect on 
20 March 2005;  Regulations on Putting Non-profit ICP on Records went into effect on 20 March 2005; 
Regulations on Internet Domain Names in China was amended and went into eff ect on 20 December 2004. 
221Dominant is defined under the Regulations on the Interconnection between Public 
Telecommunication Networks as those who control necessary basic telecommunication equipment, and have 
more than a 50% market share in the local business and are able to "substa ntially affect the market accession of 
other service providers".  WT/TPR/S/199 Trade Policy Review 
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are also minimum capital requirements.222  Under China's GATS commitments, there are foreign 
equity restrictions (currently 49% for fixed line and mobile services).  In practice, other than for 
value-added services, where around 95% of enterprises have "domestic private" or foreign ownership, 
foreign investment in fixed-line and mobile services  is below these limits.  At end 2007, China had 
received 34 applications for setting up foreign-fund ed telecom enterprises to provide value-added 
services.  Of these , 19 projects have been approved by the M II and granted the Examination Opinions 
on Foreign Investment in Telecommunications Servi ces Provision, with which they can apply for an 
Approval Certificate for Foreign-funded Enterprises,  a Telecom Operation Licence, and finish the 
registration process for foreign investment in teleco mmunication enterprises.  In addition, 14 foreign-
invested enterprises had formally applied for the Value-added Telecom Operation Licence;  11 were 
granted the licence;   while the other three were waiting for approval.   
227. For an FIE to obtain a telecom services licence,  the Chinese major investor (rather than the 
foreign investor) must submit an application to the MII.223  According to the authorities, foreign 
investors do not need to submit the application.  The examination process must be completed within 
180 days of receipt of an application for a licence for basic telecommunications, and within 90 days 
for value-added services.  For applications for the provision of value-added telecommunications 
services within provinces, autonomous regions, or  municipalities under the Central Government, the 
relevant examining authority (in the first instan ce) is the local telecommunications administration 
department.  The local department must give its  comments on the application to the MII within 
60 days from receipt of the application.  The MII must make a decision to approve or reject the 
application within 30 days of receipt.  Approved pr ojects receive an Examination Opinions on Foreign 
Investment in Telecommunications Services Provision.   A written notification must also be provided 
to the applicant if the project is rejected.  Wh ere a foreign-invested telecommunication enterprise 
needs to be approved by State Council authorities, MII transmits the application to these authorities 
before granting the Examination Opinions.224  In some unspecified cases, further examination may be 
required by the NDRC; a further 30-day period is provided for approval.225   
Telecommunications tariffs 
228. The Ministry of Information Industry (M II) sets tariff caps for fixed-line domestic and 
international long-distance telephony.226  Telecom companies may determine their prices 
independently within these caps.  As a result, ta riffs of different telecommunications services vary 
                                                      
222 Minimum registered capital for a foreign-invested telecom enterprise providing services across the 
country or across differen t provinces, autonomous regions, and mu nicipalities directly under the Central 
Government (an area), is Y 2 billion for basic telecom serv ices and Y 10 million for value-added services.  For 
services provided within an area, the requirements are Y 200 million for basic services or Y 1 million for value-added services (WTO document S/C/N/236, 24 November 2003).  The minimum registered capital requirement 
stipulated in the Provisions on Administration of Foreign Invested Telecommunications Enterprises is identical 
for foreign-invested and domestic telecom enterprises. 
223The application must include the project propos al, a feasibility study report, and the relevant 
documents certifying compliance of the foreign and Chinese investors with the provisions and conditions in the 
Regulations on Telecommunications 
224 Whether a project needs such further approval is determined by the  Government's  policies 
regarding investment and financing arrangements. 
225 Article 15 of the Provisions on Administration of Foreign-Invested Telecommunications Enterprises 
(WTO document S/C/N/236, 24 November 2003). 
226 Tariff caps are Y 0.07/6 seconds for domestic long-distance telephony, and Y 0.8/6 seconds for 
international long-distance telephony  (for outgoing calls to the Hong Kong and Macao SARs, and Chinese 
Taipei, the tariff cap is Y 0.2/6 seconds).  The caps for inter-area local fixed telephony tariffs vary among 
different provinces, ranging from Y 0. 3 to Y 0.5/minute.  For intra-area lo cal telephony, the charge for the initial 
3 minutes is Y 0.18-0.22, then Y 0.09-0.11 per minute thereafter. China WT/TPR/S/199 
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significantly in the different regions due to economic conditions and users' ability to pay.  In addition, 
monthly rental charges apply.227 
229. Telecom tariffs were adjusted in 1999 and 2001.228  In 2002, new rules and revised tariffs 
established the current regulatory framework for telecom tariffs.229  The Regulations on 
Telecommunication of People’s Republic of Chin a stipulate that, where there is "adequate 
competition"  prices of telecommunication services must be determined by the market.  The tariffs of 
value-added services, and services where there is "su fficient market competition" have gradually been 
liberalized since 2002.  In 2005, a number of pr ice caps were fixed for services including domestic 
long-distance, international long-distance (and long-distance calls to Chinese Taipei, the Hong Kong 
and Macao SARs), mobile domestic roaming, and tr ans-regional fixed-lines.  In 2007, in mobile 
telephony, a transformation from two-way to one- way charging, within an operating area, was 
implemented nationally.  In addition, the pri ce caps for mobile domestic roaming charges were 
reviewed to assess whether the price caps could be lowered.  A public hearing on lowering the cap for 
domestic roaming charges of mobile phones was held at the end of January 2008. 
230. There are three types of tariffs:  government set , government guided, and market adjusted.  
The Government maintains price controls on basic telecommunication services, fixed lines, cellular  
services, local call charges, and monthly rental char ges.  The three Government types of tariff are 
applied to basic telecommunication services, while government guided or market adjusted prices are 
applied to value-added services. 
231. As from October 2005, fixed-line domestic, international long-distance, and domestic 
roaming charges for mobile telephony have been su bject only to government set ceiling prices.  For 
fixed-line domestic long-distance and internationa l calls, the MII sets an upper limit, below which 
companies may fix their own rates, subject to approval.   Operators' actual rates must be notified to the 
MII or the local telecommunication authorities.  Mont hly charges, local fixed-line charges, and other 
basic telecom service fees are still subject to government  approval.  Due to several factors, including 
competition and upgrading of technology, telecom service operators in China may also offer 
preferential prices to customers, including credit accumulation and discounts.  The pricing structure 
for mobile telephony services is similar.  MII main tains upper limits for roaming calls:  Y 0.8 per 
minute for pre-paid services and Y 0.6 for others.  For pre-paid services there is no monthly fee and 
usage is Y 0.6 per minute within the operating area.  For contractual users, monthly rental is Y 50 and a Y 0.4 charge for each minute within the operating area.  Actual prices paid by users are below the 
tariff ceilings.  According to the annual report of China Mobile (Hong Kong) Ltd., its average revenue 
per minute fell from Y 0.31 in 2004 to Y 0.24 in 2006.   Moreover, China Unic om's charges are about 
10% below China Mobile's. 
Universal service 
232. Under the Regulations on Telecommunications  (2000), operators must provide universal 
service, however no universal service fund has, as ye t, been established.  When China Telecom was a 
                                                     
 
227 The rental charge is Y 20-25 in the provincial capital city, Y 12-18 in other cities and towns, 
Y 10-15 in rural areas, and Y 25-35 for commercial users. 
228 Adjustments in January 2001 rebalanced telecom tariffs by increasing local fixed-line tariffs and 
reducing tariffs on seven other services, including long-d istance, leased-line fees, and Internet access fees.  
Information provided by the authoritie s suggests that tariffs for broadband access fell by as much as 95%.  
Further changes in July 2001 saw the removal of installation fees and mobile phone subscription fees.     
229 These included: Measures on the Approval and Filing Procedure of Telecommunication Tariff, the 
Catalogue of Telecommunications Tariffs Subject to Market-adjusted Prices, and the Catalogue of 
Telecommunications Tariffs Administered by Provincial Communications Administration Authorities. WT/TPR/S/199 Trade Policy Review 
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monopoly it provided universal services by means of cr oss-subsidization;  however, this is no longer 
possible since competition and tariff liberalization have  been introduced.  Currently, the MII, together 
with other ministries, is establishing a telecommunications universal service fund and working out the 
cost structure for compensating service providers fo r the provision of universal service.  Meanwhile, 
MII has issued a detailed plan related to universal  service each year since 2004.  In January 2004, the 
Government launched the Village Access Project, aimed at providing at least two telephones per 
village for 95% of China's administrative villages by the end of 2005, and for more than 99.5% of 
China's administrative villages by the end of 2010.  The programme also calls for expanding access to 
Internet and promoting the spread of information technology in rural areas.  Funds for the Village 
Access Project are provided by the six telecom service providers, the Central Government, and some local government resources. 
(v) Transport services 
(a) Air transport services 
Market overview 
233. China's civil aviation industry has been growi ng rapidly since its previous Review.  In 2006, 
the industry transported 30.6 billion tonnes pe r kilometre, 160 million p assengers, and 3.49 million 
tonnes of cargo and mail, which represented increas es of 17%, 15.5%, and 13.9%, respectively, over 
the previous year.
230  From 2000 to 2006, annual average grow th rate of air passenger transport was 
15.6%, and 12.7% for international passengers.231  The annual average growth rate for cargo and mail 
traffic was 12.6% between 2001 and 2006.232 
234. Domestic routes and passenger traffic dominate the business233:  66.3% of the total air traffic 
in 2006 was on domestic air routes and 33.7% was on international routes.  Passenger traffic 
accounted for 69.2% of the total;  cargo and mail traffic accounted for the rest.234 
235. Seat occupancy rate has been increasing, with an  average of 73.9% for regular flights in the 
first half of 2007, up 1.6 percentage points year on year, and an all-cargo load factor of 65%, down 
0.2 percentage points.  According to the authorities,  the drop of load  was due to the decline in the 
load rate on international routes brought about by  competition amongst the four  giants in the global 
air cargo transport market (FedEx, UPS, DHL, and TNT). 
236. Figures on the share of domestic and internationa l air traffic of foreign-owned carriers were 
not available.   Registered airplanes in the civil aviation sector in China totalled 1,054 at the end of 
June 2007, an increase of 56 over the previous six months.    
                                                      
230 CAAC (2007). 
231 WTO document S/C/M/89, 19 November 2007. 
232 WTO document S/C/M/89, 19 November 2007.  The industry continued to grow in 2007:  in the 
first half, total transport turnover reached 16.7 b illion tonnes/km (10.9 for domestic routes and 5.8 for 
international routes);  86.7 million passengers were transported (78.2 on domestic routes and 7.9 on 
international air routes), and 1.8 million tonnes of mail freight was carried (1.3 million for domestic routes and 508,000 tonnes for international air routes).  Hong K ong Trade Development Council online information, "Civil 
Aviation Industry Growth Robust", 10 September 2007 .  Viewed at:  http://industries.tdctrade.com 
[19 February 2008]. 
233 In the first half of 2007, the industry's main op erating turnover reached Y 121.8 billion, rising by 
18.3% year on year; the industry's costs totalled Y 118.3 billion, up 14 .9%;  while total profits reached 
Y 4.6 billion, an increase of Y 4.9 billion after deficits. 
234 CAAC (2007). China WT/TPR/S/199 
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237. The sector is highly concentrated.  The three st ate-owned airlines, Air China, China Eastern, 
and China Southern, were created following the consolid ation of nine state-controlled airlines in 2002.  
Together, they represent 80% of the market.  
238. Since 2004, the Government has been allowing priv ate investment in domestic airlines, in a 
move to progressively open the market.  Since th en, 20 new airlines have established operations in 
China, and foreign investment wa s allowed in existing companies235;  foreigners have invested in the 
three main airlines.236  As of December 2007, there were 42 independent civil airlines in China;  
amongst the many start-ups licensed in 2005 three intended to operate as low-cost-companies.237 
239. China’s major airports, including Beijing Capita l Airport and Shanghai-Pudong International 
Airport, are currently operating at or near maximu m capacity for takeoffs a nd landings.  The available 
slots are not sufficient to meet the rapid rise in demand.238  Currently, Beijing can handle at most 
1,000 flights per day safely.  The Capital Airport is being expanded;  this is expected to improve the 
situation, particularly in light of the 2008 Olym pic Games, during which Beijing can expect a 20% 
increase in air traffic (and as much as 70% in peak  periods), according to data from the International 
Civil Aviation Organization (ICAO).  In August 20 07, the Civil Aviation Administration of China 
(CAAC) issued Provisional Rules on Slot Management .  Slot Coordination Co mmittees, composed of 
officials from CAAC, air traffic control bureaux, airlines, and airports, were set up at busy airports. 
Regulatory framework 
240. The CAAC, the main agency responsible for the governance of the civil air transport sector,  
has seven regional administrations and 33 district and municipal security supervisory offices.  The sector is regulated by the Civil Aviation Law, admi nistrative regulations issued by the State Council, 
and related rules formulated by the CAAC. 
241. Requirements for the establishment of public air transport enterprises have remained 
unchanged since the previous Review.  They include:  use of aircraft that meet national safety and 
security requirements;  legally licensed aviation sta ff;  registered capital no less than the minimum 
specified by the State Council.  In addition, these enterprises may not have less than three purchased 
or rented civil aircraft that meet the relevant safety requirements;  their flight, aircraft maintenance, and other specialized technical staff must meet the relevant requirements of civil aviation rules;  the 
legal representative of the enterprise must be a Ch inese citizen;  the registered capital must be no less 
than the minimum specified by the State Council;  th ey must have access to bases, airports, and other 
fixed operational places and equipment necessary for business operation.
239  
242. According to the authorities, no airlines have exclusive rights over domestic services;  rather, 
they apply to the CAAC for the right to pr ovide domestic services in accordance with common 
principles and conditions.  According to the Supervis ory Regulations of Domestic Routes and Flights, 
the CAAC classifies routes between the 148 domestic  airports into two types:  those requiring 
                                                      
235 Among the 20 new airlines, 11 are wh olly private or pr ivate-controlled. 
236 Air China is 40.40% state owned;  17.34% is owned by Cathay Pacific, and 34.21% by other foreign 
investors.  China Southern is 50.3% state owned and 26.84% foreign owned.  China Eastern Airlines is 61.64% 
state owned and 32.20% foreign owned. 
237 These are Okay Airways (based in Tianjin), Spring Airlines (bas ed in Shanghai) and United Eagle 
Airlines (based in Chengdu) (WTO document S/C/W/270/Add.2, 28 September 2007). 
238 WTO document S/C/M/89, 19 November 2007. 
239 Article 7 of the Approval Regulations of the Operations of Public Air Transport Enterprises 
(Order 138 of the CAAC).  WT/TPR/S/199 Trade Policy Review 
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approval, which concern the ten busiest routes in terms of passengers carried, and those requiring 
registration, which concern all other routes. 
Bilateral air service agreements and international linkages 
243. China’s bilateral aviation policy is closely linke d to its tourism policy, aimed at progressively 
opening up new destinations for Chinese travellers.  At end 2007, China had signed bilateral air 
services agreements with 95 countries;  it is ne gotiating such agreements with 15 countries.  
Currently, 95 foreign airlines operate 1,611 week ly passenger and cargo flights to 30 mainland 
cities.240 
Foreign investment in the sector 
244. Foreign investment in the civil aviation i ndustry has been governed since 1 August 2002 by 
Order No. 110, jointly issued by the CAAC , the MOFCOM (then MOFTEC), and the NDRC.  
245. Foreign investors may invest in civil airports, public air transport enterprises, general aviation 
enterprises241, and "projects related to air transport", wh ich include air fuel, ai rplane maintenance, 
freight transport and storage facilities, ground services,  air food, and parking lots.  Foreign investors 
are not allowed to invest in or to manage air traffic control systems.  
246. Foreigners may invest by establishing an equity joint venture or contractual joint venture; or 
through the purchase of shares of civil aviation enterprises, including shares issued overseas and 
foreign shares issued in Ch ina by the aviation enterprises.242  Since 2002, foreign investors in all-
cargo, all-passenger, or combined airlines in Chin a have been allowed to hold 49% of the capital, 
while the individual shareholding of a foreign i nvestor and its affiliates must not exceed 25%.243  
CAAC Decree 110 stipulates that all public aviation enterprises with foreign investment must be 
controlled by Chinese shareholders, and a single fore ign investor (including it s affiliate companies) 
can hold no more than 25% of the shares.  Total foreign shares in an airline must not exceed 49%. 
247. Order 110 has been complemented by Or der 139, which entered into force on 
24 February 2005.  This order puts into effect pr eferences granted to Hong  Kong, China and Macao, 
China which allow them to provide management servi ces of medium and small airports in the form of 
a contractual joint venture, equity joint venture or solely-funded enterprise. 
                                                      
240 For details on these bilateral agreements see WTO (2006). 
241 General aviation enterprise include those engaging in agriculture, forestry and fishery operations, as 
well as business flight, air sight-seeing or services to the industry. 
242 Foreign investors must be qualified as a Chinese legal person to invest, in the form of contractual 
joint venture, in public air transport and general aviatio n enterprises engaging in business flights and air sight-
seeing. 
243 WTO document S/C/M/89, 19 November 2007.  According to Article 6 of Order 110, "where 
foreign investors invest in civil airports, the Chinese party shall take the relatively holding position. Where 
foreign investors invest in public air transport enterprise s, the Chinese party shall take the holding position, and 
the proportion of investment made by one foreign investor (including its associate enterprises) may not exceed 
25%. Where foreign investors invest in the general aviation enterprises engaging in business flight, air sight-
seeing or that serving the industry, the Chinese party shall take the holding position; where they invest in the 
general aviation enterprises engaging in agriculture, fo restry or fishery operations, the proportion of foreign 
investment shall be determined by both the Chinese and foreign parties through negotiation." China WT/TPR/S/199 
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(b) Maritime transport services 
Market structure 
248. Some 90% of China's exports and imports are transported by sea.  By the end of 2006, the 
ocean fleet capacity was 45.5 million deadweight t onnage (DWT), of which 23.2 million belonged to 
the 1,920 ocean-going vessels flying the national flag.244  
249. China’s international maritime  transport industry is both horizontally and vertically 
integrated.  At end 2006 ，more than 280 international maritime tr ansport companies had registered in 
China, among which over 20 were joint ventures.  More than 170 international liners have been 
engaging in international shi pping operations, 110 of which are offshore companies coming from 
30 countries and regions (nearly 65% of the total). 
250. About 30 foreign shipping companies have set up wholly foreign-owned companies in China. 
Over 1700 domestic and foreign companies have been qualified as non-vessel-operating common 
carriers (NVOCC), of which 790 are foreign-invest ed companies and offs hore companies. Over 
1,000 offshore navigation companies have set  up resident representative offices in China.245  
251. Since 2005, 40 foreign liners have been eligible to engage in interna tional liner operations. 
Nearly 100 offshore companies have been qualified as NVOCCs, seven "offshore navigation 
companies" have set up new wholly foreign-owne d companies related to shipping and container 
transportation services, and added 54 branches.  Mo re than 300 "offshore port navigation companies" 
have set up representative offices in China.  
Regulatory system 
252. The regulatory system for maritime transport has remained largely unchanged since the 
previous Review of China (Table AIV.4).  The Ministry of Communications (MOC) is in charge of formulating shipping and port policies with a view to:  establishing a competitive maritime transport market;  building up an internationally competitiv e commercial fleet;  and forming a multi-functional 
port system, taking into consideration econom ic development and security concerns. 
253. According to the authorities, there are no financial subsidies or cargo preferences for 
domestic shipping companies;  domestic and foreign companies enjoy equal market access with regard to maritime transport services.     
254. The Maritime Code and the Regulations on Inte rnational Maritime Transportation provide the 
general regulatory framework.
246  Examination and verification by the MOC is required for an 
international shipping operator to engage in interna tional liner services.  Bulk shipping is also covered 
by the Regulations. 
                                                      
244 According to the authorities, there are no statis tics for the state-owned share of the deadweight 
tonnage. 
245 In accordance with China's laws and regula tions, overseas enterprises or other economic 
organizations may set up non-profit representative offices in  China.  MOC approval is  necessary, and the period 
of operation cannot exceed three years. 
246 The Regulations were issued by the State Council,  effective 1 January 2002.  For details of the 
regulatory framework, see WTO (2006). WT/TPR/S/199 Trade Policy Review 
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255. Under the Maritime Code, shipping and towi ng between domestic ports cabotage must be 
undertaken by ships flying the national flag, unless otherwise stipulated by laws or administrative 
rules and regulations.247  
256. Around 50% of total international shipping tonnage is accounted for by Chinese-owned 
vessels registered overseas and flying foreign flag s. In order to expand the Chinese-flagged ocean 
shipping fleet, and to ensure employment for Ch inese nationals, the Ministry of Communications put 
in place an Ad-hoc Tax-free Registration Polic y for the Chinese-owned Vessels Engaged in 
International Voyage, which entered into force on 1 July 2007.  Under this new policy, Chinese-
owned vessels registered overseas before the end of 2005 will be exempted from customs duty and 
import VAT, and allowed to register back in Chin a in accordance with the cu rrent ship registration 
regulations, if they comply with certain criteria on the age of the vessel and technical requirements 
and, if they submit import declarations within two years from 1 July 2007.248   
257. The Maritime Code includes provisions on mu lti-modal contracts and operators and their 
responsibilities.  The Government encourages enterprises to expand multi-modal transport, including by:  investing in deep-water c ontainer-dock constructi on and improving the road, railway, coastal, and 
freshwater transport system
249;  establishing an internationally competitive container fleet;  developing 
container transport information technology, incl uding electronic data inte rchange (EDI) and other 
electronic business systems;  and improving the legal structure for multi-modal transport.  In addition, FIEs are encouraged to engage in internationa l container multi-modal transport in the form of 
NVOCCs.   
Foreign direct investment 
258. There has been no significant change to th e regulatory framework on foreign direct 
investment in the maritime sector, although a new Ca talogue for the Guidance of Foreign Investment 
Industries was issued in November 2007, to ente r into force in December 2007.  In addition to 
Article 32 of the Maritime Transportation Regul ations, which provides a general regulatory 
framework for foreign investment, detailed regulatio ns are provided in the Administrative Rules on 
Foreign Investment in the International Maritime  Transportation Industry, effective 1 June 2004.
250  
Under these rules, the MOC, and MOFCOM ar e responsible for granting approval for the 
establishment of FIEs operating in internationa l maritime transport.  Wholly foreign-owned 
enterprises are allowed for maritime cargo storag e and warehousing services;  sino-foreign equity 
joint-ventures or sino-foreign contractual joint vent ures with the majority share held by the foreign 
partners are allowed for international ship mana gement, international ma ritime container freight 
stations and container yard services.  Sino-foreign eq uity joint ventures, sino-foreign contractual joint 
ventures, or wholly foreign-owned enterprises ar e allowed to offer routine services, such as 
                                                      
247 The Regulation on Vessel Registration, effective 1 January 1995, stipulates that, to fly the national 
flag, a vessel must be registered in China and obtain Ch inese nationality.  Its crews are usually Chinese citizens;  
when it is necessary to recruit foreign crew, approval from  the MOC is required.  In addition, if the ship is 
owned by a Chinese citizen, the owner must have their reside nce or main business office in China;  if the ship is 
owned by a legal person, their main business office must also be in China;  for a joint venture with foreign 
investment, no less than 50% of the company's registered capital must be owned by the Chinese partner.  
According to the authorities, there are no exclusivity ri ghts or subsidies for ships flying the national flag. 
248 Ad-hoc Tax-free Registration Policy for the Chinese-owned Vessels Engaged in International 
Voyage, Ministry of Communications, 26 June 2007.  China Development Gateway.  Viewed at:  http:// 
www.chinagate.com.cn/reports/2007-06/29/content-8458895.htm [18 February 2008]. 
249 Information provided by the authorities stated that, the average handling capacity of container ports 
is increasing by 25-30% annually, and the proportion of "doo r-to-door" transportation is also increasing rapidly. 
250 Ministry of Communications online information.   Viewed at:  http://www.moc.gov.cn/zhengwu/ 
zhengwu/t20040428_10154.htm [1 July 2005]. China WT/TPR/S/199 
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canvassing of cargoes, issuance of bills of landing , settlement of freight, and signing of service 
contracts for the investor's owned or operated vessels.     
Auxiliary services 
259. Tally services in China used to be monopoli zed by the China Ocean Shipping Tally 
Company.251  According to the authorities, the estab lishment of the China United Tally Company 
(CUTC) on 18 March 2003 constituted a step to introduce competition in tally services.  
260. Under the Regulations on Administration of Pilo tage, effective 1 January 2002, pilotage is 
compulsory mainly for foreign flag vessels, a nd for some Chinese vessels under certain laws or 
regulations.  According to the authorities, the prac tice is not discriminatory, as it is required to 
safeguard national security, safety, and the environment.252  All pilotage staff must be Chinese 
nationals.253  The authorities note that reform in pilo tage services is envisaged, and will entail, inter 
alia, separating pilotage entities from port enterprises, and, based on the principle of "one port, one 
pilotage entity", establishing non-profit pilotage entities administered by local port administration 
authorities.254 
Port services 
261. As ports are the conduit for around 90% of China's rapidly growing trade, their efficiency is 
essential.  There were 1,430 ports in China in 2003, of  which 132 could deal with international trade.  
In 2006, merchandise throughput in Chinese por ts was 970 million tonnes, up 18% over 2005;  
container throughput at key ports amounted to 47. 4 million TEUs, up 30.9% over 2002.  Nine coastal 
ports have a throughput exceeding 100 million tonnes;   thus, half of the world's ports with a 
throughput over 100 million tonnes are located in Chin a.  China's ten biggest coastal ports handled 
71.7% of total cargo handled by the country's coastal ports.  
262. At end 2006, there were 35,453 productive berths in China's ports, including 1,203 deep-
water berths for 10,000-tonne vessels. Cargo and container movements increased by 17% and 20%, 
respectively.255  Goods handling capacity at China’s ports was 4 billion tonnes in 2004.  On average, 
ships stop at major ports in China for 1.1 days (the average turnover time).  
263. China's ports used to be regulated at three di fferent levels of govern ment:  under the Central 
Government, regulated by the MOC;  under the shar ed control of the MOC and local governments;  
and those regulated by the local government.  Reform  of this system started in 2001 when the Central 
Government delegated all responsibility to local governments.  Cu rrently, the MOC is responsible for 
overall national port administration, including fo rmulation of policy, while local governments 
designate a department (port administration author ity) to implement port-related regulations.    
264. The main legislation is the Port Law, which en tered into force on 1 January 2004.  Under this 
law, domestic and foreign investment in port construction and operation is encouraged.  The 
                                                      
251 Tally companies are public notary companies that operate between the ship ping companies and the 
terminal operators when cargo is delivered.  They issue legally binding documents to verify the quantity and quality of the import and export cargo delivered. 
252 UNESCAP (2002). 
253 Ministry of Communications online information.   Viewed at:  http://www.moc.gov.cn/zhengwu/ 
zhengwu/2003_01_20_5551.htm  [4 July 2005]. 
254 According to the authorities, for reasons of national security and port safety, it is not appropriate to 
privatize or corporatize pilotage entities. 
255 China Daily, 22 June 2007, "Foreign Investment Boosts Port Industry". WT/TPR/S/199 Trade Policy Review 
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Regulations on Administration of Port Operation, ef fective 1 June 2004, stipulate that, to engage in 
port operations, enterprises must obtain an operation licence from the port administration authorities.
256  Port operators are required to ensure port safety;  operators in violation of relevant 
requirements are subject to fines of up to Y 200,000 or revocation of their operating licence.  
265. In order to improve safety at ports, China h as applied the International Convention for the 
Safety of Life at Sea of 1974 (SOLAS) since 2002,  and the International Ship and Port Facility 
Security Code (ISPS) became effective on 1 July  2004.  To implement these conventions, around 
1,700 Chinese ships had to obtain a Certificate of International Ship Security from the MOC before 
1 July 2004, and about 10,000 secu rity personnel had to undergo security training.  The Maritime 
Safety Administration, under the MOC, is the comp etent authority for safety issues;  its Guide for 
Ship's Implementation of ISPS assists small a nd medium-size companies to implement these 
international conventions.  The MOC also formulated  the Regulations on Port Facility Security on 
14 November 2003, as the basis fo r special working groups to evaluate port facilities across the 
country.  The evaluation of large ports was co mpleted by 31 March 2004 a nd of other ports by 
30 April 2004;  685 port facilities in China had obtaine d a Port Facilities' Safety Certificate by 2006.  
266. Foreign investment in port construction and management is listed as "encouraged" in the 
Catalogue for the Guidance of Fore ign Investment Industries.  The Port Law applies to foreign 
investment in port operations;  foreign investors ma y establish wholly owned port operators or set up 
joint ventures.257  In 2005, there were over 200 FIEs invol ved in port services in China;  total 
investment was over Y 20 billion, of which more than Y 11 billion was foreign.  A port's harbours 
may be owned and operated by stat e-owned harbour companies, FIEs, or private enterprises.  Under 
the Port Law, private enterprises and FIEs that satis fy certain requirements have the same access to all 
port services as state-owned companies.  Port  administrative functions are under the port 
administration authorities;  enterprises are r esponsible for daily ope ration and maintenance .  
267. Port charges are decided by the MOC and the ND RC, taking into consideration cost and the 
level of competition in the market;  the charges are applied uniformly across the country.  Port 
operators may set some fees, such as for warehousing and container yard services.   
268. A port may have more than one stevedoring company, but each stevedoring company is 
confined to one port.  When establishing stevedori ng companies, approval is required (from provincial 
governments for domestic companies and from the MOC for FIEs).  
Bilateral and international agreements 
269. According to the authorities, China does not  have any cargo reservation or preference 
measures;  all commercial cargo is accessed freely, unless covered by cargo-sharing arrangements.  China has bilateral cargo-sharing arrangements with Algeria, Bangladesh, Brazil, and Zaire.
258      
270. China is a Class-A member of the International Maritime Organization (IMO).  It participates 
in the drafting and amending of international rul es, such as the ISPS Code.  At end 2006, China had 
                                                      
256 Other regulations in this regard include Rules on Port Charges, Rules on Goods Handling in Port, 
and Regulations on Management of Dangerous Goods in Port. 
257 Before the enactment of the Port Law, foreign oper ators were restricted to less than 50% equity in 
port construction, and port investment needed Central Government approval, which could be time-consuming. 
258 The authorities state that cargo-sharing arra ngements with these countries have not been 
implemented. China WT/TPR/S/199 
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concluded bilateral maritime transpor t agreements with 58 countries.259  A consultation mechanism 
has also been set up between China and several WTO Members, including the United States, the 
European Communities, Japan, and the Republic of Korea.  
271. Since China's previous Review, there has b een no change in the Agreement on Maritime 
Transport signed by China and the United States on 8 December 2003,260 or arrangements under the 
Closer Economic Partnership A rrangements (CEPA) with the Special Administrative Regions of 
Hong Kong and Macao.261   
(vi) Distribution services 
(a) Market overview 
272. China's distribution sector has developed rapidly and been subject to important liberalization 
over recent years.  Total retail sales increased from about Y 940 billion in the early 1990s to Y 6.72 trillion in 2005.
262  Wholesale and retail trade accounted for 7.2% of GDP in 2006 (down from 
7.8% in 2004), and empl oyed 51.3 million people.263  Foreign investment in the subsector is 
significant.  According to official data, net FDI in wholesale and retail trade amounted to 
US$1.11 billion in 2006, representing 6.3% of total net FDI received that year;  accumulated net FDI 
amounted to US$128.6 billion, 17.3% of the total.264  The development of the subsector has been 
fuelled by rising urban income and rapid urbanization, concurrently with the entry and expansion of 
modern distributors in major citi es.  Real growth of non-grocer y retail sales between 2000 and 2005 is 
estimated at 75%, by far the highest rate among the world's developed and emerging economies.265   
273. The retail subsector has undergone a radical tr ansformation, from state-owned operations and 
traditional small shops to modern distribution form ats such as hypermarkets.  Traditional department 
stores (typically selling non-food merchandise) have been popular in China, but are facing pressure as 
a result of the development of hypermarkets and othe r modern retailers.  Hence, to stay competitive, 
many have made efforts to incorporate new ma nagement methods and better use of technology.266  
The sector is still changing as both domestic and international chains are expanding aggressively, 
although foreign presence remains limited to big citi es.  Given the subsector's recent further opening 
to FDI, many global distribution companies are seek ing to enter China, attracted by the market size 
                                                      
259 According to the authorities, these agreements incl ude all the coastal countries that have diplomatic 
relations with China;  some of the agreements are confidential.  
260 U.S. shipping companies are now allowed to establish joint-venture shipping agencies and wholly 
owned shipping companies, container transport service companies and logistic serv ice companies in China, 
while Chinese shipping companies are no longer labelled "controlled carriers" by the United States. 
261 Under the CEPA, service suppliers in these region s are allowed to:  set up wholly owned companies 
in China to conduct international ship management, seaborne cargo storage and warehousing, container yard, 
container freight stations, and NVOCC business;  offer serv ices such as cargo canvassing, issuing bills of lading, 
settling freight, and signing service contracts for the ships they own or operate;  and utilize trunk-line container 
carriers to transport empty containers they own or rent between the mainland ports, after undergoing Customs 
procedures.  The minimum registered capital requirements for these suppliers to engage in warehousing services 
and freight forwarding services are the same as those required for domestic enterprises. 
262 Economist Intelligence Unit (2006b), China Hand,  Chapter 11:  Distribution, November, p. 18;  and 
PriceWaterhouseCoopers (2007a). 
263 National Bureau of Statistics of China, 2007. 
264 National Bureau of Statistics of China, 2007. 
265 Euromonitor (2007), p. 57. 
266 Foreign operators in this sector include Parkson (Malaysia), Pacific Department Stores (Chinese 
Taipei) and Robinson (Philippines), (PriceWaterhouseCoopers (2007a), p. 24;  Economist Intelligence Unit 
(2006b), p. 21). WT/TPR/S/199 Trade Policy Review 
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and future growth prospects.  Supermarkets are do minated by domestic players;  while hypermarkets 
are dominated by foreign suppliers. 
274. The subsector is extremely fragmented.  The country is dominated by small independent 
shops, often family-owned.  In 2004, there were 39.2 million getihu  (individual registrations), of 
which 41% were engaged in retailing.267  Moreover, in 2005, over 80,000 wholesale markets operated 
throughout China, with some 15 million stalls  and employing between 10 and 15 million people.268  In 
2005, China's top 30 chain enterprises accounted fo r 7.3% of total retail sales of consumer goods, 
essentially unchanged from 2004.269   
275. According to the China Chain Store and Franch ise Association, sales revenues of China's top 
100 chain stores totaled Y 855.2 billion in 2006, up 25% from the previous year and exceeding the 
13.7% rise in China's total consumer goods sales.  There were 69,100 chain store outlets in the 
country, employing 2.04 million people, up 31% from the previous year.  Total sales of the top 
100 stores recorded average annual growth of over 30%  in recent years and their share in total retail 
sales of consumer goods increased to 11.2% in 2006 from 6% in 2002. 
276. According to the MOFCOM, 1,027 foreign-invest ed enterprises (mainly wholesalers) were 
granted approval to operate in the subsector in 2005, three times the number approved during 
1992-04.270  It would appear that sales by foreign-inve sted department stores account for less than 5% 
of total retail sales of consumer goods  (and about 10% in major cities).271   
277. Franchising is also growing rapidly, albeit from a low base.  The China Chain Store and 
Franchise Association estimates that at end 2005 there were 2,300 franchise businesses operating 
168,000 units, up from about 500 franchises in 2000.  The sale of franchise products has increased at 
40% or more annually in recent years, faster than  the annual increase in overall sales of consumer 
goods.  Franchises are active in a wide range of activities, from fast-food restaurants to the provision of education services, although the sale of franchise products accounts for only 3% of the total retail 
sales in consumer goods.  Foreign presence in this segment is important since 15 of the top 20 international franchisers are already present.
272  The entry of foreign franchises helps to 
promote new business concepts and marketing met hods stimulating the overa ll development of the 
subsector.  Some local franchises are also growing rapidly.273   
278. Other distribution formats have had a more limited impact.  Convenience store chains have 
only been successful in major cities.  For instan ce a number of local as well as foreign chains 
(Lawson, Dairy Farm, 7-Eleven) are expanding quic kly in Beijing and Shanghai.  Japan's Lawson has 
increased its stores in Shanghai to more than 280 , while 7-Eleven Japan has opened 30 stores in 
Beijing through a joint-venture.  Direct selling is  still developing, as regulations were introduced 
in 2005.  Foreign companies with a substantial pr esence include Amway, Avon, and Mary Kay.  After 
                                                      
267 Economist Intelligence Unit, p. 19. 
268 MOFCOM (2007a). 
269 MOFCOM (2007a), p. 107. 
270 Top retailers include local players such as Beijing Hualian, Lianhua, China Resource Enterprise, 
Hualian Supermarket and Shanghai Nonggongshang.  Foreign distributors include Carrefour, Auchan, Wal-Mart, Tesco, Metro, AS Watson and CP Seven Eleven (MOFCOM (2007a), p. 108). 
271 MOFCOM (2007a), p. 108. 
272 According to the International Franchise Associa tion, about 50 U.S. franchises are doing business in 
China (China Chain Store & Franchise Association, "Franchises in China could soar", 27 February 2007.  
Viewed at:  http://www.ccfa.or g.cn/English/news_show_2005.jsp?id=36192 [9 July 2007]). 
273 For example, the sports compan y Li Ning has more than 2,500 franchisees (China Law & Practice 
(2007a)). China WT/TPR/S/199 
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direct selling had been banned in 1998, a number of  direct selling companies opened retail networks 
so as to build brand awareness and business.  Amwa y's sales in China totaled Y 10 billion in 2003, 
making China its largest market worldwide.274 
(b) Regulatory framework 
279. Although the liberalization process first started in 1992 by allowing the establishment of some 
joint-ventures, major reforms in the sector are th e result of the China's GATS commitments.  These 
provided for a step-by-step incr ease in access to foreign suppliers, in particular under mode 3 
(commercial presence).  For a number of products, fo reign participation was typically first allowed 
through joint venture, then foreign majority owners hip was allowed, and later, wholly foreign-owned 
enterprises were allowed.  The range of products th at foreign enterprises can sell has also increased 
over time, as has the geographical scope of their operations (for retailing).  China still maintains 
certain restrictions, for example, suppliers with mo re than 30 outlets may not sell certain products.   
Wholesaling and commission agents services  
280. The Administrative Measures on Foreign Investment in Commercial Fields (MOFCOM,  
2004) stipulate the removal of limitations for fore ign suppliers to practice in the sector.  These 
measures - which also applied to retailing a nd franchising - include provisions on licensing 
requirements and approval procedures.  Wholesale co mpanies may sell products on a wholesale basis, 
act as a commissioned agent, import and export produc ts, and provide related services.  Examination 
and approval of applications is by MOFCOM's local departments.275  Upon approval, a company may 
combine retail and wholesale activities.  For such co mpanies, retailing of some products is subject to 
specific regulations set out in different administrative measures.276   
281. China has granted 17 licences for the wholesale distribution of oil products, mostly to  
domestic private companies.277  In June 2007, two foreign joint-ventures, with Sinopec Fujian 
Refining & Petrochemical Co. Ltd (FRPC), and Sino pec SenMei (Fujian) Petroleum Co. Ltd (SSPC), 
both of which are partly owned by ExxonMobil a nd Saudi Aramco, were approved to enter the 
domestic wholesale oil product market.  These were the first licences granted to companies with 
foreign investment.278  The regulation that authorizes PetroChina and Sinopec as the only final oil 
                                                      
274 PriceWaterhouseCoopers (2007a);  and KPMG (2006). 
275 China Daily,  "Investors Enjoy Easier Access to Distribution Firms", 27 February 2006. 
276 The distribution of specific products - also for retailing - is subject not only to the Administrative 
Measures on Foreign Investment in Commercial Fields, but also to the Measures for Administration of the 
Market of Processed Oils, the Meas ures for Administration of the Market of Crude Oil, Administrative 
Measures on Refined Oil Market, the Measures for the Implementation of the Administration of Automobile Brand Sales, the Measures for the Administration of Chinese-Foreign Cooperative Audio-video Product 
Distribution Enterprises, and the Measures for the Administration of Foreign-Funded Distribution Enterprises of 
Books, Newspapers, and Journals. 
277 Market Avenue, "China Issues Crude Oil And Oil Products Trading Licences", 6 August 2007. 
278 On 28 July 2007, the Ministry of Commerce (MOFCOM) granted the first licences to distribute 
crude oil to PetroChina, Sinopec, CNOOC Refining & Petrochemical Co., Sinochem International Corporation and China Arts Huahai Import & Export  Corporation.  PetroChina and Sinopec also obtained licences for crude 
oil storage. PetroChina, Sinopec, CNOOC, and Sinoch em are China's largest stat e-owned oil companies.  
MOFCOM also granted six oil product wholesale licences to China Arts Hu ahai Import & Export Corporation, 
Liaoning Fangyuan National Reference Petrol Co. Ltd, Dongming China Petroleum Fuel & Petrochemicals, 
Xinjiang Zetian Petroleum & Chemicals Co. Ltd, Maoming Gang'an Petroleum & Chemicals Co. Ltd and 
Ningxia Baoneng Industry Co. Ltd, as well as five oil product storage licences to Maoming Gang'an Petroleum & Chemicals Co. Ltd, Jiedong Tonghui Energy & Chemi cal Co. Ltd, Xinjiang Zhong You Chemical Group Co. WT/TPR/S/199 Trade Policy Review 
Page 178 
 
 
product distributors still stands, thus other companie s must still sell and purchase oil products to and 
from these two companies.  
Retailing services 
282. The authorities aim to facilitate foreign par ticipation in wholesale trade and commission 
agents' services as described in the Administrativ e Measures on Foreign Investment in Commercial 
Fields, issued by MOFCOM in April 2004.   
283. Other regulations affecting retailers allo w authorities not to grant licences if urban 
commercial network plans have not been finalized.  New rules on large stores (outlets of more than 
10,000 sqm) are being reviewed by the State Counc il.  These rules will require public hearings on the 
impact on communities of such stores;  a panel co nsisting of regulators, competing retailers, and 
representatives of local residents will be in charge of the assessment.279  According to the authorities, 
most large and medium-size cities (e.g. Dalian and Xiamen) have made plans for the establishment of 
large stores, and have organized public hearings to  discuss impact of these rules on competition (e.g. 
to avoid concentration of the same type of stores), and on the environment. 
284. Incentives are granted by MOFCOM for the estab lishment of certain retail stores (e.g. small 
convenience stores) in rural areas.  The incentives ar e usually in the form of government grants, and 
are higher if stores are established in western China. 
Franchising 
285. The Government recently adopted a new lega l regime for franchising, including the 
Regulations for the Administration of Commercial Franchising, the Measures for the Administration 
of Filings of Commercial Franchising, and the Measures for the Administration of Information 
Disclosure of Commercial Franchises, issued by  MOFCOM effective 1 May 2007.  The new rules 
relax the requirement for a franchisor to have two outlets in China for one year to be allowed to 
franchise, but maintain the requirement for two di rectly operated outlets, although not necessarily in 
China.  In addition, the franchisor is no longer requi red to bear all liability for the quality of products 
provided by the designated suppliers.280 
286. The new rules impose a requirement on franchisors  to file a record with MOFCOM within 
15 days of execution of the franchise contract.  If all requirements are met, the registration will be granted within ten days and the filing published on MOFCOM's webs ite.  The new rules also require 
the franchisor and franchisee to specify in the franchise agreement the period during which the 
franchisee can unilaterally rescind the agreement.  The franchisee is allowed to rescind the contract if 
the franchisor conceals relevant inform ation or provides false information.
281   
Direct selling 
287. Direct selling, which typically refers to door-to-door sales by representatives, has been 
allowed in China since December 2005.282    This is after a seven-year ban on direct selling 
                                                                                                                                                                     
Ltd, Urumqi County Petroleum Co. Ltd, and Xinjiang Zetian Petroleum & Chemicals Co. Ltd ( Market Avenue,  
"China Issues Crude Oil and Oil Produc ts Trading Licences", 6 August 2007). 
279 China Foreign Law & Practice (2006). 
280 China Law & Practice (2007b). 
281 China Law & Practice (2007b). 
282 The Regulations for the Administration of Direct  Selling entered into force on 1 December 2005. China WT/TPR/S/199 
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operations, due to concerns about certain fraudulent pyramid schemes.283  Between December 2005 
and June 2007, MOFCOM received applications fro m 24 foreign-invested direct selling enterprises 
and approved 14 of them284;  five applications had been received from domestic companies 
by September 2007. 
288. Under the regulations, compensation to a sales representative must be based only on sales 
revenues and cannot exceed 30% of such revenues.  So-called "single-level direct selling" (where 
sellers receive compensation solely on the basis of their own sales revenues) has become the only 
legitimate way of operating direct selling since mu lti-level selling (where se llers receive additional 
compensation based on sales by sellers they themse lves engaged) is associated with banned pyramid 
schemes.  Single-level direct selling might be easier  for authorities to control, including for consumer 
protection.285  
289. Foreign suppliers must establish a commercial presence to conduct direct selling activities in 
China.  Applications must be submitted to a pr ovincial branch of MOFCOM and a decision for 
approval is taken within 90 days.  The minimum capital requirement is Y 80 million, and a security 
deposit of Y 20 million is payable at the time of es tablishment;  this is adjusted over time.  These 
requirements apply equally to fo reign and domestic suppliers.  Ot her provisions for direct selling 
enterprises include:  not requiring sales representatives to pay certain fees or purchase  certain goods 
as a condition for hiring them;  allowing the cons umer to demand product replacement or return 
during the first 30 days if the products have not been  unpacked;  and the need to establish a branch in 
each province where direct selling takes place as well a store in each district where the direct sellers 
operate.286  MOFCOM and SAIC issued the list of  products allowed for direct selling, on 
2 November 2005, which includes cosmetics, health food, cleaning products, health care equipment, 
and small kitchen utensils and appliances.287  
290. Foreign investors must have at least three y ears of overseas direct selling experience, to be 
allowed to operate in China.  The authorities indi cate that this does not apply to domestic companies 
because, until recently, they had been prohibited from direct selling.288   According to the authorities, 
direct selling enterprises can operate in all pr ovinces, and there are no quantitative limits on 
branching. 
(vii) Postal services 
291. The evolution of China's postal and express de livery services has been mixed over the past 
two decades.  On the one hand, fast growth and in creased competition have dramatically changed the 
structure of the sector.  On the other hand, regulat ory reform is lagging behind and a new regulatory 
framework has yet to be established. 
                                                      
283 Pyramid schemes remain banned through the Regulations for the Prohibition of Pyramid Selling, 
which entered in effect on 1 November 2005. 
284 Xinhua News Agency,  "19 Companies licensed to conduct direct selling", 8 May 2007.  The 
14 foreign suppliers are:  Avon, Nu Skin Daily-use & Health Products, Pro-Health, Ningbo Yofoto Commodity, 
Oriflame Cosmetics, Kaslyju, For Your Health Tech nology, Marykay Cosmetics, Amway, Perfect, Guandong 
Apollo, Nanfang Lee Kum Kee Co., Herb alife Health Product s, and Shaklee. 
285 See World Federation of Direct Selling Associ ations online information.  Viewed at:  
http://www.wfdsa.org. 
286 China Trade Law & Practi ce (2005a) and (2005b). 
287 Ministry of Commerce and State Administration for Industry and Commerce, Announcement (2005) 
No. 72 Announcing the Scope of Products that May be Sold Directly, 5 November 2002. 
288 WTO document S/C/M/85, 12 December 2006, para. 26. WT/TPR/S/199 Trade Policy Review 
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(a) Market overview 
292. China's State Post Bureau functioned as both postal administrative authority and business 
operator until 29 January 2007 when it was split into two entities:  a new State Post Bureau and China 
Post Group Corporation. 
293. Both foreign and domestic private express deliver y companies have engaged in international 
express letter services since the 1980s, and the State Post Bureau had to compete with them.  While 
the revenue of its letter mail service has increased st eadily over the past few years, the express mail 
services (EMS) has been its most profitable and f astest-growing business, representing about 24% of 
total annual postal services revenue (excluding revenue from postal savings).289  Express mail services 
revenue reached Y 8.06 billion in 2006, an  increase of 22.4% over the previous year.290  
294. China Post Group Corporation is a fully state-owned company operating in both postal and 
non-postal services, including letter mail service, parcel service, stamps, EMS, distribution of newspapers and periodicals, logistics, agen t and information service, and postal savings. 
295. China's express delivery market has been ope n to competition since the 1980s.  The four 
major international express delivery companies (DHL , FedEx, UPS, and TNT) all entered the market 
when the sector was opened and have gradually set up domestic networks in China, which are linked 
to their global networks.
291  The four companies have expanded business in China very quickly in 
recent years, including through the creation of wholly owned subsidiaries and the establishment of air cargo hubs or handling centres.  According to their own estimates, their business in China grew at an 
annual average of 50% in 2000-04.
292  China's international express delivery market is highly 
concentrated, as the four companies account for nearly 80%293;  the China Post Group Corporation is 
now the only domestic company that has the capacity to compete with them. 
296. There are now more than 2,000 domestic express delivery companies operating in the market, 
including state-owned and private companies.  These companies provide mainly domestic intra-city or inter-city express parcel delivery services.
294  DHL and FedEx have recently extended their business 
in China to domestic express parcel delivery services.295 
                                                      
289 WTO document S/C/M/85, 12 December 2006. 
290 WTO document S/C/M/85, 12 December 2006. 
291 In 1980, when China Post first founded its co mmercial arm, Express Mail Service (EMS), DHL 
entered China's express delivery market through an ag ent agreement with Sinotr ans, a fully state-owned 
shipping company.  FedEx and UPS also signed agent agreements with Sinotrans in 1984 and 1988, 
respectively.  In 1985, the first express delivery joint venture in Ch ina was established between DHL and 
Sinotrans, with registered capital of US$500,000 in a 50:50 partnership.  TNT, UPS and FedEx established their joint ventures in China in 1988, 1996 and 1999, respectively. 
292 European Express Association (2006). 
293 European Express Association (2006). 
294 The first (and only official) statistics of Chin a's express delivery services were published on 
29 June 2007 (State Postal Bureau online information.  Viewed at:  http://www.post.gov .cn).  At end 2006, there 
were 2,422 companies operating express delivery services, employing 227,000 people and generating total 
revenue of Y 29.97 billion, of whic h domestic express deliv ery services accounted for 60% and international 
express delivery services 40%.  Among those companies,  fully state-owned compan ies account for 1.7%, fully 
domestically-owned private companies 36.6%, other joint-stock companies and limited liability companies 
57.3%, and foreign-invested companies 2.4%.  
295 FedEx is now operating in more than 200 Chinese cities and plans to extend its network to another 
100 in the next few years.  (FedEx Press Release,  "FedEx Announces Plans for Expansion in China", China WT/TPR/S/199 
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(b) Regulatory framework and recent reforms 
297. China's main postal regulations include the Po stal Law and its Implementation Rules, which 
entered into force on 1 January 1987 and 2 November 1990, respectively.296  The State Postal Bureau 
is the competent authority for postal services.  In addition, there are postal bureaux within the regional 
and local governments (at provincial, municipality or  county level).  These bureaux were previously 
both administrative authorities and operators of postal services – "postal enterprises".297  Exclusive 
rights are granted to postal bureaux to handle letters  and other articles with characteristics of letter.298 
298. Express delivery services in China are not regulated by the postal administrative authority. 
Foreign express delivery companies must register  with MOFCOM, and are licensed by the State 
Administration of Industry and Commerce (SAIC).  Domestic express delivery companies must 
register with the provincial or local leve l Administration of Industry and Commerce. 
299. The Postal Reform Scheme, approved by the State Council in August 2005, called for the 
separation of  administrative functions from postal business activities;  the restructuring of postal supervision institutions and the setting up of China Post Group Corporation;  the reorganization of 
postal services and postal savings;  and the improvem ent of the mechanisms related to universal 
service, special service, safety guarantee, and pricing. 
300. As a result, China Post Group Corporation was formally established on 29 January 2007, 
marking the formal separation of business activities from administrative functions of the State Post 
Bureau.  The newly established Corporation is a full y state-owned company with registered capital of 
Y 80 billion.  The new State Post Bureau now serve s as the regulator of postal services;  its main 
functions include: making postal de velopment policies; drafting postal regulations; monitoring the 
postal market; regulating access to the postal ma rket; establishing postal services standards; and 
regulating tariffs.
299  More measures are to be taken to rest ructure the sector, to separate competitive 
and non-competitive activities of China Post Group Cor poration, and to define the operational scope 
of its subsidiaries.  
301. As part of the postal regulatory reform, the Stat e Post Bureau's first Express Delivery Service 
Standards became effective on 1 January 2008.  This document defines express service as well as 
various types of express services, such as urban, in land, and international services.  It also establishes 
criteria regarding the quality of express services and the capacity of enterprises wishing to engage in 
express services.  It specifies standards related to size and weight of delivery items, delivery time, 
pricing, express service contracts, and management  of express delivery enterprises.  In addition, it 
contains provisions to address complaints from custom ers.  According to an explanation by the State 
Post Bureau, the standards document is recomme ndatory, but it applies to all express delivery 
operators in the market, regardless of their legal nature.300 
                                                                                                                                                                     
24 October 2004.  Viewed at: http://www.fedex.com/cgi-bin/content.cgi?template=gb_pr&content=about/press 
releases/emea/ pr102404&cc=gb.) 
296 Article 2 of the Implementation Rules of the Postal Law.  The Ministry of Post and 
Telecommunications was the competent authority for post al services under the Stat e Council, administering 
postal services throughout the country.  In 1998, the Mini stry of Information Industry (MII) was established to 
replace the Ministry of Post and Te lecommunications and the Ministry of  Electronics, and the State Postal 
Bureau, established under the MII, became th e competent authority for postal services. 
297 Article 3 of the Implementation Rules of the Postal Law. 
298 Article 4 of the Implementation Rules of the Postal Law. 
299 See State Postal Bureau online informati on.  Viewed at:  http://www.post.gov.cn. 
300 State Postal Bureau online information.  Viewed  at:  http://www.post.gov.cn.  (In Chinese only) WT/TPR/S/199 Trade Policy Review 
Page 182 
 
 
302. China's Postal Law grants exclusive rights to the State Post Bureau to provide letter mail 
service (as reflected in China's GATS commitments).  Nonetheless, it would appear that this segment 
of the market has been de facto  open to competition.  Shortly after China's accession to the WTO, two 
Notices were issued to regulate the market fo r international express letter services, from 
December 2001 to February 2002.  These measures required domestic and foreign-invested express 
delivery companies to obtain "entrustment" from th e postal administrative authority and to comply 
with new weight and rate restrictions on the letters they could handle.301  Concerns were raised by 
some WTO Members about the consistency of th ese measures with China's horizontal "acquired 
rights" commitments under the GATS.302  After consultations with these Members, China issued two 
Notices (in September and October 2002) to simplif y the entrustment application process and remove 
the weight and rate restrictions.303  According to the authorities, the entrustment is not a second 
approval procedure.  Foreign companies' existing a nd new branches do not need separate entrustment.  
At end 2005, 167 international freight agencies and 327 branches engaged in international mail 
express delivery had obtained the Postal Entrustment Certificate.304   
303. Efforts have also been made to amend the appa rently outdated Postal Law.  According to the 
authorities, draft amendments are being prepared  after soliciting opinions from domestic and foreign 
companies.   
(viii) Legal services 
(a) Market overview 
304. The provision of legal services in China is segmented into services concerning Chinese law, 
and services relating to foreign law.  A foreign law fi rm's representative office is permitted to provide 
consultancy services on the laws of its practitione rs' home jurisdictions, and on international 
conventions and international prac tices.  In addition, it can be en trusted by clients or Chinese law 
firms to handle legal affairs of the country where th e lawyers of the law firm are permitted to practice, 
and can entrust, on behalf of foreign clients, Chinese  law firms to deal with Chinese legal affairs.  In 
doing so,  a foreign law firm's representative office  may enter into contracts to maintain long-term 
entrustment relations with Chinese law firms.305  A foreign law firm representative may also provide 
clients with information on the impact of the Chinese legal environment.306   
305. The numbers of Chinese law firms and the repr esentative offices of foreign and Hong Kong 
SAR law firms have grown steadily since 2002 (Table  IV.10).  All foreign law firms' representative 
                                                      
301 Notice No. 629 issued by MII,  MOFTEC, and SPB on 20 December 2001; Notice No. 64 issued by 
SPB on 4 February 2002.  "Entrustment" means that the postal administrative authority will allow qualified 
enterprises to conduct international e xpress delivery services after registra tion in accordance with relevant laws 
and regulations.  
302 Communications respectively from the EC, the United States, and Japan, contained in WTO 
documents S/C/W/211, S/C/W/212 and S/C/W/213. 
303 Notice No. 472 by MII, MOFTEC, and SPB of 5 September 2002, and Notice No. 556 issued by 
SPB. 
304 Information provided by MOFCOM. 
305 No statistics are available on th e number of short- and long-term  entrustments. According to the 
authorities, compilation of information in that regard only began in 2007. 
306 The scope of business for foreign law firms represen tative offices is set out in almost identical terms 
in China's GATS Schedule of Specific Commitments, GATS /SC/135, p. 6;  and Article 15 of the Regulations on 
Administration of Foreign Law firm's Representative Offi ces in China;  Decree No. 338 of the State Council, 
published on 22 December 2001, and effective  1 Janu ary 2002, henceforth "the Regulations". China WT/TPR/S/199 
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offices are 100% foreign owned.307  At the end of 2006, these foreign-funded law firms employed 
410 lawyers.  
Table IV.10 
Law firms and representative offices, 2002-07  
Year Hong Kong-funded representative 
offices  Foreign-funded representative 
offices Domestic-funded law firms  
2002 25 91 10,873 
2003 35 116 11,593 
2004 45 144 11,823 
2005 54 165 12,428 
2006 59 179 13,096 
31 July 2007 60 191 .. 
.. Not available. 
Source: Data provided by the Chinese authorities. 
306. Foreign and Chinese local firms generally wo rk together on large M&A deals and cross-
border matters;  foreign firms ensure that deals are in accordance with inte rnational standards and 
local firms ensure compliance with Chinese law.  
(b) Regulatory framework 
307. With the elimination of geographic and quantita tive limitations a year after China's accession 
to the WTO, foreign law firms are entitled to ope rate one or more representative offices in all 
provinces.  Foreign lawyers working in representative offices must be members of a bar or law society 
of a WTO Member and have practiced for no less than  two years outside of China.  They must reside 
in China for at least six months per year.  For a foreign lawyer employed by representative offices to 
have "representative" status, the foreign law firm must apply to and obtain approval from the 
competent authorities.  Foreign lawyers can be employed by the representative offices as "support staff", who must not provide legal ser vice to the clients.  The chief representative must be a partner or 
equivalent (e.g., member of a law firm of a limit ed liability corporation) of a law firm of a WTO 
Member and have practiced for no less than thr ee years.  A representative office may not employ 
Chinese national registered lawyers.   
Licensing and other regulations 
308. The licensing system is based on a two-tier ex amination process, involving legislative and 
administrative authorities of provinces where th e representative offices are based, as well as the 
judicial administration department of the State C ouncil (Ministry of Justice), who effectively grants 
the licences to establish a representativ e office and post representatives. 
309. In order to obtain a licence, a law firm must meet the requirements set out in China's GATS  
schedule regarding representatives and the chief repre sentative (in particular two and three years prior 
practise outside China, respectively);  it must have  been practicing lawfully in its home country and 
never been subject to punishment for a violation of lawyers’ professional ethics or practicing 
                                                     
 
307 The representative offices in mainland China come from 19 countries (i.e. Australia, Brazil, Canada, 
France, Germany, India, Italy, Japan, Jordan, Korea,  the Netherlands, Norway, Si ngapore, Spain, Sweden, 
Switzerland, the United Arab Emirates, the United Ki ngdom, the United States) and 1 region (Hong Kong 
SAR). WT/TPR/S/199 Trade Policy Review 
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disciplines;  and "practical need" must exist to establish a representative office in China to conduct 
legal service.308  This is determined according to the so cial and economic development status of the 
place of domicile of the representative office to be established;  the need for legal service development in the place of domicile of the represen tative office to be established;  the applicant's 
scale, time of establishment, major business areas and professional specialties, analysis of the 
business prospect and planning of future business deve lopment;  and restrictions in China's laws and 
regulations on specific legal services or affairs.
309 
310. Licence application documents are submitted to th e judicial administration department in the 
location of the proposed representative office.  These  bodies must complete their examination within 
three months and submit their opinions and the appl ication documents to the judicial administration 
department of the State Council for re-examinatio n;  the State Council takes a decision within 
six months, and if the application is successful, issues a licence certificate to practice.310 
311. A law firm must have a registered representa tive office for three successive years in China 
before it may open an additional representative office.311  The licensing process is the same as for the 
initial office.  A representative in one office cannot concurrently act as a full-time or part-time 
representative in another office.312  Authorization by the judicial administration department of the 
State Council is required for a change of name of a representative office or the reduction or 
representatives. 
312. Foreign law firms' representative offices are s upervised and administered by the judicial 
administration department of the State Council a nd the province, autonomous region or municipality 
directly under the Central Government.313  They must register annually314, and submit annual 
information on their performance of legal services, including those entrusted to Chinese law firms.  
They must also provide audited financial statemen ts and documents verifying that all accounts have 
been settled and taxes paid. 
313. There are no restrictions on fees charged by representative offices.  It would appear that 
foreign representative offices usually charge on an h ourly basis, while Chinese law firms charge fees 
in various ways, such as on a flat fee, hourly, or contingency basis, or proportional to the amount in 
dispute.  
314. As mentioned above, foreign law firm's represen tative offices may engage in short-term or 
long-term entrustment activities with Chinese law firm s.  While the term entrustment is not defined, 
Articles 39 and 40 of the Implementing Provisions (D ecree 73) clarify that a foreign law firm cannot 
invest in a Chinese law firm, operate on an associat e basis, establish joint o ffices, dispatch personnel 
to work in a Chinese law firm, or manage, operate, or control any equity interests in a Chinese law 
firm.  Foreign representative law offices may not employ licensed Chinese lawyers;  any agreement 
on profit or risk sharing and any payment of fees, remuneration, or dividends between such offices and licensed Chinese lawyers are prohibited.  
                                                     
 
308 Articles 6 and 7 of the Regulations. 
309 Article 4 of the Provisions of the Ministry of Justice on the Execution of the Regulations on the 
Administration of Foreign Law Firms’ Representative offi ces in China (Decree No. 73 of  Ministry of Justice, 
modified by Decree No. 92 of Ministry of Justice and implemented on 2 September 2004), henceforth "Decree 
No. 73". 
310 Article 9 of the Regulations. 
311 Article 10 of Decree No. 73. 
312 Article 18 of the Regulations. 
313 Article 21 of the Regulations. 
314 Article 10 of the Regulations. China WT/TPR/S/199 
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315. Foreign lawyers are not allowed to practice Chinese law.  Chinese nationals that are 
permanent residents in the Hong Kong SAR and allo wed to practice law there may qualify to practice 
Chinese law upon passing the state judicial examination and obtaining the legal professional qualification and practicing certificate. 
Commercial arbitration 
316. Commercial arbitration is a growing market.  The China International Economic and Trade 
Arbitration Commission (CIETAC) remains among th e busiest arbitration centres in the world.  
Representative offices and their representatives may par ticipate as agents in foreign arbitration cases 
involving Chinese laws and foreign laws (or inte rnational laws) simultaneously, and present opinions 
or comments on foreign laws and international la ws.  However, they are prohibited from giving 
opinions or comments on Chinese laws in arbitration.  
(ix) Accountancy services 
(a) Market overview 
317. According to the Chinese Institute of Certified Public Accountants (CICPA), total revenue of 
certified public accountants (CPAs) in 2006 exceed ed Y 22 billion.  The CICPA, founded in 1988, 
exercises its functions in accordan ce with the Law on Certified Public  Accountants, the Charter of the 
Chinese Institute of Certified Public Accountan ts, and other relevant laws and regulations.
315 
318. The responsibilities of the CICPA include monitoring the service quality and professional 
ethics of members and regulating the CPA profession according to the relevant laws.  At end January 2008, the CICPA had more than 6,300 group members (accounting firms, including six Sino-
foreign companies), and over 150,000 individual members, among whom about 80,000 were 
practicing members.  CICPA has been a member of the Confederation of Asian and Pacific Accountants (CAPA) since October 1996, and the International Federation of Accountants (IFAC) 
since May 1997. 
(b) Regulatory framework and recent reforms 
Accounting and auditing standards  
319. The Ministry of Finance issued a new Accoun ting Standard System for Business Enterprises 
in February 2006;  the Standards, applicable to listed companies, entered into force on 
1 January 2007.  According to the authorities,  the Chinese standards differ from international 
standards only in a few aspects.  China has made sign ificant effort to narrow those differences;  since 
2005, it has held a series of meetings with the In ternational Financial Reporting Council with the aim 
of improving harmonization.  New Auditing Standard s for Certified Public Accountants have been 
applied since 1 January 2007. 
Licensing and qualification re quirements for individuals 
320. The accountancy profession in China is regulated by the Accounting Law, and the Law on 
Certified Public Accountants.  The national examinati on is a required qualification.  To apply for the 
examination, candidates must abide by accounting la ws and other financial la ws/regulations;  have 
good moral conduct;  and have basic know ledge and skills of accounting.   
                                                     
 
315 CICPA online information.  Viewed a t:  http://www.cicpa.org.cn/english.htm. WT/TPR/S/199 Trade Policy Review 
Page 186 
 
 
321. A CPA qualification is required in order to pr ovide CPA auditing service.  Holders of the 
national CPA examination who have been engaged in auditing services in China for more than 
two years can register as CPAs.  Citizens of  Hong Kong SAR, Macao SAR and Chinese Taipei are 
accorded national treatment in regard to the issuan ce of a Chinese CPA certificate;  foreigners are 
accorded national treatment based on the principle of  reciprocity.  Residents of Hong Kong or Macao 
SARs that meet requirements specified in the Pr ovisional Regulatory Rules on the Qualification for 
Accounting Technicians are allowed to participat e in the exams of the Accounting Technician 
Qualification.316  
Licensing system for accountancy firms 
322. According to the Interim Measures for the Examination, Approval and Supervision of 
Accounting Firms (Order No. 24 of the Ministry of Finance), any Chinese certified public accountant (including Chinese and foreign citizens with Chinese CPA certification) may apply to establish a 
partnership accounting firm or a limited liability acc ounting firm.  The requirements for a partnership 
are:  two or more partners;  a written partnershi p agreement;  a name for the accounting firm;  and a 
fixed office.  To establish a limited liability accounting firm, there must be:  five or more 
shareholders;  a fixed number of full-time professiona l staff;  registered capital of not less than 
Y 300,000;  articles of association jointly drawn up by  the shareholders;  a company name and a fixed 
office. 
323. Partners or shareholders of an accounting fi rm must:  hold the Chinese Certified Public 
Accountant Certificate (CPAC);  be full-time prac titioners in an accounting firm;  not have been 
subject to administrative punishment due to accountan cy practice within the three previous years;  
have had relevant auditing experience in accounting firms, as a CPAC holder, for the five previous 
consecutive years, of which at least three years in China;  and have not been rejected, disapproved or 
revoked as an accountant the year prior to becoming a partner or shareholder. 
324. To establish a branch, an accounting firm must, inter alia , have a sound internal management 
system;  consists of at least 50 CPAs (excluding th e CPAs to practice in the branch);  have most 
recent year-end aggregate net assets and professional  risk fund of not less than Y 3 million (for a 
limited liability accounting firm) or not less than Y 1.5 million (for a partnership accounting firm). 
Scope of permitted activities of foreign accountancy firms  
325. Under the Law on Certified Public Account ants, public accounting firms may undertake 
statutory audit services of certified public accountants, including examining companies' statements of 
accounts and producing audit reports;  producing capital verification reports;  and audit services in 
regard to mergers, divisions or liquidations.  With  permission from the Ministry of Finance, foreign 
public accounting firms can establish resident representative offices and undertake professional 
services temporarily in China, but they may not unde rtake statutory audit services of certified public 
accountants. 
326. According to the Provisional Regulations on Resident Offices of Overseas Public Accounting 
Firms, the business scope of resident offices of fo reign public accounting firms include providing 
accounting, tax, and other services to foreign clients that invest or do business in China, and providing 
information on international taxa tion and other consulting services to Chinese clients.  Under the 
Interim Regulation on Audit Services Supplied Tem porarily by Foreign Public Accounting Firms in 
China, these temporary services are limited to tho se undertaken by their pa rent companies abroad. 
                                                     
 
316 APEC (2006). China WT/TPR/S/199 
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(x) Tourism 
(a) Market overview 
327. Tourism is China's largest services export, a nd its second-largest service import;  both exports 
and imports have risen rapidly in recent years (Table IV.11).  According to Chinese government 
figures, as reported to the United Nations' World To urism Organization (UNWTO), China received an 
estimated 49.6 million visitors (overn ight tourists) in 2006, and ranked 4th in the world behind France, 
Spain, and the United States.  However, tourist arri vals increased by 6.6% in 2006, down from 12% in 
2005, perhaps influenced by the appreciation of renminbi.  China ranked 5th in terms of receipts in 
2006, at an estimated US$33.9 billion, behind the Un ited States, Spain, France, and Italy.  With 
respect to outbound tourism, 34.5 million Chinese trav elled abroad in 2006, an increase of 11% over 
2005, while spending increased by 16%.  In 2006, China ranked 6th worldwide in tourism 
expenditures, at an estimated US$24.3 billion, be hind only Germany, the United Kingdom, the United 
States, France, and Japan.317 
Table IV.11 
China's international tourism receipts and expenditures 
(US$ billion) 
 1995 2000 2004 2005 2006 
International receipts 8.7 16.2 25.7 29.3 33.9 
International expenditures 3.7 13.1 19.1 21.8 24.3 
Source: World Tourism Organization (2007), World Tourism Barometer, Vol. 5, N° 2, June 2007.  
(b) Regulatory framework and recent reforms 
Hotels and restaurants 
328. Occupancy rates for hotels in Beijing and Sh anghai were 74.1% and 69.5%, respectively, 
in 2006, down from 75.9% and 72.6% in 2005.318  There are some 4.3 million hotels and restaurants in 
China employing around 33 million people.  With in the four- and five-star hotel sector, about 
170 additional hotels have been promised to th e International Olympic Committee, through new-
builds and reconstruction.319  The economy sector is also growing rapidly:  it is estimated that at 
end 2006, there were more than 100 economy hot el brands in the China market, owning over 
1,000 hotels, nearly double the previous year's figures;  domestic brands face stiff competition from foreign brands.
320 
329. Since its accession to the WTO, China has gradua lly opened its hotel market to international 
development and competition.  By end 2005, it had ope ned the market for foreigners to invest in 
hotels, restaurants, and other mixed-used real est ate development projects.  International competition 
has posed great challenges for domestic hotels, of  which 57% were owned by various government 
entities.  The performance of many domestic hotel s lagged behind that of internationally managed 
operations due mainly to management inefficiency.  To prepare domestic hotels – particularly state-
owned hotels – for global competition, the Government  has initiated fundamental reforms in the hotel 
industry.321  According to the authorities, there are no limitations on foreign investment in the hotel 
sector.  However, international brands, particularly  in the luxury segment, prefer to sign management 
                                                      
317 UNWTO (2007), No. 2, June. 
318 UNWTO (2007), No. 1, January. 
319 WTTC (2006). 
 320 China Retail News,  30 April  2007. 
321 Yu and Gu (2005), p. 153. WT/TPR/S/199 Trade Policy Review 
Page 188 
 
 
agreements with the hotels' owners.  In the case of  medium-sized economic hotels, there is a tendency 
to invest directly, because of market potential.  At end 2006, there were 302 five-star hotels in China, among which 57 were foreign-invested;  among the 1, 369 four-star hotels, 65 were foreign-invested. 
Travel agencies and tour operators 
330. Foreign investment in travel agencies and tour operators is regulated by the Regulations on 
the Administration of Travel Agencies, and the In terim Provisions on the Establishment of Foreign-
Controlled and Wholly Foreign-funded Travel Agencies.  In February 2005, the National Tourism Administration and MOFCOM jointly issued amendm ents to the Interim Provisions, which reduced 
the minimum registered capital requirement for sino-foreign and wholly foreign-owned travel 
agencies from Y 4 million to Y 2.5 million;  geographical limitations to foreign-invested travel 
agencies were eliminated.  After amendments to rele vant laws and regulations, foreign travel agencies 
are to be allowed to establish new branches in China.  Minimum capital requirements are 
Y 1.5 million for a Chinese-owned international tr avel agency and Y 300,000 for a domestic travel 
agency. 
331. Joint-venture travel agencies with foreign majo rity share ownership have been allowed since 
1 January 2003, and wholly foreign-owned travel agencies since 31 December 2005.  At mid 2007, there were 29 foreign-invested travel agencies, including 12 wholly foreign-owned and nine foreign 
controlled;  total revenue of foreign-invested trav el agencies represented 1.6% of the total industry 
revenue (inbound and outbound tourism).  Foreign-invest ed travel agencies are not allowed to conduct 
outbound travel business.   
Approved destination status 
332. According to the authorities, all countries may a pply for approved destination status (ADS) as 
an overseas destination for Chinese citizens.  China introduced th e ADS for reasons related to 
protecting the safety, as well as the legitimate rights and interests of Chinese citizens travelling out of 
China.  The authorities state that ADS is granted upon application.
322  At end December 2007, 
Chinese (mainland) nationals may visit 134 countries and regions, up from 18 in 2001, with a total of 
86 destinations approved for group travel.  Competiti on between destinations for China's tourists has 
intensified greatly.323 
Foreign exchange requirements 
333. According to the authorities, travel agenci es may purchase foreign exchange from a bank 
based on their actual needs.  Travellers can buy fo reign exchange for personal use directly from the 
banks.  Travellers planning to stay abroad for l ess than half a year may buy the equivalent of 
US$5,000 in foreign exchange, by providing their passport and a valid visa.  For a longer stay, travellers are allowed to buy up to US$8,000.  In  addition, travellers can make purchases in foreign 
countries using foreign currency credit cards issued by banks in China.
324 
Tour guides 
334. No changes have been introduced to the re gulations governing tour guides since China's 
accession to the WTO.  Only Chin ese citizens may work, upon approval, as tour guides.  Applicants 
must pass an examination for tour guide qualifications. 
                                                      
322 WTO document WT/TPR/M/161/Add.1, p. 313. 
323 UNWTO (2007), No. 2, June. 
324 WTO document WT/TPR/M/161/Add.2, p. 112. China WT/TPR/S/199 
 Page 189 
 
 
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