RESTRICTED  WORLD TRADE  
ORGANIZATION  S/C/W/294 
21 November 2008 
 (08-5700) 
Council for Trade in Services Original:   English 
  
 
COMMUNICATION FROM THE UNITED STATES 
 
Transitional Review Mechanism Pursuant to Paragraph 18 of the Protocol of
  
Accession of the People's Republic of China ("China")  
 
 
 The following communication, dated 20 November 2008, from the delegation of the United States is being circulated to the Members of the Council for Trade in Services.  
 
 
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Questions from the United States to China  
  
I. DISTRIBUTION SERVICES:  SALES AWAY FROM A FIXED LOCATION 
1. China issued regulations in August 2005 governi ng sales away from a fixed location, or direct 
selling.  The United States supports China’s effort s to protect the public from fraud while opening its 
market to direct selling.  The United States notes that these efforts need not limit the growth of 
legitimate domestic and foreign direct selling operations.  
(a) Since the direct selling regulations became effective in December 2005, a number of 
companies, including foreign companies, received direct selling licenses.  However, 
the United States understands that, since May 2007, China has not approved any new applications for direct selling licenses even though 16 domestic and foreign companies have applied.  Can China explai n the factors that have caused it to delay 
its consideration of these applications?  Ca n China confirm that it will review these 
applications and approve a ny qualified applicants within the 90-day time period set 
forth in the direct selling regulations?   
(b) The United States understands that very few companies have been able to obtain 
licenses that would enable them to conduct direct selling in more than one province in China, which significantly restricts their ab ility to expand their businesses in China.  
Can China explain why it imposes these restrictions on the geographic scope of 
licenses?  
(c) The direct selling regulations provide that a direct seller in a particular province must 
operate a provincial office in the provincial capital and a “service center” in each district where the direct seller sells products to consumers.  Can China comment on whether it would be open to changing its requirements from one service center in 
each district to one service center in each city, with approval at the city level rather 
than the district level?  S/C/W/294 
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  (d) Article 7.2 of the direct selling regulations requires that foreign-invested companies 
have three years of direct selling experience in other markets to apply for a direct selling license in China, but does not impose the same or a similar requirement on domestic companies.  Will China change the provision in question so that the same 
requirements apply to both domestic and foreign companies?  
(e) The United States remains concerned that the direct selling regulations include a 
compensation cap for salespeople of 30 percent of sales revenue.  Based on international compensation practices, this  cap unnecessarily limits direct selling 
companies from sufficiently motivating thei r sales representatives.  Except for Korea, 
which has a compensation cap higher and more narrowly defined than that proposed 
by China, no country limits the income  received by direct sellers.  Will China 
consider amending its compensation practices to come into compliance with internationally accepted practices  regarding direct selling? 
(f) The direct selling regulations do not allow for compensation based on services 
rendered. This effectively denies payment fo r marketing services, and is a significant 
departure from international practice, including the United Nations’ Consumer 
Product Code under which pers ons engaged in direct selling may earn compensation 
from the sales of both products and services. Will China consider amending its compensation restrictions to come into  compliance with internationally accepted 
practices regarding direct selling? 
II. DISTRIBUTION SERVICES: RETAIL SERVICES 
2. The United States appreciates that, on 12 Se ptember 2008, China’s Ministry of Commerce 
(MOFCOM) issued a regulation providing that licen sing authority for foreign retailers seeking to 
establish a new outlet (or store) would be devolved from the central government level to the provincial government level.  This change could be an important step in facilitating the approval of 
new outlets, depending how the new appr oval process works in practice.   
(a) Can China confirm that the various prov incial licensing authorities will apply similar 
approval procedures and requirements to fo reign and domestic companies seeking to 
open new retail outlets?  
(b) Can China confirm that foreign retailers will no longer need to satisfy additional 
“informal” minimum capital requirements that  are not imposed on domestic retailers?  
(c) Can China confirm that it will apply any other requirements, including zoning 
requirements, on the same basis to foreign and domestic retailers?   
3. China’s GATS commitment to allo w majority foreign-owned chain store retailers with more 
than 30 outlets to sell motor vehicles was scheduled  to be implemented no later than 11 December 
2006.  However, it does not appear that China has i ssued regulations to implement this commitment.  
Can China confirm that this right is being provided?   If not, why not? 
III. DISTRIBUTION SERVICES:  CRUDE OIL AND PROCESSED OIL 
4. Can China explain the steps that it has take n to fulfil its GATS commitments regarding 
wholesale and retail distribution of crude oil and processed oil?   S/C/W/294 
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  IV. EXPRESS DELIVERY 
5. The United States is very concerned about certain  aspects of China’s current draft Postal Law, 
which is under consideration by the National Pe ople’s Congress and has been made available for 
public comment.  
(a) Articles 50 and 83 of the draft Postal  Law would exclude foreign express delivery 
service suppliers from its domestic express document delivery market.  In contrast, 
Chinese domestic express delivery companies would be allowed to provide a full scope of domestic express delivery servi ces – both document delivery and package 
delivery.  Please confirm that China will take the necessary steps to amend its draft Postal Law to remove this discriminatory element. 
(b) The draft Postal Law also contains other troubling elements, including the lack of a 
specific definition of the postal monopoly (instead of a weight-price multiple that is the international norm) and a universal pos tal fund requirement that would subject 
express delivery companies to additional tax es that would benefit China Post.  Please 
explain China’s rationale for imposing uni versal postal fund requirements on express 
delivery companies.  Please confirm that China will take these comments into account 
in re-drafting its draft Postal Law. 
6. Foreign express delivery companies have reported that China’s licensing process for trucking 
services is complicated and prolonged and serves as an impediment to the efficient supply of express 
delivery services.  Can China describe any plans it has to facilitate the granting of licenses for 
trucking services? 
V. TELECOMMUNICATIONS 
7. In the GATS Schedule accompanying its Protocol of Accession, China made commitments 
with regard to foreign equity and geographical limitations in the telecommunications sector.  What 
specific measures has China issued and implemented to reflect the phased-in liberalization of these 
commitments to date?   Are these measures public?  Please identify them.  
8. On 15 September 2008, through State Council Decree No. 534, China reduced minimum 
registered capital requirements for foreign-inv ested telecommunications enterprises engaged in 
national or cross-provincial basic telecommunica tion services from RMB 2 billion ($292 million) to 
RMB 1 billion ($146 million).  The United States not es this development but believes that this 
reduced capital requirement is still too high, both wh en viewed in relation to the norms in other 
economies and in the specific context of China' s telecommunications market. During a past 
transitional review, China asserted (in document S/ C/M/85 at para. 30) that “such requirement was 
necessary both to guarantee the normal business operation and to safeguard the interests of users of 
telecommunication services, as the telecommunica tions industry was a capital-intensive industry 
involving economies of scale.”  While many operato rs focus on capital-intensive operations and seek 
market advantages and efficiencies based on economi es of scale, it is not necessary to adopt this 
approach to succeed in telecommunications markets,  either in China or elsewhere.  Thus, China 
appears to be restricting market entry through this requirement to a subset of the potential 
telecommunications market entrants (i.e., large, highly capitalized enterprises).  In many cases, the 
current high capital requirement appears to be an arbitrary hindrance to legitimate and rational 
business models that should be permitted based on Ch ina’s WTO commitments.  For example, resale-
based operators, operators offering services over high-s peed Internet connections, such as VOIP, and 
providers of niche services, such as leased line ser vices or corporate data services, targeting a limited 
number of customers, require very little capital to operate.  Even for capital-intensive services, if 
relying on infrastructure located substantially ou tside of China (e.g., satellite-based services, or S/C/W/294 
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  submarine-cable based services), there would appear to be no reason to need to invest significantly in 
China to provide a broad range of services.  As th e United States has noted during past transitional 
reviews, the fact that there has been little or no new entry in China’s basic telecommunications sector 
suggests that this high capital requirement is func tioning as a market entry deterrent, for both Chinese 
and foreign operators.   
(a) Has this capital requirement reduction r esulted in any new entry into the basic 
telecommunications market? 
(b) Will China consider significantly reducing its capital requirement for basic 
telecommunications services? 
9. In paragraph 314 of the Working Party Report accompanying China’s Protocol of Accession, 
China agreed to permit foreign app licants in any sector subject to joint venture requirements to freely 
choose a joint venture partner, even from outside the sector being applied for.  In response to a 
question at a past transitional review about wh y China prohibits partnering with non-incumbent 
telecommunications operators, China stated that “the number of licenses for basic telecommunication services was limited due to the scarcity and avai lability of such scarce resources as frequencies, 
numbers and rights of way.”  China went on to expl ain that most of the frequencies and other scarce 
resources had already been allocated to existing ope rators.  This response, however, raises the same 
concerns described above.  Many legitimate services, such as resale-based services, Internet-based 
services, niche-services and services based on infrastruct ure located outside of China, can be provided 
without competing for scarce resources.   
(a) Even where scarce resources are implicated, as in the cases of rights of way, numbers 
or frequencies, what evidence does China ha ve to demonstrate that these resources 
are exhausted, particularly given the eviden ce that incumbents continue to grow at a 
rapid rate?   
(b) What measures has China introduced to ensure that scarce resources can be 
efficiently shared among competitors?  H as China introduced number portability or 
sharing access to physical infrastructure and rights of way? 
(c) Given that China has no more than two or three telecommunications operators  in each 
major market segment, i.e., wireless, fixed and satellite, it is hard to conceive of 
resource exhaustion, when major markets t ypically support dozens, even hundreds of 
operators in certain segments.  Doesn’t China have significan tly unused spectrum 
(i.e., over 100 megahertz) that has yet to be  released to the market given the Chinese 
government’s concern over whether Chinese consumers are ready for 3G wireless 
services?   
(d) As the United States has noted above, to date, there have been no cases of China 
issuing licenses in the basic telecommuni cations sector where the Chinese joint 
venture partner was not also an existing basic telecommunications licensee.  
Although Chinese officials have justifie d preventing additional market entry as 
prudent market management, designed to prevent “excessive competition”, how is such a policy consistent with (i) China’ s commitment not to limit the number of 
market participants, (ii) China’s commitmen t not to employ an economic needs test 
and (iii) China’s commitment to permit fo reign companies free choice of joint-
venture partners? 
10. Please provide an update on the number, natu re and foreign affiliation of both basic and 
value-added service suppliers now operating in China.  S/C/W/294 
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  11. In paragraph 309 of China’s Working Party Report, China agreed that, upon its accession to 
the WTO, the organizations regulating services indu stries in China would be independent of the 
services suppliers they regulate.  Section 5 of the Basic Telecommunications Reference Paper also specifically calls for an independent telecommunica tions regulator that is separate from, and not 
accountable to, any supplier of basic telecommunicati ons and makes decisions on an impartial basis.  
What structural mechanisms within the Minist ry of Industry and Information Technology (MIIT) 
ensure that MIIT’s role in industrial promoti on (e.g., for TD-SCDMA) does not conflict with its 
obligation to be impartial?  How does China reconcile  an obligation of its regulator to be impartial 
with a measure providing advantages for deploying TD-SCDMA (such as loan s, more rapid approval 
of a standard, preferential test licenses, policy support, etc.)?  
12. China has repeatedly stated its commitm ent to licensing wireless technologies in a 
technology-neutral manner, letting operators  choose technologies solely on commercial 
considerations.  The United States is very concer ned that China’s TD-SCDMA 3G “test project” is 
already establishing a serious commercial foothold in  the China market, an opportunity denied to 
suppliers of competing 3G services.   
(a) When will China formally begin licensing 3G providers to introduce competition in 
this key sub-sector?   
(b) Does China’s commitment to technol ogy neutrality extend to all wireless 
technologies, including wireless broadband technologies such as WiMax, or only established 3G technologies?  Please explain. 
(c) What steps has China taken to ensure that procedures for the allocation of frequencies 
for all such services are administered in  an objective, timely, transparent and non-
discriminatory manner, consistent with China’s Reference Paper commitments? 
13. Please provide an update on China's draft Telecommunications Law.  Is it still being 
circulated in draft form among China’s ministries an d agencies?  When will this draft law be provided 
to the National People’s Congress for review and circulated for public comment?    
14. Is China planning on updating its  domestic definition of value- added services?  If so, what is 
the timetable? 
15. The United States understands that  China allows Hong Kong-based  satellite operators to sell 
satellite capacity (space segment) directly to broad casters located in China, who then use their own 
uplink facilities to distribute the programming throughout China .  At the same time, China prohibits 
operators of other WTO Members from entering into similar arrangements, requiring them instead to 
contract through a domestic Chinese opera tor to reach their customers.   
(a) Please explain how this policy is consiste nt with China’s MFN obligations under the 
GATS. 
(b) In the past, China has suggested that Hong Kong operators’ services were 
“grandfathered” upon China’s accession to the WTO.  What evidence can China 
provide to demonstrate that these servi ces were supplied prior to China’s WTO 
accession?  What is the basis for China’s asser tion that China has a right to maintain 
this discrimination post-accession? 
16. China’s State Administration of Radio, Film  and Television (SARFT) issued Notice No. 72 
on 24 July 2007. S/C/W/294 
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  (a) This notice requires CCTV and provincial satellite TV and radio channels to move 
their channels from certain foreign-operat ed satellites to the domestic satellites 
Sinosat 3 and Chinasat 6B satellites.  Si nce this measure appears to provide a 
preference for a domestic operator, how is this measure consistent with the national 
treatment obligations China has undert aken under the GATS with respect to 
international telecommunications services?  
(b) This notice additionally requires certain  DTH TV channels and 34 foreign TV 
channels to be moved from a China-based sat ellite (Sinosat 1) to a satellite owned by 
Hong Kong-based satellite operator APT.  Ot her foreign satellite operators, however, 
appear prohibited from carrying DTH signals.  How is this measure consistent with 
China’s MFN obligations under the GATS? 
VI. CONSTRUCTION SERVICES 
17. The United States remains concerned about ma ny aspects of China’s regime for construction 
services and construction engineering and design servi ces and how this regime conforms with China’s 
GATS obligations.  In connection with last year’s tr ansitional review before this Council, the United 
States asked questions about some of these concerns , but China did not fully respond to all of them.  
The United States repeats those questions below and asks some additional questions and would 
request that China provide responses to them dur ing the upcoming transitional review before this 
Council. 
(a) Under Decree 113, the Regulations on the Administration of Foreign-Invested 
Construction Enterprises , jointly issued by the Ministry of Construction and the 
Ministry of Commerce in September 2002, foreign-invested enterprises are limited in the kinds of projects they can apply to undertake, raising national treatment issues 
because domestic enterprises face no such r estrictions. Does China intend to broaden 
the scope of projects that foreign- invested enterprises can undertake? 
(b) With regard to Decree 113, can China confirm that it will consider reducing the 
registered minimum capital requirements?  Will China also consider the financial 
strength of the parent company and/or bonding and other guarantee arrangements in 
lieu of the registered minimum capital requirements?   
(c) With regard to Decree 113, can China c onfirm that, similar to the practice under 
Decree 114, the Regulations on the Administration of Foreign-Invested Construction 
Engineering Design Enterprises , jointly issued by the Ministry of Construction and 
the Ministry of Commerce in September 2002, it will take into account project 
experience outside of China in qualifying co mpanies to carry out certain “grades” of 
projects?  
(d) The United States welcomes the implementi ng rules for Decree 114, set forth in 
Circular 18, the Implementing Rules for the Regulations on the Administration of 
Foreign-Invested Construction Engineering Design Enterprises , issued by the 
Ministry of Construction in January 2007.  The United States notes that many of 
Circular 18’s elements are temporary, in cluding improvements relating to personnel 
qualifications.  Can China confirm that it  will make these changes permanent?   
(e) The United States appreciates th at China also introduced the Regulations on the 
Management of Qualifications for Cons truction and Engineering Supervision and 
Design Enterprises , issued by the Ministry of Construction in June 2007 (known as 
Decree 160), which relates to the upgrading of qualifications for foreign-invested  S/C/W/294 
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  enterprises providing engineering and design services.  However, the United States 
urges China to allow all foreign-invested  companies to take advantage of this 
liberalization, rather than subject fore ign-invested design enterprises to more 
restrictive procedures under Circular 202, Implementing Rules for the Regulations on 
the Management of Qualifications for C onstruction and Engin eering Supervision and 
Design Enterprises , issued by the Ministry of Construction in August 2007, which 
does not allow these enterprises to start at “Grade A” or above, i.e., the most 
comprehensive licenses.  Can China confirm th at it will consider modifications of this 
nature? 
(f) As a result of Circular 200, the Provisional Measures for Construction Project 
Management , issued by the Ministry of Construction in November 2004, China does 
not allow foreign companies to provide project management services without already holding construction enterprise qualifications .  Could China provide information on 
how it might remove this overly burdensome  aspect of its regime, either through 
revising Decree 200 or other measures?  
VII. LEGAL SERVICES 
18. While the United States acknowledges the steps that China has taken toward opening the legal 
services sector, foreign firms continue to face onerous restrictions regarding market access and national treatment in China.  For example, despite  China’s explanation at past transitional reviews 
before this Council, the United States remains c oncerned over China’s imposition of a three-year 
waiting period before a foreign law firm can open an  additional office in China, particularly because it 
includes an application process that could take as l ong as nine months and requires that market need 
be demonstrated.  Please describe whether China h as any current plans to address these concerns.  
VIII.  TRANSPARENCY 
19. The United States appreciates China’s recen t decision to publish in advance for public 
comment, subject to specified exceptions, all trad e and economic-related administrative regulations 
and departmental rules that are proposed for adopti on and provide a public comment period of not less 
than 30 days from the date of publication.  China indicated that it would publish these proposed 
measures on a single Chinese Government website mainta ined by the Legislative Affairs Office of the 
State Council. Can China explain how this new syst em is operating in pr actice with regard to 
proposed measures that relate to the services sector? 
 
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