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IV. TRADE POLICIES BY SELECTED SECTORS1 
(1) INTRODUCTION  
1. China's economic reforms have been instrument al in significantly reducing its barriers to 
trade and foreign investment.  Other measures, such as  price controls and restri ctions on private sector 
participation in certain sectors of the economy, part icularly manufacturing, have also been reduced.  
In services, while the State continues to be domin ant in key sectors, the supervisory framework is 
being strengthened, and restrictions on private dom estic and foreign investment are being gradually 
relaxed. 
2. Agriculture is an important sector;  while its contribution declined to some 13% of GDP in 
2004 (according to new GDP figures released in 2006), it accounts for some 45% of employment, which means that labour productivity in the sector is  well below the level elsewhere in the economy.  
Agricultural policy has traditionally been aimed at ensuring an adequate supply of food at stable 
prices.  Thus, procurement, distribution, and marke ting restrictions were used in addition to measures 
such as price controls and import and export restricti ons to meet this goal.  Reforms in agriculture, 
which started in the late 1970s, have gradually re duced intervention and perm itted greater flexibility 
in production decisions.  Border measures have al so been reduced signifi cantly.  China's average 
MFN tariff on agricultural goods (WTO definition) fell from 23.1% in 2001 to 15.3% in 2005;  in 
addition, import quotas have been converted to ta riff rate quotas, which ar e maintained for some 
cereals, some edible oils, sugar, mineral and ch emical fertilizers, and wool and cotton.  China 
continues to use state trading to manage trade in some products.  In a significant policy change in 
2004, the Government moved away from taxing agriculture  to providing a net transfer to agriculture.  
Major agricultural tax reforms are under way to re duce the burden of taxes and other charges that 
resulted in a net transfer out of the agriculture sect or.  There remain some distortions, however.  For 
example, domestic prices of some products are subject to controls, principally to maintain stability of 
supply and prices. 
3. China's energy use and reliance has increased rapi dly in recent years.  Imports of crude oil 
were 120 million tonnes in 2004 and are projected to  have increased to 130 million tonnes in 2005.  
China's energy policy is aimed at supplementing do mestic supplies of petr oleum through imports and 
through outward investment by its SOEs;  it also aims to establish a national oil reserve to stabilize 
prices and supplies.  In order to maintain such st ability, purchasing and pricing of oil are still largely 
controlled by the Government through SOEs and STEs and through government-set prices.  Some 
efforts have been made recently to reduce barriers to trade and to permit private (both domestic and 
foreign) investment in the sector.  With regard to electricity supply, which is crucial for China's 
rapidly growing economy, there is a need for urgent  reform to tackle the growing problem of power 
shortages.  In recent years, growth in consump tion has tended to outpace growth in supply due to, 
inter alia,  intensive energy use by certain sectors, artif icially low prices set by the Government, 
insufficient investment, and an inadequate distributio n network.  China plans to supplement its current 
source of electricity, mainly coal, with others, such  as hydro and nuclear power.  At the same time, it 
intends to reduce energy costs per unit of GDP by 20% in the next five years.
2 
4. China's economic reform and the adoption of an "open door" policy have attached high 
priority to encouraging export-oriented capital-in tensive manufacturing, especially by attracting 
foreign direct investment (FDI) to the sector.  Th e sector has also benefited from considerable public 
investment as well as various other forms of gove rnment assistance, including price controls and 
                                                      
1 Parts of this Chapter are without the benefit of detailed comment/clarification from the authorities. 
2 This appears to be one of China's major goals for the 11th Five Year Plan period ( People's Daily 
Online .  Available at:  http//english.people.com.cn/20051 0/13/eng20051013_214194.html [16 January 2006]).  WT/TPR/S/161 Trade Policy Review 
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consequent subsidization of energy, water, and land, and financing on favourable terms for 
manufacturing SOEs.  As a result, manufacturing has apparently developed much more quickly than 
other sectors, notably agriculture and services.3  It now accounts for over 90% of China's merchandise 
exports and is the source of much of China' s processing trade, which is dominated by foreign 
enterprises.  Import tariffs on manufactured goods ha ve declined to a current level of 9.8%, from 
15.6% in 20014;  and key industries have been restructured to improve their competitiveness.  
However, a range of other measures remain in pl ace in order to secure domestic supplies for key 
industries and to manage their growth.  Thus, for ex ample, use has been made of interim export taxes 
and VAT rebates to manage exports of steel a nd to ensure sufficient domestic supply, and to 
encourage exports of electronic products.  In an a ttempt to address the problem of low value addition 
by domestic companies, China is currently encouraging technology upgrading and investment in high-technology-based manufacturing, including through foreign investment.  The State also seems to "guide" investment into or out of certain sectors or activities. 
5. The Government's emphasis on the development of manufacturing, which tends to be more 
capital-intensive than services, has meant that liberalization of the latter has proceeded rather more 
slowly.  Even with the recent upward adjustment of  services' share of GDP to almost 41% in 2004, 
this share has remained considerably lower than  that in other major developing (and developed) 
countries, which suggests that there is considerab le scope for expansion of the services, perhaps 
through further liberalization of the sector.  Chin a has liberalized it services in line with its GATS 
Schedule;  its specific commitments in this regard  are relatively extensive by developing country 
standards, covering nine out of the twelve large se ctors in the GATS list.  Services, especially in the 
key areas of financial, telecommunications, and tran sport services, tend to be characterized by greater 
state ownership, restrictions on foreign equi ty ownership (although th ese have been relaxed 
somewhat), and limited competition.  There rema ins a high degree of concentration of assets and 
premiums among the state-owned commercial banks and insurance companies, while foreign presence 
is generally low.  China's state-owned banks have in the past been the primary source of lending to 
SOEs and, as a result, continue to be burdened with large non-performing loans (NPLs).  Efforts have 
been made to rectify this situation, including th rough the injection of funds by the Government and 
purchase of NPLs;  recently NPLs of these banks were transferred to asset management companies, which are expected to dispose of them by 2006.  The Government is also trying to improve 
governance in these banks, including through a pilo t scheme for two of the four state-owned banks 
and some foreign investment.  In this context, one of these state-owned banks, the China Construction 
Bank was recently listed on the stock exchange.  Improved governance for the whole banking sector is 
being pursued through an improved su pervisory framework.  Despite these efforts, the level of NPLs, 
especially in the state-owned banks, seems to remain  high and few banks have managed to achieve the 
required capital adequacy ratio.  
6. Progress has been made in reforms to China's stock markets, which are relatively small.  
Efforts include measures to address the problem of the relatively large share of non-tradeable shares 
and improve corporate governance among listed compan ies, and to continue to attract foreign 
investment.  In addition, to attract portfolio i nvestment and given the non-convertibility of the yuan, 
China started a Qualified Foreign Institutional Investors (QFII) scheme in 2002, and has been 
gradually increasing the amount that can be invested under the scheme. 
7. China began introducing competition in the tel ecommunications sector in 1994, leading to a 
substantial increase in telecommunications penetrati on rates.  Prices have also declined, although they 
                                                     
 
3 A recent report by the NDRC suggests that during the 10th Five Year Plan period (2001-05) industrial 
output grew 2.4 percentage points faster than GDP ( People's Daily Online .  Available at:  
http//english.people.com.cn/200602/01/eng20060201_239616.html [1 February 2006]). 
4 Based on ISIC Rev.2. China WT/TPR/S/161 
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remain largely set or "guided" by the Govern ment.  Telecommunications reforms include the 
establishment of a regulatory framework and effort s to introduce greater competition in the sector, 
through, inter alia,  the formulation of rules determining interconnection as well as limited foreign 
investment in some of the six majority-state -held basic telecommunications service providers. 
8. Air and maritime transport are of key importance for the further development of China's 
international trade and services.  The main challenge facing the air transport industry is to expand existing 
capacity to meet rapidly increasing demand for these services.  Recent reforms have reduced regulatory 
barriers and increased market-based incentives for investment, although fares for both domestic and international routes must still be submitted to, and approv ed by, the regulator.  An expansion of capacity in 
the sector will require furt her liberalization of current regulations.  In maritime transport services, China is 
gradually relaxing government control and improving legislation.  It has also permitted foreign investment 
in various services since 2000.  However, restrictions remain;  depending on the specific services, there may be requirements on the proportion of Chinese nati onals in the number of employees, or foreign equity 
restrictions. 
(2) AGRICULTURE  
(i) Features and market developments 
9. Agriculture's contribution to GDP has declined since 2000 but, it is still an important sector.  
In 2004, it accounted for some 13.1% of GDP accordi ng to the latest revision in GDP (14.8% in 2000) 
and over 45% of employment (46.3% in 2000), whic h indicates that labour productivity in agriculture 
is less than one fifth of the level in the rest of the economy.5  In 2004, farming accounted for 50.1% of 
total agricultural production, while livestock contributed 33.6%, and fisheries 10%.6 
10. Agriculture in China is char acterized by scarce land and capital in relation to labour and 
small-scale farming.  It has declined in importance as a source of employment.7  This is a result of 
stronger growth elsewhere in the economy, relaxation in the hukou  system, and the creation of 
township and village enterprises (TVEs), which have absorbed some of the ag ricultural labour surplus 
(Chapter III(4)(v)).8  Despite the decline in employment, it has been estimated that a large part of the 
current agricultural workforce is not productively employed.9  The excess labour has resulted in a high 
ratio of labour per unit of land and thus low la bour productivity and agricultural incomes.  The 
income gap between rural and urba n households is wide and growing.  Therefore, according to the 
authorities, one of China’s main challenges is to gu ide migration of rural surplus labour in a stable 
and orderly fashion.  This requires the developm ent of an integrated urban-rural labour market.10 
11. Land tenure is based on a household contract system.  Farmland is owned by the village 
collectives, which extend contracts to individual hou seholds, currently 30 years for tillable land, 30 to 
50 years for grass land, and 30 to 70 years for forest land.  The household has the right to use the land, 
"reap the yields", and transfer the rights granted by the contract, but cannot sell the land.11  Weak 
                                                      
5 OECD (2005d).  According to the latest adjustment in GDP by the National Bureau of Statistics, 
agriculture's share of GDP in 2004  was 13.1% rather than 15.2%. 
6 National Bureau of Statistics (2004). 
7 Agricultural labour figures may be overestimated as they most likely include 100 million "floating" 
migrants employed in urban areas for at least part of the year. 
8 In order to absorb excess labour in the rural ar eas, sub-national governments were encouraged to 
develop rural non-agricultural industries, known as township and village enterprises (TVEs). 
9 Estimates suggest that between 30% and 40% of the current agricultural workforce is under-employed 
(OECD, 2005d). 
10 Information provided by the Ministry of Agriculture. 
11 The Law on Land Contract in Rural Areas, 1 March 2003. WT/TPR/S/161 Trade Policy Review 
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land-use rights have an adverse impact on investment  and the development of a rural credit system.  
Moreover, if farmers have full ownership of the la nd, they are likely to care more about preserving 
land fertility and productivity, controlling soil and water erosion, and reducing pollution.12  T h e  
creation of well functioning land and labour markets would facilitate the structural adjustment of the 
sector. 
12. While grain remains the key crop, its share in total crop production and in area sown has 
declined since 1990, due partly to the relaxation of  measures that, in the past, resulted in farmers 
producing grains rather than other crops, and part ly to a changing structure of production favouring 
crops other than grains.  This includes progressive relaxation of the grain quota system and, more 
recently, removal of the special agricultural tax on all goods except tobacco leaf.13  Thus, farmers 
have switched production to other more profita ble crops, such as fruit and vegetables.  These 
adjustments are also in response to changes in domestic demand and to emerging export opportunities.  
The reallocation of resources is in line with China’ s comparative advantage, since fruit and vegetables 
are labour-intensive products, while grain is land intensive, China’s relatively scarce resource.14  
Consequently, both the area sown to grains and the level of grain production fell between 2000 and 
2003.15  There was also some restructuring as land sown  to rice and wheat declined, while land sown 
to corn increased.16  This reflects a shift in focus from food to feed in line with changes in food 
consumption patterns, with demand shifting from the ma in staple grains (i.e. rice and wheat) to meat, 
in turn stimulating demand for feed grains, in particular maize. 
13. China is the largest livestock producer in the world.  Driven by strong domestic demand, the 
livestock sector has grown fast since 2000 and is expected to continue growing along with the increases in incomes and urbanization, the two ma jor forces driving the rising demand for meat and 
shifts in dietary pattern.
17  Exports of meat and related products are also expected to increase as 
sanitary conditions improve.  Accordingly, the net demand for feed grain to support the livestock sector is also expected to grow.  Fisheries, anot her labour intensive activity, has also developed and 
grown rapidly since the reform, albeit not as fast as livestock.
18  Nevertheless, trade in fish products 
has shown impressive growth;  exports grew by 16.9%  and imports by 19.4% in 2003.  China is a net 
exporter of fish products, which account  for 27.5% of agricultural exports. 
14. The contribution of agriculture to total trade has declined since 2000.  Even though the real 
values of agricultural imports and exports incr eased during 2000-04, their shares fell from around 
8.7% to 7.4% for imports and 6.6% to 4.1% for exports, reflecting an expa nsion of trade in other 
products.  After being a net food exporter up to 2003, China became a net food importer in 2004.19  
Imports of agricultural goods have been increasing since 2001, but especially in 2003 and 2004, when 
                                                      
12 Tso and He, (2004). 
13 The authorities sometimes refer to this tax as the tax on specific agricultural products or the 
agricultural specialty tax.  The difference is due mainly to the translation from Chinese. 
14 Production of fruit increased from 123.7 million tonnes in 2000 to 160.9 million in 2004 (National 
Bureau of Statistics, 2004). 
15 Production of cereals (maize, ri ce, and wheat) declined from 407.3 million tonnes in 2000 to 
376.1 million tonnes in 2003.  However, production increase d again in 2004;  this has been attributed to high 
international prices and to direct subsidies grante d to grain farmers in 2004 (National Bureau of 
Statistics, 2004). 
16 Huang and Rozelle (2004). 
17 During 2000-03 average growth in the livestock s ector was 8.1%;  in 2003 the sector grew by 12.8% 
(National Bureau of Statistics, 2004). 
18 Average growth during 2000-03 was 5.55%, and 5.6% in 2003 (National Bureau of Statistics, 2004). 
19 Under SITC Rev.3 food includes food and live animals (Divisio n 0);  beverages and tobacco 
(Division 1);  oil seeds and oleaginou s fruits (Division 22);  and animal and vegetable oils, fats, and waxes 
(Division 4). China WT/TPR/S/161 
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imports grew at around 39.5% and 39.7%, respectivel y.  Imports of cereals (i.e. maize, rice, and 
wheat) (mainly wheat in 2004), oil bearing crops (mainly soybeans), and cotton have shown the 
highest rates of growth.  This is in line with the expectation that reduced protectionism in agriculture 
would lead to an increase in imports of land-intens ive farm products and that national self-sufficiency 
would decrease slightly, while exports of labour-i ntensive farm products, in which China has a 
comparative advantage, could increase.20  For instance, exports of fruit have doubled in value since 
200021, accounting for 2.4% of agriculture exports in 2004, up from 1.4% in 2003.  Exports of fish 
products have also increased since 2000, as me ntioned above, as have exports of meat.22 
(ii) Policy objectives and administration 
(a) Policy formulation, and ins titutional and legal framework23 
15. There is a complex network of agencies that fo rmulate and implement agricultural policies.  
At least 16 institutions, including ministries, ba nks, and commissions are involved in governing 
agriculture and its upstream and downstream subsectors;   they are divided into four tiers according to 
level of responsibility (Table IV.1).  The coor dination of policy-making and implementation among 
these agencies is difficult because their functions are often fragmented and overlap.  For instance, 
eight agencies are responsible for quality and safet y management of agricultural products, eight for 
agricultural investment, six for processing and allocation of farm products, and five for the provision of inputs.  Coordination is also difficult because of the divergent priorities and interests of the 
different ministries.  Coordination problems also arise because of the gradual decentralization of 
government power over the past 20 years.  Sub-natio nal governments have become more influential in 
the policy-making process and have often been free to decide how to implement national government 
policies, resulting in some variation in the way national policies have been implemented. 
16. Agriculture is regulated by a number of laws a nd regulations.  The principal legislation is the 
Agricultural Law, which establishes overall policy.  Other laws, such as the Grassland Law, the Seed 
Law, or the Law on Promoting Agricultural Mechani zation, deal with specific aspects of the sector.  
More specific guidance for policy implementation are contained in regulations issued by the State 
Council and various administrative or gans of the Central Government. 
(b) Policy objectives 
17. Government intervention in the sector, although still significant, has decreased.  China has 
progressively reduced import tariffs, partially rem oved licensing requirements on imports and exports, 
abolished some quotas and converted others to tariff rate quotas (TRQs), removed some price 
controls, and somewhat liberalized the marketing sy stem.  These reforms have affected imports and 
exports. 
18. Agricultural policies have traditionally been aime d at ensuring an adequate supply of food at 
stable prices.  Nevertheless, these policies resulted in the extraction of resources from agriculture to 
support industry and in major fiscal transfers from farmers in the form of taxes and local levies, and 
miscellaneous fees.  Due to the growing inco me gap between urban and rural populations, and 
between developed and underdeveloped rural areas, there has been a f undamental shift recently in the 
                                                     
 
20 Anderson et al. (2004). 
21 Exports of fruit increased from US$227.1 million in 2000 to US$589.8 million (UNSD, Comtrade 
database (SITC Rev.3)). 
22 Meat exports have grown throughout the period under review, with the exception of 2002 (UNSD, 
Comtrade database (SITC Rev.3)). 
23 This section is based on OECD (2005b). WT/TPR/S/161 Trade Policy Review 
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Government's agricultural policy, from taxing agricu lture to supporting agriculture, notably farmer's 
incomes.24  As a result, policies have been adopted to raise agricultural incomes nationwide;  these 
include the reform of agricultural taxes and the pr ovision of direct subsidies to grain farmers.  
According to the authorities, food security remains at the forefront of policy considerations, along 
with the objective of increasing incomes in rural ar eas.  Other agricultural policy objectives include 
food safety, environmental protection, and the improvement of agricultural competitiveness. 
Table IV.1 
Central institutions involved in agricul ture policy-making and implementation 
Institutiona Functionb 
Tier I   
State Council Policy formulation 
Tier 2  
Leading groups Policy analysis and guidance 
Development Research Centre (D RC) of the State Council, the 
Communist Party's Central Policy Research Centre Office Policy research and suggestions 
Tier 3  
National Development and Refo rm Commission (NDRC)  Proposes development strategies 
Recommends agricultural reforms 
Sets broader targets for annual plan s as well as the core tasks  of 
medium and long term plans 
Key coordinating agency overs eeing the implementation of 
agricultural and rural policies 
Oversees areas under the respons ibility of the Ministry of 
Agriculture, the State Forestry Administration, and the Ministry of Water Resources Supervises the State Grain Administrations and State Administration of Tobacco  
Pricing policy on inputs, products and services of importance to 
the agriculture sector:  grain, o ilseeds, cotton, seeds, fertilizer, 
silkworm cocoons, irrigation wa ter, transportation services 
State Owned Assets Supervision Administration Commission 
(SASAC) Responsible for governance and oversight of several SOEs 
including some with direct interest in the agri-food sector (e.g. China National Cereals, Oils and Foodstuffs Corporation 
(COFCO); Sinochem (fertilizers); and China National Tobacco 
Company) 
People's Bank of China Supervises rural financial institution system 
Ministry of Finance Responsible for drafting policies to support agriculture, 
formulating the agricultural de velopment plan, allocating and 
managing financial funds on ag riculture, and allocating the 
poverty reduction funds 
Ministry of Commerce Manages imports and exports of agricultural products 
Tier 4  
Ministry of Agriculture Drafting, inter alia , the agricultural development strategy and 
development plans for the marketing system 
Making recommendations on policies affecting agriculture such as prices, tariffs, taxation, credit, support, etc. 
Ministry of Water Resources  Formulating policie s, regulations, and development strategies and 
plans of water conservation. 
Ministry of Land and Resources Responsible fo r the planning, manage ment, protection, and 
"rational" utilization of natural re sources (including land, mineral, 
and marine resources). 
Ministry of Education Extension activities 
Table IV.1 (cont'd) 
                                                      
24 State Council (2004). China WT/TPR/S/161 
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Institutiona Functionb 
Agricultural Development Bank of China 
Agricultural Bank of China Specialized in extending loans for agriculture and rural enterprises 
General Administration of Quality  Supervision, Inspection and 
Quarantine   SPS policy 
All China Federation of Supply and Marketing Coopera tives Marketing of inputs and agricultural products 
a This list is not exhaustive. 
b Only the main functions in regard to agriculture have been included. 
Source:  OECD (2005b), Governance in China . 
19. Grain self-sufficiency has been regard ed as the key to achieving food security25;  according to 
the authorities, China's large population has the pot ential to destabilize international production and 
trade in food, requiring it to meet much of its demand for food through domestic supplies.  Self-
sufficiency has been a primary infl uence on agricultural policies.  It is a major determinant, not only 
of grain policies, but also of broader agricultural pol icies.  Since a major element of food security is 
the affordability of food, policy-makers have not only sought to ensure that sufficient food is supplied, 
but also that it is available at affordable pri ces, mainly for urban consumers.  The objectives of 
attaining food security by increasing production, while  maintaining affordable consumer prices and 
raising incomes in rural areas through price support a nd other measures such as direct subsidies, result 
in constant modification of agricultural policies to deal with production surpluses and/or shortages 
with the heavy financial burden falling on the Government.  The fiscal sustainability of the grain 
self-sufficiency policy, and of other recently adopted  policies such as the provision of direct subsidies 
to grain producers and the agricultural tax reform, which, inter alia,  will require substantial offsetting 
transfers from the central government to the provinces, is not clear.26  The authorities state that the 
Chinese Government will maintain "the stable implementation" of these financial transfers. 
(iii) Policy instruments 
(a) Border measures 
Imports 
Tariffs and other import taxes 
20. China has progressively reduced import tariffs on agricultural products.  Applied tariff rates 
are very close to the bound rates.  In 2005, all tari ffs applied to agricultural goods, with the exception 
of six lines in HS Chapter 2 (meat and edible offa l, of poultry) and one line in HS Chapter 5 (frozen 
gizzards), were ad valorem .27 
21. Applied tariffs on agricultural products (WTO definition) fell from 23.1% in 2001 and 18.2% 
in 2002 to 15.3% in 2005, but are still higher than the overall average applied MFN rate of 9.7% in 
2005 (Table III.2).  Tariff dispersion has also declined, from a range of 0% to 121.6% in 2001, to 0% to 65% in 2005.  Tariffs on dairy products declined  from 35.9% in 2001 to 12.1% in 2005.  Tariffs on 
grain and oilseeds have also seen a substantial re duction since 2001, from 51.9% to 33.9% and 32% to 
                                                     
 
25 OECD (2005d), for example, points out that th is means aiming to produ ce 95% of China's grain 
requirements . 
26 The need for compensatory transfers from the Central to local governments is a broader issue linked 
to tax reform in general (see Chapter I). 
27 According to the authorities, one tariff line in Chapter 22 (HS 2203.0000:  beer brewed from malt) 
also carries a specific duty.  However, as this line is zer o rated, the Secretariat has not included it as a specific 
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11.1%, respectively.28  Nevertheless, grain, and other trad itionally highly protected agricultural 
commodities, such as sugar and confectionary sugar (29.9% in 2005) and tobacco (25.4% in 2005), 
still benefit from higher than average protection.  Some  of the lowest tariffs apply to oilseeds, a sector 
that was previously highly protected, to ensu re their availability for state procurement.29  With the 
exception of oilseeds, it seems that lower tariffs a pply to subsectors in which China apparently has a 
comparative advantage (i.e. labour-intensive farm  products), such as horticultural and animal 
products.  The varied levels of tariff protection acr oss commodities is a potential source of distortion.  
This pattern of protection seems to reflect China's policy of attaining grain self-sufficiency through an 
adequate domestic supply. 
22. It has been estimated that the level of produ cer support has increased since 1999 despite the 
decrease in tariffs.  This could be attributed to th e limited impact that tariffs might have had on trade 
flows and prices in China prior to 2000, when pri ces of basic crops (cereals, soybeans, and cotton) 
were fixed by the State;  state trading played a key role in foreign trade, and domestic grain supplies were secured through the grain quot a system.  Since 2000, tariffs, even if falling, seem to be having 
more influence upon domestic prices as a result of a decline in domestic regulation.
30 
23. Imports of agricultural goods are also subject to VAT.  The rate for agricultural products is 
13%, 4 percentage points lower than the rate generall y applied to other products.  As discussed earlier 
(Chapter III(4)(ii)(b)), agricultural products produced  and sold directly by small-scale farmers are 
exempted from VAT.  VAT is instead collected from the primary purchasers of agricultural products, 
when they sell these products,  at which point the tax is calculated on the value of the trader's margin, 
not on the value of the product.31  VAT exemptions have also been applied, sporadically, to a wide 
range of agriculture-related impor ts in order to manage them.32  For instance, if there is a domestic 
oversupply of grain, the VAT exemption on grain impor ts is apparently removed.  According to the 
authorities, however, all imports of grains are subject to VAT. 
Tariff rate quotas 
24. Tariff rates quotas (TRQs), apply to 55 tariff lines .33  According to the authorities, the system 
serves to restrict the quantity of imports34,  and is necessary to avoid large quantities of imports 
affecting farmers’ incomes and social stability.  The size of the annual quota is based on China's 
commitments at the time of accession to the WTO.  It appears that MOFCOM has promulgated an 
Announcement to eliminate the TRQ on vegetable o ils from the beginning of 2006, implementing a 
tariff-only arrangement instead. 
                                                      
28 The definition of grain does not include soybeans. 
29 For instance tariffs levied on soyb eans declined from 114% (out-of-q uota rate) in 1997 to 0%-3% as 
of 2002. 
30 OECD (2005d). 
31 The authorities further clarified that if an ordina ry taxpayer purchases agricultural products that are 
exempted from VAT, the buyer calculates the input VAT based on the purchase price and a deduction of 13%.  
When the processed product is sold, an output VAT is calculated based on the sales revenue and the VAT rate.  
VAT paid is then the difference between output VAT and input VAT. 
32 Seeds, breeding animals, certain chemical fer tilizer and pesticides, raw materials for manufacturing 
feed products,  and cotton. 
33 The 55 tariff lines are included in HS Chapters 10  (wheat and meslin, maize,  rice), 11 (cereal flour 
other than wheat and meslin, cereal groats), 15 (soybean oil, palm oil, rape colza, mustard oil), 17 (cane or beet 
sugar), 3 (mineral chemical fertilizers) and 51 (wool and waste of wool).  Although fertilizer is not an 
agricultural product under the WTO definition, it is includ ed in this section because of its importance as an 
input.  Upon accession, China replaced quantitative import restrictions on sugar, cotton, an d three types of 
fertilizers (DAP, NPK, and urea) by TRQs (W TO document WT/ACC/CHN/49, 1 October 2001). 
34 WTO document G/LIC/N/3/ CHN/2, 9 October 2003. China WT/TPR/S/161 
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25. With the exception of cotton, imports under TR Qs have, in general, been low during the 
period under review;  most TRQs are generally unfill ed (Table AIV.1).  Imports of grain under TRQs 
have been especially low, with the exception of  wheat in 2003.  Since 2003, quota levels for cotton 
have been increased and imports of cotton were  above the in-quota level specified in China's 
Accession Protocol.  Nevertheless, according to the authorities, all cotton imports during 2002-04, 
including those in excess of the quota, were charge d the in-quota tariff rate.  The quotas for cotton 
were presumably increased to supplement domestic s upplies for the textiles and clothing industry. 
26. The process of quota allocation and re-allocati on is managed by the National Development 
and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM).35  The NDRC, in 
consultation with MOFCOM, is responsible for dist ributing the TRQs for cotton, maize, rice, and 
wheat;  MOFCOM is solely r esponsible for other products.36  The NDRC and MOFCOM publish 
annual announcements to administer TRQs37;  these announcements stipulate, inter alia , the TRQ 
level, the amount allocated to STEs, the "basic" and "o ther" requirements for applicants to be eligible 
for a quota share, the criteria to allocate the quot a, and the application and allocation deadlines.38  The 
general administration procedures for tariff quotas have been notified to the WTO.39 
State trading (imports) 27. The gradual liberalization of China's foreign trade regime has somewhat diminished the 
influence of state-trading enterprises (STEs);  how ever, the Government still retains some influence 
on imports (and exports) of key commodities thro ugh the state-trading system.  Under China's 
Protocol of Accession, agricultural products subject to import by STEs are:  grain (including maize, 
rice, and wheat), vegetable oil, sugar, tobacco, and cotton.  Chemical fertilizers are also subject to 
state trading.  China maintains state trading to, 
inter alia,  ensure the stable supply and price of these 
products.40  STEs set import prices, which are "usually" b ased on the c.i.f. price plus tariff and other 
charges.41  China’s TRQ system includes criteria for allocating the import quotas to state trading 
enterprises (STEs) and private enterprises;  however, STEs continue to control major shares of maize, 
                                                      
35 WTO document G/LIC/N/3/ CHN/2, 9 October 2003. 
36 Previously all the quotas except for fertilizers were administered by the State Development Planning 
Commission (SDPC) (currently the NDRC);  quotas for fer tilizers were administered by the State Economic and 
Trade Commission (SETC) (currently MOFCOM) (WTO document G/LIC/N/3/CHN/1, 23 September 2002).  
37 This is in accordance w ith the "Interim Measures on Admini stration of Tariff Rate Quota for 
Importation of Agricultural Products" (issued by MOFCOM and the NDRC);  and the "Interim Measures on the 
Administration of Tariff Rate Quota for Importation of Fe rtilizers" (issued by the fo rmer SETC and the General 
Administration of Customs). 
38 In 2005, TRQs were allocated  in accordance with th e "Quantities, Application Conditions and 
Allocation Methods of Tariff Rate Quota for Importation of Grain and Cotton of 2005" (NDRC Announcement 
No. 58 of 30 September 2004).  Available (in Chinese only) at:  http://www.sdpc.gov.cn/b/ b200409303a.htm [17 June 2004];  "Allocation Methods of Tariff Rate Quota for Importation of Palm Oil, 
Soybean Oil, Rape Seed Oil and Sugar of 2005" (MOFCOM Announcement No. 60 of 29 September 2004).  
Available at:  http://www .mofcom.gov.cn/aarticle/b/e/200409/2004 0900286127.html [17 June 2004];  The 
"Implementing Rules on the Administration of Tariff Rate Quota for Importation of Wool and Wool Tops of 
2005" (MOFCOM Announcement No. 61 of 29 September 2004).  Available (in Chinese only) at:  http://www.mofcom.gov.cn/aarticle/b/e/200409/200409002 86130.html [17 June 2004];  and the "Quantities, 
Allocation Principles and Application Procedures of Tariff Rate Quota fo r Importation of Fertilizers of 2005" 
(MOFCOM Announcement No. 62 of 8 October 2004).  Available at:  http://www.mofcom.gov.cn/ aarticle/b/e/200410/20041000287864.html [17 June 2004]. 
39 For further details, see WTO documents G/AG/N/CHN/2, 25 September 2003;  G/LIC/N/3/CHN/2, 
9 October 2003, and G/LIC/N/3/CHN/3, 30 September 2004. 
40 WTO document G/STR/N/9/CHN/Add.1, 14 July 2003. 
41 These include VAT and other taxes, port charge s, inspection fees, and domestic transportation 
charges. WT/TPR/S/161 Trade Policy Review 
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cotton, rice, sugar, and wheat imports.  The shar e of vegetable oils (palm, rapeseed, and soybean) 
imported by STEs is relatively low.42  In addition, imports of tobacco remain under state monopoly. 
Non-tariff measures affecting agricultural imports 
28. Agricultural imports are subject to licensing, tariff-rate quotas and prohibitions.  Automatic 
import licensing is used to monitor imports;  non-au tomatic import licences are used to fulfil China's 
obligations under international c onventions.  TRQs are non-automatic , except for goods allocated on a 
first-come first-served basis.  Agricultural imports subject to automatic licences (33 tariff lines at the 
HS eight-digit level) include mainly chicken, sp irits, and tobacco.  Non-automatic licences apply to 
five tariff lines, including a few plants used, inter alia,  to make pharmaceuticals, perfumes, and 
insecticides (three lines at the HS eight-digit level).43  A general import prohibition maintained under 
Article XX, applies to a few products, such as opium  and ivory, and four additional products are 
subject to import prohibition under processing trade.44 
Exports 
State trading (exports) 29. In 2003, China notified to the WTO that agri cultural products subject to state trading 
comprised cotton, grain (i.e. maize, rice, and soybean), silk, and tea.
45  However, according to the 
authorities, they have comprised only rice, maize, cotton, silk, and tobacco since 2002.  Exports of 
soybeans were liberalized as of 1 November 2001;  a nd the authorities noted that exports of tea were 
subject to designated trading prior to 2004.  As of  1 January 2005, state trading was eliminated for 
silkworm cocoons and silk products.46  Export quotas have been in place for these products;  100% of 
the quotas were exported by STEs.47  The continued use of state tr ading to export these commodities 
allows the Government to influence their domes tic (and export) price.  Exports by STEs are 
determined taking into account both domestic a nd international demand and supply, and seek to 
maintain stable prices of "strategic" agricultural co mmodities, and ensure adequate supplies of inputs 
to state-run processing industries.  Thus, the latter industries enjoy an implicit subsidy. 
Non-tariff measures affecting agricultural exports 
30. Export restrictions remain in place to avoid do mestic shortages and depletion of exhaustible 
natural resources, and to comply with China’ s obligations under inte rnational agreements.48  C hi na  
imposes export quotas that are global (i.e. irrespec tive of destination) and destination-specific 
(Chapter III(3)(iv)).  In 2004, global export quotas applied to exports subject to state and "designated" 
trading such as cotton, grains, silk, and tea (39 ta riff lines at the HS eight-digit level).  As of 
1 January 2005, export quotas and licensing for sev en silkworm cocoons and silk products (at 
                                                      
42 In 2005, 90% of the wheat quota was reserved for STEs;  the STE re served portion of the quota for 
maize was 60%, for rice 50%, for sugar 70%, for cotton 33%, and for vegetable oils 10%.  The STE reserved 
portion for fertilizers' ranges from 70% to 90%, dependin g on the type of fertilizer (information provided by the 
authorities). 
43 The other two lines concern vegetable soaps and extracts used in pesticides and essential oils other 
than of citrus fruit. 
44 These are frozen offal of chicken (HS 02071429), edible bird’s nests (HS 0410.0010), pilose antlers 
and powder thereof (HS 0507.9020), and American ginseng, fresh or dried (HS 1211.2010). 
45 WTO document G/STR/N/9/CHN/Add.1, 14 July 2003. 
46 WTO document G/C/W/505, 25 November 2004. 
47 Information provided by the authorities. 
48 WTO document G/C/W/505, 25 November 2004. China WT/TPR/S/161 
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HS eight-digit) were eliminated.49  In 2004 and 2005, destination-specific quotas applied to, inter alia , 
live cattle, live swine and live chicken to be exporte d to the Special Administrative Regions (SARs) 
of Hong Kong and Macao.50  Non-automatic licences are used to manage these export quotas.  Non-
automatic export licences also a pply to a few plants used, inter alia,  to make pharmaceuticals, 
perfumes, and insecticides (part of five tariff lines at the HS eight-digit level).  Other exports, including meat products and liquorice (34 tariff lines at the eight-digit level) are subject to automatic licensing for statistical purposes. 
Export taxes 
31. In 2005, bones and horn-cores, powder and w aste thereof (HS 0506.0000) and raw hides and 
skins of goats (HS 4103.1010) were subject to export taxes of 40% and 20% respectively.  
Degelatinized bones (HS 0506.9090) were subject to an interim export duty rate of zero for 2002-05, 
they are also partially prohibited from export since China's accession to the WTO.  Export taxes (and 
other export restraints) are potentially distorting and implicitly subsidize downstream processing by 
resulting in their provision as inputs at below wo rld prices, thereby encouraging domestic value 
added.  Such taxes may contribute to an inefficien t use of resources.  The authorities note that under 
its Protocol of Accession, China maintains the righ t to impose export duties on some products in order 
to maintain a balance between dema nd and supply in the domestic market.  They also state that there 
is no evidence that export duties lead to a differe nce in domestic and international market prices, 
thereby implicitly subsidizing downstream processing. 
Export subsidies and other support 
32. China has notified to the WTO that during 2002-04 it did not subsidize its exports of 
agricultural goods.
51 
33. Exporters of agricultural products are entitled to a VAT rebate at the time of exportation.  
Rebates vary according to commodity and thus appear to have been used to manage exports of certain 
products (Chapter III(3)(iii)).52 
(b) Internal measures 
Taxation 
34. During the period under review, the main ta xes levied on agriculture have been the 
agricultural tax, the animal slaughtering tax (prior to 2004), the special agricultural tax, and the VAT.  
There is also a contract tax (levied when a land c ontract is transferred) a nd tax on use of cultivated 
land, levied when arable land is used for non-agricultural purposes. 
35. The agriculture sector is taxed differently from ot her sectors.  In addition to agricultural taxes, 
farmers pay fees and charges levied at the sub-pr ovincial level and provide "labour accumulation" for 
the construction of communal facilities.53  Taxes and fees have imposed a heavy burden on farmers.  
                                                      
49 WTO document G/C/W/505, 25 November 2004.  Export quotas and licences affecting other 
agricultural products have also been removed since 2002.  For a complete list of these products, see WTO 
documents G/C/W/438, 20 November 2002 and G/C/W/474, 20 November 2003. 
50 MOFCOM, General Administration of Customs Announcement No. 78 (2004), 10 December 2004. 
51 WTO documents G/AG/N/CHN/4, 7 Septembe r 2004, and G/AG/N/CHN/6, 5 April 2005. 
52 For instance in 2001, VAT rebates for pork and beef were 5.2% while rebates for chicken were 13%. 
53 This refers to a certain number of labour-days that  rural workers had to work, largely to maintain the 
rural infrastructure, without any compensation (in cash or in kind). WT/TPR/S/161 Trade Policy Review 
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In order to increase farmers’ incomes and dimini sh the increasing urban-rural income disparity, 
agricultural tax reform was initiated on a trial basis in 2000, and is being phased-in across rural China 
(Box IV.1).54  In March 2005, the Government announced  that agricultural tax reform should be 
further accelerated with the aim of, inter alia , phasing out the agricultural tax by 2006;  it is envisaged 
that transfer payments from the central budge t will be used, as required, to compensate local 
governments for the lost revenue.55 
36. In the period 2000-03, on average, the agricultu re sector contributed some 4% to total tax 
revenue (Table III.10), and gene rated 15.5% of China’s GDP.56  This implies that the contribution of 
the sector to total tax revenue is relatively low.  However, such comparison does not take account of 
the generally lower incomes in the rural sector and fa rmers’ relatively lower ability to pay taxes.  Nor 
does it take into account non-tax govern ment revenue collected from the rural sector (such as fees and 
charges collected by to wnships and the villages)57, or the implicit taxation involved in the 
(compulsory sale at below market prices) state procurement system.  Mandatory state purchases of 
grains at prices lower than those prevailing in the market meant that the state denied farmers of a 
proportion of their incomes.58  The authorities maintain that sin ce China's accession to the WTO, such 
mandatory purchases by the State have not occurred. 
Support to agriculture59 
37. China has made no notifications to the WTO re garding its support for the agriculture sector.  
In the context of this review, no information was provided on the programmes available to support the 
sector or on budgetary outlays.  However, the Agricu ltural Law of 2002 (Article 37) states that to 
develop the agriculture sector and increase farm ers' incomes, the State supports and protects 
agriculture through the provision of financial suppor t, preferential taxation, and banking assistance. 
Moreover, the State Council in its No. 1 Document (2005) stated that China would continue to directly subsidize grain producers, increase subsidi es to farmers, to purchase improved crop strains, 
agricultural machinery, and tools, and  follow a minimum purchase price policy for key grains.
60 
 
 
                                                      
54 In 2001, the tax-for-fee reform was tried in the provinces of Anhui and Jiangsu, and in a total of 
102 counties in other provinces.  In 2002, the trial was extended to 16 other provinces (State Council, "Circular 
on Implementing Pilot Project of Rural Taxation Reform", March 2000;  Ministry of Agriculture, 2001;  and Ministry of Agriculture, 2002). 
55 Ministry of Finance (2005). 
56 This calculation is based on data from China Statistical Yearbook,  which includes the animal 
slaughtering tax, the special agricultural tax, the tax on use of cultivated land, and the tax on contract (National 
Bureau of Statistics of China, various issues). 
57 Though the incomes of rural households were much lower than those of their urban counterparts, 
rural households were taxed much more heavily.  The impact of the rural tax in general has been much more 
regressive, which has been attributed to the increas ing rural-urban income disparity and the uneven tax 
incidence biased against poorer households.  Moreover, th e additional fees could affect anywhere between a few 
dozen and more than 100 items (Tao and Liu, 2005). 
58 It has been estimated that the tax through compulsory delivery averaged 12% and in grain producing 
areas 18%-24% (Aubert and Li, 2002). 
59 This section is based on Gale et al. (2005). 
60 In 2005, minimum purchase prices applied to rice and wheat.  The authorities state that the policy is 
implemented for products for which demand overwhelms supply from major grain producing provinces. China WT/TPR/S/161 
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Box IV.1:  Agricultural tax reform  
The main objective of the rural tax-for-fee reform, proposed in 2000 by the CPC Central Committee and the State 
Council, is to reduce the "farmers’ burden" by merging the township and village levies with the agricultural tax, 
and eliminating all additional fees, levies, and compulsory investments and donations.  Prior to the reform, townships and villages were financed largely off-budget th rough these additional fees and levies operating mostly 
free of oversight from higher levels.  By banning extra-bud getary levies, the Central Government also aims to 
control expenditures at the township and village level, by bringing previously extra-budgetary revenues and 
expenditures on budget and curbing the excesses in "taxing and spending" at the grassroots level. 
Agricultural tax reform included the following measures: 
Funds:  the elimination of funds collected from the rural population at the township level,  including all 
administrative fees/charges, contributions to government funds, and contributions to farm-related pooling funds collected from farmers. 
Animal slaughtering tax:  a gradual removal of the animal slaughtering tax and other fees attached to this tax 
across China.  According to the authorities it was eliminated on 1 January 2003. 
Special agricultural tax:  this tax was removed on all products, except tobacco leaf, in 2004. 
Agricultural tax:  a new system was designed to calculate the agriculture tax.  The new system stipulates that the 
tax may be levied at different rates in different regions, but should not exceed 7% (usually of the land area of the household times expected production per mu (i.e. 1/15 ha)).  However, calculation methods may vary from one locality to another.  State farms are taxed at 4%.  This new system was due to be implemented nationally in 2001, but budgetary constraints prevented this from occurring until 2003.  In 2004, the government announced the progressive elimination of this tax by 2009, with annual reductions commencing in 2004.  At the beginning of 
2005, it was announced that the tax would be eliminated in 31 provinces by the end of the year. 
Village levies:  these levies were to be replaced by a surcharge of up to 20% on the agricultural tax (i.e. an 
additional 1.4%) to provide revenues for village activities. 
Accumulated labour service and voluntary labour service:  these services, which refer to a certain number of labour-
days that rural workers had to work without any compensation (in cash or in kind), will be abolished. 
According to the authorities, in areas where the tax reform had been implemented, the "farmers’ burden" was 
reduced by 20% in 2001.  However, agricultural taxes still provide a large share of the local governments’ revenues.  The elimination of the agricultural tax and fees could mean a loss of up to 25% of tax revenue for local governments.  Hence, the success of the reform depend s on the continued offsetting transfers from the Central 
Government to provinces and counties as compensation for lower sub-national tax revenues.  It was estimated that in 2005 an additional Y 14 billion from the central budget would be needed in the form of transfer payments to support implementation of these policies by local governments.  Local governments have already experienced strong fiscal pressure due to the significant reduction in revenue after the reform, and in some cases, local administrations were almost paralyzed due to a lack of funds.  If this continues, rural fees might re-emerge.  To compensate for the reduced fiscal revenues, some local governments have, for example, set the parameters used to calculate the agricultural tax, such as normal output and price, at unreasonably high levels.  Local governments may 
also find themselves under strong fiscal pressures because of the much lower fiscal revenues, but relatively rigid 
expenditures; for instance, many politically driven "target reaching" projects such as infrastructure construction, hospital and school building remain in place.  The loss of an important source of revenue combined with increased demands suggests a major adjustment in the relationships between central, provincial, prefectural, and local governments with regard to local public finance;  better revenue sharing arrangements among different layers of 
government need to be in place to achieve this end. 
Source:  Gale et al. (2005), China’s New Farm Subsidies, Electronic Outlook Report from the Economic Research 
Service , USDA.  Available at:  www.ers.usda.gov [10 June 2005];  Ministry of Agriculture (2001), 2001 
China Agricultural Development Reports , China Agriculture Press, Beijing;  Ministry of Agriculture 
(2002), 2002 China Agricultural Development Reports,  China Agriculture Press, Beijing;  Ministry of 
Finance (2005), Report on the Implementation of the Central and Local Budgets for 2004 and on the Draft 
Central and Local Budgets for 2005 , Third Session of the Tenth National People's Congress, 5 March 
2005.  Available at: http://www2.chinadaily.com.cn/english/doc/2005-03/16/content_425555_7.htm [27 June 2005];  Tao Ran (undated), Current Taxation Reform in Rural China  [Mimeo Provided by the 
World Bank];  and World Bank (undated), China: Tax-for-Fee Reform Summary Analysis  (unpublished). WT/TPR/S/161 Trade Policy Review 
Page 174 
  
38. Total national government expenditure on agri culture has increased from Y 123 billion in 
2000 to Y 236 billion in 2004, the latest  year for which data were available.61  Expenditure to support 
"rural production" accounted for 71.8% of total expe nditure in 2003, while expenditure on "capital 
construction" accounted for 24%.62  In addition, expenditures on a "subsidy for price increases" 
reached Y 79.6 billion in 2004 (Table IV.2).63  Support to agriculture is planned to increase in 2005.64  
Despite the existing assistance, it h as been calculated that the actual level of domestic support is 
almost negligible, or even negative, if the vari ous fees and levies imposed on farmers are taken into 
account.65 
Table IV.2 
Agricultural price subsidies, 1998-04 
  1998 1999 2000 2001 2002 2003 2004 
Total (Y billion) 71.2 69.8 104.2 74.2 64.5 61.7 79.6 
Subsidies for price increases in grain, cotton, and edible oil 56.5 49.2 75.9 60.5 53.5 55.0 66.0 
Subsidies for curbing price increase 2.8 1.4 1.8 1.7 0.5 0.5 0.5 
Subsidies for increase in meat price 2.6 2.1 1.9 0.5 0.2 0.1 0.1 
Other price subsidies 9.3 17.1 24.6 11.5 10.3 6.1 12.9 
Per cent of total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 
Subsidies for price increases in grain, cotton and edible oil 79.3 70.6 72.8 81.6 83.0 89.1 83.0 
Subsidies for curbing price increase 3.9 2.0 1.7 2.3 0.8 0.8 0.7 
Subsidies for increase in meat price 3.7 2.9 1.9 0.6 0.2 0.2 0.2 
Other price subsidies 13.0 24.4 23.6 15.5 16.0 9.8 16.2 
Annual growth rate total (%) 29.0 -2.0 49.4 -28.9 -13.0 -4.3 28.9 
Subsidies for price increases in grain, cotton and edible oil 36.6 -12.9 54.1 -20.2 -11.6 2.8 20.0 
Subsidies for curbing price increase -35.0 -49.3 24.3 -5.5 -68.2 -3.2 1.4 
Subsidies for increase in meat price -7.6 -21.2 -5.6 -76.5 -64.8 -20.0 0.0 
Other price subsidies 39.0 83.6 44.5 -53.4 -10.3 -41.0 112.3 
Source: National Bureau of Statistics (2005),  China Statistical Yearbook . 
39. A number of new price and income support policy measures were implemented in 2004 and 
extended in 2005 to increase grain production and ru ral incomes.  Farmers growing grain received a 
direct subsidy based on the area of land sown to maize, rice or wheat.  This programme started on a 
trial basis in 2002, and was implemented nationally in  2004.  Each province could set its own method 
for granting subsidies.  The standard practice, however, seems to be to pay farmers a set amount, 
generally around Y 10 per mu (appr oximately US$7.33 per acre), for areas planted with grain.  The 
subsidy also varied across regions and commoditi es.  Subsidies were generally not planned for 
oilseeds, cotton, and other crops;  however, the Prov ince of Anhui subsidized rapeseed in 2004.  The 
subsidies amounted to Y 16.5-Y 41.4 (US$2-US$5) per tonne and the subsidy per farm was also 
                                                      
61 According to the authorities, this includes mainly expenditure on infrastructure construction, 
structural reform, technological development, disaster aid and prevention, environmental protection, and poverty 
alleviation. 
62 Ministry of Finance (2004) and National Bureau of Statistics (2004). 
63 No details were provided to the Secretar iat as to the nature of these programmes. 
64 China plans to increase subsid ies granted to grain producers  The Central Government will 
appropriate Y 3.7 billion to help farmers purchase improved seeds, Y 850 million (or 29.8%) more than was budgeted in 2004, and Y 300 million for the purchase of agricultural machinery and tools, Y 230 million (or 
328.6%) more than in 2004.  In addition, special funds have been earmarked (Y 15 billion) in 2005 to support 
major grain-producing counties (Ministry of Finance, 2005). 
65 Ke et al. (2003). China WT/TPR/S/161 
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small, since the average farm plants 3-4 mu of e ach crop.  The estimated cost of the programme for 
2004 was Y 11.6 billion, some 2% of the gross value of grain production.66 
40. It has been suggested that these subsidies have had only a minor impact on production and 
rural incomes67;  however, the authorities believe that the impact has been major.  The increase in 
grain production in 2004 was more likely due to hi gh grain prices in the domestic and international 
markets during early 2004 and favourable  weather which boosted grain yields.68  The subsidies are not 
high enough to make grain as profitable as alternative crops, such as cotton, fruit or vegetables;  hence, they are not enough of an incentive to modi fy planting decisions.  The effectiveness of these 
policies will become more apparent when world grai n prices are lower.  Nevertheless, the granting of 
subsidies is an important symbolic change  from the traditional taxing of agriculture. 
41. China has sought to reduce the cost of agri cultural inputs through measures including tax 
relief for manufacturers and service providers, and price regulation of essential services.  To lower prices of fertilizers, fertilizer producers have b een given access to lower priced inputs, such as 
electricity, and are exempt from VAT.  Also, in an effort to improve the oil yield of domestically 
produced soybeans, improved quality soy seeds have been subsidized since 2002.
69  In 2004, this 
scheme was extended to encourage the use of  improved seeds for rice, maize, and wheat.70  T h e  
Government also provided subsidies for the purchase of farm machinery, which assists a small number of farms that are sufficiently large to warrant mechanization. 
42. Rail shipments of cereals (i.e. maize, rice, a nd wheat), cotton, and soybeans destined for 
export and the domestic market were to be temp orarily exempted from payment of the railway 
construction fee into the railway constructio n fund, which represented 20%-50% of total 
transportation costs, from April 2002 until December 2003.
71  
Price controls 
43. Price controls, which have in certain instances be en tied to state procurement, have been in 
place for major agricultural commodities for much of  the period under review.  However, China has 
progressively liberalized the price of agricultural pr oducts.  It seems that as of 2004, centrally set 
"government pricing" applies only to tobacco72;  a minimum procurement price scheme remains in 
place for rice and was extended to wheat in 2005. 
44. According to its Protocol of Accession to the WTO, at the time of China's accession, tobacco 
was subject to "state pricing" (i.e. prices fixed at  the central level), and cotton, grain, silkworm 
cocoons, and vegetable oil to "government guidance pr icing" (i.e. the Government set either a "basic 
price" or a price that could fluctuate within a range  (generally 5% to 15%)).  In the context of this 
review, the authorities clarified that even though co tton was included in Annex 4 (Products Subject to 
                                                      
66 A total of Y 31.32 billion was allocated from the Central Budget to fund the subsidy on seeds and the 
tax reform ( Beijing Review , No. 24, 16 June 2005). 
67 The new subsidies (grain and seed subsidies) have contributed only modestly (in the order of 5%) to 
increases in grain farmer’s income s in 2003-04 (Gale et al. 2005). 
68 Price indexes show that in August 2004 prices for rice were up by 50%, wheat by 45%, and corn by 
26% from a year earlier.  
69 Ke et al. (2003). 
70 Thirteen provinces were provid ed with special subsidies for purchasing improved seeds for these 
crops amounting to a total of Y 2.85 billion. 
71 On 26 March 2002 the SDRC issu ed a document abolishing the ra ilway construction fee levied on 
the transport of cotton, cereals, and soybeans (Ke et al. 2003). 
72 Tobacco remains subject to a st ate monopoly under which the state purchases all raw tobacco grown 
in China, at prices determined by the NDRC and the Nati onal Tobacco Bureau. WT/TPR/S/161 Trade Policy Review 
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Government Guidance Pricing) of the Accession Protocol73, its price has been liberalized gradually 
starting in 1998, when state pricing was changed to a guidance price;  since September 1999, it has been determined mainly by market forces.
74  Vegetable oil has also been removed from the list of 
products subject to government pricing.75  As of 1 August 2001, several agricultural products, i.e. 
cotton, edible vegetable oil, grain, silkworm coc oons, and sugar, have been  considered "important 
reserved materials".76  Reserves are sold at a statutory price,  which is lower than the market price, 
when the market price reaches a certain level.  It  appears that these products are not otherwise subject 
to price controls (Chapter III(4)(ii)). 
45. China has gradually liberalized the prices of grai n.  Prior to 1997, farmers were required to 
deliver a fixed amount of grain at an administrativ e price (procurement or quota price).  This price 
was kept artificially low in order to subsidize urban consumers.  In late 1997, the market prices of wheat and maize fall below the quota price and in order to protect rice and wheat producers, the government introduced "protective prices" for grai n, at which the state guaranteed purchase of the 
total output of specific commodities.
77  However, due to budgetary constraints for many local 
governments in major grain producing regions, th e scheme was under-funded.  Thus, payments for 
state purchased grains could not always be made, grain prices kept falling, and STEs could not sell at 
profitable prices, leading to stocks becoming stale.  Some grain producing areas also had storage difficulties.  Given these problems, in 2000 the Government decided to reduce protective prices as well as the scheme’s coverage.
78  Since then, different grains produced in different provinces were 
gradually removed from the scheme79;  the scheme was completely eliminated in 2004.  The 
protective price system was replaced by a minimum price system or "lowest purchasing price" in major grain producing provinces, below which the G overnment guarantees purchase.  It applies to 
major grain crops produced in regions suffering from food shortages;  in 2004, it was applied only to 
paddy rice.  The authorities state that, in accordance with a decree i ssued by the State Council states 
that as of May 2004 grain prices would be "mainly" determined by supply and demand
80, government 
intervention in the pricing of grain has been minimized to the extent possible. 
Marketing 
46. Until the mid 1980s, both upstream and downstream  agriculture related enterprises were 
organized into state monopolies.  However, since the latter part of the 1990s, Chinese farmers have 
had the option of selling most of their products, with the exception of cotto n, grain, and tobacco, 
                                                      
73 WTO document WT/L/432, 23 November 2001. 
74 Liu, Zhenwei (2002). 
75 WTO document G/SCM/M/48, 30 March 2004. 
76 Fertilizer, which was subject to  guidance pricing at the time of accessi on, has also been included in 
the list of "important reserved materials" ("State Planning Commission and Relevant Agencies of State 
Council's Catalogue of Products and Se rvices Subject to Price Control"). 
77 In 1998, the state procurement quota were eliminat ed and STEs were given a monopoly to purchase 
all grains that producers wanted to sell at the state-set protective price. 
78 For instance, for the 2000 market season, long-grain non-glutinous rice produced in south China, 
spring wheat in northern China, and wheat in southern China, were removed from the scheme, while maize 
produced south of the Yangtze River was included in the scheme and protective prices were reduced for grains 
that were still covered (State Council, 2000, the "Circula r on the Related Issues Concerning the Withdrawal of 
Part of the Grain Varieties from the Area of Purchase under Protective Prices";  and Ministry of Agriculture, 
2001). 
79 For instance in 2001, maize and rice produced in the Provinces of Hebei, Henan, Shandong, and 
Shanxi were withdrawn from the protective scheme. 
80 Decree No. 407 of the State Council of the People’s Republic of China promulgating the "Regulation 
on Grain Circulation Management".  Available (in Ch inese only) at:  http://www.china.org.cn/chinese/PI-
c/578990.htm [27 June 2004]. China WT/TPR/S/161 
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through diversified private channels.81  China's tobacco industry is subject to a state monopoly, with 
rigid control over production, marketing, and trade in  tobacco products.  By contrast, the circulation 
of cotton has been substantially liberalized through the dismantling of the monopoly on cotton 
purchasing from farmers in 1999 and on cotton distribution in 2001.82 
47. Reform of the grain circulation system began in  the early 1990s and has been gradual.  In 
1998, the State Council issued a new grain policy package.83  As a result, STEs were granted a 
monopoly to purchase all grain that producers wished to sell, at the state-set "protective price" put in 
place in 1997.  The STEs were allowed to sell purch ased grain at prices covering all operating costs 
and even allowed to make profits.  Implementati on of the new policy encountered several problems, 
such as overstocking by STEs, accumulation of poo r quality grain in government stocks, etc.  As a 
result, the Government had to change its policy again.84 
48. As of 2001, policy decisions regarding grain ma rketing were decentralized to the provincial 
level.85  Some grain users (e.g. grain processors, feed  manufacturers) were allowed to purchase grain 
directly from producers.86  Also in 2001, eight grain purchasi ng provinces were allowed to liberalize 
their grain markets.87  This involved the abolition of compulsory state purchasing, with farmers no 
longer obliged to sell to the State, and the end of state "protective price" setting for grains.88  In 2002, 
some other provincial governments decided to libera lize their own markets either across the province, 
or in major grain purchasing areas within the provi nce.  Progress was also made in the reform of 
SOEs;  from 1998 to the end of 2004, the number of these enterprises was re duced by 36% and the 
number of employees by 50%;  between 1998 a nd end October 2002, losses were cut by 22%.89 
49. In June 2004, the Central Government issued a new regulation on grain marketing.  The new 
regulation has, in principle, liberalized grain marke ting by allowing "qualified" non-state firms to buy 
and sell grains.90  If this new regulation is fully implem ented, the monopoly position of the STEs will 
be effectively ended.  However, the governors' gr ain-bag responsibility system, established in 1995, is 
                                                      
81 These include direct sales by farmers to retail or  wholesale purchasers, including supermarket chains, 
direct sales to local markets, direct  contracting with food processors/exporters, and sales through farmers' 
professional associations or cooperatives. 
82 State Council:  "The Opinions on Further Deepenin g the Reform of the Cotton Distribution System",  
and "Circular on Opinions on Separating the Supply and Marketing Cooperatives from Cotton Businesses" 
issued by the State Economic and Trade Commission and other departments" (September 2002). 
83 State Council:  "Decision on Deepening the Refo rm of the Grain Circulation System" (1998). 
84 State Council:  "Circular on Further Improving Policy Measures of the Grain Circulation System 
Reform (May 1999);  "Supplementary Circular on Further Improving Policy Measures of the Grain Circulation System Reform" (October 1999);  "Circular on the Rela ted Issues Concerning the Withdrawal of Part of the 
Grain Varieties form the Area of Purchase  under Protective Pri ces" (February 2000). 
85 Liu, Zhenwei (2002).  The Governor of the province was made responsible for maintaining a balance 
between demand and supply of grain in the province. 
86 Ministry of Agriculture (2001). 
87 These provinces were Beijing, Fujian, Guangdong, Hainan, Jiangsu, Tianjin, Shanghai, and Zhejiang. 
88 Liu, Zhenwei (2002). 
89 Ministry of Agriculture (2003). 
90 The authorities noted that the State Grain Bureau an d the SAIC issued the "Interim Measures on the 
Qualification Examination of Grain Purchasing Enterpri ses", which defines which enterprises are qualified to 
buy and sell grain.  Qualified enterprises include those capable of fund raising, possessing or leasing grain storage facilities, and those capable of quality control and preservation of procured grain. WT/TPR/S/161 Trade Policy Review 
Page 178 
  
retained, in principle, under the new regulations;  it is not clear how that responsibility is to be 
discharged in the newly liberalized market.91 
50. It has been reported that grain markets have b ecome more competitive and open, owing to the 
progressive reform.  Private and individual grain merchants are playing a greater role in grain 
procurement, state-owned enterprises are improvi ng services and working with  village brokers to 
purchase grain, and farmers have more alternatives to grain marketing.92 
(3) ENERGY  
(i) Petroleum 
51. China is a relatively oil-intensive economy and,  given its reliance on imported oil, is more 
vulnerable to oil price shocks than its main trading partners.93  Hence oil is of strategic importance, 
and "oil security" has become an important goal, especially as its reliance on imports to meet domestic demand increases.
94  According to the Tenth Five-Year Plan (2001-2005), domestic oil 
production can no longer keep pace with the country 's needs, resulting in an increasing imbalance 
between supply and demand.95  In 2003, total domestic consumption of crude oil was 274 million 
tonnes (up 11.5% from 2002);  demand continued to increase in 2004 (by 16.4%) and it is expected to 
continue rising.96  However, domestic production of crude oil has not kept pace with demand and 
hence the consequent increase in imports of crude oil.  In 2003, China produced some 169 million 
tonnes of crude oil (up 1.5% year-on-year) and imported 91 million tonnes (up by 31.3%);  
accounting for 36.1% of domestic consumption.  In 2004, producti on increased again (by 2.9%) but 
imports increased faster.97  China imported 122.7 million tonnes of crude oil in 2004, an increase of 
34.8% over the previous year98;  imports are expected to have been 130 million tonnes in 2005.  
Imports of crude and processed oil products account ed for 8% of total merchandise imports in 200499, 
and are expected to continue to rise in tandem with domestic demand.100  Due to its size and its 
increasing demand, China has become a key player in the international oil market.  However, it seems 
                                                      
91 The "governor's grain-bag responsibility system" (GGBRS) was formally instituted in early 1995, 
imposing a responsibility on provincial governments to ensure adequate local grain supply and market stability, especially for grain purchasing regions. 
92 Gale et al. (2005). 
93 China's oil intensity (defined as primary oil consumed per unit of GDP) is more than twice as much 
as in OECD countries (International Energy Agency, 2004, p. 11). 
94 Chen (2004). 
95 The Tenth Five-Year Plan:  Oil & Gas Exploration.   Available at: http://bizchina.chinadaily.com.cn/ 
guide/industry/industry4-1.htm [7 July 2005]. 
96China News,  "China's petroleum import dependency to top 50% in 2010.  Available at:  
http://www.chinanews.cn/news/2004/2005-02-16/1707.shtml [7 July 2004]. 
97 National Bureau of Statistics (2005b). 
98 This was the first time that China's annual crude oil imports were above 100 million tonnes (National 
Bureau of Statistics). 
99 In 2004, imports of petroleum and petroleum pr oducts reached US$44.8 billion, up by 66.5% from 
2003 (UNSD, Comtrade). 
100 In February, the Energy Research Institute (ERI ) of the NDRC indicated that imports of petroleum 
would reach 180 million to 200 million tonnes by 2010,  and China's aggregate pe troleum demand would reach 
350 million to 380 million tonnes, making its import dependency over 50%.  China's oil import dependency was only 29.1% in 2000 ( China News , "China's petroleum import dependency to top 50% in 2010"). China WT/TPR/S/161 
 Page 179 
 
 
that its oil demand growth might be slowing, ther eby reducing the pressure on international prices, but 
considerable uncertainty remains.101 
52. Oil security is at the core of China’s energy strategy.  As a result, the Tenth Five-Year Plan 
called for the "reorganization" of the oil industry, with a view to ensuring a sustainable oil supply "at 
lowest possible cost".  While the reorganization fo cused primarily on developing the domestic market, 
increasing exploration efforts, and building oil reser ves, it also envisaged a growing reliance on the 
international market, including through imports and outward investment (in oil production), to 
supplement domestic supplies.  This , according to the authorities, would enable China to diversify its 
suppliers, avoid the risk of over-dependence on an y one supplier, and reduce the effects of price 
fluctuations.102  China has therefore entered into sev eral overseas oil investment projects 
(Chapter II(6)(i)), through which, by virtue of bein g a direct investor or shareholder, it normally 
secures a share of the annual oil out put at pre-established prices.  Domestic enterprises have also been 
encouraged to take a more active ro le in the international market to source oil from different origins;  
hence, the recent bid by China National Offshore Oil Corporation (CNOOC) for Unocal, which was 
later withdrawn.103  China is also establishing a national oil reserve system to ensure a stable oil 
supply and to prevent possible negative effects th rough supply disruptions, price upheavals, and other 
unexpected events.104 
(a) Reform and industrial structure 
53. Despite efforts to reform the sector, both upstream and downstream operations are still 
dominated by a few SOEs.  Thus, lack of competit ion continues in the petroleum sector.  In 1998, 
China restructured its oil industry by integra ting upstream with downstream operations, domestic 
trade with foreign trade, and production with sales, aimed at creating internationally competitive large 
oil companies.105  The two major national companies, Chin a National Petroleum Corporation (CNPC) 
and the China Petroleum and Chemical Corporatio n (SINOPEC), were reorganized into two new 
competing vertically integrated entities.  The new CNPC, which had formerly been concerned mainly 
with the upstream side (exploration) of the industr y, accounted after the restructuring for 66% of both 
China’s oil and gas output, and 42% of its refining capacity.  The new SINOPEC, which had 
previously focused on midstream and downstream operations (refining and retailing), accounted for 
23% of oil output, and 54% of refining capacity.106  These two companies operate alongside CNOOC, 
and China National Chemicals Import and Export Comp any (Sinochem Corp), which is in charge of 
trading. 
54. CNPC and SINOPEC were further reorganized in 1999, when the companies’ core business 
was separated from non-core business and social se rvices, and transferred to newly incorporated 
                                                      
101 According to the International Energy Agency (IEA) , oil demand will continue to increase in China, 
but at a slower rate.  The increase in demand in 2004 was attributed to unique incidents, such as the increased 
use of oil to generate electricity.  However, unless the supply of electricity is increased through the use of 
alternative energy sources, demand for oil might well incr ease again at a significant rate.  ("World Oil Supply 
and Demand."  Available at:  www.oilmarketreport.org [7 July 2005];  and Ramsey, 2005). 
102 The Tenth Five-Year Plan:  Oil & Gas Exploration.  Available at: http://bizchina.chinadaily.com.cn/ 
guide/industry/industry4-1.htm [7 July 2005] 
103 "Chinese Oil Company Joins Bid for Unocal", International Herald Tribune,  24 June 2005;  and 
"Profit or politics? Chief of CNOO C faces a delicate balancing act", International Herald Tribune,  7 July 2005. 
104 In 2003, the State Development Planning Commi ssion (SDPC) (at present the NDRC) announced 
that China was to build four strategic oil reserve facilitie s on the coast.  So far, work has started on the first 
phase, capable of holding an oil reserve of 10 million cubic meters (The Tenth Five-Year Plan:  Oil & Gas 
Exploration;  and "Setting Some Aside", Beijing Review,  11 November 2004). 
105 The Tenth Five-Year Plan:  Oil & Gas Exploration;  and Nolan and Zhang (2002). 
106 Nolan and Zhang (2002). WT/TPR/S/161 Trade Policy Review 
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entities PetroChina and SINOPEC Group, respectively.107  In 2000, both PetroChina and SINOPEC 
Group were listed in international stock markets.   After the global listing, CNPC held 90% of 
PetroChina’s total equity and SINOPEC held  67.92% of SINOPEC Group.  These initial public 
offerings were the first steps to opening the sector to foreign competition by allowing minority foreign 
shareholding in PetroChina and SINOPEC.  In  September 2005, a new state-owned company 
(Yanchang Oil (Group) Co. Ltd) was set up in Shaan’xi Province.108  This company is the 
consolidation of several small companies into one  group and become the fourth largest company in 
China after PetroChina, SINOPEC, and CNOOC in r espect of petroleum exploitation and refining 
capacity.109 
55. Oil exploration seems to be dominated by these four companies. The lack of competition in 
this area means that petroleum resources may not ha ve been exposed to the full range of exploration 
ideas and technologies.  Moreover, private investment in oil exploration was not allowed until recently.  Companies need approval from the State C ouncil to engage in oil exploration activities prior 
to applying for a licence and registering with the State Administration of Industry and Commerce 
(SAIC).  They also need an exploration and mi ning permission certificate from the Ministry of Land 
and Resources, which states the terms and extent of  the exploration rights.  As of February 2005, 
"qualified" private enterprises may obtain prospecting and mining rights.
110  Information regarding the 
procedures and requirements to obtain such rights w as not provided to the Secretariat;  the authorities 
state that this is due to their time and resource constraints. 
56. Private investment is permitted in refining, a nd wholesale and retail of oil products;  however, 
these activities are still largely controlled by SOEs .  Refining and wholesale operations remain 
dominated by PetroChina and SINOPEC111, and retail activities are not fully open to competition;  
in 1999, the two companies were granted exclus ive licences to operate new service stations.  In 
October 2003, however, the first wholesale licence in four years was granted to a domestic company 
(Hubei Tianfa Group in Hubei) to sell refined oil pr oducts.  This is not likely to affect the market, 
since PetroChina and SINOPEC still control the wholesale market and most storage facilities.112  In 
June 2005, China's first private petroleum group, the Great United Petroleum Holding Co., Ltd (GUPC) was established;  it aims to create a cor poration with several subsidiaries in charge of 
exploration and mining, refining, storing, whol esale and retailing, and importing and exporting.  
However, the company still needs to  acquire licences, including to sell oil products at the wholesale 
level, and to import oil products and fuel oil.
113  Information was not provided regarding the 
procedures to obtain wholesale and retail licences, or  the applicants’ qualifications, again due to the 
authorities' time and resource constraints. 
57. To promote foreign investment, petroleum refining was included in the most recent 
"Catalogue of Encouraged Foreign Investment  Industries" which entered into force on 
                                                      
107 Each of the companies' core business covers oil (and gas) exploration and development exploration 
and development, storage and transpor tation, and refining and marketing. 
108 This company is controlled by Shaan'xi's SASAC. 
109 China Daily,  20 September 2005. 
110 On 25 February 2005, the State Council issued "Guidelines on Encouraging and Supporting the 
Development of the Non-Public Sector including Individual and Private Enterprises", allowing private 
companies to invest in previously restricted industries, including those dominated by state monopolies and heavily regulated sectors such as the oil industry. 
111 In a market overhaul in 1999, the Government recalled thousands of wholesale licences for refined 
oil products and consolidated the business into a duopoly featuring PetroChina and Sinopec. 
112 "Door to oil sector opens slightly" ( China Dail y, 22 October 2003.  Available at:  
http://www2.chinadaily.com.cn/en/doc/2003-10/ 22/content_274590.htm [7 July 2005]). 
113 "China's first private petroleum corporation established amid disputes".  (Available at:  
http://en.ec.com.cn/pubnews/2005_06_30/200507/1095369.jsp [7 July 2005].) China WT/TPR/S/161 
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1 January 2005.114  Moreover, China has committed to allowi ng foreigners to engage in the wholesale 
distribution of crude and processed oil by 2006 (five years from accession);  foreign majority ownership will be allowed and no ge ographic or quantitative restrictions will apply.  According to the 
authorities, foreigners have been allowed to engage in the retail of processed oil since 2004.
115  
However, no information was provided regarding the extent of foreign participation;  again, the 
authorities state this is due to their time and resource constraints. 
58. While barriers to trade have d eclined somewhat since 2001, tr ade in crude and processed oil 
products is still restricted since imports and exports rema in to a large extent under government control 
through state trading.  Applied tariffs on crude a nd processed oil products have decreased since 2001.  
The specific tariff of Y 16 per tonne levied on crude oil was removed in 2002, while tariffs on 
processed petroleum products decrease d from 8% in 2001 to 5.7% in 2005.116  Import quotas and 
import licences on petroleum products were phased out by 1 January 2004;  however, automatic 
import licences still apply to oil and oil products subject to state trading.  Imports of oil by STEs 
remain substantial, but under China's WTO commitm ents, the import share of non-STEs should have 
increased annually (Chapter III(2)(vii)).  In 2005, ex ports of crude oil and processed oil were subject 
to export quotas and state trading (Table AIII.5);  in addition it appears that foreign-invested 
enterprises designated by MOFCOM, were al lowed to export crude and processed oil 
(Chapter III (3)(vii)). 
59. Crude and processed oil products are included in the list of "important reserved materials".117  
The NDRC sets the price of refined oil products  (e.g. gasoline, diesel, aviation kerosene) in 
accordance with a 2001 Circular issued by the State Development Planning Commission (SDPC), 
NDRC’s predecessor, which was amended in 2003.118  Domestic wholesale prices of finished products 
are based on the weighted average of f.o.b. pr ices in New York, Rotterdam, and Singapore, plus 
insurance, freight, and taxes.  Domestic prices are not  adjusted daily but monthly or when they deviate 
by 8% from the weighted spot av erage price in the three markets.119  Retail prices are set by the oil 
companies based on the wholesale price set by the NDRC plus a profit margin (also determined by the 
NDRC), which varies from +/-5% to +/-8%.  Even  though the pricing mechanism envisages price 
adjustments, prices of refined oil products in China ha ve not kept up with international prices.  Prices 
of finished oil products in China were adjusted  only three times in 2004 and five times in 2005, 
despite the increase in the international crude oil pr ice.  As a result, production of refined products has 
decreased and companies prefer to export than to  sell domestically, causing supply shortages in some 
cities.  To prevent further shortages, the VAT a nd excise tax rebates on exports of some petroleum 
products were suspended from 1 September 2005 until the end of the year120, and new contracts for 
                                                      
114 Order of the National Development and Reform Commission, Ministry of Commerce (No. 24) of 
30 November 2004, "Catalogue for the Guidance of Foreign Investment Indust ries".  Available at:  
http://english.mofcom.gov.cn/aarticle/topic/lawsdata /chinaforeigntradelaw/20 0501/20050100015843.html 
[8 June 2005]. 
115 WTO document S/DCS/W/CHN, 24 January 2003. 
116 WTO Secretariat calculation based on SITC Rev.3 (Division 33). 
117 State Planning Commission and Relevant Agencies of State Council, "Catalogue of Products and 
Services Subject to Price Control" .  Available (in Chinese only) at:  http://www.ndrc.gov.cn/zcfb/zcfbl/ 
zcfbl2003pro/t20050707_27540.htm [22 September 2005]. 
118 This is based on an unofficial translation of "The NDRC announced publicly that (China) entered 
into a high oil price period (the oil sector is full of) contradictions" in People's Daily,  4 August 2005.  Available 
(in Chinese only) at:  http://finance.people.com.cn/GB/1045/3591695.html [4 August 2005]. 
119 However, it is reported that the NDRC chan ged the price adjustment mechanism in 2003.  
According to these changes, domestic prices are adjusted irregularly, ac cording to domestic economic needs, 
rather than the 8% deviation from the weighted spot average price. 
120 Products affected include petrol and aviation gasoline (HS 2710.1110) and naphtha (HS 2710.1120) 
(Ministry of Finance and State Administration of Taxation,"Circular on Suspending Export Rebates of Gasoline WT/TPR/S/161 Trade Policy Review 
Page 182 
  
imports of crude oil under processing trade have been prohibited, while processed products from 
already sanctioned contracts can only be sold do mestically.  The NDRC is reviewing the pricing 
mechanism for refined oil and is planning to change it from lagged to real-time, to follow fluctuations 
in international oil prices more closely. 
(b) Institutional and legal framework 
60. The institutions in charge of regulating the oil sect or have also been restructured.  In 1998, the 
Ministry of Chemical Industry (MCI), the sectoral regulator, was replaced by the State Bureau of Petroleum and Chemical Industry (SBPCI), whic h took over MCI’s functions and the CNPC and 
SINOPEC’s administrative functions.  SBPCI wa s affiliated to the State Economic and Trade 
Commission (SETC), and had two main functions:  to  draw up the industry’s development plan and to 
promote the reform of the SOEs in the sector.
121  In 2001, the SBPCI was dismantled and replaced by 
the China Petroleum and Chemical Industry Associ ation (CPCIA), which does not have governmental 
functions, but assumes obligations entrusted to the former SBPCI.122  At present the Bureau of Energy 
(Office of National Oil Reserve) in the NDRC is in charge of formulating the industry's development 
plan, and for "administering" the sector and the national oil reserves. 
61. The sector is regulated by several laws including:  the Mineral Resources Law (revised on 
29 August 1996)123; the "Compendium of the Management of the Exploration of the Oil Fields" 
(27 August 2004)124;  "Regulations on the Exploitation of Offshore Petroleum Resources in 
Cooperation with Foreign Enterprises" (amended 2001)125;  "Regulations on the Exploitation of 
Onshore Petroleum Resources in Cooperation with Foreign Enterprises"126;  and the "Provisional 
Measures for Administration of the Market of Processed Oil" (MOFCOM Decree No. 23 of 2004).127  
However, it seems that there is no comprehensiv e law and no proper regulatory framework for the 
sector;  hence, the legislative framework tends to  be provided by regulations and administrative 
documents rather than by laws.128  To foster the further development of the sector and encourage 
private investment and competition, a legal frame work would need to cover all areas of the 
hydrocarbon industry and define the roles, rights, a nd obligations of the different players in the sector. 
(ii) Electricity  
62. China has one of the fastest-growing electricity markets in the world, due partly to its rapid 
economic growth and conse quent increasing demand for electricity, but also due to the use of energy-
                                                                                                                                                                     
and Naphtha of 25 August 2005".  Available at:  http://english.mofcom.gov.cn/aarticle/policyrelease/ 
domesticpolicy/200508/20050800335449.html [26 September 2005]). 
121 Nolan and Zhang (2002). 
122 People's Daily  online information, 21 April 2001.  Av ailable at:  http://english.people.com.cn/ 
english/200104/29/eng20010429_68892.html [7 July 2005];  and China Petroleum and Chemical Industry Association online information.  Available at:  http://www.cpcia.org.cn/xl.jsp?biaoshi=8383 [7 July 2005]. 
123 China Climate Change Info-Net online informat ion.  Available at:  http://www.ccchina.gov.cn/ 
english/source/ca/ca2003091803.htm [7 July 2004]. 
124 InfoPetro online information.  Available at:  http://www.infopetro.com.cn/Laws/ 
ShowLaws.aspx?id=90 [7 July 2004]. 
125 Information available online at:  http://www.wiseman.com.cn/management/tools/policynlaw/10/ 
10014a.htm [7 July 2004]. 
126 Novexcn online information.  Available at:  http://www.novexcn.com/explore_petro_resources.html 
[7 July 2004]. 
127 InfoPetro online information.  Available at:  http://www.infopetro.com.cn/Laws/ShowLaws.aspx? 
id=16 [7 July 2004]. 
128 World Bank and the IESM (2000).  China WT/TPR/S/161 
 Page 183 
 
 
intensive technologies in the industrial sector.129  In 2004, the latest year for which data were 
available, consumption of electricity grew by 14. 2% (16.5% in 2003).  As in previous years, the 
industrial sector was the largest consumer, in 2004, accounting for 74.8% (73% in 2003) of total 
electricity consumption.  By contrast, consumption in other sectors is relatively low.  Despite an 
increase in installed electricity capacity over the last two decades, supply has not kept pace with 
demand.130  According to the authorities, however, this  is no longer the case and China’s electricity 
supply is at present enough to meet demand.  Also, wh ile efforts to unify the market have been made, 
it remains fragmented and electricity trade between provinces is low. 
63. The strong growth in demand for electricity is due in part to highly intensive electricity use.  
Considerable progress has yet to be made with regard to electricity conservation in China.131  F o r  
instance, electricity use in 11 major industries is much higher  than international standards.132  In 1997, 
these industries consumed 82% of the total elec tricity consumed by industry and transportation.133  In 
2000, the average electricity consumption in these i ndustries was, in certain instances, 6% to 36% 
higher than international levels.  Low investment in energy-efficient technology and practices is one 
of the reasons for China’s relatively high demand.134  Abolishing preferential pricing for 
energy-intensive products would help curb demand for electricity.135  No information was provided to 
the Secretariat on the annual outlays associated with such preferential pricing. 
64. By end 2001, China ranked as the second largest producer of electricity in the world, with 
total nation-wide installed capacity of 338 gigawatts  and total generating ou tput of 1,446 terawatt 
hours.136  In 2004, total generating output reached  2,187 million TWh and electricity supply, 
according to the authorities, is expected to grow by 12% in 2005.  However, despite the increase in 
supply, consumption has outpaced capacity since 2000 .  Imports of electricity, which have also 
increased since 2000, cannot meet the excess demand;  in 2003 they accounted for only 0.15% of total 
energy available for consumption.  According to th e authorities, this trend has been reversed and in 
2004 and 2005, supply outpaced demand.137  Power shortages can be attributed to several factors, 
including artificially low electricity prices, insufficient investment in the sector, uneven distribution of 
electricity due to the absence of a national transmission network, and inadequate planning.138  T h e  
authorities attributed the power shortages to additiona l factors, such as China’s rapid growth and to 
some energy-intensive sectors, for instance steel, which grew faster than other sectors and is now one of the "overinvested" industries (Chapter IV(4)(ii)).  China’s efforts to meet its power needs have also 
                                                     
 
129 However, empirical findings sugg est that there has been a decoupli ng of electricity consumption and 
economic growth.  The rate of growth of electricity consumption is not a di rect one-to-one co rrelation with GDP 
growth.  Thus, rapid GDP growth might not trigger similar growth in electricity consumption (Shiu and 
Lam, 2004). 
130 China Electricity Council online information.  Av ailable at:  http://www.cec. org.cn/ [26 May 2005]. 
131 Some research suggests that the Chinese economy is more energy ef ficient today than a decade ago.  
Two major reasons are proposed for the fall in electricity intensity:  an improvement in electricity efficiency of electrical appliances and equipment,  and conservation efforts to reduce electricity consumption (Shiu and 
Lam, 2004). 
132 These industries include chemical s, coal, light industry non-ferrous metal, petroleum, refining, steel, 
and textiles;  and railways. 
133 More recent data were not provided to the Secretariat. 
134 World Bank (2005).  
135 Chen (2004). 
136 Lin (2003).  1 gigawatt is equal to 1 billion watts.  1 terawatt is equal to 1 trillion watts. 
137 No data were provided to the Secretariat to support this statement. 
138 For instance, in the wake of the Asian financia l crisis, China slowed the construction of power 
plants in anticipation of a decrease in power demand.  Demand did decline initially, but it unexpectedly rebounded in 1999 and 2000 prompting power shortages due to a lack of installed production capacity. WT/TPR/S/161 Trade Policy Review 
Page 184 
  
been hampered by the absence of a fully developed national power grid.139  The authorities maintain 
that the existing grid is appropriate and that th ere is interconnection amongst most of the networks. 
65. China relies mainly on coal for power generation.  Since 2000, some 80% of total electricity 
has been generated with coal, followed by hydrop ower, which accounted for less than 20%.  Efforts 
are being made to further develop hydropower, alte rnative energy sources, such as nuclear power, and 
cleaner energy sources, including natural gas.140  Although in 1992, China included nuclear power as 
part of its fuel mix, its contribution to total gene ration capacity remains low, at just 2.3% of total 
electricity generation in 2003.  However, the aim a ppears to be to increase the proportion of nuclear 
power in total power generation to 7% in 2020.141  In the short run, coal-based generation will remain 
dominant, but hydropower will play an increasingly important role.142  This is largely due to the 
Chinese Government’s commitment to develop the h ydro-rich western region and the adverse impact 
that the use of coal has had on the environment. 
(a) Electricity reform 
66. The sector has undergone three major reforms since 1986, aimed at improving its 
performance and overcoming impediments to its development.  These reforms involve essentially 
changing the Government's role in the sector and introducing market mechanisms.143  T h e  m a i n  
objective of the 1986 reform was to increase investme nt to expand generation capacity.  As a result, 
local governments were permitted to invest in electri city generation.  The 1997 reform was aimed at 
reducing Government involvement in the sector th rough the corporatization of public-sector power 
companies.144  In April 2002, the State Council approved another reform plan.145  This encompassed 
four key measures:  the unbundling of generation and transmission;  the dismantling of the monopoly 
held by the State Power Corporation (SPC) in generation and transmission;  the separation of 
transmission from distribution, and the introduction of  a competitive system for grid access;   and the 
introduction of competition at the retail level. 
67. A key component of the 2002 reform was the rest ructuring of the SPC, which was created in 
1997 with responsibility for electricity generation and transmission.146  Generation and transmission 
were separated in late 2002 by eliminating the SPC's monopoly in these areas.  The SOE was divided 
into five power generation companies147, and two power grid operators (see below).  The separation of 
transmission from distribution and the introducti on of a competitive system for grid access and 
competition at the retail level have yet to be attained. 
                                                      
139 Even though some 40% of all investment in the electric power sector during 1995-03 went into the 
construction of the power grid, the network remains unfinished (KPMG, 2005). 
140 An additional 10 Gw of natural gas generation capacity has been planned for the Tenth Five-Year 
Plan period (Zhang, 2003a). 
141 Feng (2004). 
142 The proportion of hydropower in total electricity production should increase from 16.4% in 2000 to 
19-22% by 2020 (Feng, 2004). 
143 It is suggested that in the future the Government's role should be that of a regulator and not a 
producer.  The Government would formulate policies, implement a comprehensive energy strategy, regulate the industry, and formulate statutes, whic h can promote competition and fight m onopolies in order to guarantee fair 
and orderly competition in the market (Chen, 2004). 
144 Zhang (2003b). 
145 State Council Notification on Power Sector Reform, Document No. 5, 2002. 
146 Transmission and distribution are not separated in China. 
147 These are:  Huaneng Group, Huadian Power, Guodian Power, Datang Power Group, and China 
Power Investment Company. China WT/TPR/S/161 
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68. It has been reported that the biggest obstacle to the reform and development of the energy 
sector, including electricity, are anti-competitive practices, i.e. the operation of monopolies and 
region-based market segmentation.148  Given energy's importance to the economy, structural and 
institutional reforms in power could be used  to lead and complement other reforms.149 
(b) Regulation 
69. The sector is regulated, inter alia , by the Electricity Law of 1995, which came into effect in 
1996, the "Regulations for Administration of Electri city Industry" of 2005, and the "Electric Power 
Regulations".150  The Electricity Law is being amende d and "Regulations on Competition in the 
Electricity Market" were drafted and published in 2005.  However, no information was provided to 
the Secretariat on the planned amendments or on the implementation of the new Regulations. 
70. As part of the ongoing reform of the sector, the State Electric Regulatory Commission 
(SERC) was established in March 2003.151  The SERC’s responsibilities include:  regulating the 
electricity market;  formulating laws and regulati ons;  setting up electricity trading arrangements;  
monitoring the operations of the electricity market to  ensure orderly and fair competition;  regulating 
transmission, distribution and "non-competitive" generation business;  and proposing tariffs and 
adjustments to the NDRC, the government pricing authority.  The Energy Bureau  of the NDRC was 
also set up in 2003 and charged with formulating the development plans for the energy sector. 
(c) Generation 
71. In late 2002, the SPC was divided into five pow er generation companies in order to end its 
monopoly in electricity generation and transmission.152  These companies are majority state-owned 
and under the direct ownership and control of the State-owned Asset Supervision and Administration 
Commission (SASAC).  In an attempt to introduce competition in electricity generation, each of the 
companies may only hold up to 20% of the market shar e in the region in which it operates.  In total, 
the five companies generate less than half of Ch ina's electricity;  the rest is produced by over 
40 companies owned by local governments, some 30 publicly listed companies, and several smaller 
enterprises.  At present, it seems that private owne rship in power generation accounts for 8% of total 
capacity.  Despite efforts to introduce competition, it would appear that the government continues to 
determine the amount of power that each generato r is to produce and approves the selling price. 
(d) Transmission and distribution 
72. The separation of transmission from distributio n has not yet been achieved.  There are 
six regional networks (Northern China, Northeast , Northwest, Eastern China, Central China, and 
Southern China) in charge of transmission and distribution.153  Currently, all the networks, except the 
                                                      
148 Chen (2004). 
149 World Bank (2002). 
150 In addition, there are the "Regulation on Elect riciy Supply and Utilization", the "Regulation on 
Protection over Electric Power Equipmen t", the "Basic Rules on the Operation of Electricity Market", and the 
"Circular on Printing and Issuing the Guiding Opinions for Construction of Regional Electricity Markets State 
Electricity Regulatory Commission".  These docum ents are available (in Chinese only) at:  
http://www.serc.gov.cn/opencms /export/serc/laws/zywj/inde x.html [7 July 2005]. 
151 State Council Notification on Power Sector Reform, Document No. 5, 2002. 
152 These are:  Huaneng Group, Huadian Power, Guodian Power, Datang Power Group and China 
Power Investment Company. 
153 Zhou (2002).  WT/TPR/S/161 Trade Policy Review 
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China Southern Power Grid Company (CSG), are subsidiaries of the State Power Grid Company.154  
The CSG is linked with the Special Administrativ e Regions of Hong Kong and Macao, and controls 
the transmission and distribution of electricity in five southern provinces155, while the State Power 
Grid controls the grids in the rest of the country ;  there is no competition be tween China Southern and 
the State Power Grid Company.  All power grids ar e state-owned, although, according to the reform 
programme, the grid companies should be establishe d as joint-stock companies.  The State Power 
Grid Company is responsible for the operati on and development of inter-regional grids. 
73. The regional grid companies were allowed to own distribution assets up to the end of 2005;  
they were to have achieved "accounting" separation of  transmission and distribution prior to 2005, but 
this does not appear to have occurred.  Under each regional network, there are several provincial 
power companies that own and operate their own local transmission lines and distribution networks, 
and remain responsible for supplying  electricity to the end-users through their local branches.  These 
companies have monopolies over the distribution and sales  of electricity in a specified service area as 
stipulated by the Electricity Law.156   
74. At present, most electricity trading takes place between the generators and the provincial 
power companies, which act as single buyers and ow n most of the transmission grids and part of the 
distribution grids within the province.  Only sm all quantities of electricity are traded between 
provinces.  In inter-provincial power markets, both the provincial and the inter-provincial grid 
companies may purchase electricity.  However, th ere is little trade between the various regions;  
rather, each region uses its own supply to meet its local electricity needs.  Only a few generators sell 
electricity outside their own regions.  The SERC is trying to develop regional power markets.157  
However, as mentioned above, a major challenge to the further development of these markets is the 
establishment of a national network.  Nevertheless, according to the authorities, the present network is 
appropriate for China’s needs as most of it is already interconnected.  
75. There are provisions in the law for electricity distribution quotas.158  However, according to 
the authorities, electricity is not allocated through a quota system. 
(e) Pricing of electricity 
76. Electricity prices (including the rates at whic h the power-generating enterprises sell to the 
network/grid, the rates charged by a power network/gr id to sell to another network/grid, and the price 
charged to consumers) are still controlled by the Gove rnment and set according to the Electricity Law.  
A notable exception involves an ongoing pilot project  whereby the prices for access to the grid are 
being set through a bidding process.159  The prices are fixed by the NDRC according to the principles 
of "reasonable cost compensation (i.e. average cost),  reasonable determination of profit (i.e. national 
                                                      
154 The China Southern Power Gr id Company (CSG) is a stat e-owned company founded in 
December 2002 in accordance w ith the State Council’s power system re form strategy and programme.  Its 
service area covers Guangdong, Guangxi, Guizhou, Hainan, and Yunnan Provinces.  Its main functions are:  to 
operate and manage the power network, to ensure a safe power supply, to develop a regional power network, to 
administer a regional power market, to manage a power dispatching and transaction centre, and dispatch power 
based on market rules.  Information available online at:  http://www.csg.net.cn/english.aspx [7 June 2005]. 
155 These are Guangdong, Guangxi, , Guizhou, Hainan, and Yunnan. 
156 Electricity Law, Chapter IV, Article 25. 
157 For example, the north-east electricity market has been established and is operational while in other 
regions of China similar markets are expected to be established according to the authorities. 
158 For instance, the law states that:  "the people’ s government ... shall, when  distributing electricity 
quotas, guarantee a proper proportion of electricity fo r agriculture and the rural areas" (Electricity Law, 
Chapter VI, Article 49). 
159 Electricity Law, Chapter V, Article 35. China WT/TPR/S/161 
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long term bond rate +/- 2-3%), taxes, and fairly shared burdens among end-users, and promotion of 
electric power construction".160  In March 2005 the NDRC promulgated measures to administer 
electricity prices charged for generation, transmission and retailing.161  However, it seems that, in 
practice, there is no direct correlation between electricity costs and prices;  the latter are apparently determined as much by political and macroeconom ic factors (such as income redistribution and 
inflation control).  It has been suggested that th e existing centrally administered pricing system has 
diminished local and foreign interest in inves ting in new generating capacity, and low electricity 
prices have been identified as the root cause of China’s power shortage problem.
162 
77. Currently, all generators sell electricity at prices determined by the NDRC at the time the 
plant was built.  These per kWh prices were original ly set for the plant’s output, based on a minimum 
number of operating hours, over which fixed costs would be recovered, an d depreciation of capital 
costs over a relatively short time scale, with the pr ices then reduced.  Until recently, these prices were 
considered a contract (i.e. they could not be cha nged).  However, more recently, prices have, in some 
cases, been adjusted to reflect th e increase in the price of coal.  Plants' operating hours have been 
increased due to electricity shortages, and ad hoc  price adjustments have been applied for output 
above the minimum level of kWh.  Also, for new generators, the assumed life of the plant has lengthened so that capital costs may be recovered over a longer period. 
78. The 2002 reform envisaged the development of  trading arrangements for electricity, which 
includes, inter alia,  the introduction of a bidding system for operators to have access to the grid, and a 
new system to set the price paid to generators.  Th e price paid to generators (the "on grid price") 
would include two kinds of arrange ment, one consisting of a "gover nment-determined fixed capacity 
price" and a "market-determined energy price", and the other involving a single energy price.
163 
79. The implementation of pilot programmes to ac cess the power grid through an open bidding 
system has been planned in five provinces and the city of Shanghai.164  Since the beginning of 2004 
one of these pilot programmes has been implemented in north-eastern China.  A few generators are 
participating in the project and only a fraction of their production has been sold through this process. 
80. At the retail level, electricity rates vary by province and by type of end-user.165  It seems that 
these variations are due partly to varying cost s of production across provinces, and surcharges 
imposed by the local governments166, and to the use of multiple pricing by the national government to 
attain different goals.167  For instance, in 2004 higher electricity prices were established for six sectors 
to curb their expansion.168  The average retail tariff across the country was Y 0.471 kWh in 2004.  
                                                      
160 Electric Power Law, Chapter V, Article 36. 
161 The "Interim Methods for the Administration on the Electricity Price at which Power Generator 
Sells Electricity to the Grid", the "Interim Methods for the Administration on the Price of Electricity 
Transmission by the Grid Enterprises" and the "Interim Methods for the Administration of the Price at which 
Power Enterprises sell Electri city to the Consumers". 
162 Lam (2004). 
163 No further information was provided by the authorities regarding these arrangements.  No 
explanations were provided by the authorities regarding the rationale for using two types of arrangement. 
164 The five provinces are Jilin, Liaoning, Heilongjiang, Shandong, and Zhejiang. 
165 No details were provided regarding the criteria us ed to set electricity prices at the retail level. 
166 The Central Government has recently mandated th e removal of many of these illegal surcharges 
(Lam, 2004). 
167 In 2002, however, China had stated that:  "the practice of one product or service under multiple 
pricing has been entirely eliminated in China" (WTO document G/SCM/N92, 31 October 2002).  The 
authorities state that these two types of price contro ls are different, although this was not clarified. 
168 Aluminia, ferroalloy, calcium carbides, caustic soda, cement, and steel ( People's Daily  online 
information, 17 June 2004.  Available at:  http://english.peopledaily.com.cn/ [26 September 2005]). WT/TPR/S/161 Trade Policy Review 
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Within provinces, retail prices vary according to end- user;  prices for residential, agricultural, and 
irrigation and drainage are set at different leve ls from those for commercial and industrial use.169  
Prices also vary substantially according to time of use, as most distributors adopt 'time-of-day' 
tariffs.170  The mechanism to set retail prices is expect ed to change as the new trading arrangements 
are established and competition is introduced at the retail level as stipulated by the 2002 reform.  The 
authorities note that although accord ing to the "Blueprint on Reform of Electricity Price", end users 
are expected to be able to choose from a number of electricity suppliers;  this is, however, still not the 
case and the retail price is still set by the Government. 
(f) Foreign direct and private investment 
81. Foreign investment has an important role to play in helping to develop China’s growing 
electricity sector;  however, for investors to enter th e market there would need to be further relaxation 
of investment restrictions and further liberaliza tion of the sector.  Regarding generation, the most 
recent "Catalogue for the Guidance of Foreign Inv estment Industries", which came into force on 
1 January 2005, continues to classify seven ty pes of power generation projects as "encouraged".171  
Majority Chinese ownership is required only for th e construction of nuclear plants;  all other 
"encouraged" projects allow 100% foreign ownership.  However,  the Government still plays a 
significant role in determining the terms of inv estment in electricity generation, including the 
generators' location, the type of generators to be established, and the prices that can be charged.  
Foreign investment in the construction and operatio n of conventional coal-fired power plants of an 
installed capacity of less than 300,000 kW remains "restricted".172  Foreign investment is prohibited in 
the construction and operation of pow er transmission and distribution. 
82. In February 2005, the State Council issued "Some Opinions of the State Council on 
Encouraging, Supporting and Guiding the Developm ent of Private and Other Non-Public Economic 
Sectors", under which market-access conditions were  relaxed for private domestic and foreign capital 
to "public economies", including in the electricity sector.173  As a result, regulations, rules, and policy 
stipulations that restrict market access for non-public economic sectors will be revised.174  However, it 
is not clear to what extent the electricity sector will be liberalized as a result of implementation of these Opinions. 
                                                     
 
169 In 2004, retail price averages for different end-users were:  Y 0.776/kWh for commercial users; 
Y 0.441/kWh for residential and Y 0.443/kWh for industrial us ers;  in general, it appears that prices in the rural 
areas remain higher than in urban areas partly due to poor infrastructure and prov incial surcharges (see for 
example, Zhang, 2003b). 
170 Time-of-day tariffs enable electricity demand to be spread more evenly over the day in order to 
ensure a more even utilization of the network. 
171 These projects include:  construction and management of thermal-power plants with single 
generators of a capacity of at least 300,000 kW;  construction and management of power plants using clean coal burning technology, heat, natural gas, hydropower, nuclear power, or new resources (geothermal, solar, wind, 
tide, etc.). 
172 Ministry of Commerce (2004a). 
173 Public economies means those industries that are dominated by state monopolies and in which 
private sector investment wa s prohibited or restricted. 
174 People's Daily  online information 25 February 2005.  Available at: 
http://english.peopledaily.com.cn/ [3 June 2005]. China WT/TPR/S/161 
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(4) MANUFACTURING  
(i) Overview 
83. Since the onset of economic reform and the adoption of the "open door" policy, China's 
manufacturing sector has apparently developed much more quickly than other sectors, notably 
agriculture and services, although data in this regard  are not available.  In 2004, manufacturing  
accounted for 11.5% of employment, slightly higher than in 2000 (11.2%).175  
84. Considerable deregulation has taken place during the economic reform process;  as a result 
government agencies are no longer responsible for regulating the steel, textiles and clothing, and 
automotive industries, while the administrative and commercial functions of the Ministry of 
Information Industry (MII), the regulator of the electronic and communications equipment industry, 
were separated.  Deregulation has cleared the way for much greater private participation in the sector.  
In some industries (notably textiles and clothing, automotive, and electronic and communications equipment), the share of private, especially foreign investors, has increased, while that of SOEs has 
declined.  During the period under review, manufacturing accounted for over 70% of newly 
established foreign-invested enterprises (FIEs), wh ich have benefited from the more rapid easing of 
restrictions on FDI than other sectors, as well as from lower tax rates, and/or tax holidays. 
85. With FIEs using China as a manufacturing platform for exports manufactured goods 
accounted for 91.4% of China's total merchandise e xports in 2004.  FIEs' shares of exports were 
especially large as regards electronic and communications equipment, and automotive products.  At 
the same time, manufactures accounted for 76.3% of  China's total merchandise imports, much of 
which are processed for re-export.  China is a net ex porter of manufactured goods, with the surplus of 
exports over imports amounting to 5.9% of GDP in 2004. 
86. In contrast to FIEs, domestically owned enterp rises in manufacturing appear to lag behind in 
technology development and contribute relatively little to value added;  this is particularly true for 
those engaged in the electronic and communications e quipment industry.  As a result, the Government 
has been attempting to upgrade technology through, inter alia , industry development policies (for 
steel and automobiles), attracting FDI, including through joint ventures, improving protection of 
intellectual property rights (in the textiles and clot hing, and electronic and communications equipment 
industries), and facilitating the establishment of R&D centres. 
87. 
While tariffs on manufactured goods are relatively low, with a simple average applied MFN tariff 
of 9.8% in 2005, down from 15.6% in 2001176, an array of non-tariff measures are used in some 
instances to restrict imports and exports. 
(ii) Iron and steel 
(a) Market structure 
88. During the period under review, China's iron and steel industry has grown rapidly 
(Table IV.3).  China has been the worl d's largest crude steel producer since 1996177 and the largest 
                                                      
 175 China's Statistical Yearbooks  do not provide the share of manufacturing to GDP.  In 2004, the share 
of industry (including manufacturing, mining and quarrying, production and supply of electricity, gas and 
water), accounted for 40.8% of GDP (Table I.4). 
176 The tariff for manufacturing is based on ISIC Rev.2. WT/TPR/S/161 Trade Policy Review 
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consumer since 2003.178  In 2003, the industry accounted for 8.3% of value added in manufacturing 
and employed 5.2% of its total workforce. 
Table IV.3 
Steel industry, 2000-04 
 2000 2001 2002 2003 2004 
Output (million tonnes)a      
Pig iron 131.0 155.5 170.8 213.7 251.9 
Growth rate (%) 4.5 18.7 9.8 25.1 17.9 
Crude steel 128.5 151.6 182.3 222.3 272.8 
Growth rate (%) 3.7 17.98 20.25 22.0 22.7 
Finished steel products 131.5 160.7 192.5 241.1 297.2 
Growth rate (%) 8.6 22.2 19.8 25.2 23.3 
Total output (Y billion) 473.3 570.7 649.2 1000.7 .. 
Growth rate (%) 59.7 20.6 13.8 54.1 .. 
Total value added (Y billion) 129.9 153.0 179.9 282.4 .. 
Growth rate (%) 44.4 17.8 17.6 56.9 .. 
Total sales (Y billion) 470.9 565.1 647.2 993.7 .. 
Growth rate (%) .. 20.0 14.5 53.5 .. 
Apparent consumption (million tonnes) 141.21 169.5 211.54 271.29 312.3 
Growth rate (%)  .. 20.03 24.8 28.25 15.1 
Imports (million tonnes)       
Billet and other primary steel products 4.9 8. 36 4.68 5.93 3.9 
Growth rate (%) .. 70.6 -44.0 26.7 -34.2 
Finished steel products 15.96 17.2 24.5 37.2 29.3 
Growth rate (%) .. 7.9 42.2 51.8 -21.2 
Exports (million tonnes)       
Billet and other primary steel products 5.1 2. 7 1.4 1.5 6.2 
Growth rate (%) .. -46.4 -50.6 10.4 313.4 
Finished steel products 6.2 4.7 5.5 6.96 14.2 
Growth rate (%) .. -23.7 14.98 27.7 104.5 
.. Not available. 
a National Bureau of Statistics (2005), Statistical Yearbook 2005.  
Source : China Iron and Steel Association (CISA). 
89. The steel industry faces several inter-related pr oblems, including the "irrational" location of 
steel plants179, the proliferation of small producers and the consequent lack of scale economies and 
low total factor productivity, weak innovation cap ability and thus an excess of low value-added 
products.  More specifically, most large steel producer s are located in the east and north-east of China, 
away from the coast, where the majority of users are found.  Between 2002 and 2004, the number of steel producers increased from 290 to 871;  only 15 of  these have the capacity to produce more than 
                                                                                                                                                                    
 
177 In the first half of 2005, China's crude steel out put increased by 28% from the previous year, while 
that of all other countries in the world stagnated (average increase of 0.6%).  China accounted for 30% of global 
output in the first half of 2005, up from 20% in 2002. 
178 In 2003, China consumed one quarter of global steel output.  China CCM online information.  
Available at:  http://www.chinaccm.com/80/8002/800 201/news/20040415 /103339.asp [21 April 2005]. 
179 Except Tibet, all provinces, autonomous regions, and municipalities have steel plants, many of 
which are located in provincial capital cities or larg e cities with a population of over one million. China WT/TPR/S/161 
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5 million tonnes of steel per year, and these account for 45% of the country's total steel output.180  In 
addition, there remains a shortage of high-valu e-added products, which therefore account for a 
significant share of  imports.181 
90. Furthermore, China's steel indu stry appears to be "overinvest ed";  fixed asset investment 
increased by 96% in 2003.  The Central Government has adopted a number of measures to rectify this 
situation, including: imposing controls on bank loans182; raising thresholds for entry into the industry 
(see below);  readjusting technology, energy, safet y and quality requirements;  tightening examination 
and approval procedures for land use;  and urgi ng local governments to abolish price discounts on 
electricity for steel plants.  Another problem faci ng the industry is the shor tage of domestic iron ore 
supply.  To address this, the Government is enco uraging investment in other countries' iron ore 
industries.183  Other problems facing the steel industry include inadequate electricity supply and 
transport capacity. 
(b) Regulatory framework and restructuring  
91. There is no government regulatory agency for the sector.  The China Iron and Steel 
Association (CISA) is a non-governmental busin ess association.  Founded in 1999, the CISA 
functions mainly as a bridge between its member s and the Central Govern ment.  Enterprises with 
production capacity of 1 million tonnes or above may join the CISA;  smaller steel producers may join 
local iron and steel associations, which are also members of the CISA.   
92. Foreign investment plays a relatively small role  in the industry.  In 2004, of the 871 steel 
producers, 107 were SOEs, accounting for 56.8% of  total production capacity;  706 were private 
domestically owned enterprises, accounting for 39.4%  of total production cap acity, and 58 were FIEs, 
accounting for 3.8% of total production capacity.184   
93. In July 2005, the NDRC issued China's first "Steel Industry Development Policy", focusing 
on industrial restructuring and technology upgrading.  The overall targets for restructuring the steel 
industry include, inter alia , achieving "reasonable" production capacity  by consolidating the industry, 
expanding the proportion of high-valu e-added products, saving energy, and reducing 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 will be closed down or acquired by large ones.185  Through 
                                                      
180 By contrast, in 2004, the leading five steel groups in Japan accounted for more than 75% of its total 
output, and the leading six steel groups in the EC-15 accounted for 74% of the total output (China International 
Electronic Commerce Network.  Available at:  http ://news.ec.com.cn/pubnews/2005_04_13/100109/1083869. 
jsp [20 April 2005]).  The number of enterprises above appears to include onl y large-scale steel producers.  Data 
from the authorities indicate that, the number of steel producers, including small enterprises, increased from 
3,360 in 2002, to 4,992 in 2004. 
181 China has to import large valumes of high-value-added steel products.  The special and quality steel 
mainly used in the automobile and machinery industries acco unted for 8% and 10%, respectively, of China's 
total output, while in a typical industriali zed country, they accoun t for 35% and 24%. 
182 For example, the People's Bank of China (PBC) raised bank reserve requirements, and the China 
Banking Regulatory Commission (CBRC) sent inspectors to seven provinces (Guangdong, Zhejiang, Henan, 
Hebei, Hubei, Jiangxi, and Jiangsu) to examine bank loans to steel producers (China Internet Information Centre.  Available at:  http://www.china.org.cn/english/BAT/94827.htm [20 April 2005]). 
183 An example is Brazil, a major exporter of iron ore ( Financial Times, 25 May 2004). 
184 The above data are from the CISA.  The authoritie s suggest, including small scale enterprises, there 
were 4,992 steel producers in 2004, among which, 458 SOEs, 2,549 private domestically owned enterprises, and 
153 FIEs. 
185 Efforts under way to consolidat e the sector include, mergers and acquisitions, and closure of small-
scale plants;  the latter poses difficulties for local governments as it will reduce jobs and taxes collected.  ( China WT/TPR/S/161 Trade Policy Review 
Page 192 
  
these measures, the Central Government hopes to ach ieve its objective of the top ten steel makers 
accounting for more than 50% of total steel output by 2010, and over 70% by 2020.186  A detailed 
relocation plan for iron and steel enterprises is de scribed in the steel policy;  based on regions' 
resource endowment, transport facilities, market demand,  and environment, reloca tion is to be carried 
out through, inter alia,  mergers and acquisitions.  In particul ar, the Government intends to relocate 
some large iron and steel enterprises to the coastal area. 
94. Requirements for foreign and domestic investment  in the industry include:  examination and 
approval by the NDRC;  and self-owned capital of no less than 40% of the regi stered capital for steel 
manufacturers.187  In addition, cross-region investment by domestic iron and steel enterprises is 
permitted if their previous year's output of comm on steel was 5 million tonn es, 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 ex isting enterprises, but may not undertake "greenfield" 
investment or take controlling stakes.
188 
95. 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, and funds for research and development, etc. to major 
iron and steel projects using newly developed domest ic equipment.  Equipment and technology that 
domestic enterprises are unable to produce may be imported but need to be "modern and practical"189 
(the meaning of this is not clear).   The Government also provides assistance for exports of technology 
and metallurgy equipment by domestic equipment ma nufacturers, for example, in the form of export 
credit.  In addition to these measures, steel and automotive producers have been cooperating with a 
view to upgrading steel-makers' production capability.190 
(c) Import and export measures 
96. The simple average applied MFN tariff on Chin a’s iron and steel (ISIC 371) imports fell from 
7.8% in 2001 to 5.1% in 2005.  Import quotas were  eliminated, and designated trading in steel 
products was removed three years after China entered the WTO.  Despite steps to reduce controls in 
the international trading of steel products, import a nd export administration measures still appear to be 
used.  For example, MOFCOM and Customs issu ed the "Measures on the Iron Ore Import Licensing 
                                                                                                                                                                     
Daily  online information, 14 October 2004.  Available at:  http://www.china.org.cn/english/2004/Oct/ 
109440.htm  [20 April 2005]). 
186 It appears that the Central Government is hoping that, through continued deregulation and 
consolidation, the large steel producers will be able to a ttract private sector investment;  foreign participation in 
the sector will also improve the ability of large steel pr oducers to produce high-value -added steel products.  For 
example, Angang Group established a joint venture with Germany-based Thyssen Krupp, the second biggest 
carbon steel supplier in Europe;  Benxi Steel Corpora tion established a joint venture with Pohang Steel of 
Korea;  Shanghai's Baosteel, Japan' s Nipon Steel Corporation and the Euro pe-based Arcelor Steel, the world's 
largest steel producer, established a joint venture in Shanghai;  and Guangzhou Iron & Steel Enterprises 
Holdings Ltd set up a joint venture with Japan's JFE Steel Corp in Guangdong Province. 
187 Other requirements include, inter alia,  modern technology and management, strong supply and 
distribution networks, reliable water, minera l, and power resources, and transportation. 
188 Article 23, Steel Industry Development Policy. 
189 Under Article 18, when importing equipment and technology, enterprises are encouraged to use 
domestic equipment and technology and to reduce import s.  For large scale equipment, "localization of 
production is to be organized".  Enterprises are forbidden to use second-hand, outdated domestic or imported 
steel production equipment.  
190 In this regard, in 2003, Shanghai's Baosteel Group launched a strategic cooperative project with 
Dongfeng Motor Corporation, First Automobile Works Group, and Shanghai Automotive Industry Corporation. China WT/TPR/S/161 
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Administration", effective 1 March 2005, attemptin g to regulate imports of iron ore by granting 
import licences only to enterprises satisfying certain requirements.191  However, in anticipation of this 
measure, some importers increased their imports in the first two months of 2005.192  The Government 
then introduced a new import licensing system, effective 1 May 2005, under which only enterprises 
that imported more than 300,000 tonnes of iron ore in 2004, or more than 100,000 tonnes in the first two months of 2005, are eligib le to apply for (non-tradeable) import licences.  The measure 
effectively obliges small-scale steel producers to purchase domestic iron ore. 
97. In the past, more than 95% of steel output was destined for domestic use, but in the fourth 
quarter of 2004, China became a net exporter of steel  products (Table IV.3).  According to the CISA, 
an important reason for this development is that domestic prices are lower than international prices. 
98. In order to discourage exports, the Government  has reduced VAT rebate rates for iron and 
steel exports.  For example, the Ministry of Finance and the State Administration of Taxation announced that, from 1 April 2005, VAT rebates on expor ts of billet and other primary iron and steel 
products were cancelled.  On 1 May 2005, the VAT rebate rate for finished steel products was 
reduced from 13% to 11%.  In April 2005, th e GAC and the MOFCOM issued a "Forbidden 
Commodity Catalogue of Processing Trade", covering 30 items at the HS ten-digit level, covering mainly steel products, such as iron ore, pig iron, scrap steel, billets, and steel ingots.  As of 19 May 2005, imports and exports of these pr oducts are prohibited under processing trade 
(Chapter III(2)(v)).
193  As of 1 July 2005, VAT rebates on certain steel products used for processing 
trade in bonded areas or free-trade zones were di scontinued, to discourage exports of processed iron 
and steel.194 
(iii) Textiles and clothing 
(a) Market structure 
99. China is the largest textiles and clothing producer  in the world.  Employment in the sector, 
including household industries, was 19 million in 20 04, accounting for 22% of the total workforce in 
manufacturing.195  In 2003, the industry used more than 6. 2 million tonnes of domestic natural fibres, 
                                                      
191 For an iron ore importer to obtain an "automatic" import licence, it needs to provide the following 
documents to the MOFCOM:  a copy of the business certifi cate;  registration form of a foreign trade operator;  
application form;  and import contract.  The importer need s to satisfy criteria set by the Chamber of Commerce 
for Import and Export of Metals, Minerals and Chemi cal Products (CCCMC), and the CISA.  Automatic import 
licences are not required  for:  processing trade;  FIEs own use;  samples or materials for experiments (for 
imports valued at less than Y 5,000);  and temporary imports under Customs surveillance.  Information available 
at:  http://xatb.mofcom.gov.cn/aarticle /lingzxz/200503/20050300022980.html.  According to the authorities, by 
deciding which enterprises qualify for licences, the CI SA and CCCMC are able to carry out industry self-
discipline to streamline the import of iron ore;  in 2005, the import of iron ore rose by 30%. 
192 Xinhua  online information.  Available at:  http://news.xinhuanet.com/fortune/2005-04/01/content_ 
2772189.htm [12 July 2005]. 
193 Ministry of Commerce online information.  Av ailable at:  http://english.mofcom.gov.cn/aarticle/ 
policyrelease/domesticpolicy/200505/20050500099320.html [8 June 2005]. 
194 China used to encourage the pr ocessing of domestically produced steel products for export:  from 
1 January 1998, 17% VAT rebates were given to selected steel manufacturers, if they sold their products for 
processing trade in bonded areas or free-export zones.  These rebates were cancelled on 1 July 2005. 
195 Ministry of Commerce (2005a). WT/TPR/S/161 Trade Policy Review 
Page 194 
  
provided by 100 million farmers.196  Of the sector's total output, 70% is for domestic consumption, 
while the rest is exported. 
100. From 2001 to 2004, China was the world's third largest textiles and clothing importer, after 
the United States and the European Communities197;  during this period, the three largest sources of 
China's imports were Japan, Chinese Taipei, and Hong Kong, China.  Since 1995, China has become 
the world's largest textiles and clothing exporter ;  in 2004, the largest export markets were 
Hong Kong, China;  Japan;  the United States;  and the EC-15, accounting for 18.2%, 17.4%, 11.5%, and 11.2%, respectively of China's textiles and clothing exports.
198  In 2004, textiles and clothing 
imports were US$16.8 billion, and exports were US$95.3 billion.199  Although their export value 
increased by 20.6% in 2004 (Table IV.4), textiles an d clothing exports grew more slowly than exports 
in general (merchandise exports  increased by 35.4% in 2004). 
Table IV.4 
Textiles and clothing industry, 2001-04 
Number of enterprises (unit) Ratio of profits to total cost (%) 
Year:  2004 
SOEs FIEs SOEs FIEs 
Manufacture of textiles 1,274 3,519 -0.48a 3.18 
Manufacture of textiles wearing apparel, 
footwear, and caps 332 4,450 1.23 3.75 
Manufacture of leather, fur, feather, and 
related products 118 1,937 0.34 2.86 
Manufacture of chemical fibres 106 223 3.77 5.79 
Imports (US$ billion)  Exports (US$ billion)  Year 
Textiles Clothing Textiles Clothing 
2001 12.6 1.3 16.8 36.7 
2002 13.1 1.4 20.6 41.3 
2003 14.2 1.4 26.9 52.1 
2004 15.3 1.5 33.4 61.9 
a Negative figure indicates a loss.  
Source:  National Bureau of Statistics (2005), China Statistical Yearbook 2005;  import and export data are from UNSD, 
Comtrade database (SITC Rev.3). 
                                                      
196 CNTAC (2004).  According to the Report, the in dustrial chain from agriculture to end-product, 
created by the textile industry's processing system, is the major channel for boosting the international 
competitiveness of agricultural products.  As the textile industry employs large numbers of rural workers, about 10 million rural households increased their incomes as a result.   
197 In terms of import value, China was the second-largest cotton importer in the world, after the 
EC-15.  Textiles, especially synthetic fabrics, also form a significant share of textile and clothing imports 
(UNSD, Comtrade database (SITC Rev.3)).  Data from the authorities indicate that China was the world's 
largest cotton importer in terms of volume;  among the 1.9 million tonnes of cotton imported in 2004, 
1.1 million tonnes were from the United States (MOFCOM, 2005b). 
198 In 2004, the value of the United States' imports from China were US$18.99 billion, accounting for 
19.7% of total U.S. imports of textiles and clothing;  EC-15 imports from China reached US$21.5 billion, accounting for 13.1% of total imports of textiles and clothing (UNSD, Comtrade database (SITC Rev.3)).  The 
authorities provided figures using the HS nomenclature:  in 2004, the largest export markets for China's textiles 
and clothing products were Hong Kong, China (18.99%);  Japan (8.3%);  the EC-15 (12.2%); and the United States (10.2%).  The value of the EC-15 im ports was US$10.8 billion, and the U.S. imports was 
US$9.1 billion. 
199 UNSD, Comtrade database (SITC Rev.3).  Using the HS nomenclature, in 2004, textile materials 
and apparel products imports were worth US$23.0 billion and exports were US$88.8 billion. China WT/TPR/S/161 
 Page 195 
 
 
(b) Regulatory framework, restructuring, and FDI 
101. The textiles and clothing industry has been dere gulated since the early 1990s.  The Ministry 
of Textile Industry was dismantled and replaced by the China National Textile Council (CNTC) in 
1993, which was replaced by the State Textile Industr y Bureau (STIB) in 1998.  In the same year, the 
China National Textile and Apparel Industry C ouncil (CNTAC) was established.  The STIB was 
dismantled in 2000;  currently, there is no government agency regulating the industry.  
102. Major modernization and restructuring of  the industry took pl ace between 1997 and 2000, 
presumably in anticipation of China's accession to  the WTO and the expiry of ATC quotas.  During 
this period, 10 million outmoded cotton spindles, 280 ,000 wool spindles, and one million silk spindles 
were scrapped.  Many state-owned textiles enterprise s went bankrupt or were forced to merge, leading 
to the unemployment or redeployment of 1.4 million workers.  Over US$30 billion of state-of-the-art textiles machinery was imported during this period.
200  Based on the number of spindles scrapped, the 
Central Government provided assistance to certain SOEs that were running at a loss.  In 1997 and 
1998, Y 1.6 billion and Y 1.5 billion were provide d in the form of grants or tax forgiveness.201  Since 
2000, there have been no government subsidies to this industry. 
103. The textiles and clothing industry has been  liberalized more than other manufacturing 
industries.  Data provided by the authorities indicate that, in 2004, the total output for all enterprises with annual turnover above Y 5 million was Y 1.58 trillion (11.3% of GDP), of which 9.5% was 
produced by SOEs, 11.7% by FIEs, and most of the rest by domestic private enterprises.
202 
104. China encourages FDI in some sections of the te xtiles and clothing industry.  The "Catalogue 
for the Guidance of Foreign Inv estment Industries" lists high-value-added textiles and clothing 
products as "encouraged".203  In 2004, among enterprises with annua l turnover over Y 5 million, FIEs 
accounted for 34.5% of total exports and 68.9% of total imports of textiles and clothing products.204 
105. Despite recent restructuring and the moderniz ation, domestic enterprises in the textiles and 
clothing industry are not as technologically advanced as FIEs.  Efforts to upgrade technology and 
improve productivity include, inter alia :  expanding the proportion of high-quality products, by 
bringing the industry into line with internationa l standards, enforcing st andards inspection, and 
emphasizing quality management and training;  developing innovation capability, by protecting intellectual property rights, accelerating renovation of  technologies and equipment, and strengthening 
international exchanges and cooperation;  and sp eeding up IT construction and improving enterprises' 
reaction capability to improve their competitiveness.
205 
106. The CNTAC notes that quantitative import restri ctions on raw materials for textiles and 
clothing are in place in the form of tariff rate quotas (TRQs) for cotton.  The CNTAC questioned the 
                                                      
200 Ministry of Commerce (2005a). 
201 WTO document WT/L/432, Annex 5B, 23 November 2001. 
202 The CNTAC estimated that, in 2004, total output for all enterprises, regardless of turnover, was 
Y 2.64 trillion, of which less than 8% was produced by SOEs. 
203 "Encouraged" industries include: production of special textiles for engineering use, weaving and 
dyeing as well as post dressing of high-grade fabric;  production of chemical fibres for environmental protection;  and production of polyester with a daily production capacity of 400 tonnes or over.  "Restricted" 
industries are:  production of chemical fibre drawnwork of conventional chipper, production of viscose staple 
fibre with an annual single thread output capacity of less than 20,000 tonnes, production of polyester and spandex used for fibre and non-fibre with a daily production capacity of less than 400 tonnes. 
204 Fabrics China online information.  Available a t:  http://www.fabricschin a.com.cn/chinese/pages/ 
news/news1.asp?newsid=72 [11 November 2005]. 
205 CNTAC (2004). WT/TPR/S/161 Trade Policy Review 
Page 196 
  
rationale of the TRQs, especially given that fo r the past few years, TRQs in excess of the quota 
amount of 894,000 tonnes have been awarded for imports of cotton;  according to the authorities, all 
imports took place at the in-quota tariff rate.  The authorities note that the TRQs on cotton are 
maintained to balance supply and demand for the pr oduct, and to protect farmers.  In addition, 
according to the CNTAC, apart from guidance prici ng on silk cocoons, the reason for which is not 
clear, there are no other price constraints in the industry. 
(c) Import and export measures 
107. China's trade policy regarding the textiles and clothing industry consists mainly of reducing 
tariffs and non-tariff restrictions on imports, and relaxing controls on some exports.  In addition, in 
agreement with certain trading partners, Chin a has imposed restrictions on some exports. 
108. Since China's accession to the WTO, tariffs on textiles and clothing imports have been 
reduced gradually, but remain higher than the overa ll MFN average;  the simple average applied MFN 
tariff rate (including interim duty) for textiles (ISIC 321) was reduced from 20.7% in 2001 to 10.9% in 2005;  the rate for clothing (ISIC 322) was reduced from 24.1% in 2001 to 15.8% in 2005. 
109. Certain textiles products used to be subject to  import and export restrictions imposed by the 
Chinese Government, but these restrictions are being phased out gradually.  For example, as of 1 January 2005, state trading in silk was discontinued and export quotas and licensing for seven silk cocoon and silk products, at the HS eight-dig it level, were abolished (Chapter III(3)(iii))
206;  as a 
result, there are currently ten silk cocoon and s ilk products subject to export quotas and licensing. 
110. Under the WTO Agreement on Textiles and Clothing  (ATC), exports of textiles and clothing 
were subject to quantitative restrictions until 1 January  2005;   these restrictions were called "passive 
quotas" under the "Measures on the Administration of Passive Quotas for Textile Products".207  On 
1 January 2005, although the ATC was terminated, under China's Protocol of Accession to the WTO, 
its textiles and clothing exports may be subject to other restrictions.208  
111. In response to the concerns of its trading part ners, the Government has imposed restrictions 
on exports of textiles and clothing.  On 1 January 2004,  as part of its reform of the VAT rebate system 
for exports, VAT rebate rates were reduced for mo st textiles and clothing exports, from 17% to 13%.  
The reduction in these rates constitutes a levy on ex ports.  On 1 January 2 005, China imposed export 
taxes on 148 textiles and clothing products (at the HS  eight-digit level).  The taxes were Y 0.2 or 
Y 0.3 per piece, or Y 0.5 per kg.  On 20 May 20 05, China announced that, from 1 June 2005, export 
taxes would be increased for 74 of these products, reduced for 3, and removed for 2;  one more 
product was added to the list.  On 30 May 2005, 79  textile products were removed from the list;  and 
on 25 July 2005, China announced the removal of  export taxes on 17 products, covered by the 
                                                      
206 WTO document G/C/W/505, 25 November 2004. 
207 The measures were formulated based on China' s Foreign Trade Law and the "Regulation on the 
Administration of the Import and Ex port of Goods", and acco rding to the WTO ATC framework and China's 
commitments to the WTO regarding textile products (China International Electronic Commerce Network.  
Available at:  http://en.ec.com.cn/pubnews/2003_02_16/200604/1000889.jsp [04 April 2005]). 
 208 For example, under Article 242 of China's Working Party Report, if a WTO Member believes that 
imports of textiles and apparel products of Chinese origin covered by the ATC would cause market disruption, it 
can request consultations with China.  During the consultation, China would hold exports of the products 
concerned to a level no greater than 7.5% (6% for wool) above the amount entered during the first 12 months or the most recent 14 months preceding the month in which consultations were requested.  These provisions apply 
until 31 December 2008 (WTO document WT/ACC/CHN/49, 1 October 2001).  Article 16 of China's Protocol 
of Accession specifies that, transitional product-specific safeguard measures may be implemented until 2013 (WT/L/432, 23 November 2001).  Measures under these two provisions cannot be imposed simultaneously. China WT/TPR/S/161 
 Page 197 
 
 
Memorandum of Understanding (MOU ) signed with the European Communities (see below).  Thus, 
as of 1 August 2005, 51 textiles and clothing products we re subject to export taxes, at rates of Y 0.2, 
Y 0.3, Y 1.0, Y 3.0 or Y 4.0 per piece.  All export taxes on textiles and clothing products were 
removed on 1 January 2006. 
112. China's trading partners have also launched sp ecial safeguard investigations and, in some 
cases, imposed safeguard measures on certain textiles and clothing imports from China.209  O n  
10 June 2005, an MOU signed between China and the EC restricted the growth rates of ten categories 
of Chinese textile exports to the EC from 11 J une 2005 to 31 December 2007.  More specifically, 
China agreed to limit the export growth rates for:   cotton fabrics, bed linen, and table and kitchen 
linen to 12.5% annually;  T-shirts, dresses, bras, flax  and ramie yarn to 10% annually;  and pullovers, 
men's trousers, and blouses to 8% from 11 June to  31 December 2005, and to  10% annually for 2006 
and 2007.210  The EC agreed in turn to end the ongoi ng safeguard investigation into the products 
concerned, and to refrain from adopting measur es, as permitted under Article 242 of China's WTO 
Working Party Report, in categories not covered by the MOU, and for 2008. 
113. On 19 June 2005, following the signing of the MOU, MOFCOM issued the "Interim 
Measures for the Administration of Textile Exports (T rial Implementation)", which entered into force 
on 20 July 2005.211  These were later revised, effective on 22 September 2005.  Under the interim 
measures, a "Catalogue of Commodities Subject to Te xtile Export Interim Control" lists textile and 
clothing exports subject to restrictions imposed by countries or regions unilaterally, as well as those 
subject to temporary quantitative control under bilate ral agreements, such as the MOU with the EC.  
For a product listed in the Catalogue, part of the export quota will be assigned through a bidding 
system, and allocation of the remainder will be based on the exporter's share in  total export value in 
the respective categories in the previous year, together with other factors.212  The licence, which is 
transferable, is valid for six months during each calendar year. 
                                                      
209 For example, the EC issued Guidelines for the use of the Textile Specific Safeguard Clause (TSSC) 
on 6 April 2005, and launched investigations on nine categ ories of China's textiles exports on 24 April 2005.  
The United States imposed safeguard restrictions on three categories of China's textiles exports on 
13 May 2005, and on four categories on 18 May 2005. 
210 Information available online a t:  http://europa.eu.in t/comm/trade/issues/sect oral/industry/textile/ 
mou_tex_china_en.htm [22 June 2005]. 
211 Ministry of Commerce online information.  Ava ilable at:  http://www.mofcom.gov.cn/aarticle/b/c/ 
200506/20050600123519.html [21 June 2005].  On 1 March 2005, China adopted an automatic export licensing system for textiles and clothing.  Under the system, MOFCOM compiled a "First Batch of Products under 
Automatic Export Licensing Catalogue".  Exporters may obtain an export licence from MOFCOM or its 
authorized agencies automatically on ce they have an export contract.  W ith the licence, Customs would process 
their exports (MOFCOM "Temporary Measures of Automatic  Permission for Textile Export".  Available at:  
http://english.mofcom.gov.cn/aar ticle/policyrelease/domesticpolic y/200502/200502 00018112.html 
[04 April 2005]).  However, since 20 July 2005 when the "Interim Measures for the Administration of Textile 
Exports" entered into force, insofar as the interim measures are applied to items in the "First Batch Catalogue", 
licensing of these exports is no longer automatic (MOFCOM announcements Nos. 3, 7, and 44 in 2005). 
212  These include:  the total export quota for the specific product, as established by MOFCOM;  the 
value of exports by the enterprise as well as total exports to countries or regions imposing quotas on Chinese 
textiles and clothing exports after 1 January 2005;  the va lue of exports by the enterprise and total export value 
to countries or regions not imposing quotas on Chinese textiles and clothing exports after 1 January 2005;  and 
the value of exports by the enterprise and total export value to the world before 1 January 2005.  Article 9 of the 
interim measures includes an equation to calculate quotas allocated to exporters.  Other factors taken into consideration for the 2006 quotas include the firm's exports between June 2004 and May 2005, and the amount 
of quotas between June and December 2 005.  For exporters located in the we stern part of China, their export 
performance taken into consideration equals their actual exports multiplied by 1.5;  for exporters located in the middle and north-east of China, their actual export va lue will be multiplied by 1.3.  (Ministry of Commerce WT/TPR/S/161 Trade Policy Review 
Page 198 
  
114. Based on the "interim measures" and the "M easures on Invitations to Tender for Export 
Commodity Quota", MOFCOM issued the "Detailed Rules for the Implementation of Bidding for Quantity of Export Licence of Textiles" (Detailed Rules) in September 2005.
213  All enterprises that 
have exporting rights, are registered with the SAIC, and have exported products in the bidding 
categories during the required period,  are allowed to participate in the bidding process.  A minimum 
bidding price, together with minimum and maximum bidding quantities are specified by the Bidding Committee under the MOFCOM.  The bidding office, com posed of relevant associations, is in charge 
of the tendering process.
214  Exports of these products need to carry not only an export licence, but 
also a "Certificate of Transferring and Accepting Textiles Export Quantity", or a "Certificate of 
Applying for Textiles Export Licence under Tendering".215 
115. On 8 November 2005, China and the United States signed an MOU, restricting China's 
exports of certain textiles and clothing products to the United States.  The MOU covers 1 January 2006 to 31 December 2008.  Exports of so me textile and clothing products from China are 
permitted to grow by 10-15% in 2006, by 12.5-16% in 2007, and by 15-17% in 2008.  The benchmark 
for calculating 2006 growth rates is actual imports by the United States from China in 2005.
216  In 
turn, the United States agreed to refrain from adopting measures as permitted under Article 242 of 
China's WTO Working Party Report. 
116. A similar agreement appears to have been si gned with Brazil on 10 February 2006.  Although 
full details are not yet available, it appears that  the MOU, which will enter into force 30 days 
following signature, will cover exports of eight textiles and clothing product groups from China to 
Brazil, covering some 70 tariff lines and around 60% of  China's exports of textiles and clothing to 
Brazil.217 
117. The Government provides export assistance to selected textiles and cl othing exporters, for 
example, through export credit insurance provided by SINOSURE (see Chapter III(3)(viii)).218  The 
CNTAC has also made efforts to strengthen bilateral cooperation w ith trade organizations in other 
                                                                                                                                                                     
online information.  Available at:  http://wms.mofcom.gov.cn/aarticle/ztxx/ac/al/200509/20050900441013.html  
[26 September 2005].) 
213 Ministry of Commerce online information.  Available at:  http://english.mofcom.gov.cn/ 
aarticle/policyrelease/domesticpolicy/200509/20050900458891.html  [26 September 2005] 
214 The China Chamber of Commerce for Import & Export of Textiles is responsible for the daily work 
of the bidding office. 
215 After the "Detailed Rules" were issued, MOFCOM announced its call for public bids for 30% of the 
2006 export quota in the ten categories negotiated with the EC (the remaining 70% is allocated according to the 
interim measures that took effect on 20 July 2005, and were revised (effective 22 September 2005)).  The first 
round of bidding took place between 27 and 30 Septembe r 2005 and involved 60% of  the total bidding quantity 
(30% of the 2006 quota).  In addition to the minimum bidding price and quantity, MOFCOM categorize 
exporters according to their exports between January and July 2005, based on which a maximum bidding 
quantity was assigned.  Bidding is car ried out electronically and a company that succeeds in its bid must pay a 
deposit on the quotas (MOFCOM onlin e information.  Available at:  http://english.mofcom.gov.cn/aarticle/ 
policyrelease/domesticpolicy/200509/20050900435605.html [23 September 2005]). 
216 According to MOFCOM online news, 21 categories of exports are covered in the MOU, including 
10 categories of textiles products and 11 categories of apparel products (MOFCOM online news.  Available at:  
http://www.mofcom.gov.cn/aarticle/a/ 200511/2005110074219 9.html  [9 November 2005].  However, the 
USTR "Facts on Textiles" indicates that 34 products ar e covered in the MOU. USTR online information.  
Available at:  http://www.ustr.gov/assets/Document_Li brary/Fact_Sheets/2005/asset_upload_file813_8339.pdf 
[9 November 2005]). 
217 Brazilian Government online information.  Available (in Portuguese) at:  http://www.brasil.gov.br/ 
noticias/ultimas_noticias/exportacao_chinesa/view?searchterm=China [15 February 2006]. 
218 Ministry of Commerce online information.  Av ailable at:  http://wmfzj.mofcom.gov.cn/article/ 
200503/20050300363558_1.xml [7 April 2005]. China WT/TPR/S/161 
 Page 199 
 
 
countries, including by signing a memorandum of  understanding with its Ge rman counterpart, and 
maintains a regular dialogue with Japan, Korea, and some north European countries.  In addition, the 
CNTAC is improving its information services to, inter alia , encourage investment in new technology 
and industrial upgrading.  It also provides guidance to enterprises as regards their export activities, by 
holding exhibitions and fora, conduc ting statistical analysis, and issuing frequent guidelines to help 
enterprises to stop or reduce exports of certain te xtile and clothing products to countries that impose 
restrictions on the products concerned. 
118. China also encourages investment abroad by tex tiles and clothing companies, in particular in 
developing and least developed coun tries, by providing preferential loans, simplifying administrative 
procedures, enhancing information support, and issuing a catalogue fo r investing in Asia, Africa, and 
Latin America. 
(iv) Automotive sector 
(a) Market structure 
119. China has been the world's fourth largest au tomobile manufacturer since 2003, after the 
United States, Japan, and Germany.  In 2004, China became the third largest market in the world, 
after the United States and Japan.  The share of th e automotive sector in total manufacturing value 
added increased from 3.73% in 2001, to 3.98% in 2004, while its share in the total manufacturing workforce fell from 3.93% in 2001, to 2.77% in 2004. 
120. Distinctive features of this sector appear to include government efforts to introduce 
economies of scale in production, to support private car purchases, and to attract foreign 
investment.
219  A partial consequence of this is the in creasing involvement of FIEs, despite reductions 
in tariff and non-tariff restrictions;  at the same time, some private domestically owned automotive 
manufacturers have emerged.  The number of firms in the automotive sector fell from 116 in 2001, to 102 in 2004, indicating some consolidation in the industry (Table IV.5). 
121. Foreign investment plays an important role in China's automotive sector:  between 2001 
and 2004, FIEs accounted for around 80% of China's passenger car production.
220  Also, along with 
tariff reductions, actual use of FDI increased fro m US$754 million in 1998 to US$1.02 billion in 
2001, and US$3.35 billion in 2004.221  Some private domestically ow ned automobile manufacturers 
began production aimed at the low-end of the market.222  However, despite recent market growth, car 
ownership in China remains limited.223  On the other hand, average prices in the passenger car market 
fell by around 11% in 2003 and 13% in 2004, as a result of supply outstripping demand. 
                                                      
219 The manufacture of automobiles and motorcycles is listed as "encouraged" in the "Catalogue for the 
Guidance of Foreign Investment Industries" (amended in 2004). 
220 From 2001 to 2004, FIEs accounted for 90.66% , 71.40%, 91.06%, and 88.29% respectively of 
China's passenger car market share.  
221 Ministry of Commerce (2005b). 
222 For example, Chery Automobile Company began to produce cars in 1999, and is reportedly going to 
export cars;  and Geely Automobile Company, which began manufacturing in 1997, sold 100,000 vehicles in 
2004;  both firms are private domestically owned ( China Economic Quarterly , Q4, 2005, p. 41). 
223 The NDRC stated that car ownership in China was 0.3 cars per 100 people in 2004, while the figure 
from the China Association of Automobile Manufacturer s was 2.1 cars per 100 people.  Global average car 
ownership was 12 cars per 100 people, and 60 cars per 100 in the United States ("Cars in China – Dream Machines", The Economist,  2 June 2005). WT/TPR/S/161 Trade Policy Review 
Page 200 
  
Table IV.5 
Automotive industry, 2001-04 
 2001 2002 2003 2004 
Production (million vehicles)a     
Automotiveb 2.3 3.3 4.4 5.1 
Cars 0.7 1.1 2.0 2.3 
Sales (million vehicles)     
Automotive 2.4 3.2 4.4 5.1 
Cars 0.7 1.1 1.99 2.3 
Share of imported motor vehicles to 
total domestic sales (%) 3.0 3.8 3.8 3.4 
Number of firms  116 117 115 102 
Imports (US$ billion)     
Automotive products 4.9 6.96 12.78 14.43 
7843 Other parts, motor vehicles 2.5 2.98 6.1 7.3 
7812 Passenger transport vehicles 1.3 2.6 4.4 4.6 
Exports (US$ billion)     
Automotive products 1.9 2.7 3.6 6.3 
7843 Other parts, motor vehicles 1.3 1.8 2.4 4.4 
a National Bureau of Statistics, China Statistical Yearbook,  various issues. 
b Includes buses, trucks, and cars. 
Source:  Data on the sales, share of imported motor vehicles to total domestic sales, and number of firms are from China 
Automobile Industry Association;  import and export data are from UNSD, Comtrade da ta base (SITC Rev.3). 
(b) Regulatory framework 
122. On 19 February 1994, the State Council issued an "Industrial Policy for the Automobile 
Industry", China's first automobile industry policy;  it was revised in 2004.  The aim of the 1994 
policy was to transform China's fragmented and decen tralized automotive industry into a pillar of the 
national economy, by, inter alia , improving product quality and rea lizing economies of scale in 
production.224  Under this policy, all foreign investment  in the sector had to be approved by the 
Central Government.225  To establish FIEs, foreign investors had to have their own product patents 
and trade marks, product development and manufact uring technology, independent international sales 
channels, and adequate financing capabilities.  For manufacturers of completely built up automobiles 
                                                      
224 From 1996, automobile manufacturers exceeding certain production, sales, and R&D expenditure 
levels, were granted preferential treatment by the Central Government, such as reduction of tax rates when making fixed asset investment, favourable conditions for bank loans, priority approval when listing on stock 
exchanges, and easier access to capital fro m abroad and government loans.  In  addition, bus, truck, motorcycle, 
and automotive component manufacturers that exported more than a certain percentage of their total sales were 
entitled to easier access to capital (if exports to total sa les exceeded 3%, 5% or 8% depending on the category, 
for passenger vehicles, 4% or 5% for trucks, 10% for motorcycles and automotive components).  However, according to the authorities, these meas ures had not been implemented as there were no implementing rules. 
225 The 1994 policy specifi ed that large-scale construction plans or new investments from domestic 
sources needed to be approved by either the State Planning Commission or the State Economic and Trade 
Commission (SETC).  On 20 June 1997, a "Further Strengthening Administration of Automobile Industry 
Projects Opinion" was issued, under which the State Planning Commission and SETC must approve all 
automotive projects, regardless of the source and the amount of funding, the type of construction or the type of assembled product. China WT/TPR/S/161 
 Page 201 
 
 
and engines, a Chinese partner had to own at least 50% of the company's equity.226  Imports of motor 
vehicles could enter only through the four coastal ports of Dalian, Tianjin, Shanghai, and Huangpu, 
and two terrestrial ports of Manchuria and Shenzh en (Huanggang).  The importation of used vehicles 
was prohibited.  Tariffs on imported parts and comp onents were linked to the vehicle's final value;  
the higher the percentage of imported components, th e higher the overall tariff rates (see (c) below). 
123. On 1 June 2004, the 1994 policy was replaced by a new "Automotive Industry Development 
Policy", issued by the NDRC.227  The main feature of this new policy is the incorporation of China's 
WTO commitments.228  In addition, the 50% equity limit con tinues to apply to foreign investment in 
vehicle manufacturing, including completely built  up units (CBUs), automobiles for special use, 
agricultural transport vehicles and motorcycles.  Howe ver, if approved by the State Council, this limit 
can be relaxed for vehicle manufacturers intending to  export and located in an export processing zone;  
the new policy does not stipulate a maximum equity  limit for such cases.  Two joint ventures with 
foreign automakers are still permitte d per vehicle category;  additiona l joint ventures are permitted if 
this involves investing with the Chinese partner to acquire other domestic automakers.  In 2005, there 
were 23 FIEs in the automotive industry. 
124. The approval system for new investment projects was also replaced with a registration or a 
verification system.  Producers must register w ith the provincial departments of the NDRC or the 
MOFCOM, including for:  the expansion of existi ng production facilities for automobiles, agricultural 
transport vehicles, and automobile engines;  invest ment to produce 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, agricultu ral transport vehicle, and automobile engine 
production;  and expansion by existing automotive ma nufacturers into different types of products. The 
minimum capital requirement for new entrants is Y 2 billion, of which self-owned capital must be no 
less than Y 0.8 billion, and an R&D institution must  be established with investment of no less than 
Y 0.5 billion.229  When establishing a foreign-invested automotive manufacturing joint venture, the 
                                                      
226 Other requirements include, inter alia,  the FIEs had to set up their own R&D departments in China, 
manufacture products that meet international technical standards, balance their foreign exchange independently , 
and give preferences to domestically produced parts and components. 
227 A full version of the text is available (in Chin ese) at:  http://www.ndrc.gov.cn/b/b200406011.htm  
[13 April 2005]. 
228 According to the authorities, the new policy abolis hed requirements on foreign exchange balancing, 
local content and export pe rformance (WTO document WT/G/L /708, 8 November 2004). 
229 Article 47 of the new policy specifies more detailed requirements for new investment projects:   for 
example, manufacturers of motorcycles and engines should have technology development ability and the total investment of the project cannot be less than Y 0.2 billion;  manufacturers of special autos should also have 
tehnology development ability, and registered capital must be no less than Y 0.2 billion;  total investment for 
projects producing other types of complete autos should be  no less than Y 1.5 billion, the enterprise's debt to 
asset ratio should be under 50%, and the credit grade granted by banks should be AAA;  auto manufacturers 
aiming to produce cars and other passenger autos that are not within their production scope should have good 
performance in batch production of au tos, and accumulative after tax prof its for the most recent three years 
should be over Y 1 billion, the enterprise's debt to asset ratio should be under 50%, and its credit grade should 
be AAA;  total investment for auto engine manufacturers should be no less than Y 1.5 billion, of which self-owned capital should be no less than Y 0.5 billion;  new assembly plants must have annual capacity to produce 
at least 10,000 trucks, or 50,000 autos with 4-cylinder engine, or 30,000 autos with 6-cylinder engine.  The 
requirement for newly established enterprises to set up their own R&D institutions was, to "equip the enterprises with basic technical ability in order to ensure that the newly-established enterprises be able to conduct technical 
reconstruction and research and development on their own products, and that they could meet the increasing 
technical and legal requirements on safety, environmenta l protection and energy saving, as well as customer 
demand in China" (WTO document WT/G/L/708, 8 November 2004). WT/TPR/S/161 Trade Policy Review 
Page 202 
  
technology transfer agreement with the foreign pa rtner must be registered with the competent 
authorities, such as the provincial de partments of the MOFCOM or the NDRC.230   
125. From 1994 to 1999, preferential tariff rates, based on "localization rates" of automotive 
production, were offered to promote the localizati on of the automotive industry in China.  This 
measure was phased out in 2000.  The new polic y supports manufacturers' efforts to improve 
domestic production of auto products, and promote domestic research and t echnology development.  
Enterprises' R&D expenditures are tax deductible provi ded they comply with the technological policy.  
The new policy also adopts measures against lo cal protectionism:  under Article 62, local 
governments "should not implement discriminative po licies on automobiles not produced locally nor 
adopt measures that may result in discriminative co nsequence".  In addition, standard nationwide 
administrative and registration fees must be applied to unify local governments' levies.231   
126. Vehicle manufacturers that can no longer maintain routine production and operation are not 
allowed to transfer their manufactur ing licences to non-automotive enterprises.232 
127. Other regulations include the "Administra tive Regulations on Recalls of Defective 
Automobile Products", introduced on 1 October 2004 to protect buyers against manufacturing 
defects.233  AQSIQ is the competent entity in charge of recalls.  The "Implementing Measures on 
Management of Automobile Brand Marketing", i ssued by MOFCOM, NDRC, and SAIC and effective 
on 1 April 2005, stipulated that the marketing of any brand of automobile is generally confined to one 
domestic enterprise;  foreign automobile producers may authorize a domestic enterprise, or set up a 
FIE in China to do their marketing.  The proportion of foreign investment in an automobile-marketing 
FIE, that opens more than 30 shops in China before 11 December 2006, must not exceed 49%.  
MOFCOM also issued the "Second-hand Car Circ ulation Management Methods" on 29 August 2005, 
which encourages the establishment of a second-hand car market. 
(c) Import and export measures 
128. In 2004, 3.44% of total vehicles sold in Chin a were imported;  this share was 2.11% in 
2001.234  Since China's accession to the WTO, tariff ra tes have been falling.  The simple average  
applied rate (including interim duty) for moto r vehicles (ISIC 3843) fell from 30.1% in 2001, to 
14.8% in 2005.  Tariff rates and reductions for vehicles and for components are different.  For 
example, tariff rates for motor vehicles, with a cy linder capacity not exceeding 3,000cc, were reduced 
from 70% in 2001 to 30% in 2005, and for those w ith a cylinder capacity exceeding 3,000cc from 
80% to 30%.  Tariffs for vehicle components are to be reduced from 15-50% before China's WTO 
accession to 10% by 2006. 
                                                      
230 According to the authorities, China requires "forei gn technology transfer and contract on technical 
cooperation" to prevent illegal assembling, to protect intellectual property and to ease up the procedures for 
product testing and accreditation, not to force foreign parties to transfer their technologies (WTO document 
WT/G/L/708, 8 November 2004). 
231 Local government in Shanghai charges a much higher car registration fee than in other parts of the 
country;  according to the authorities, Shanghai is an exceptional case. 
232 These licences are issued by the NDRC;  fo r FIEs, approval from MOFCOM is required. 
233 Recalls are divided into two categories:  activ e recalls by manufacturers or importers;  and 
designated recalls by AQSIQ. 
234 Total imports of automotive products reached US$14.4 billion in 2004, up by 12.9% over 2003;  
exports were US$6.3 billion in 2004, 75.6% higher than in 2003.  China exports mainly low priced cars.  In the first half of 2005, China exported 9,600 cars, an increase of 183% from the same period in the previous year;  
the per unit export value was US$7,238.5, down 14.4% fro m the same period in the previous year.  The main 
destinations are developing countries (online inform ation available at:  http ://www.chinaisa.org.cn/en/ 
news/hy0508101.htm [2 September 2005]). China WT/TPR/S/161 
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129. The new policy permits imports of vehicles th rough Xinjiang Alashankou in addition to the 
four coastal ports and two terrestrial ports.235  From 2005, imported vehicles can no longer be stored 
in bonded zones;  import duties are instead collected when the vehicle enters Ch ina.  According to the 
policy, CBU units include assembled parts, which, if meeting the requirements specified in the new 
policy, are subject to the same tariffs as CBU units .  In addition, if imports of key pieces reach or 
surpass stipulated volume, they are considered as as sembled parts and may be subject to tariff rates 
applied to CBU units.  Further, on 1 April 2005, the "Administrative Rules on Imports of Auto Parts 
with Features of Assembling Whole Vehicle" entered into force.  The Rules stipulated a procedure for 
applying to Customs for a tariff classification;  it may take up to one month to confirm a tariff. 
130. The new policy still prohibits the import of used autos, motorcycles, and parts and 
components.  The reason given by the authorities for this is the high cost of verifying whether the 
vehicles meet environmental and safety standards.  However, imports into export processing zones of 
used products for repair a nd re-export, are permitted. 
131. Import licences and quotas for all automotive vehi cles were phased out as of 1 January 2005.  
Before 2005, the quotas were increased by 15% annually.  China eliminated import licences for 
engines in 2003, motorcycles, trucks and bu ses in 2004, and passenger vehicles in 2005.  On 
1 January 2005, the "Implementing Rules on Issuance and Administration of Automatic Import Licences for Automobile Products" entered into force.  Under the rules, importers of motor vehicles 
or key spare parts must apply to MOFCOM or its designated provincial depart ments for an automatic 
import licence.  The licence is used for statistical pu rpose;  it is issued within ten working days of 
receipt of the application, and valid for six months within a calendar year. 
132. Under the "Regulation of Certification and Accr editation" and "Regulation of Certification for 
Automotive Products", automotive products must obta in a China Compulsory Certificate (CCC) mark 
and are subject to random inspection at the border.   Each vehicle will then be issued with an 
"Inspection and Quarantine Certificate for Enteri ng Commodities" and a "Car Attaching Inspection 
Certificate";  the latter certificate must accomp any the car throughout the distribution process in 
China, and be used in its licence registration. 
133. On 10 August 2005, MOFCOM issued the "Automobile Trade Policy"
236, which encourages 
FIEs to engage in automobile trade. To establish an FIE, foreign investors need to meet general 
foreign investment requirements in relevant laws  and regulations, and obtain approval from the State 
Council after completing an examination at the provi ncial level.  Article 39 of the trade policy 
prohibits unfair trade with regard to imports of automobiles and parts;  the competent authorities 
under the State Council may implement anti-dumping,  countervailing, and safeguard measures, 
establish a warning system, and conduct investigati ons into the competitiveness of the automobile 
industry.  The policy also encourages the estab lishment and development of an export base for 
automobiles and parts.  A "central foreign trade fu nd" will be used to support international trade in 
automobiles and parts.  Recently, domestic auto mobile companies started to invest abroad, 
presumably to upgrade technology and absorb advanced management skills.237   
                                                      
235 Imports of CBU vehicles through Xinjiang Alashankou are for use in the Xinjiang Autonomous 
Region only, and these imports are from the Commonwealth of Independent States.  
236 Ministry of Commerce online information.  Available at:  http://english.mofcom.gov.cn/ 
aarticle/policyrelease/domesticpolicy/200508/20050800262774.html [31 August 2005]   
237 For example, in October 2004, Shanghai Automotive Industrial Corporation (SAIC) acquired 48.9% 
of South Korea's Ssangyong Motor Company. WT/TPR/S/161 Trade Policy Review 
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(d) Automobile financing  
134. Under the 1994 policy, car prices were subject to government "guidance", while prices for 
other automotive products were determined by the market.  Price controls on cars were removed on 
21 May 2001.  The Government provided support for private car purchases for all cars sold 
domestically by encouraging auto-related non-bank financing to transform the car market from a 
system where vehicles were procured mainly by the Government for its own use to individual 
ownership of cars.  In 1998, the PBC issued th e "Administrative Rules for Automotive Consumer 
Loans", permitting state-owned commerc ial banks to provide auto financ ing.  In 1999, the PBC issued 
"Guidelines on Consumer Credit to Individuals" , which permitted Chinese commercial banks to 
provide consumer loans. 
135. The 1998 auto loan rules were replaced by th e new "Administrative Rules for Automotive 
Loans", effective on 1 October 2004.238  The new rules extend the cove rage of the lenders from all 
commercial banks to urban and rural credit coopera tives and non-bank financia l institutions;  they 
also provide different loan conditions for indi vidual borrowers, car dealers, and institutional 
borrowers.239  All loans are subject to a maximum term of  five years, up to a maximum of 80% of the 
price;  and the term for used automobiles cannot ex ceed three years.  The lenders are required to adopt 
a series of risk control measures, such as establis hing the borrowers' credit scoring system and an 
early warning system concerning potential risks.  Car purchases using credit reached 30% of total 
sales in 2003, but fell to 10% in 2004, partly due to tightened lending for car purchases by 
commercial banks and insurance companies.   
136. On 23 October 2003, the China Banking Regulatory Commission (CBRC) issued the  
"Administrative Rules Governing Auto Financing Co mpany", which permitted fo reign participation in 
the auto financing sector, either through joint vent ures, or through wholly foreign-owned enterprises.  
So far, GMAC-SAIC Automotive Finance Company Limited240, Toyota Motor Financial (China) 
Corporation, Volkswagen Finance (China) Company,  Ford Automotive Financing (China) Company, 
and Daimler Chrysler Auto Finance (China ) Company have all obtained approval.  
(v) Electronic and communications equipment industry 
(a) Market structure 
137. China's electronic and communications equipment i ndustry is the third largest in the world in 
terms of output, after the United States and Japan.  In 2004, the industry accounted for 12.7% of total 
manufacturing output and employed around 6.4% of the manufacturing workforce.   Among the 
various subsectors of the industry, output of pers onal computers grew by 91.2% in 2003 and 6.1% in 
2004;  mobile phones by 50.1% in 2003 and 28.0% in 2004;  and integrated circuit boards by 53.9% in 2003 and 42.6% in 2004.
241 
                                                      
238 People's Bank of China online information.  Available at:  http://www.pbc.gov.cn/english// 
detail.asp?col=6800&ID=19 [13 April 2005]. 
239 Individual borrowers include residents of foreign countries that have stayed in China for one year or 
longer. 
240 GMAC-SAIC Automotive Finance Company is a joint venture between the General Motors 
Acceptance Corporation (GMAC), a wholly owned subs idiary of General Motors, and Shanghai Automotive 
Group Finance Company.  The GMAC holds 60% of the stake, and SAIC holds 40%;  China's first auto 
financing company has a registered capital of Y 500 million.   
241 National Bureau of Statistics (2005a). China WT/TPR/S/161 
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138. Electronic and communications equipment also accounts for the largest share of China's 
exports.  With export revenue of US$142.1 billion in 2003, the industry accounted for 32.4% of total 
export value.242  FDI plays an important role in this industry;  according to MOFCOM, "foreign 
invested enterprises have become the major force in the growth of the electronic and communications 
equipment sector".243  By the end of 2003, the actual accumulated inflow of foreign investment was 
US$34.4 billion, accounting for 17.2% of the total in manufacturing.  In 2003, there were 2,957 newly 
established foreign enterprises in this industry, among which, wholly-owned foreign enterprises 
accounted for 77.4%.244  Exports by FIEs accounted for 81.3% of total exports of the industry in 2004. 
(b) Regulatory framework and foreign investment 
139. The Ministry of Information Industry (MII) administers the electronic and communications 
equipment industry.245  The industry has two distinctive features :  one is the Government's efforts in 
attracting FDI, the other is the relatively low level of technological development of domestic 
enterprises.  The Government actively seeks to attr act FDI to the industry.  The "Catalogue for the 
Guidance of Foreign Investment Industries" in cludes many areas relating to the electronic and 
communications equipment industry in the "encouraged" category.246  In addition, among the many 
preferential policies granted to FIEs, foreign-invest ed hi-tech manufacturing enterprises enjoy income 
tax exemptions in the first two years after making pr ofits and income tax reductions by half in the 
following three years.  There are no minimum ca pital or technology requirements for foreign 
investment in the industry.  In addition, it is re ported that many local governments refund their share 
(25%) of VAT revenue to FIEs.247 
140. By contrast, domestic enterprises seem to have  lower levels of technological capability and 
contribute less to value-added.  Their advantage lies mainly in medium and low-end products, but 
they lag behind in high-end products.  For example,  in 2003 FIEs' exports accounted for more than 
90% of all computer exports;  they also account for most of the total value added of the sector, 
including the design of software, silicon ch ips, and liquid crystal display monitors.248 
141. The Central Government has adopted several measures to assist the development of the 
electronic and communications equipment industry, in particular to improve the technological capabilities of domestic enterprises.  On 24 June 2000 , the State Council issued "Certain Policies on 
Promoting Software and IC Industries", aimed at  reducing the technological gap between domestic 
and foreign enterprises.
249  Under these policies, the Government allocated funds to software and IC 
industries for the establishment of software design centres in, inter alia , universities and research 
institutes.250  Preferential policies include VAT rebates251, tariff exemptions for imported equipment 
for own use, export loans provided by the EXIM  Bank and export credit insurance provided by 
                                                      
242 Ministry of Commerce (2004b). 
243 Ministry of Commerce (2003). 
244 Ministry of Commerce (2004b). 
245 "The administrative and enterprise functions of the MII were separated in 1998 to make the MII 
administratively more effi cient" (APEC, 2004a). 
246 Only "production of satellite receivers and key pa rts and components" is listed in the restricted 
category. 
 247 O'Melveny & Myers LLP (2003), p. 11. 
248 Financial Times,  9 May 2005. 
249 Other regulations issued in this regard include:  "Regulations on the Protection of the Design of IC 
Board Layout Drawing", and "Regulations on Protecting Computer Software", both issued in 2001. 
250 For example, some major universities have established software and IC design programmes, and the 
local government in Beijing established a Beijing Integrated Circuit Design Park. 
251 For example, until 2010, software and IC design  enterprises must pay 17% VAT;  however, it 
appears that VAT in excess of 3% is refunded to the former and in excess of  6% to the latter. WT/TPR/S/161 Trade Policy Review 
Page 206 
  
SINOSURE at favourable conditions, g overnment procurement preferences252, and a special fund set 
up by MII, NDRC, and MOF to promote domestic  enterprises' R&D ability in the semi-conductor 
industry.253 
142. The competitiveness of domestic enterprises app ears to have improved.  For example, China 
is now the world's largest manufacturer of televisions, colour TV production increasing by 26.9% in 2003 and 12% in 2004.
254  Since July 2005, domestically manufactured chips have started to be 
embedded in TVs.255  In addition, some FIEs have in recent years started to set up R&D centres in 
China. 
(c) Import and export measures 
143. Tariffs on electronic and communications equipm ent imports have fallen since China acceded 
to the WTO.  The simple average applied MFN rate  (including interim duty) for electrical machinery 
apparatus, appliances and supplies (ISIC 383) was re duced from 15.5% in 2001, to 9% in 2005.  On 
23 April 2003, China joined the WTO Information Technology Agreement (ITA), and 258 tariff lines 
at the HS eight-digit level are subject to zero tariffs.256  Import licences and quotas on certain 
electronic and communications equipment products have been removed. 
144. As in other sectors, VAT rebate policies re garding certain imports and exports in the 
electronic and communications equipment industry ha ve been changed according to industrial policy 
goals.  For example, the VAT rebate was disconti nued on 1 October 2004 for imports of integrated 
circuits (ICs) designed in China, but produced ab road, and as of 1 April 2005, for firms producing ICs 
in China on their domestic sales.257  On 1 November 2004, VAT rebates for some information 
technology (IT) exports (including some ICs, mo bile communications equipment and terminal 
stations, computers, and digital cont rolled machines) were fully rebated. 
145. To enhance the competitiveness of Chinese enterp rises, the Government provides assistance, 
such as export credit insurance by SINOSURE, to select ed exporters in certain sectors, including the 
                                                      
252 For example, in important and large investment projects, preferences could be given to domestically 
designed software.  Also, Article 10 of China's "Gove rnment Procurement Law" specifies that, with some 
exceptions, the Government should procure domestic goods, construction, and services. 
253 "Semiconductor sector to get further boost", China View, 15 April 2005.  It also reported that, 
domestic chip makers on average spend about 10% of their annual revenues on R&D, while the corresponding 
figure in the global semiconductor industry is about 20%. 
254 Exports of domestically produced TV s, however, face restrictions in other markets.  For example,  
colour TV sets were subject to anti-dumping tariffs imposed by the European Communities for 15 years;  China 
resumed exporting colour TV sets to the European Commun ities in 2002.  In April 2004, the U.S. Department of 
Commerce ruled that certain Chinese televisions sets should be subject to anti-dumping tariffs of 4.35% to 
24.48%.  These include a rate of 24.48% on TV sets produced by Sichuan Changhong Electric Company, 
22.36% by TCL International Holdings, 21.49% by Skyworth Digital Holdings, 11.36% by Konka Group, and 4.35% by Xiamen Overseas Chinese Electronic Corp oration.  "US Softens Stance on China TVs", Financial 
Times, 15 April 2004. 
255 "China-made chips to be embedded in TVs", People's Daily,  27 June 2005. 
256 The number of tariff lines are based on the 2005 tariff schedule. 
257 WTO documents WT/DS309/1, 23 March 2004, WT/DS309/7, 16 July 2004, and WT/DS309/8, 
6 October 2005.  On 18 March 2004, the United States requested consultations with China regarding China's 
VAT refunds on integrated circuits.  Following consultations, the two countries reached an understanding that, 
by 1 September 2004, China would start to revoke those measures that provided VAT refunds on ICs designed in China but produced abroad, with the effective date of revocation no later than 1 October 2004;  and by 
1 November 2004, China would start to  amend measures with a view to el iminating the VAT refunds to firms 
producing ICs in China on their domestic sales, with the effective date of these amendments to be no later than 
1 April 2005. China WT/TPR/S/161 
 Page 207 
 
 
electronic and communications equipment industry (see Chapter III(3)(viii)).  The Government is also 
encouraging domestic enterprises to invest abro ad, in an attempt to upgrade technology and to 
establish a commercial presence in the international market.  For example, in December 2004, the 
domestically owned company Lenovo bought IBM's PC branch. 
(5) SERVICES  
(i) Overview 
146. The tertiary sector in China accounted for some  32% of GDP in 2004, the most recent year 
for which data are available (although th is was revised in January 2006 to 41%).258  In 2003, the major 
services activities were wholesale and retail trade and catering services (23.6% of the total), finance 
and insurance (16.5%), and social services (12.5%) ( Chart IV.1 ).  These were also the main service 
activities in 2000;  however, while the shares of w holesale and retail trade and catering services and 
finance and insurance have declined slightly, that  of social services has risen.  According to data 
released in January 2006.  China h as adjusted its GDP upward;  it appears that most of this revision is 
due to the inclusion of services, including small businesses that tend to be privately owned.  The 
sector, nevertheless, remains relatively small compar ed with other developing countries, the new data 
showing its contribution to be almost 41% of GDP  in 2004.  Further liberalization of services may 
contribute to absorbing excess labour in othe r sectors of the economy, notably agriculture. 
147. China is a net importer of services.  Its main tains a negative services trade balance amounting 
to some 0.5% of GDP.  The main exports of servi ces in 2004 included:  tourism, which accounted for 
some 41% of receipts, and transportation, whic h was around 19% of receipts.  The main services 
imports in 2004 also involved transportation and tourism (34% and 26.5%, respectively), but also increasingly insurance, which accounted for 8.5%  of payments in 2004 up from 6.5% in 1998.
259  
148. In general, services are characterized by state involvement through SOEs and restrictions on 
private-sector involvement.  Both are gradually being liberalized although there are foreign investment equity restrictions or prohibitions for most services.  In certain services activities, 
particularly wholesale and retail, catering, real estate, storage, and transport, there appears to be a 
sizeable private sector presence, although this is di fficult to measure due to the small scale of the 
operators.
260  In liberalizing services, China has tended to follow closely its commitments under the 
GATS rather than liberalize autonomously, although its GATS commitments tend, in general, to be 
more extensive than those of other developing countries. 
                                                      
258 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 construction). 
259 There may be a discrepancy between data on trade in services and the contribution of services (the 
tertiary sector) to GDP as the data on trade in services is from the balance of payments.  The use of balance-of-
payments data may also tend to underestimate trade in services, as their coverage is more limited in scope than 
that of the GATS (for example, mode 3 is not usually covered by balance-of-payments data). 
260 Economist , 14 January 2006, pp. 61-62;  and China Daily Online.  Available at: 
http://english.people.com.cn/200512/20/eng20 051220_229482.html [23 January 2006]. WT/TPR/S/161 Trade Policy Review 
Page 208 
  
Education, culture & arts, 
radio, film & television
8.0Social services
10.9
Real estate
5.7
Finance & 
insurance
17.4
Wholesale/retail trade 
& catering 
   24.5Post & 
telecommunication
6.7Transport & storage
11.4Chart IV.1
Value added in services, 2000 and 2003
2000
Source:  National Bureau of Statistics (2005), China Statistical Yearbook 2005 .2003
Total:  Yuan 2,990.5 billion Total:  Yuan 3,918.8 billionPer cent
Other   
7.6Governemnt/parties
 agencies & social 
organization    7.9Education, culture & arts, 
radio, film & television 
 8.7Social services
12.5
Real estate
6.1
Finance &
 insurance
16.5
Wholesale/retail 
trade & catering
23.6Post & 
telecommunicaiton
8.2Transport & storage
8.8Other
 7.7Government/parties
agencies & social
organization  8.0
 
(ii) Commitments under the General Ag reement on Trade in Services 
149. In the GATS, China made specific commitments in nine out of the 12 large sectors contained 
in the classification list generally used by Members for GATS scheduling purposes:  business 
services;  communication services;  construction a nd related engineering services;  distribution 
services;  educational services;  environmental services;   financial services;  tourism and travel related 
services;  and transport services.261  No commitments were made in health related and social services;  
recreational, cultural and sporting services;  or other services not included elsewhere. 
150. 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, science,  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 a FIE (the shorter of three years or length of 
contract);  and service salespersons nego tiating the sale of services (90 days). 
                                                      
261 WTO document GATS/SC/135, 14 February 2002. China WT/TPR/S/161 
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151. With regard to national treatment, China has scheduled a horizontal limitation under mode 3 
that covers all the existing subsidies to domestic  service suppliers in audiovisual, aviation, and 
medical services.  The presence of natural pers ons (mode 4) is unbound, except for the persons 
permitted entry into China as listed above.  China's sector-specific commitments are listed in 
Table AIV.2.262 
152. 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)).263 
(iii) Financial services 
(a) Overview 
153. Financial sector reforms began in China in 1979,  when the monopoly of the People's Bank of 
China (PBC) was removed and its commercial functions were separated into four state-owned 
banks.264  Joint-stock banks were introduced later to diversify the ownership structure in the banking 
sector.  The banking sector remains the most importa nt source of credit in the financial sector, while 
insurance services and the equity and bond markets ar e still relatively underdeveloped.  Assets of the 
banking and insurance sectors are also highly concentr ated:  the largest four banks and six insurance 
companies currently account for 54% and 85%, respectively, of banking assets and insurance 
premiums.  Another notable feature of the fina ncial sector is the high degree of government 
ownership.  All the banks and insurance agencies me ntioned above are majority or fully government 
owned.  In addition, the foreign-ow ned financial sector remains very small.  Thus, in contrast to the 
industrial sector, where efforts have been made to develop and strengthen the private sector, including 
through the easing of restrictions on private-sect or activities and improving access to credit, the 
financial services sector (like other services) displa ys a high level of public ownership and control. 
154. The reforms that began over 25 years ago ar e, however, slowly starting to improve 
competition in the banking and insurance sectors.  Since the 1990s, the Government has also been 
trying to deal with the problem of non-performi ng loans (NPLs), which remain relatively high in the 
state-owned banks, although this has been a slow pr ocess, due partly to inadequate information about 
the actual magnitude of NPLs.  In the latest round of  reform, the Government has transferred some of 
the NPLs of two state-owned banks to asset management companies.  These two banks are currently being restructured and one of them has recently listed its shares on the stock exchange.
265  Of the 
remaining two banks, the Agricultural Bank of China see ms to be the weakest;  it is not clear whether 
there are plans to restructure it in the future. 
                                                      
262 The other two modes are:  cross border supply (mode 1) and consumption abroad (mode 2). 
263 WTO document GATS/EL/135, 14 February 2002. 
264 Before this, the role of the People's Bank of China was to collect revenue from the state-owned 
enterprises and allocate investment acco rding to government policy, mainly through the SOEs, as well as to act 
as the country's central bank (see for example, Pei and Shirai, 2004). 
265 The second is reportedly planning a US$5 billion foreign listing in early 2006 ("Special Report:  
China's banking industry", Economist,  29 October 2005). WT/TPR/S/161 Trade Policy Review 
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(b) Banking 
Structure 
155. As at December 2004, there were 34,000 banking  institutions in China, of which 135 were 
commercial banks ( Box IV.2) .  Among the commercial banks, there are four state-owned commercial 
banks (SOCBs) and 12 joint-stock commercial banks (JSCBs), of which five are listed on China’s 
local stock exchanges.  It appears that the JSCBs tend to finance SMEs and smaller SOEs, while the 
four SOCBs seem to have a significant share of thei r loans tied up in the large SOEs.  There are also 
112 city commercial banks (CCBs) and seven rural commercial banks (RCBs), most of which were 
created as a result of the restructuring and conso lidation of urban credit cooperatives and rural credit 
cooperatives, respectively.  The CCBs, RCBs and ru ral cooperative banks are all local financial 
institutions subject to strict geographic restrictions .  Rural and urban credit cooperatives were formed 
to diversify the financial sector and to finan ce projects that did not have access to adequate 
resources.266  Both may operate only in the communities where they are located .  China also has a 
Postal Savings Institution . 
156. Restrictions on the operations of foreign banks have declined gradually.  These banks were 
first permitted to operate in China in the early 1980s, but only through representative offices.267  Since 
then, as reforms have led to a gradual opening up of  the sector, they have been permitted to establish 
branches, although with geographic, pr oduct, and client restrictions.  As a result of its accession to the 
WTO, China is to permit foreign investment in  the banking sector without geographic or client 
restrictions by the end of 2006 (see GATS commitments below).  At the end of June 2005, there were 
225 licensed foreign banks operating in China repr esenting 68 banks from 19 nations.  The majority 
of these (173) were foreign bank branches, while six banks were local subsidiaries of foreign banks.  
Among these foreign banks, 133 are permitted to conduct business in the local currency, 15 are 
allowed to operate on-line banking, 41 may deal in derivatives and five are permitted to conduct trust 
business under the Qualified Foreign In stitutional Investor (QFII) scheme. 
157. Despite a larger number of banks operating in  the sector, around 54% of bank assets continue 
to be held by the four state-owned banks while  the 12 joint stock commercial banks account for 
around 15% of total bank assets (Table IV.6).  Th e foreign banks account for around 1.2% of total 
bank assets.  The four SOCBs, the Agricultural Ba nk of China (ABC), the China Construction Bank 
(CCB), the Bank of China (BOC), and the Industr ial and Commercial Bank of China (ICBC), were 
split from the People's Bank of China in 1979, an d took over its commercial activities. They have 
been the primary source of lending to China’s SOEs and, as a result, continue to be burdened with 
large NPLs. 
158. The three policy banks, the Agriculture Development Bank of China, the Export Import Bank 
of China, and the China Development Bank were cr eated in 1994.  These banks were to replace the 
sectoral, development, and export activities carried out by the SOCBs which, since 1994, have been 
permitted to carry out commercial activities.  The China Development Bank finances projects 
involving infrastructure and "key" industries, la rge and medium-sized construction projects and 
technical renovation;  the Export and Import Bank of China provides credit mainly for export of 
                                                      
266 For example, rural credit cooperatives were firs t established in the 1950s.  Their shareholders 
include farmers and agricultural and other economic organizations and, according to the authorities, they tend to 
provide loans mainly for rural households rather than for rural enterprises.  As part of China's economic reform 
of its financial system, they have been gradually restru ctured and some have become rural commercial or rural 
cooperative banks. 
267 The first branch of a foreign bank, the Nanyang Commercial Bank Ltd (regi stered in Hong Kong, 
China) was established on 17 July 1981. China WT/TPR/S/161 
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large-scale machinery and electri cal products and equipment;  a nd the Agricultural Development 
Bank provides funding for the purchase and storage of grain, cotton, and oil.  Funding for these banks comes primarily from State budgetary allocations as well as through bond issues.  According to the 
authorities, the policy banks provide financing for large infrastructure projects that the commercial 
banks find to be too risky.  They state that ther e are three main differences between the policy banks 
and commercial banks:  first, the policy banks provid e lending for the priority projects of the State;  
second, they do not draw on commercial deposits;  and third, their final goal is not to make profit. 
Box IV.2:  The structure of banking in China 
Following reforms to the banking system that started in  the late 1970s, there are currently five kinds of 
banks: 
State-owned commercial  banks (SOCBs) :  there are four SOCBs, formed under the State Council's 
"Decision on Financial System Reform" issued in December 1993.  The Law on Commercial Banks, which 
became effective in 1995, permitte d commercial banks, including the SOCBs, to operate under market 
criteria.  The SOCBs are extremely large, with extensive regional networks throughout China.  Their 
influence over the banking sector has been  declining, however, in recent years. 
The SOCBs continue to be controlled by the State, although foreign strategic investors are permitted to 
invest in them.  Some SOCBs are currently undergoing reform to become joint-stock companies.  Their 
financial performance has been poor.  A large volume of China's NPLs appear to be concentrated in the 
SOCBs.  The authorities point out that NPLs, which are hi gh for historical reasons, have declined in recent 
years. 
Policy banks:   the three policy banks are the Agricultural Development Bank of China, the Development 
Bank of China, and the Export Import Bank of China.  They were created in 1994 to assume the state 
directed lending carried out by the commercial banks.  Their funds come mainly from government deposits 
and guaranteed bond issues.  Their lending is currently focused on infrastructure and development projects 
as well as for agricultural and import-export purposes. 
Joint stock commercial banks (JSBs):   the first JSBs were formed in the 1980s.  These banks are partly 
owned by the State and partly by others including SOEs, private enterprises, and individual investors.  They 
are subject to closer scrutiny by shareholders and have better disclosure and governance requirements.  In 
addition, five of the 12 JSBs are listed on domestic stock exchanges and thus undergo the additional 
disclosure requirements of these exchanges.  As a resu lt partly of better governance, they have lower NPLs, 
better capitalization, and more adequate provisioning than the SOCBs. 
City commercial banks:   these are owned by municipal governments and others, including SOEs, private 
enterprises, and individual investors.  There are 11 2 city commercial banks in China with widely ranging 
standards of governance and performance. 
Rural commercial banks:   these were set up in 2004 and took over some of the activities of the rural credit 
cooperatives;  they provide financing mainly  for commercial projects in the rural areas. 
Urban credit cooperatives:   are gradually being consolidated to form the city commercial banks. 
Rural credit cooperatives:   there are 38,000 rural credit cooperatives.  They mainly provide funding for 
agricultural households (as opposed to rural commercial banks which provide funding for commercial 
ventures in the rural areas), although it has been s uggested that they are the weakest entities in the banking 
sector with problems of governance and large stocks of NPLs. 
159. There are also a number of non-bank financial ins titutions including:  the trust and investment 
corporations (TICs), created in the 1980s, to pr ovide financing beyond the credit quotas imposed on 
the commercial banks;  and the asset management co mpanies (AMC), established in 1999, to recover 
NPLs held by the state-owned banks thr ough different asset resolution techniques. WT/TPR/S/161 Trade Policy Review 
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Table IV.6 
Performance of the banking sector, 2003 and 2004 
(Y billion and %) 
 2003 2004 2005 (end September) 
Total assets (Y billion at year end) .. 31,599.0 35,964.4 
Policy banks .. 2,412.2 (7.6)  .. 
Commercial banks .. 23,334.9 (73.8) .. 
SOCBs .. 16,932.1 (53.6) 19,153.2 
Joint stock commercial banks .. 4,697.2 (14.9) 5,490.7 
City commercial banks .. 1,705.6 (5.4) 1,883.4 
Rural credit cooperatives .. 3,133.2 (9.9) .. 
Urban credit cooperatives .. 178.7 (0.6) .. 
Foreign banks .. 582.3 (1.8) .. 
Non-performing loans (% of total loans) .. 14.10 8.58 
Commercial banks .. 13.21 8.70 
SOCBsa 20.4 15.6 10.11 
Joint stock commercial banks 7.9 4.9 4.51 
City commercial banks 15.0 11.7 5.80 
Capital adequacy ratios (%) .. .. .. 
SOCBsb 6.7 6.8 .. 
Joint stock commercial banks 7.4 7.6c .. 
City commercial banks .. 6.1 .. 
.. Not available. 
a The ratio of NPLs for the SOCBs appear to be quite wide ranging:  in 2002 NPLs were 15.17% for the China Construction Bank;  
22.49% for the Bank of China;  25.69% for the Industrial and Co mmercial Bank of China;  and 30% for the Agricultural Bank of 
China.  Data provided by the authorities indicate that by end 2004, the non-perfor ming ratios were 3.9% for the CCB and 5.12% 
for the BOC. 
b The capital adequacy ratio for SOCBs was estimated at 5.2 in 2002. 
c Based on the new five-part classification. 
Note: Figures in parenthesis denot e percentage of total assets. 
Source:  China Banking Regulatory Commission (CBRC). 
Regulatory framework 
160. In April 2003, the State Council established the China Banking Regulatory Commission 
(CBRC) to take over supervisor y and regulatory functions prev iously performed by the PBC.268  The 
CBRC’s objectives include:  protecting consumers and depositors through prudential supervision of 
the sector;  maintaining stability in the banking sy stem;  enhancing the competitiveness of banks;  
encouraging competition;  educating the public on th e role of finance;  and eradicating financial 
crime.269  Its main functions include:  formulating su pervisory rules and regulations for the sector;  
conducting on-site examinations a nd off-site surveillance;  penalizing non-compliance;  conducting 
fit-and-proper tests on senior bank management;  providing proposals to resolve problems in deposit taking institutions in consultation with the relevant regulators;  an d administering supervisory boards 
of the major state-owned banking institutions.
270  The CBRC currently supervises nearly all the 
34,000 banking and non-bank financia l legal entities, accounting for over 90% of the total assets of 
                                                      
268 The People’s Bank of China maintains regulation of monetary policy and financial liquidity.  It sets 
the interest rate bands for loans and deposits as well as reserve requirements of banks.  It also appears to monitor and regulate the credit expansion of a large portion of the banking system. 
269  CBRC online information. Available at:  http://www.cbrc.gov.cn/english/index.htm 
[1 April 2005]. 
270 CBRC online information. China WT/TPR/S/161 
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financial institutions in China.271  In addition, the Ministry of Finance oversees the management of 
SOCBs' NPLs by the asset management companies (see below), while the PBC is responsible for 
overall financial stability. 
161. In addition to the regulators, there are industr ial associations, such as the National Association 
of Banking Industry and National Association of  Finance Companies that, according to the 
authorities, ensure industrial self-disci pline, business cooperation and innovation. 
162. The main legislation regulating the sector in cludes:  the Law on Commercial Banks, adopted 
by the NPC on 10 May 1995 and most recently amended on 27 December 2003;  and the Law on 
Regulation of and Supervision over the Banki ng Industry, adopted on 27 December 2003 and 
effective 1 February 2004.  In addition, guide lines issued to improve corporate governance and 
management of banks, include, inter alia,  the "Guidelines on the Corporate Governance of Joint Stock 
Commercial Banks" (4 June 2002),  and the "Gui delines on the Internal Control of Commercial 
Banks" (18 September 2002).  The "Regulations on Ad ministration of Foreign Financial Institutions 
and its Implementing Rules" determine the rules u nder which foreign and foreign-funded banks may 
operate in China, while the "Administrative Rul es Governing the Equity Investment in Chinese 
Financial Institutions by Overseas Financial Ins titutions" regulate equity investment by foreign 
financial institutions.272 
163. Application procedures and requirements as we ll as prudential requirements for commercial 
banks are described in the Law on Commercial Banks.273  The applicant must submit a written 
application, along with a feasibility study, and "other documents" that may be specified by the CBRC 
when the above mentioned documents are not comp lete and may therefore vary from case to case.  
Following this, the applicant must provide:  a draf t 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 lis t of the names, capital contributions, and shares of 
shareholders;  credit worthiness certificates and releva nt information on sharehol ders with 5% or more 
of the company's shares;  and business policies and plans, and other documents as specified by the 
CBRC.  The authorities state that these documents are for the purposes of prudential regulation and 
supervision.  Once the banking permit has been issu ed by the CBRC, the licence holder must register 
with the State Administration of Industry and Commerce (SAIC) and obtain a business certificate.
274  
Banks must obtain approval from the CBRC for ever y additional branch;  the total amount allocated 
to such branches may not exceed 60% of the total capital of the head office.  Any significant changes, 
                                                      
271 CBRC (2005).  The remaining 10% comprise asse ts of securities and insurance companies. 
272 A foreign financial institution is a commercial bank incorporated outside the territory of the People's 
Republic of China following the approval or authorization by the financial supervisory authority of the country, whereas a foreign-funded legal entity is a wholly fore ign-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 Implementing the Regulations Governing Foreign funded Financial Institutions). 
273 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;  handling the acceptance and disco unting 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;  engaging in interbank lending;  buying and selling foreign exchange, and 
acting as an agent for the purchase and sale of foreign exchange;  engaging in 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 
the amendment of 27 December 2003). 
274 Articles 14-16 of the Law on Commercial Banks. WT/TPR/S/161 Trade Policy Review 
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including in:  the name;  the amount of registered capital;  location of head office or branch;  the 
scope of the business;  shareholders with 5% or more of the banks shares;  the articles of association;  
or other matters, including changes in operating fu nds of local branches of foreign banks or of 
foreign-invested or joint venture banks, or the tran sfer of assets by headquarters to foreign financial 
institutions in China, must be approved by the CBRC .  A change in senior management must also be 
notified to the CBRC, and the qualifica tions of the new management approved.275  For an SOCB, a 
board of supervisors must be established to oversee its operations and its assets-liabilities ratio and to 
maintain and increase the value of state-owned assets.276  According to the Law on Regulation of and 
Supervision over the Banking Industry, decisions re garding bank licences must be made within six 
months from the date when the CBRC receives the appli cation, within three months for any change or 
termination of a financial institution, and w ithin 30 days for examining and approving the 
qualifications of senior officials of the financial institutions.277 
164. According to the Law the minimum registered capital required for establishment is Y 1 billion 
for a commercial bank, Y 100 million for an urba n commercial bank, and Y 50 million for a rural 
commercial bank.278  In addition, the capital adequacy ratio  (CAR) may not be lower than 8%, the 
ratio of the outstanding loans to deposits may not exceed 75%, the ratio of the balance of floating 
assets to the balance of floating liabilities may not be  lower than 25%, and the ratio of the outstanding 
loans granted to the same borro wer to the balance of the capital of the commercial bank may not 
exceed 10%.279  Other requirements include:  the ratio of loans outstanding by a commercial bank to 
related parties must be no more than 10% of the to tal net capital of the bank (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.280  
165. Minimum registered capital and operating capita l requirements of wholly foreign-funded 
banks or joint equity banks and for foreign funded or joint equity finance companies are described in 
the "Administrative Rules Governing the Equity Investment in Chinese Financial Institutions by 
Overseas Financial Institutions".281  According to these rules, a foreign financial institution wishing to 
invest in a Chinese financial institution must fulfil th e following requirements:  its total assets at the 
end of the previous year must, in principle, be  no less than US$10 billion if investing in a Chinese 
commercial bank, and no less than US$1 billion if investing in a Chinese urban or rural credit 
cooperative, or a Chinese non-bank financial institu tion;  it must have had a favourable long-term 
credit rating for the previous two consecutive years;  it must have been profitable during the previous 
two consecutive years;  and if the overseas financia l institution is a commercial bank, it must have a 
CAR of no less than 8%.  
166. Prudential requirements for foreign-funded financial institutions under the "Rules for 
Implementing the Regulations Gove rning Foreign funded Financial Institutions" include:  a sound 
corporate governance structure;  persistently  sound operational performance, such as good 
profitability;  financial reports drawn up in line with prudent accounting principles,  such as sufficient 
provisioning of capital, and "clean" financial reports for three consecutive years;  no record of major 
                                                      
275 Article 24 of the Law on Commercial Banks. 
276 Article 18 of the Law on Commercial Banks. 
277 Article 22 of the Law on Regulation of and Supervision over the Banking Industry. 
278 Article 13 of the Law on Commercial Banks. 
279 Article 39 of the Law on Commercial Banks. 
280 Further details are given in the "Rules on Commercial Banks' Connected Transactions with Insiders 
and Shareholders" (CBRC Decree No. 3 of 2004) and the "R ules on Monitoring, Indicators and Assessments on 
Assets/liabilities Ratio Management at Commerc ial Banks" (CBRC Circular No. 450 of 1996). 
281 Chapter III, Articles 31-36 of the "Rules fo r Implementing the Regulation Governing Foreign 
funded Financial Institutions". China WT/TPR/S/161 
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legal violations or of "bad credits", such as cases of contract infringement;  a favourable reputation in 
the banking sector and good image in the society;  stable political and economic situations in the 
home country or region of the applicant in th e case of a foreign bank branch as well as a sound 
communication mechanism between home and host supe rvisory authorities;  and "other requirements 
in relevant laws and regulations on investors in the financial sector".  The authorities state that these 
other requirements include anti-money laundering provi sions.  The capital adequacy ratio requirement 
is 8%, and the largest or sole foreign shareholde r must be a commercial bank (or a finance company 
in the case of a joint equity finance company).  According to the "Implementing Rules of the 
Regulations on Administration of Fo reign Financial Institutions", fo reign bank branches involved in 
local currency business in China must have a mini mum operational capital of Y 200 million, of which 
Y 100 million should be devoted to local currency busi ness;  a foreign bank branch that provides all 
local currency services is required to have Y 500 million in operational capital. 
167. Foreign equity in the sector is restricted a nd follows China's GATS commitments, which will 
gradually open the sector to foreign competition (see below).  Equity held by a single overseas 
financial institution in a Chinese fina ncial institution may not exceed 20%.282  From the date of 
accession until 30 June 2005, 227 foreign licen ces had been approved in the banking sector.283  By the 
end of 2004, according to the CBRC, 18 Chinese cities were open to foreign banks to provide local 
currency services;  Xi'an and Shenyang were opene d to foreign banking one year ahead of schedule.284  
Local currency business was opened to foreign banks  in two other cities, Shantou and Ningbo, in 
December 2005.285 
168. In an attempt to encourage investment in th e less prosperous parts of the country, the CBRC 
eased review and approval procedures for foreign ba nk branch applications in China's western and 
north-eastern areas and relaxed regulatory require ments for conducting local currency business.286  
Under these relaxed requirements, instead of assess ing the profitability of each individual branch 
when considering the application, the CBRC will ta ke into account the profitability of all Chinese 
branches of the foreign bank.  In addition, accordin g to the authorities, a gr een passage is established 
for foreign banks wishing to provide services in western and north-eastern regions. 
169. There is currently no explicit deposit insurance scheme, although the Government appears to have 
given full protection to individual savings in the commercial banks and urban credit cooperatives in recent years.  The operations of the four SOCBs, which accoun t for the majority of deposits, are also guaranteed 
by the Government.  However, the authorities acknowledge that while the guarantee provides protection to 
depositors, it also props up the ailing banking system and is detrimental to the creation of competition in 
the sector.  A decision has therefore been made to establish a deposit insurance system.  The regulations and rules, which are currently being drafted jointly by the three regulators, the PBC, the CBRC, and the 
MOF, will, inter alia,
 make the insurance scheme compulsory  for all deposit-taking institutions, 
including the postal savings institution and the credit cooperatives, except foreign financial 
institutions that are not legal entities (such as fo reign bank branches);  permit differentiated premium 
rates depending on the size of assets and exposure to risks;  provide a maximum indemnity of up to 
                                                      
282 If the total share of foreign banks in a non-liste d Chinese financial institution reaches 25% or more, 
the non-listed Chinese financial institution is treated as  a foreign funded financial institution by the CBRC;  
however, if the total share of fore ign banks in a listed Chinese financia l institution reaches 25% or more, the 
Chinese financial institution is still treated as Chinese by the CBRC. 
283 WTO document S/C/W/267, 22 September 2005. 
284 CBRC (2005). 
285 WTO document S/FIN/M/50, 23 September 2005. 
286 CBRC (2005). WT/TPR/S/161 Trade Policy Review 
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Y 100,000 for a single deposit account;  and a source of  funding, which is likely to be through public 
financing, special financing by the PBC, and income from premiums.287 
170. Banking supervision is covered under Chapters V,  VI, and VII of the Commercial Bank Law;  
in addition, in December 2003, the Law on Regula tion of and Supervision over the Banking Industry 
was enacted to, inter alia,  improve banking supervision and to promote the sound development of the 
sector.  The Law applies to:  financial institutio ns (including their foreign business operations) 
established in China that receive deposits from the general public, i.e. commercial banks (including 
SOCBs), urban and rural credit cooperatives and po licy banks;  non-bank financial institutions 
(including their foreign business operations) esta blished in China (including financial asset 
management companies, trust and investment corpor ations and other financia l institutions established 
with the approval of the CBRC);  and financial in stitutions established outsi de China, upon approval 
by the CBRC.  Supervision is to be conducted both off-site and on-site, and includes examination of 
CARs, asset quality, management ability, earnings, liqui dity, and sensitivity to market risk.  On-site 
inspections are irregular due to the CBRC's limite d resources.  They include special inspections of 
institutions with high risk, institutions with probl ems of "key" importance identified during routine 
inspections as well as problems such as illegal beha viour, false financial information, and severe 
defects in risk management or internal manageme nt.  The CBRC is currently establishing an off-site 
supervision system, the core of which is risk superv ision.   It includes supervision of consolidated 
financial statements, risk analysis, as well as "thr ee party talks" and "prudential talks".  The CBRC 
may, inter alia,  ask financial institutions to provide re gular written reports on certain problems, 
impose special requirements with regard to risk supervision indices and capital requirements, and ask 
financial institutions to change senior mana gement within a certain period of time. 
171. The CBRC also has a rating system and an early warning mechanism for supervision of banks 
to determine the frequency and scope  of on-site inspection and other supervisory measures that need 
to be taken.  The system for foreign legal pe rsons is based on five elements (capital, assets, 
management, earnings, and liquidity);  the CBRC draws up its risk rating based on data collected on 
these five indicators.288  The CBRC rates branches of foreign banks according to four elements (risk 
management, operational controls, compliance, and asset  quality);  one of five rates is given.  An 
early warning system and a regulation consistency warning system have also been established for 
foreign invested banks. 
Recent reforms 
172. Despite partial reform attempts, the history of  state involvement in and control over China’s 
banking sector has resulted in significant gove rnance and financial problems.  The SOCBs 
accumulated large portfolio's of NPLs as a result of lending to SOEs.  Estimates of the size of the NPLs vary, but figures released by the SOCBs in  2001 showed a range from around 18% at the CCB 
to over 40% at the ABC.  Independent estimates put NPLs at between 30% and 60% of total loans, 
with the SOCBs having the largest share.
289  Several attempts have been  made to address the problems 
of the SOCBs, including through cash infusions  and purchase of NPLs.  For example, in 1999 
Y 270 billion was injected into the four SOCBs, and Y 1.4 trillion of NPLs were purchased and transferred to four special asset management companies (AMCs), all owned by the Ministry of Finance.  According to the authorities, the AMCs, which were given ten years to recover what they 
could, had disposed of around Y 940 billion by the end of 2004, of which around Y 430 billion 
                                                     
 
287 CBRC (undated a). 
288 The five levels are:  normal (level 1), basically  normal (level 2), attention (level 3), problematic 
(level 4), and danger (level 5). 
289 Green (2003). China WT/TPR/S/161 
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(around 30%) was at the final stage of disposal.  The AMCs are expected to complete the disposal of 
their debts by 2006.290 
173. Most recently, in 2003/04, the Government used US$45 billion of its foreign exchange 
reserves to partially bail out two SOCBs (Bank of China and the China Construction Bank) to prepare 
them for possible listing on the stock exchange (see below).291  The Government created a state-
owned entity, Huijin Investment, to manage th e Government's investment in the two banks.292  Banks 
were also warned to stop lending to customers wi th poor credit records.  However, the financial 
performance of the SOCBs remains poor.  The av erage NPL ratio, especially among the SOCBs has 
remained high, at 20% of outstanding loans, with 8% for the joint-stock commercial banks at the end 
of 2003.  More recently, the CBRC announced that th e NPL ratio in the 16 la rgest banks (four SOCBs 
and the 12 joint-stock banks) fell from 17.8% at the end of 2003 to 13.2% by the end of 2004;  by 
September 2005, the figure ha d fallen further to 8.7%.293  However, it has been  suggested that because 
these figures do not reflect the NPLs that were transf erred to the AMCs in 1999, and a further transfer 
of bad loans from the two "pilot" SOCBs as part  of their recapitalization, they are actually 
underestimates.294  The banks also have a substantial number of special mention loans that are 
considered performing, but have a higher risk of  becoming non-performing in the future.  At end 
2002, the share of such loans was 14% for the Ba nk of China, 19% for CCB and 12% for ICBC.  
Another problem is the low CARs among the SOCBs.   The average CAR for the four banks was 6.8% 
at the end of 2004, still below the required 8%295;  the total number of banks  meeting this requirement, 
including the City Commercial Banks, rose from eight at the beginning of 2004 to 33 by June 2005.296  
It is also estimated that the return on assets of  the Chinese banking sector is less than 0.5%, worse 
than for many countries in the region.297  In addition, largely as a result of these problems, the private 
sector has tended to use forms of financing other than through banks. 
174. The Government has therefore concentrated its most recent efforts on improving governance 
and raising supervisory standards to international levels as well as increasing transparency and 
competition in the sector, including through increased foreign presence.  For example, the Bank of 
America currently holds 9% of China Construc tion Bank (CCB) shares, while Asia Financial 
Holdings Private Limited, a company belonging to the Singapore Government's Holding Company, 
Temasek, holds 5.1% of CCB shares.  A special  "pilot scheme" for governance and supervision 
reforms for the Bank of China (BOC) and the CCB were also announced in March 2004.  The 
objective of the "Guidelines on Corporate Governan ce Reforms and Supervision of Bank of China 
and Construction Bank of China" is to transform th e two banks within three years into "modern and 
internationally competitive joint-stock commercial ba nks with adequate capital, strict internal 
controls, safe and sound business operations, quality services and desirable profitability."298  The two 
                                                      
290 CBRC (undated a). 
291 US$23 billion of this was injected into the China Construction Bank at the end of 2003. 
292 Huijin's senior staff seem to come mainly from the PBC, the State Administration of Foreign 
Exchange (SAFE), and the Ministry of Finance.  It thus  seems likely that once the tw o SOCBs are listed on the 
stock exchange, Huijin would retain majority ownership of these banks (Royal Institute of International Affairs, 
2004). 
293 CBRC online information.  Available at:  h ttp;//www.cbrc.gov.cn/english/ [6 April 2005]. 
294 A large part of the outstanding NPLs transferred to the AMCs remains to be resolved.  For example, 
as of September 2003 the AMCs had disposed of around 30% of the stock of NPLs that they had originally assumed (Prasad, 2004).  It has also been suggested that if these NPLs were added to the total figure given by 
the CBRC, the figure would rise from 13.2% to 19.8% ( China Economic Quarterly , 2005, Q1, pp. 10-11). 
295 In the case of the Agricultural Ba nk of China, the CAR at the end of 2002 was estimated to be as 
low as 1.44 (Pei and Shirai, 2004). 
296 CBRC (undated a). 
297 "Special Report:  China's banking industry", Economist, 29 October 2005. 
298 CBRC (undated b). WT/TPR/S/161 Trade Policy Review 
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banks are required to put in place a governance struct ure that includes a general shareholders meeting, 
a board of directors, a board of supervisors, a nd an executive management.  Their functions will be 
separate and distinct following the structure require d for joint-stock commercial banks.  In addition, 
the Guidelines specify performance assessment indi cators, such as a net return on assets ratio and a 
return on equity that is required to rise gradually an d be equivalent to that of international banks by 
2007.  The banks are also required to apply a five category system when classifying their "non-credit 
assets", while the non-performing asset ratio is to be within the range of 3% to 5%.299  According to 
the authorities, the five-category classification system has been put in place by the SOCBs and 
JSCBs.300  The CAR is also to be maintained above 8% as of 2004, in keeping with international 
standards, and lending to any single client, as of 2005,  is to be no more than 10% of the bank's total 
net capital.301  The problem of NPLs is also to be  addressed through a gradual increase in the 
provisioning ratio, which is expected to incr ease to 60% and 80% for the BOC and the CCB, 
respectively, by the end of 2005, and to be increased  further by the end of 2007;  the authorities note 
that the provisioning ratio for the CCB may be revised to the same level as for the BOC.302  According 
to the authorities, the CBRC has carried out a ppraisals of the performance of these banks using 
various indicators.  However, no information was provided on the performance of these banks or the 
indicators used.  According to the IMF a similar appr oach is being considered for the Industrial and 
Commercial Bank of China (ICBC).303  The Agricultural Bank of China (ABC) appears to be the 
weakest of the four SOCBs, with higher NPLs than the others.  According to the authorities, the ABC 
was required to strengthen its internal management an d reduce its NPLs to prepare for further reform;  
its reform is expected to be incorporated into  the reform process of the rural financial system. 
175. In addition to the SOCBs, the Government is ma king efforts to address the problems of the 
rural credit cooperatives (RCCs).  It is estimated that  the RCCs' NPLs were 23% of their loans at the 
end of 2004.  The Government promulgated a number of measures in 2004, including:  reforms of the 
ownership structure of the RCCs and efforts to improve corporate governance;  changes in their 
management structure;  and subsidies (direct tran sfers, corporate tax exemptions, "issuing central 
bank papers to dispose NPLs of RCCs and allo cating special re-lending as financial support").304  A 
pilot programme was launched in 2003 in eight pr ovinces to diversify ownership and to provide 
additional funding to RCCs.  The programme was expa nded to 21 provinces in 2004, and in 2005 the 
authorities began efforts to restructure non-viable RCCs.  According to the authorities, there are two 
elements to the reform of RCCs:  their manageme nt and their ownership structures.  Measures to 
support the reform process include subsidies, tax reductions and exemptions, and assistance from the 
PBC (including disposal of NPLs or "allocating speci al re-lending" at low rates of interest).  No 
figures on total outlays envisaged for this assi stance were provided to the Secretariat. 
176. Efforts are also being made to gradually liberalize lending rates.  Until December 2003, 
lending in RMB was restricted to a maximum of 130% above the offi cial benchmark interest rate, 
depending on the type of institution;  the highest ra te of 130% applied to SM Es.  In December 2003, 
the upper band on RMB lending was raised and conso lidated at 170% of the benchmark rate, while 
the lower band was maintained at 90%.305  For the RCCs, the upper band was raised from the previous 
                                                      
299 The international five category classification syst em was adopted by the P BC in 1999.  The system 
classifies bank loans as:  pass, special mention, substa ndard, doubtful, and loss;  the last three categories are 
recognized as NPLs.  It is likely th at the old four-category cl assification used by Chinese banks underestimated 
their level of NPLs (Pei and Shirai, 2004). 
300 CBRC (undated a) . 
301 CBRC (undated b). 
302 CBRC (undated b). 
303 IMF (2004a). 
304 CBRC (undated a). 
305 Prasad (2004). China WT/TPR/S/161 
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ceiling of 150% to 200% of the benchmark rate .  In November/December 2004, the upper band was 
removed, while the lower ba nd was liberalized further.306  According to the authorities, the policy 
banks continue to provide lending, so me at "minor preferential" rates. 
177. China's banks are penalized by the tax system, including corporate income tax and a business 
tax.  The income tax rate is currently 33% a lthough banks providing only foreign currency business 
are taxed at a rate of 15%.307  The business tax rate is currently 5% , down from 8% in the late 1990s.  
The latter tax is high, since it is assessed on gross income from interest and fees.308  It appears that 
banks are not permitted to deduct specific provisions  from income for tax purposes, thereby creating a 
disincentive for provisioning against NPLs  and cleaning up their balance sheets.309 
GATS commitments 
178. According to China's GATS schedule310, foreign financial institutions with total assets of over 
US$10 billion at the end of the year prior to appli cation will be permitted to est ablish a subsidiary of a 
foreign bank or a foreign finance company or a Ch inese-foreign joint bank or  a Chinese-foreign joint 
finance company in China.  In order to establish a branch in China, the fo reign financial institution 
must have total assets of more than US$20 billion at the end of the year prior to applying.  
Furthermore, foreign financial ins titutions applying to engage in local currency business in China (in 
addition to the geographic and client  restrictions indicated below), must have three years of business 
operation experience in China and have been profita ble for two consecutive years prior to applying. 
179. With regard to commercial presence, there are no geographic restrictions for conducting 
foreign currency business.  For conducting local curre ncy business, foreign investors were permitted 
in Shanghai, Shenzhen, Tianjin, and Dalian upon Ch ina's accession to the WTO.  The geographic 
coverage was gradually ex panded to Guangzhou, Zhuhai, Qingdao, Nanjing, and Wuhan within a year 
following accession (December 2002), to Jinan, Fuzhou,  Chengdu, and Chongqi ng within two years 
(December 2003), to Kunming, Beiji ng, and Xiamen within three years (December 2004), and to 
Shantou, Ningbo, Shenyang, and Xi'an within four years (December 2005);  the geographic 
restrictions are to be lifted completely within  five years after accession (December 2006).  The 
authorities confirmed that by the end of 2004, 18 cities (the 16 under the GATS commitments as well 
as Xi'an and Shenying ahead of schedule) were open to foreign investors;  and by the end of 2005, 
25 cities (among which Harbin, Changchun, Lanzh ou, Yinchuan, and Nanning ahead of schedule) 
were open to foreign investors. 
180. Foreign currency services can be supplied to all type s of clients as of the date of China's WTO 
accession.  However, the clients that can use local  currency services are restricted.  Two years after 
China's accession to the WTO, foreign financial in stitutions were to be pe rmitted to provide local 
currency business to Chinese enterpri ses;  the authorities confirmed that this liberalization occurred, 
as scheduled, on 1 December 2003.  Provision of local currency services by foreign financial 
                                                      
306 IMF (2004b). 
307 Ernst and Young (2003). 
308 For example, Nicholas Lardy in a paper presente d at a conference organized in 1999 by the Bank for 
International Settlements, states that in 1997 the Agricultural Bank of China paid Y 5.332 billion in business 
taxes and surtaxes, but only Y 259 million in income tax.  The bank's effective rate of taxation for this year was 
over 91% (Bank for International Settlements, 1999).  Mo re recent information seems to suggest that taxes 
continue to be a burden.  For example, total taxes as a share of adjusted profit (total taxes divided by the sum of 
net profit and total tax) in 2001 and 2002 were over 50% for the ABC, CCB, and ICBC and over 40% for the 
BOC (Prasad, 2004). 
309 Prasad (2004). 
310 Unless otherwise indicated, the section on GA TS commitments is based on WTO document 
GATS/SC/135, 14 February 2002. WT/TPR/S/161 Trade Policy Review 
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institutions to all Chinese clients is to be perm itted within five years of accession (December 2006).  
In addition, foreign financial institutions licensed to provide local currency services in one region may 
do so in any other region that has been opened for such business.  China has also committed to lifting 
within five years of accession (by December 2006) , any existing non-prudential measures restricting 
ownership, operation, and juridical form of fo reign financial institutions, including on internal 
branching and licences. 
181. The cross-border supply of banking and other financial services (excluding insurance) has 
been left unbound, except for:  the provision and transf er of financial informat ion and financial data 
processing and related software by suppliers of other financial servi ces;  and advisory, intermediation 
and other auxiliary financial services. 
(c) Insurance 
Structure 
182. China's insurance industry at the end of 2004 comprised 80 institutions providing insurance 
services.  Of these, 40 are Chinese companies, including six holding companies (with 
16 subsidiaries)311, and 32 insurance companies;  there ar e also two insurance asset management 
companies.  In addition, there are 37 foreign providers, mo st of which seem to be branches, with some 
joint ventures;  the foreign insurance providers were  subject to geographic restrictions until the end of 
2004 and they may not write compulsory insurance, such as motor third party liability.312  Under the 
Insurance Law, an insurer may not conduct proper ty and life insurance under the same legal entity, 
and must operate within the business scope author ized by the regulator.  The current legislation 
permits the establishment of insura nce brokers;  at end June 2005, th ere were 234 insurance brokers in 
China, of which four are foreign-owned (o r joint ventures with foreign investment). 
183. Domestic companies had a market share of almost 100% until recently, although 
concentration in the market had dr opped to 97.7% by the end of 2004.  According to the authorities, 
the combined share of the three biggest non-life insurers (China People's Property and Casualty 
Insurance Company, China Pacific Property In surance Company, and China PingAn Property 
Insurance Company) dropped from 89.3% to 79.9% a nd the combined share of the three largest life 
insurers (China Life Insurance Company, PingAn Life Insurance Company and China Pacific Life 
Insurance Company) dropped from 86.6% to 83.2%.   The largest Chinese non-life insurance company 
is the China People's Property and Casualty Insu rance Company Limited (PICC), the former state 
monopoly founded in 1949.313  It currently has around  58% of the domestic market and continues to 
be majority-owned by the State (around 69% by PICC Holding Company, 14.5% by AIG, and the rest by the public).  The China Paci fic Insurance Holding Company, established in 1991, holds around 
12% of the market;  and the China PingAn Insura nce Company of China, established in 1998, has 
around 10%.  The Huatai Insurance Company, est ablished in 1996, is owned principally by 
54 Chinese companies across various industri es, and ACE Insurance Company Limited.
314  In 2004, 
                                                      
311 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. 
312 China Internet Information Centre.  Availa ble at:  http://www.china.org.cn/english/BAT/ 
129805.htm, [6 July 2005]. 
313 The company was originally formed as "Unibank", a department of the People's Bank of China.  
During the period up to 1985, there was essentially no insu rance industry in China and the sector was revived in 
1985 through the establishment of Unibank as an independent company, the PICC. 
314 Willis Pudong Insurance Brokers Ltd. (2004). China WT/TPR/S/161 
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foreign non-life insurance companies accounted fo r around 1.22% of non-life insurance premiums in 
China, while foreign life insurance companies ha d a 2.64% share of the life insurance market. 
184. In 2004, total insurance premium income was Y 431.8 billion, up 11.3% from the previous year;  
insurance premiums in China are around 3.4% of GDP.   Recent growth rates in premiums have been 
high:  total insurance premium income (Y 388 billion) in 2003 increased by around 27% over the 
previous year.  According to information provided by  the authorities, insurance premiums received by 
foreign insurance companies in 2004 increased by 52% and 45%, respectively, for general and life, 
over the previous year. 
Legislative framework 
185. The first comprehensive law on insurance, the Insurance Law,  was enacted in June 1995 and 
updated in October 2002.  The law aims to regul ate all commercial insurance activities in China 
(excluding social security insurance).315  In addition to the Insu rance Law, several rules and 
regulations governing the conduct of insurance ac tivities have been issued by the China Insurance 
Regulatory Commission (CIRC), the sector's regulator (see below). 
186. Under the law, all insurance companies provi ding insurance services in China must be 
registered, and all legal persons or organizations in China requiring coverage in China must purchase 
it from an insurance company registered in China.316 
Regulatory framework 
187. The insurance market in China is regulated  by the China Insurance Regulatory Commission 
(CIRC), under the State Council.  The CIRC was created in 1998, and took charge of 
insurance-related regulation previously carried out by the PBC.  The CIRC is responsible for 
registering new insurance providers, as well as new products and activities.  Under Chapter IV of the 
Law, insurers may engage in property insurance (insurance against loss or damage to property, 
liability insurance, and credit insura nce) or insurance of the person (including life insurance, health, 
and accident and injury insurance).  Under Artic le 92, no insurer can concurrently provide both 
property and personal insurance services, alt hough an insurance company engaged in property 
insurance may, upon approval from the CIRC, provi de short-term health and accidental injury 
insurance. 
188. The CIRC is required to take into considerati on "the development of the insurance industry 
and the need for fair competition" when  making its decision to grant a licence.317  According to the 
CIRC, the goal is "to promote the sustainable, sound and fast development of the insurance industry 
and to ensure fair competition".  It aims to do so , based on WTO rules,  by providing market access in 
line with China's economic and regional development goa ls.  Thus, priority will be given to applicants 
wishing to provide insurance services in central, we stern, and north-eastern China or in agriculture, 
health, and pensions.  In addition, the authorities poi nt out that the higher degree of competition in the 
market as a result of different types of insuran ce providers, and new insurance products, requires a 
                                                      
315 The Law covers insurance contracts relating to pe ople and property;  insura nce companies, agents 
and brokers;  insurance sector supervision and regulations;  and legal responsibilities of agents. 
316 Article 7 of the Law states: "Any legal persons or  other organizations within the territory of the 
People's Republic of China that need insurance covera ge within the People's Republic of China shall for the 
purposes thereof apply to insurance companies established within the terr itory of the People's Republic of 
China". 
317 Article 72 of the Insurance Law. WT/TPR/S/161 Trade Policy Review 
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high level of supervisory and regulatory capability;  mark et access in this case would have to take into 
consideration the regulatory ability of the CIRC. 
189. 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.318  Under the "Rules on Administration of Insurance 
Brokerages" and the "Rules on Administration of  Insurance Agencies", 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 limited liability companies, and 
Y 10 million for joint-stock limited companies .  They must also submit 20% of their capital as a 
guarantee or to purchase professional liability insurance. 
190. Foreign insurance companies are permitted to  enter the market as 100% foreign-owned 
subsidiaries for non-life insurance and up to 50% fore ign-owned for life insurance;  according to the 
authorities, there are no plans to lift this restriction.  In order to obtain a licence, they must fulfil the 
following requirements: no less than 30 years of expe rience in the insurance business;  no less than 
two years since the establishment of a first repres entative agency 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 country ;  and other prudential c onditions established by the 
CIRC, including sound corporate governance, a good risk management system, complete internal 
control, effective management information syst em, and good performance, including no record of 
illegal behaviour.  The minimum registered capital of a joint-venture insurance company should not 
be less than Y 200 million.  In addition, 20% of th e actual paid-up capital of a joint venture 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 capital as a guarantee to be de posited in a bank designated by the CIRC.  Under 
China's GATS schedule, foreign insu rance companies were required to cede 20% of all primary risk 
insurance for non-life, personal accident, and hea lth insurance business to an appointed Chinese 
reinsurance company.  The share was to dr op each year and be removed by December 2005. 
191. Once an insurer is approved to provide a certain insurance service in China, any changes in its 
activities must first be approved by the CIRC.319  The Insurance Law includes a statutory reserve 
requirement and a solvency requirement.   Article 98 states that an insuran ce company must maintain 
"a minimum solvency commensurate with the size of its business".320  For insurance companies 
providing property insurance, premiums retained fo r the current year may not exceed four times the 
combined total of their paid-up capital and their accumulated fund, while the liability borne by an 
insurance company for each single insured event may not exceed 10% of the combined total of its 
paid-up capital and accumulated fund.321  Under Article 105 of the Insurance Law, investment of 
insurance company assets is limited to savings in  banks, government, fina ncial and corporate bonds, 
                                                      
318 Articles 70, 72, 73, and 79 of the Insurance Law. 
319 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. 
320 According to Article 85 of the "Regulations Governing Insurance Companies", Decree of China 
Insurance Regulatory Commission (No. 3 of 2004), "the CIRC specifies and adjusts the standard of minimum 
quota of solvency of insurance". 
321 Articles 99 and 100 of the Insurance Law. China WT/TPR/S/161 
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securities investment funds and "others specified by the State Council".322  Insurance brokers' licences 
are granted for two years;  the licence is not renewed if it is found that certain conditions are not fulfilled, including no business during the six months before applying for renewa l, internal operational 
difficulties, and failure of senior staff to meet the requirements of the "Rules on Administration of 
Insurance Brokerages".  In addition, the senior managers and staff are subject to qualification 
requirements, including a local written examination to  get a "Qualification Certificate for Insurance 
Industry Personnel" unless the staff has at least  three years work experience in management; 
following establishment, no less than two persons in seni or management (or equivalent to at least half 
of the brokerage's total number of employees) must obtain the Qualification Certificate. 
192. Corporate legal persons "or other organizati ons permitted by laws and administrative 
regulations" may invest in insurance companies.   However, with the exception of insurance 
shareholding companies and insurance companies a pproved by the CIRC, such investment should not 
exceed 20% of the company's shares.  In addition,  the total shares held by  overseas shareholders 
should be less than 25% of the company's total shar es;  if this shareholding exceeds 25% the company 
becomes a "foreign invested insurance company" and is subject to the laws regulating such 
companies.
323 
193. Supervision and inspection is carried out th rough a combination of on-site and off-site 
regulations under Chapter V of the Insurance La w and Chapter VIII of the "Rules on Administration 
of Insurance Companies".  Under Chapter V of the Insurance Law, insu rance clauses and premium 
rates "that have a bearing on the interests of the public", for compulsory insurance and for "newly 
developed life insurance", must be submitted to th e CIRC for examination and approval;  insurance 
clauses and premium rates for all other types of in surance must be submitted to the CIRC for their 
records.  Article 108 of the Law requires the regulator to "establish a sound indicator system for supervision and control over the solvency of insu rance companies" and shall have, under Article 109 
the authority to inspect the business and financial records as well as the employment of funds by the 
company.  Further details of the procedures to cond uct on- and off-site inspections are in the "Rules 
on Administration of Insurance Companies";  no copy of the rules was available to the Secretariat in 
English. 
GATS commitments 
194. In the GATS, China made commitments with re gard to life, health and pension/annuities 
insurance, non-life insurance, reinsu rance, and services auxiliary to in surance.  Market access through 
cross-border supply (mode 1) is unbound except for:  reinsurance;  international marine, aviation, and 
transport insurance;  and brokerage for large-scal e commercial risks, international marine, aviation, 
and transport insurance and reinsurance.  Mark et access through consumption abroad is unlimited, 
except for brokerage, which is unbound.  There are no mode 1 and 2 limitations on national treatment.  
With regard to market access through commercial pr esence (mode 3), foreign non-life insurers were 
initially to be permitted to establish branches a nd joint ventures with maximum of 51% foreign 
ownership;  within two years from China's accessi on to the WTO (December 2003), foreign non-life 
insurance providers were be permitted to establis h as wholly owned subsidiaries;  the authorities 
confirm that this took place on schedule.  Foreign life insurers are permitted to establish through joint 
ventures, but their ownership is restricted to 50%  of total equity.  In addition, the "Rules on 
                                                     
 
322 Chapter V of the "Regulations Governing In surance Companies", Decree of China Insurance 
Regulatory Commission (No. 3 of 2004).  Available at:  http://tpwebapp.tdctrade.com/ [19 April 2005].  The 
authorities state that once the State Council has given its approval the insurance company may invest through 
other channels.  For example, in 1999 insurance companies were permitted to invest in securities investment 
funds;  and in 2004 they were permitted to invest in foreign stock exchanges. 
323 Chapter I, Section 5 of the "Regulations Governing Insurance Companies". WT/TPR/S/161 Trade Policy Review 
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Administration of Insurance Companies" restrict a single foreign shareholding to 20% and all foreign 
shareholding in such joint ventures to 25%. 
195. For brokerage services, foreign equity of up to  50% is permitted in joint ventures in large-
scale commercial risk insurance and reinsurance, and international marine, air transport, and transport 
insurance and reinsurance;  this was to be raised to 51% within three years of accession 
(December 2004), which the authorities confirmed took place on schedule, and removed altogether 
within five years.  Other brokerage services are unbound. 
196. Foreign life and non-life insurers  and brokers were to be perm itted to provide services in five 
cities upon China's accession324, to be extended to an additional ten cities325;  all geographic 
restrictions were to have been removed within thr ee years of accession;  the authorities confirmed that 
this took place, as scheduled, at the end of 2004. 
197. There are also restrictions on the business sc ope of foreign insurance providers.  Upon 
accession, foreign non-life insurers were to be pe rmitted to provide "master policy" insurance, 
insurance of large-scale commercia l risks without geographic restrictions, as well as insurance for 
enterprises based outside China, and property insu rance, related liability insurance, and credit 
insurance of foreign-invested ente rprises in China.  They were to  be permitted to provide the full 
range of non-life insurance services to foreign and domestic clients within two years of accession 
(December 2003);  according to the authorities, this  liberalization took place as scheduled.  Insurance 
companies may provide individual but not group insu rance to foreigners and Chinese nationals.  By 
December 2004, foreign insurers were, as schedul ed, able to provide health insurance, group 
insurance, and pension/annuities insurance to foreigners and Chinese nationals.   Reinsurance services 
for life and non-life insurance were open to fore ign providers upon accession through branches, joint 
ventures or wholly foreign-owned subsidiaries w ithout any geographic or quantitative limits on the 
number of licences issued.  Licenc es for insurance services were to be issued without an economic 
needs test or quantitative limits, upon ac cession, subject to certain conditions.326  Market access 
through mode 4 is unbound except as in China's horizontal commitments. 
198. With regard to national treatment, there are no limitations for mode 3 except that foreign 
insurance institutions may not engage in statutory in surance business;  and as of the date of China's 
accession, 20% of all primary risk insurance for non-life, personal accident, and health insurance 
business must be ceded to an appointed Chinese re insurance company.  The percentage to be 
deposited with the appointed Chinese company is to  decline gradually (to 15%, 10%, and 5% annually 
within three years after accession);  there will no long er be such a requirement four years after China's 
accession to the WTO (December 2005);  according to the authorities, the requirement was expected 
to be removed on schedule.  National treatment w ith regard to mode 4 is unbound except as indicated 
in China's horizontal commitments. 
                                                      
324 Shanghai, Guanzhou, Dalian, Shenzhen, and Foshan. 
325 Beijing, Chengdu, Chongqing, Fuzhou, Suzhou, Xiamen, Ningbo, Shenyang, Wuhan, and Tianjin. 
326 The conditions are:  the investor must be a fore ign insurance company with more than 30 years of 
establishment experience in a WTO Member;  it should  have had a representative office for two consecutive 
years in China;  and it should have total assets of more than US$5 billion at the end of the year prior to 
application (the asset requirements fo r insurance brokers were set at US$5 00 million at accession, falling to over 
US$400 million within one year;  more than US$300 mill ion within two years;  and over US$200 million within 
four years after accession. China WT/TPR/S/161 
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(d) Securities 
Market structure 
199. China's securities and futures markets have been  developing since the 1980s, as part of its 
reform and opening up process.327  China’s securities market offe rs seven types of financial 
instruments:  A shares328, B shares329, treasury bonds, treasury bond repurchases, corporate bonds, 
convertible bonds, and securities investment funds.330  By the end of 2004, total market capitalization 
represented 27.14% of GDP;  by the end of Augus t 2005, there were 1,389 listed companies (issuing 
A shares and/or B shares).331  As mentioned above (Chapter III(4)(i v)), a large share is accounted for 
by state-controlled firms (72% of market capitalization at end February 2005). 
200. There are two stock exchanges in China:  Sh anghai Stock Exchange and Shenzhen Stock 
Exchange.332  China also has three fu tures exchanges:  Shanghai  Futures Exchange (SHFE), 
Zhengzhou Commodity Exchange (ZCE), and Dalian Commodity Exchange (DCE).333  Both ZCE and 
DCE trade in agricultural products, while SHFE pr ovides futures contracts for other commodities. 
201. Market intermediaries in Ch ina include securities companie s, futures brokerage houses, 
investment advisers, law firms, accounting firms, asset appraisal firms, and credit-rating agencies.  
Their activities in securities and fu tures transactions are superv ised by the China Securities 
Regulatory Commission (CSRC).  At the end of 2004, there were 133 securities companies, 45 fund management companies, 188 futures brokerage houses, 116 investment advisers, and 73 accounting firms licensed for securities business. 
Regulatory and legislative framework 
202. Securities and futures markets are regulated by  the CSRC established in October 1992.  Its 
principal functions include, inter alia,  formulating policies and strategies as regards securities and 
futures markets, and drafting relevant regulations , rules and measures;  regulating the offering, 
                                                     
 
327 In July 1981, the PRC restarted issuing treasury bonds.  By the mid 1980s, enterprises started to 
issue corporate bonds and shares.   
328 A shares are issued by joint-stock companies registered in China and listed on the domestic stock 
exchanges;  their face value is denominated in RMB, and they are traded in RMB by domestic companies, 
institutions, organizations or individuals (excluding investors from the Special Administrative Regions of Hong Kong and Macao;  and the Separate Customs Territory of Taiwan, Penghu, Kinmen, and Matsu). 
329 B shares are issued by joint-stock companies regi stered in China and listed on the domestic stock 
exchanges;  their face value is denominated in RMB, but they are traded on the Shanghai and Shenzhen stock 
exchanges, respectively, in U.S. and Hong Kong dollars. 
330 China Securities Regulatory Commission (2005).   
331 However, total market capitalization has been dec lining since 2000, when it reached its peak level 
and accounted for 53.8% of GDP.  See "Reform and Development of China's Securities Market" 
(7 October 2005), Presentation by B. Shen, Deputy Director of China's Securities Depository & Clearing 
Corporation Limited, 7 October 2005  (ISSA online info rmation.  Available at:  http://www.issanet.org/pdf/ 
issa_2005ap_upd_china.pd f [1 December 2005]). 
332 Shanghai Stock Exchange was founded on 26 November 1990;  by the end of 2004, there were 
837 companies with 881 equities.  Sh enzhen Stock Exchange was establishe d on 1 December 1990;  by the end 
of 2004, there were 536 companies with 673 equities.  In addition, the Shenzhen Stock Exchange established a 
Small and Medium Enterprises Segment on 27 May 2004. 
333 Zhengzhou Commodity Exchange was established in October 1990 as China's first futures market.  
However, during the following three years, there was a pr oliferation of futures exch anges in China, reaching 
50 in 1993.  As a result of market reorganization in  1994 there are now three fu tures exchanges, with DCE 
established in February 1993 and SHFE in December 1999. WT/TPR/S/161 Trade Policy Review 
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trading, custody, and settlement of equities, a nd convertible bonds;  and supervising securities 
investment funds.334   
203. The main legislation is the Securities Law, which entered into force on 1 July 1999;  it was 
most recently revised on 27 October 2005, effective on 1 January 2006.335  Under the revised law and 
"Measures on the Administration of Stock Excha nges", stock exchanges are self-regulatory legal 
entities, providing space and facilities for, as well as organizing and supervising, the trading of 
securities.336  Under the revised law, a securities comp any is a limited liability company, or a 
joint-stock limited company, approved by the CS RC to engage in securities business.  The company 
may engage in, inter alia :  securities brokerage business;  securiti es investment consultancy;  finance 
consultancy related to securities trading and inv estment;  securities underwriting;  securities business 
on its own account;  securities asset management;  and other securities business.  To establish a 
securities company, the company must have:  a charte r that meets the requirements of relevant laws 
and regulations;  a major shareholder who has sust ained profitability, no record of severe illegal 
activities during the previous three years, and net assets of no less than Y 200 million;  minimum 
registered capital of Y 50 million, Y 100 milli on, or Y 500 million, depending on the business the 
company intends to engage in;  a board of direct ors, and senior management that are qualified to 
engage in securities business;  a sound risk management  and internal control system;  a fixed place of 
business and up-to-standard trading facilities;  and other requirements under law, regulations, or set 
by the CSRC.337 
204. The depository and clearing of listed securitie s is performed by the China Securities 
Depository & Clearing Corporation Ltd. (CSDCC) , established in March 2001 under the Securities 
Law and the Company Law.  The CSDCC is under th e supervision of the CSRC.  Its business scope 
covers the opening and management of secur ities accounts and settlement accounts;  securities 
registration and transfer;  securities depository;  securities/payment clearing and delivery;  acting as the agent for securities interests dist ribution as entrusted by the issuers, internet information services, 
and any other businesses as authorized by the CSRC. 
                                                     
 
334 Other functions include:  approving the listing of corporate bonds;  supervising the trading of listed 
treasury bonds and corporate bonds;  regulating the listing, trading, and settlement of domestic futures contracts;  
supervising domestic institutions engaged in overseas futures business;  supervising the conduct of listed 
companies; supervising securities and futures exchanges and their senior executives;  supervising the overseas 
offerings and listings by domestic enterprises;  and authorizing and supervising the establishment of overseas 
securities organizations by domestic institutions, as we ll as the establishment of securities organizations in 
China by foreign institutions. 
335 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 People's Government  online information.  Available (in Chinese) at:  http ://www.gov.cn/ziliao/ 
flfg/2005-10/28/content_85556.htm [5 December 2005].) 
336 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.  
337 The 1999 law identified two types of securities companies that, subject to authorization, could 
perform securities business:  comprehensive secur ities companies and brokerage securities companies. 
Comprehensive securities companies may engage in brokerage business, securities business on their own account, securities underwriting business, and other busi ness verified by the CSRC.  The conditions for the 
establishment of a comprehensive securities company included a minimum registered capital of Y 500 million; 
chief administrators and business pers ons qualified to engage in securitie s business;  a fixed place of business 
and up-to-standard trading facilities; and a sound management system and a standardized system for the separate 
administration of business on its own account and on br okerage business.  Securities brokerage companies were 
permitted only to engage in securities brokerage business.  The minimum registered capital of a brokerage company was set at Y 50 million. China WT/TPR/S/161 
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205. A number of challenges remain, i.e. the relativel y small size of the stock market, the problem 
of non-tradeable shares (see Chapter III(4)(viii)), an d the underdeveloped bond market.  In addition, 
futures markets are relatively limited.  The authoriti es have recognized the need for continued reform 
and in January 2004 the State Council issued th e "Guidelines to Promote Reform, Opening up and 
Stable Development of the Capital Market", whic h identify the major goals and policy priorities for 
the sector.  In this context, the CSRC has been maki ng efforts to:  reform the system of non-tradeable 
shares;  restructure and consolidate the securities industry, including by building up a supervisory framework following international norms;  develop a multi-tier capital market system, including the 
development of new financial produc ts;  expand the role of instituti onal investors in the market;  
enhance corporate governance among listed companies;   and open the sector to foreign investment. 
206. With respect to non-tradeable shares, the CSRC  began implementing reforms in May 2005.  
By mid-December 2005, a quarter of all listed co mpanies were participating in this reform 
programme, representing 30% of market capitalization.   Progress has also been made in broadening 
financing channels, including for SMEs, for example,  though the establishment of the Board for Small 
and Medium Sized Enterprises in the Shenzhen Stoc k Exchange in May 2004,  and new products, such 
as exchange traded funds (ETF), warrants and secu ritization products, have been developed.  
Institutional investors, particularly mutual funds, ha ve been growing rapidly:  social security and 
insurance funds are now permitted to invest in the securities market, and preparations have been made 
to channel pension funds, corporate annuities, and ot her "legitimate" funds into the securities market.  
Since December 2002, China has also been implemen ting the Qualified Foreign Institutional Investor 
(QFII) scheme as a transitional measure to attract fo reign portfolio investment and partly open up the 
capital market. 
207. Other important recent changes have been am endments to the Company Law and Securities 
Law, which became effective on 1 January 2006.  The authorities state that these amendments will 
bring about greater market-based investment decisions in both primary and secondary markets, and 
will speed up the development of a well functioning capital market. 
Foreign investment 
208. On 1 June 2002, the CSRC promulgated the "Rules on the Establishment of Securities 
Companies with Foreign Sharehol ding", which govern the estab lishment and operation of joint-
venture securities companies.
338  The business scope of these joint ventures, which according to the 
Chinese authorities is in line with China's commitment s, involves:  underwritin g of stocks (including 
A, B, and H shares) and bonds (incl uding government and corporate bonds)339;  brokerage business in 
B and H shares;  brokerage and proprietary trad ing of bonds (including government and corporate 
bonds);  and other business approved by the CSRC. 
209. The "Rules on the Establishment of F und Management Companies with Foreign 
Shareholding" of June 2002 were replaced by th e "Measures on the Administration of Securities 
Investment Fund Management Companies" on 10 October 2004.  The measures are based on the 
Company Law and the Securities Investment Fund Law.340  Under the measures, a minimum 
registered capital of Y 100 million is required to establish a fund management company;  major 
                                                      
338 China Daily  online information (Biz Guide).  Available at:  http://bizchina.chinadaily.com.cn/ 
guide/law/law12.htm [5 December 2005]. 
 339 H shares are shares issued by joint-stock companies registered in China but listed on stock 
exchanges abroad (Hong Kong, China;  London;  New York;  Singapore);  their face value is dominated in 
RMB, and they are traded in local currencies. 
340 CAS online information.  Available (in Chines e) at:  http://www.cas.ac.cn/html/Dir/2005/02/28/ 
5044.htm [5 December 2005]. WT/TPR/S/161 Trade Policy Review 
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shareholders (with no less than 25% of total regi stered capital) must have a minimum registered 
capital of Y 300 million, while other shareholde rs should have net assets of no less than 
Y 100 million.  However, under Article 9 "an overseas shareholder of a joint-venture fund 
management company shall have  a minimum paid-up capital in convertible currency equal to 
Y 300 million", even if it is not a major shareholder. 
210. One of the distinctive features of China's secu rities market is the dominance of individual 
investors.  By the end of 2004, 68.35 million A share investment accounts were opened at the CSDCC
341, of which 68 million (99.52%) were individua l investors accounts;  institutional investors 
accounted for only 0.48%.342  Efforts to promote the development of institutional investors started 
with the promulgation of the "Interim Measures on the Administration of Securities Investment 
Funds" in October 1997, which emphasized the de velopment of the investment fund industry.343  
Nonetheless, the most important step in promoti ng institutional investors was through the opening of 
the capital market to foreign investors.  The "Inter im Administrative Measures of Domestic Securities 
Investments by Qualified Foreign Institutional I nvestors (QFII)", promulgated jointly by the CSRC 
and the PBC, took effect as of 1 December 2002.   The number of fund management companies 
increased from six in 1998 to 45 in 2004.  By th e end of August 2005, the CSRC had approved the 
establishment of four foreign-funded securities co mpanies and 19 foreign-invested fund management 
companies;  27 foreign institutions had obtained th e QFII qualification, and the permitted investment 
limit is to increase gradually from US$4 billion to US$10 billion.344 
211. Domestic companies have also been steadily encour aged to enter international capital markets.  By 
the end of 2004, a total of 111 domestic  companies had been listed overseas.345  According to the 
authorities, the Chinese companies listed overseas used  to be dominated by large SOEs;  recently, 
private enterprises and SMEs have started to list and issue shares overseas.  
GATS commitments 
212. Compared with its commitments on insurance and banking services, China's commitments on 
securities services are fairly limited.  The cross-bor der supply of securities services has been left 
unbound, except that foreign securities institutions  may engage directly (without a Chinese 
intermediary) in B share business.  The supply of  securities services in China through commercial 
presence has also been left unbound, except for th e following.  Foreign service suppliers were 
permitted to establish joint ventures with foreign e quity limited to 33% (to be increased to 49% by 
December 2004) in order to conduct domestic se curities investment fund management business.  
Within three years after China's accession (December 2004), foreign secu rities institutions were to be 
permitted to establish joint ventures with foreign mino rity ownership not to exceed one-third, in order 
to engage (without a Chinese intermediary) in unde rwriting A shares, in underwriting and trading in 
B and H shares, as well as government and corporate debts, and in launching funds. 
                                                      
341 The number of investors accounts including both A shares and B shares was 72 million by the end 
of 2004. 
342 Institutional investors refer to various legal entities, including enterprises, financial institutions, 
social welfare funds, and other investment institutions.  In 2004, institutional investors accounted for 20% of the 
total trading volume in the market. 
343 Efforts in this regard include the "Rules on the Establishment of Fund Management Companies with 
Foreign Shareholding" (effective June 2002), and the "Mea sures on the Administration of Securities Investment 
Fund Management Companies" (effective October 2004). 
344 WTO document S/FIN/M/50, 23 September 2005. 
345 Among the 111 overseas listings, 92 were listed only in Hong Kong, China;  12 were listed in both 
Hong Kong, China and New York;  4 were listed in both Hong Kong, China and London;  1 was listed in Hong Kong, China, London, and New York;  and 2 were listed only in Singapore.   China WT/TPR/S/161 
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(iv) Telecommunications services 
(a) Structure 
213. The telecommunications services sector has under gone gradual reform beginning in 1993, 
when the sole provider was the Ministry of Post  and Telecommunications (MPT).  In 1993, paging 
and some value-added services were deregulated.  In 1994, a new company, China Unicom was created to form a duopoly along with the MPT in the provision of mobile telecommunication services.  In April 1995, the Directorate General of Tel ecommunications (DGT) was separated from MPT to 
create China Telecom.
346  As a result of further deregulation and reform (including separation of 
postal and telecommunications services and restructuring of telecommunication services), there are 
currently six main nationwide basic telecommunica tions service providers (Table IV.7) and over 
17,000 value-added service providers.  Since deregul ation, there has been rapid growth in the 
provision of telecommunication services.  Data provide d by the authorities show that penetration rates 
of fixed line services increased from 14.7 telephone sets per 100 persons in 2001 to 24.9 per 100 in 
2004;  the corresponding figures for mobile phones are 11.2 and 25.9 (Table IV.8).  There has also 
been a significant increase in the use of othe r services, such as the Internet.  Prices of 
telecommunications services have also fallen consider ably, although it is suggested that this is due 
more to cuts in prices mandated by the regulator than to price competition.347 
214. Of the six basic telecommunication service providers, China Telecom and China Netcom 
(formed by a merger between subsidiaries of Chin a Telecom, China Netcom Co. Ltd, and Jitong, a 
company created by the Ministry of Electronics)  currently control 60% and 35% of the market, 
respectively, for fixed line services.  Mob ile services are provided by China United 
Telecommunications Corporation (China Unicom) and China Mobile;  despite entering the market in 
1994, China Unicom's share of the mobile services market is only around one third.348  The State 
holds a majority of shares in six telecom service providers, although private- sector participation has 
increased in recent years (Box IV.3).  In particular , there are differing degrees of foreign investment 
in the four companies that have listed on foreign stock exchanges.  The authorities state that the 
structure may change further in order to establis h a "fair and just, effective and orderly market 
environment", although there are no specific plans at present. 
Table IV.7 
Basic telecommunications service providers, 2005 
Service Providers  
Fixed line service China Telecom, China Netcom, Ch ina Unicom, China TieTong (formerly China Railcom) 
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 
(formerly China Railcom) 
Satellite service China Satellite 
Source: Information provided by the authorities.  
                                                      
346 Although created in  1994, China Unicom faced a difficult st art due to a dispute with the regulator 
(at the time the Ministry of Posts and Telecommunications ) and its operating arm, China Telecom, over terms of 
interconnection.  A brief overview of the period 1994-97 is given in ITU (undated). 
347 Pangestu and Mrongowius (2004). 
348 Pangestu and Mrongowius (2004). WT/TPR/S/161 Trade Policy Review 
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Table IV.8 
The telecommunications sector in China, 1998 and 2001-05 
  1998 2001 2002 2003 2004 2005 
Main telephone lines (million)  87.4 180.4 214.2 262.7 311.8 337.4 
Main telephone lines per 100 inhab itants 7.1 14.2 16.8 20.5 24.1 26.0 
Residential main lines (milli on) 69.8 147.3 173. 8 209.2 244.9 264.4 
Residential main lines per 100 hous eholds 5.6 11.6 13.6 16.3 18.9 20.4 
Mobile service subscribers (m illion) 23.9 145.2 206. 0 270.0 334.8 363.2 
Mobile service subscribers per 100 i nhabitants 1.9 11.5 16.1 21.0 25.9 28.0 
Subscribers of pageing services (million) 39.1 36.1 18.7 10.6 4.0 2.6 
Subscribers of pageing services per 1 00 inhabitants 3.2 2.8 1.5 0.8 0.3 0.2 
Public telephones (million) 2.6 3.5 9.9 15.6 22.2 24.5 
Public telephones per 1,000 inhab itants 2.1 2.7 7.7 12.2 17.1 18.9 
Internet hosts 17,255 89,357 156,531 160,421 .. .. 
Internet hosts per 10'000 inha bitants 0.1 0.7 1.2 1.3 .. .. 
Internet users (million) 2.1 33.7 59.1 79.5 94.0 103.0 
Internet users per 10'000 inhab itants 16.8 266.5 463.1 618.9 727.4 794.7 
Total number of PCs (million) 11.2 25.0 35.5 .. .. .. 
PCs per 100 inhabitants 0.9 2.0 2.8 .. .. .. 
Prepaid cellular tariffs (US$)       
per minute local call .. .. .. 0.07a .. .. 
cost of local SMS .. .. .. 0.02b .. .. 
Internet tariff (20 hours per month, US$) .. .. .. 10.1 .. .. 
Telecommunication revenue (US$ million) 20,533.8 .. 50,993.8 .. .. .. 
Telecommunication revenue (as % of GDP) 2.3 3.9 4.1 3.9 3.9 .. 
.. Not available. 
a As at October. 
b As at August. 
Note: Penetration information is based on population numbers as at year-end. 
Source:  ITU, World Telecommunication Development Report  (various issues);  ITU online information.  Available at:  
www.itu.int/ITU-D/ict/statistics/;  National Bureau of Statistics, China Statistical Yearbook  (various issues);  and 
data provided by the authorities.  
215. Initially, limited competition was introduced a nd licences were granted only for the services 
to be provided.  Thus, China Telecom was to provide fixed line services, China Mobile 
Communications (China Mobile) to provide mobile services, China Satellite (ChinaSat) to provide 
satellite services, and Unicom to provide mobile and paging services.  In addition, Railcom was 
granted a licence in 2000 mainly to provide fixed line telecommunications services.349  Currently, 
according to the authorities, there is at least a duopoly in each line of service. 
                                                      
349 Pangestu and Mrongowius (2004). China WT/TPR/S/161 
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Box IV.3:  The structure of the basic telecommunications sector 
There are currently six main basic telecommunications  service providers.  Th ere is limited competition 
between the providers, mainly because they are restricted to the provision of specific services  (Table IV.7).  
The State, through the State-owned Assets Supervision and Administration Commission (SASAC), remains 
the majority owner of all the telecommunications service providers, resulting in limited competition from the 
private sector. 
Prior to 1993, when China began restructuring the te lecom sector, telecom servi ces were provided by the 
Ministry of Post and Telecommunications (MPT).  In 1994, the China United Telecommunications 
Corporation (China Unicom) was created to provide co mpetition for the MPT;  its majority shareholder was 
the Ministry of Electronics (1.6% of  its shares were held by Hutchison Whampoa).  In April 1995, the 
Directorate General of Telecommunica tions was separated from the MPT to form a holding company, China 
Telecom, which became the monopoly te lecom service provider.  Another company, Jitong, was established 
in 1994 under the Ministry of Electronics to provide, inter alia,  internet data services, IP phone services, 
domestic VSAT communications. 
In 1999, China Telecom's services were further split into China Telecom (for fixed line services), China 
Mobile (for mobile services), and China Satellite (for the provision of satellite services).  China Railcom was 
created under the Ministry of Railways in 2000 to provide fixed line (international and domestic) long 
distance telephone services, IP telephony, data transfer , internet paging etc.  In May 2002, China Telecom 
was split along regional lines:  its ten provincial companies in the north were merged with China Netcom 
Co. Ltd. and Jitong to form China Netcom serving the north of China, and the remaining 21 southern 
provincial providers were consolidated under the new China Telecom serving the south and west.  The two 
new companies were permitted to provide services in each  others' territories.  In 2003, Jitong  was merged 
with China Netcom (China Telecom's subsidiary operating in northern China) to form the China Netcom 
Group.  China Railcom has been renamed China TieTong Telecommunications Corporation.   
All the assets of the six companies ha ve been transferred to the SASAC.  The State owns or has the majority 
of shares in all the companies. 
The three China Telecom companies (China Mobile, China Netcom and China Telecom), and China Unicom 
are listed on the stock exchanges.  China Mobile has foreign investment of nearly 25%, China Telecom 
listed its four profitable regional networks in Guangdong, Jiangsu, Shanghai and Zhejiang in Hong Kong, 
China and New York, raising around US$1.5 billion;  foreign equity in the company is some 17%.  China 
Netcom listed on the stock exchange in 2004 and FDI in the company is currently around 25%.  China 
Unicom, has around 22% foreign owners hip, and an additional 25% is held by domestic public shareholders. 
Source:  Pangestu, Mari and Debbie Mrongowius (2004), "T elecommunications Servi ces in China:  Facing 
the Challenges of WTO Accession", in China and the WTO:  Acce ssion, Policy Reform and 
Poverty Reduction Strategies  (eds). D. Bhattasali, S. Li and W. Martin, World Bank and Oxford 
University Press;  Loo, B.P.Y. (2004), "Tel ecommunications Reform in China:  Towards an 
analytical framework", Telecommunications Policy,  28, pp. 607-714;  and information provided 
by the authorities. 
(b) Regulatory structure and measures 
216. The telecommunications sector is regulated by the Ministry of Information Industry (MII), 
formed in March 1998 through the merger of the Mi nistry of Post and Telecommunications (MPT) 
and the Ministry of Electronics Industries (MEI).350  The MII formulates and implements 
telecommunications policy, although important stra tegy and policy documents drawn up by MII must 
first be approved by the State Council.  The Nati onal Development and Refo rm Council (NDRC) also 
plays a role in the decision-making and implementation process.351  The MII formulates tariff policies 
                                                      
350 The new Ministry also took over some parts of the State Administration of Radio, Film and 
Television (SARFT), China Aerospace Industry Corporation, and China Aviation Corporation.  
351 OECD (2003). WT/TPR/S/161 Trade Policy Review 
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for communications and information services, sets "tariff standards" for basic postal and 
telecommunications services, and supervises their implementation.  The MII determines "price standards" for telecommunications in consultation with the NDRC.  In addition, the SARFT appears 
to be in charge of radio and television markets while other government departments are involved in 
regulating the Internet.
352 
217. Although China has no telecommunications law,  the "Regulations on Telecommunication" 
were issued on 25 September 2000 and came into force under State Council Directive 291.  The regulations establish, inter alia,  the separation of 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 inte rconnection between networks for new service 
providers;  the management of service tariffs;  as well as service quality.  It appears that a new 
telecommunications law is in preparation and a draft of the new law is currently being revised.  Other 
legislation includes the "Regulations for the Admini stration of Foreign Invested Telecom Enterprises" 
and the "Administrative Measures for Telecommuni cations Business Operating Permits", both of 
which entered into effect in January 2002.  Chin a has committed itself to implementing the Telecoms 
Reference Paper, including establishing an independ ent regulator.  According to statements by China 
in the Council for Trade in Services, "China had separated the regulatory body from the operational 
business by establishing the MII in 1998".  Moreover, "the MII could regulate in an impartial, fair and 
transparent manner and acted as in independent regulator".
353 
218. The "Regulations on Telecommunications" state that a dominant service provider cannot 
refuse an interconnection requirement of any other ser vice operators or operators of specific networks.  
These regulations, along with the "Regulati ons on the Interconnection between Public 
Telecommunication Networks" (Decree 9 of the Minist ry of Information Industry), and other relevant 
regulations established a process for interconnection.354  A dominant carrier is required under these 
regulations to negotiate interconnection charges wi th new entrants and register the interconnection 
agreements with the MII.355  If no mutual agreement is reached 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 ag reement still cannot be reached within 45 days from 
either or both parties applying for mediation, the mediation authorities can solicit expert opinions and 
determine a compulsory interconnection scheme. Th e interconnection charges are set according to 
standards stipulated in the "Measures on th e Interconnection Charges between Public 
Telecommunication Networks".  If the charges are not included in the Measures, service providers 
may negotiate and agree to a mutually acceptable char ge and can apply for coordination by the MII or 
the relevant provincial telecommunications administ ration authorities if they are unable to agree.  
According to the authorities, the MII has determin ed interconnection charges in several cases when 
operators have been unable to reach agreement. 
                                                      
352 It has been suggested that there are sometimes differences between national and provincial policies.  
For example, it is reported that cities such as Sh anghai encourage e-commerce a nd local authorities have not 
necessarily sought the approval of the Central Government in implementing policies (Pangestu and 
Mrongowius, 2004).  However, the authorities state that  provincial telecommunications administration bureaus, 
established since 2000, ensure that  policies are implemented uniformly. 
353 WTO documents S/C/M/69, 15 December 20 03;  and S/C/M/63, 11 November 2002. 
354 WTO document S/C/M/75, 3 December 2004. 
355 Dominant is defined under the "Regulations on the Interconnection between Public 
Telecommunication Networks" as those who control basic telecommunication equipment, and have more than a 
50% market share and are able to "aff ect the market share of other service providers".  Currently, it appears that 
China Telecom is defined as a dominant carrier (OECD, 2003).  China WT/TPR/S/161 
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Foreign investment 
219. Before China acceded to the WTO, fore ign investment was not permitted in 
telecommunications services.  Currently, foreign investment in the sector is regulated by the 
"Provisions on Administration of Foreign Invested  Telecommunications Enterprises" promulgated by 
Decree No. 333 of the State Council on 11 December 2001 and effective as of 1 January 2002.  The provisions brought foreign equity limits into confor mity with China's GATS  commitments:  up to 
49% for basic telecom services and up to 50% for value-added telecom services.  In addition, it 
appears that the largest Chinese and foreign investor  in a foreign-invested enterprise (FIE) may hold 
up to 30% equity of the enterprise.  Under the pr ovisions, the minimum registered capital for a foreign 
invested telecom enterprise providing services acro ss the country or across different provinces, 
autonomous regions, and municipalities directly un der the Central Government, is Y 2 billion for 
basic telecom services and Y 10 million for value-added services.  For services within a province, autonomous region or municipality directly under the Central Government, the minimum registered 
capital required for FIEs is Y 200 million for basic services or Y1 million for value-added services.
356 
220. For an FIE to obtain a telecom services licence,  the Chinese partner must submit a proposal to 
the MII, along with:  the project proposal;  a feas ibility study report;  and the relevant documents 
certifying the compliance of the foreign and Chinese investors with the provisions and with any other 
conditions in the Regulations on  Telecommunications.  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 telecommunications services 
within provinces, autonomous regions or municipa lities under the Central Government, the relevant 
examining authority (at a first stage) 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 projects receive an "Exami nation Opinions on Foreign Investment in 
Telecommunications Services Provision".  A written notification must also be provided to the 
applicant if the project is rejected.  In some case s, further examination may be required by the NDRC;  
a further 30-day period is provided for approval.
357  Under China's GATS commitments, there are 
foreign equity restrictions (25% for fixed line a nd 49% for mobile services), and for some services, 
geographic restrictions (see section (c) below).  In practice, other than for value-added services, where 
around 80% of enterprises have domestic non-public or  foreign ownership, foreign investment in 
fixed line and mobile services falls below these limits.  According to notifications by China to the 
Council on Services, by end December 2005, China ha d received 23 formal applications for setting up 
foreign-funded telecommunications enterprises for the provision of value-added telecom services;  of 
these, eight have been granted "Examination Opini ons on Foreign Investment in Telecommunications 
Services Provision" by the MII, while four of th e applicants have received the "Telecommunications 
Services Operating Licence".  It is not clear wh at types of telecom services are covered by the 
licences.  The authorities state that they will con tinue to liberalize the sector according to their 
commitments under the GATS. 
Telecommunications tariffs 
221. Telecommunications tariffs are established and implemented according to the "Management 
Catalogue of Service Tariff Classification", manage d by MII with guidance from the State Council.  
There were adjustments in telecom tariffs in March 1999, October 1999, and January 2001.  In 
                                                      
356 WTO document S/C/N/236, 24 November 2003. 
357 Article 15 of the "Provisions on Administration of Foreign Invested Telecommunications 
Enterprises" (WTO document S/C/N/236, 24 November 2003). WT/TPR/S/161 Trade Policy Review 
Page 234 
  
addition, it appears that tariffs were changed in September 2005, but details were not provided to the 
Secretariat.  The discussion below, therefore, does not reflect fully the most recent changes. 
222. The change in January 2001 rebalanced teleco m tariffs by increasing local fixed line tariffs 
and reducing tariffs on seven other services, incl uding long distance tariffs, leased line fees, and 
Internet access fees.  Charges for these la tter services were expected to fall by half.358  Information 
provided by the authorities suggests that tariffs for broadband access fell by as much as 95%.  Further changes in July 2001 saw the removal of inst allation fees and mobile phone subscription fees. 
223. Tariffs are divided into:  "government set",  "government guided", and "market adjusted" 
prices;  no definitions of these were provided to the Secretariat.  It appears that fixed-line domestic 
and international long-distance a nd mobile telephony are subject only to "government set" ceiling 
prices.  As a result of the latest reforms, "govern ment guided" prices apply to charges where there is 
insufficient market competition.  "Market adjusted " prices are applied to charges for value-added 
telecommunications services
359,  and services "with sufficient mark et competition", including for IP 
telephony and Internet broadband access fees.  The G overnment maintains price controls on local 
calls (fixed line and cellular), monthly rental charges, and other basic telecom services. 
224. For fixed-line domestic long distance and intern ational calls, the MII maintains an upper 
limit, below which companies are free to fix their own rates.  The limits are:  Y 0.07 per six seconds for domestic long-distance and Y 0.8 per six seconds for international calls (0.2 per six seconds for 
calls to the SARs of Hong Kong and Macao as well as to Chinese Taipei).  Tariffs on fixed-line local 
calls vary from province to province and the upper li mit ranges from Y 0.3 to Y 0.5 per minute.  For 
local fixed-line calls within a city, a tariff ranging from Y 0.18 to Y 0.22 is charged for the first three 
minutes, followed by Y 0.09 to Y 0.11 for each add itional minute.  A monthly fee is also charged, 
ranging from Y 20-25 per month in provincial cap itals, Y 12-18 for other cities and counties, 
Y 10-15 for villages and Y 25-35 for business users.  The rates are calculated on the basis of several 
factors:  supply and demand, ec onomic development, affordability (per capita GDP), and the actual 
costs of the operator.  The rates fixed by the ope rators must be notified to the MII or the local 
telecommunication authorities.  Monthly charges, lo cal fixed-line charges, and other basic telecom 
service fees are still subject to government examin ation and approval.  During the course of this 
review the authorities stated that a greater degr ee of flexibility in the price structure was being 
introduced gradually.  Thus, telecom operators ca n charge prices below these fixed prices once they 
have registered and obtained approval from the MII;  due to several factors, including competition and 
upgrading of technology, telecom service operators in  China may also provide preferential prices to 
customers, including credit accumulation, discounts, etc. 
225. The pricing structure for mobile telephony services is similar.  MII maintains upper limits for 
roaming calls:  Y 0.8 per minute for pre-paid services and Y 0.6 for others.  There is no monthly fee for pre-paid services and the usage is Y 0.6 per minute within the operating area.  For other services, 
there is a monthly rental fee of Y 50 and a Y 0.4 charge for each minute within the operating area.  
China Unicom's charges are 10% lower than tho se charged by China Mobile.  Since the prices 
actually charged by the operators appear to be lowe r than those set by the government, the rationale 
for setting prices or price caps is not clear to the Secretariat. 
Universal services 
226. Although under the Telecommunications Decree, service providers must provide universal 
service, there appear to be no detailed regulations on  their provision.  Currently, the MII, together 
                                                     
 
358 OECD (2003). 
359 OECD (2003). China WT/TPR/S/161 
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with other ministries, is establishing a telecommunications universal service fund and working out the 
cost structure for compensating service providers for the provision of this service.  The provision of 
telecom services in rural areas appears to be a prio rity.  In January 2004, the Government launched a 
programme to provide telephone access for each village ( Cun Cun Tong ), aimed at providing at least 
two telephones per village for 95% of China's villa ges by the end of 2005.  In the past, China 
Telecom, as the only operator, provided uni versal services, which were funded through 
cross-subsidization:  from the eastern and more developed coastal areas to the western provinces and from wireless and long-distance services to local services.
360  At present all six basic telecom service 
providers are expected to provide these services fo r villages that do not yet have access to basic 
telecom services.  For the Cun Cun Tong  programme, the source of these funds includes the six 
telecom service providers, the Central Gove rnment, and some local government funding. 
(c) GATS commitments 
227. China's GATS commitments relate to value-adde d, basic mobile voice and data services, and 
domestic and international services.  With regard to market access through commercial presence for 
value-added services, foreign service providers we re permitted to establish joint ventures, with 
foreign equity restricted to 30%, and provide services in some cities (Shanghai, Guangzhou, and 
Beijing).  Access was to be liberalized gradually:   China committed itself to expand geographical 
coverage to 14 additional cities and to allow foreign equity up to 49% within one year of accession.361  
The geographic restrictions were to be lifted w ithin two years of accession and the limit on foreign 
equity raised to 50%;  the authorities confirm that  this occurred according to schedule.  Cross-border 
supply appears to be subject to the same restrictions as for mode 3.  With regard to national treatment, 
there are no limitations on cross-border supply, co nsumption abroad or commercial presence.  The 
provision of these services through the presence of natural persons is unbound except as indicated in China's horizontal commitments.  Paging services ar e subject to the same limitations as value-added 
services. 
228. For mobile voice and data services, market access limitations on commercial presence require 
foreign service suppliers to establish joint ventur es with Chinese companies;   upon China's accession, 
foreign equity would be limited to  25% and services would be restricted to and between the cities of 
Shanghai, Guangzhou, and Beijing.  Within one y ear of accession, the geographic area would be 
expanded to include services in and between the 14 cities mentioned above, and foreign equity limits 
would be raised to 35%.  The foreign equity limit w ould be raised further to 49% within three years 
from accession, and within five years from accession, there would be no geographic restrictions on the provision of these services.  The authorities confir med that they have liberalized according to 
schedule.  Cross-border supply appears to be subject  to the same restrictions as for mode 3.  For 
national treatment, the limitations are the same as for value-added services. 
229. China's commitments on domestic and international telecom services provide market access 
through commercial presence of foreigners through joint ventures of up to 25% of foreign equity 
within three years of China's acc ession.  Services would be limited at this time to and between the 
cities of Shanghai, Guangzhou, and Beijing.  The au thorities note that this has occurred according to 
schedule.  The geographic area of service provisi on would be expanded to  include the 14 cities 
mentioned above within five years of accession, and foreign investment limits be raised to 35%.  
Within six years after accession, the geographic rest riction would be lifted, and foreign investment 
limits would be raised to 49%.  As for the other services, cross-border supply seems to be subject to the same restrictions.  For national treatment the limitations are the same as for value-added services. 
                                                     
 
360 Pangestu and Mrongowius (2004). 
361 Geographic coverage was to be increased to Chengdu, Chongqing, Dalian, Fuzhou, Hangzhou, 
Nanjing, Ningbo, Qingdao, Shenyang, Shenzhen, Taiyuan, Xiamen, Xi'ian, and Wuhan. WT/TPR/S/161 Trade Policy Review 
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(v) Transport 
(a) Air transport services 
Introduction 
230. An efficient, effective, and reliable air tran sport infrastructure is especially important in 
developing countries, to ensure the realization of the gains from trade.  International civil aviation also 
makes an important contribution to the development process.362 
231. China's air transport sector faces immense ch allenges in expanding capacity to meet the 
increased demand generated by its rapid economic grow th over the past decade, which is projected to 
continue over the next decade.  Strengthened market  incentives are crucial in order to expand capacity 
for both infrastructure (especially airports) and servi ces.  This, in turn, may require further market 
access liberalization and removal of regulatory barri ers.  Continuing external market opening and 
enhanced international linkages are also vital. 
Demand growth and capacity constraints 
232. The demand for air transport services in China h as grown tremendously over the past decade, 
reflecting China's overall growth and the associated demand for air transport services.363  From 1999 
to 2004, the volume of civil air transport services gr ew at an average of 16.8%.  By 2004, the total 
volume of such services in China ranked third in the world;  robust growth in China's demand for air 
transport services is expected to continue.  Acco rding to the 11th Five-Year Plan, air transport 
services are expected to grow at over 12% at least until 2010, and the volume of air transport in China 
is predicted to be as much as five times its current level by 2022.364 
233. As of January 2005, there were 28 independent ci vil airlines in China, all considered to be 
national carriers.365  Of the 28 carriers, 18 are state-owned or  partially state-owned, and eight have 
foreign equity participation;  regulations stipulate that foreign equity in a domestic airline must not 
exceed 49%.  Six of the carriers, namely Air China,  China Eastern, China Southern, Hainan Airlines, 
Shanghai Airlines and Shandong Airlines, are listed as stock companies and the rest are limited 
companies.  Figures on the share of domestic and international air traffic of these carriers was not 
available.   According to the Government, none of the airlines has been given exclusive rights over 
domestic service; rather, they apply for the right  to provide domestic service in accordance with 
common principles and conditions.  In particular, all airlines must apply to the General Administration of Civil Aviation in China (CAAC) for the right to provide this service;  the CAAC 
examines and approves applications according to th e "Supervisory Regulations of Domestic Routes 
and Flights", which are currently being revised.  U nder the planned revisions, access to certain of the 
more important air routes will still require the approv al of the CAAC, while entry to other routes will 
merely require registration.   Since the events of 11 September 2001, the Chinese Government has 
provided third party liability insurance guarant ees in the event of war or similar conditions. 
                                                     
 
362 WTO (2005), pp. 213-264. 
363 Mean estimates of the income elasticity of demand fo r air transport services are in the order of 1.4, 
meaning that increases in income levels generate proportionately greater increases in the demand for air transport services (WTO, 2005), p. 222. 
364 China Daily, "Airbus:  China's air transpor t to soar", July 15, 2004. 
365 The industry appears to have been consolidated into three main airline groups:  Air China, China 
Eastern, and China Southern (Commission of the European Communities, 2005). China WT/TPR/S/161 
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234. China's passenger air fleet capacity and related infrastructure, such as airports, will need a 
major expansion to meet projected increase in dema nd.  This, in turn, will require large inflows of 
capital as well as increased market incentives.  Ad ministrative and regulatory barriers in the sector 
will need to be reduced further, and external market opening improved.366  The removal of these 
barriers, and freedom of pricing can  substantially improve productivity.367  China has recently taken 
steps in this direction (see below);  continuing progress will be important. 
Regulatory framework 
235. The main agency responsible fo r the governance of the civil air transport sector, the General 
Administration of Civil Aviation in China (CAAC) , has seven regional administrations and 26 district 
and municipal security supervisory offices.  According to the Legislation Law, the "Regulations of the 
Formulation Procedure of Administrative Legisla tion" and the "Regulations of the Formulation 
Process of Department Rules, the laws on the air tran sport industry are reviewed and approved by the 
NPC or its Standing Committee.  Administrative re gulations are developed by the State Council and 
related rules are formulated and promulgated by the CAAC. 
236. The CAAC and regional administrations are res ponsible for the examination and approval of 
new carriers.  Fares on domestic air routes are set ma inly through government direction.  The National 
Development and Reform Commission (NDRC) and the CAAC co-determine the base price and the "floating scope" (margin of discretion) for passe nger and cargo air transport services in domestic 
routes, taking account of average costs, and de mand and supply.  The base price is currently 
Y 0.75 per passenger kilometre.  In general, ticket pr ices may rise by no more than 25% and drop by 
no more than 45% of the base price.  However, this is subject to a number of important exceptions:  there is no restriction on the scope for reduction of  ticket prices on certain routes used mainly by 
tourists or on routes monopolized by a carrier;  an d "market-driven pricing" applies on short-haul 
routes subject to competition from alternative tr ansport modes within a province or autonomous 
region or between a municipality directly under the Central Government and neighbouring provinces 
or autonomous regions where the "floating scope" is  not stipulated.  Within the "floating scope", 
carriers determine the specific types, levels, and co nditions to be applied in  regard to their ticket 
prices.  These must be reported to the CAAC a nd the NDRC through the air service price information 
system, 30 days in advance of their implementation.  Applications by carriers to establish the base price of new air routes, adjust the base price of ex isting routes, modify the limit on the scope for price 
reduction on some routes, or adjust the set of air routes covered by market-driven pricing, must be 
made to the CAAC 45 days in advance of their im plementation.  The CAAC, in consultation with the 
NDRC, makes a decision on such matters within  15 days of the date of application. 
237. For international air transport, the CAAC exam ines and approves fares according to the Civil 
Aviation Law and the "Supervisory Regulations of In ternational Air Fares".  Carriers must declare 
their prices 60 days in advance of implementati on.  The CAAC decides whether to approve the 
proposed price based on prevailing international pri ces, market conditions, relevant exchange rates, 
and related state policies. 
238. Article 93 of the Civil Aviation Law specifies required conditions for the establishment of 
public air transport enterprises.  These include:  th e use of aircraft that meet national safety and 
security requirements;  legally licensed aviation sta ff;  registered capital no less than the minimum 
level specified by the State Council; and other c onditions specified by laws and administrative 
regulations.  Air transport companies must meet the general requirements regarding the establishment 
of enterprises.   Article 7 of the "Approval Regulations of the Operations of Public Air Transport 
                                                     
 
366 For an analysis of these issues, see Zhang (2002). 
367 WTO (2005). WT/TPR/S/161 Trade Policy Review 
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Enterprises" (Order 138 of the CAAC) requires public air transport enterprises to meet the following 
conditions:  no less than three purchased or rented civ il aircraft that meet the relevant requirements;  
overall operational and management st aff must possess the capability of public air transport enterprise 
management;  flight, aircraft maintenance and othe r specialized technological staff must meet the 
relevant requirements of civil aviation rules;  th e legal representative of the enterprise must be a 
Chinese citizen;  availability of speci alized technologists that meet the requirements of civil aviation 
rules;  the registered capital must be no less than the minimum level specified by the State Council;  
access to bases, airports, and other fixed operational places and equipment necessary for business 
operation; and other necessary conditions specified by the CAAC. 
239. Overall, China's civil air transport regulations are comparatively comprehensive;  the priority 
is on ensuring the safety and stability of the sect or.  The system is moving towards progressive 
loosening of controls on entry and pricing while ma intaining or enhancing safety standards.  It has 
been suggested that increased reliance on market forces through the removal of regulatory and 
administrative restrictions that are not needed  for safety-related reasons could strengthen the 
efficiency of the Chinese domestic air transport sector  and help it to meet the challenges associated 
with the continuing high demand growth in this sector.368 
Bilateral air service agreements and international linkages 
240. As of January 2005, China had signed bilate ral aviation transportation agreements with 
96 countries;  some had yet to become effective and others were only initial interim agreements.  
These bilateral agreements cover the standard and number of carriers, tariffs and fees, establishment 
of representative institutions, employment of staff,  airport and flying facilities and "fare ratio 
regarding their usage", freight fares, applicatio n of laws and regulati ons on crossing borders, 
regulations on airline capacity, income remittance and exchange, security, safety-related controls, 
flight routes, and a dispute settlement mechanism.  In addition, the agreements typically set out 
principles, such as fair and equal opportunities fo r companies of both parties and that capacity and 
frequency are subject to negotiation with the aviation authorities of both parties.  On the basis of its 
bilateral agreements, China generally makes speci fic transportation arrangements in the form of 
memoranda of understanding.  These usually cove r airline capacity, right to services, cooperation 
between enterprises, code-sharing, etc. 
241. The designated airlines of each party are gene rally allowed to apply to their respective 
authorities to provide service based upon their respectiv e capacities.  For international freight fares, 
China follows a system of dual ratification, i.e. appl icable fares of designated airlines of both parties 
come into effect upon ratification by both parties'  air authorities.  Companies may adjust the ticket 
price based upon commercial considerations in the marketplace.  However, the "non-ratification 
principle" is applied between China and the U.S;  and in the agreements with Germany and Australia, 
the price is determined by the country of origin .  All of China’s aviation transport agreements 
stipulate that carriers have no cabotage ri ghts within the other party's territory. 
242. Most of China's bilateral aviation agreements do not deal in detail with air cargo services.  In 
recent years, CAAC has placed increasing emphasis on promoting the development of cargo transport.  
The flight routes, air traffic "place", capacity and business rights of cargo service providers are 
specified in agreements with the United States, Au stralia, and New Zealand.  To date, China has not 
signed or joined regional agreements on cargo arrangements. 
243. The use of negotiated bilateral market access arrangements with limited or no cabotage rights 
has helped China to service the burgeoning demand for passenger and cargo service with its trade 
                                                      
368 This is a principal conclusion of Zhang (2002). China WT/TPR/S/161 
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partners.  In the future, China (and other countries)  might be better served by broader regional or even 
multilateral liberalization in this sector.369 
Access to slots and other infrastructure 
244. The availability of airport take-off and landing slots and other infrastructure is critical to 
overall air transport capacity.  Currently, all airports  in China are incorporated entities. According to 
the "Provisions on Foreign Investment in Civil Aviation", foreign investors may not exclusively own and operate airports and airport services;  a Chin ese national must have majority control.  "Oil 
services" must also be controlled by Chinese nationals, and the proportions of investment in airport 
ground services is to be negotiated between both sides of the joint venture.  The major civil airports 
are operated by independent companies that are direc tly or indirectly controlled by local governments 
(for example, Shanghai, Guangzhou, Shenzh en, Kunming, Chengdu), but Beijing Capital 
International Airport Co. Ltd is directly controlled by CAAC. 
245. Arrangements for slot allocation to national and foreign carriers comply with the Flight Slots 
Management Manual of the International Aviation Association.  National carriers must apply for 
desired slots to the relevant regional air transpor tation administration, which allocates slots based on 
supply and demand, and reports the allocation to the CAAC for examination and approval. Foreign 
carriers apply directly to the slots allocation administration of the CAAC;  decisions are made by CAAC in consultation with regional air transport ad ministrations.  Currently, the airports at Beijing, 
Shanghai, Guangzhou, Shenzhen, Chengdu, Kunming, Xi’an, and Dalian are the busiest and have the 
tightest slot availability.  Access to slots at th ese airports is coordinated on a continuing basis;   
according to the authorities, their allocation is based on principles of transparency, equality and 
justice.  Priorities are assigned based, inter alia,  on historical allocation, the introduction of new 
routes or new airports, and the continuation of the previous season's schedules.  Under the same 
conditions, slots are first allocated to internatio nal flights, then to flights from the Special 
Administrative Regions of Hong Kong and Macao, then to "main route" domestic flights, and finally 
to regional domestic flights.  These principles ar e applied without discrimination between domestic 
and foreign carriers. 
246. Most airport auxiliary services are provided by th e airport authority or ai rline companies.  Some 
ground services are provided by independent companies or companies in which the airport or airline owns 
shares.  Aviation oil is provided mainly by Chin a Aviation Oil Holding Company (CAOHC).  The CAAC 
is in the process of establishing new aviation oil and ground services rules intended to strengthen the role 
of market forces and address concerns regard ing monopolistic conditions in this subsector. 
(b) Maritime transport services 
Market structure 
247. In 2004, around 90% of China's international cargo was carried by sea.  At the end of 2000, 
China had 2,525 vessels engaged in international shipping accounting for over 37 million deadweight 
tonnes (DWT);  1,986 of these, with a total of 17 million DWT, were flying the national flag.370  The 
remaining 539 vessels, with over 20 million DWT, were "beneficially owned by Chinese operators" (owned by Chinese operators , but registered abroad).
371  Between 1998 and 2002, the average annual 
                                                      
369 WTO (2005);  see also Zhang (2002). 
370 According to the authorities, in 2004, there were  2,071 vessels with over 32 million DWT flying the 
national flag;  however, they were unable to provide updates for the other figures. 
371 UNESCAP (2002). WT/TPR/S/161 Trade Policy Review 
Page 240 
  
increases in total freight carried and tota l turnover were 6% and 3%, respectively.372  In 2003, China's 
fleet was the world's fourth largest in terms of carrying capacity and its container fleet ranked the 
fifth.   
Regulatory system 
248. The Ministry of Communications (MOC) is in charge of formulating shipping and port 
policies.  The MOC indicated that the goals of  these policies include:  establishing a competitive 
maritime transport market;  building up an intern ationally competitive commercial fleet;  and forming 
a multi-functional port system, taking into c onsideration economic development and security 
concerns. 
249. Deregulation and reform measures in the sector include:  updating legislation in accordance 
with China's WTO commitments, soliciting opinions from foreign and domestic enterprises;  relaxing 
government control on domestic shipping enterprises;  and encouraging forei gn participation in the 
international shipping business (see below).  Acco rding to the authorities, there are no financial 
subsidies nor cargo preferences for domestic shipping companies;  domestic and foreign companies 
enjoy equal treatment. 
250. The Maritime Code, effective 1 July 1993, provides a general regul atory framework for 
maritime transport.  Detailed regulations are contai ned in the "Regulations on International Maritime 
Transportation" (Maritime Transportation Regulati ons), issued by the State Council and effective 
1 January 2002.  These stipulate, inter alia:  requirements to qualify as international shipping 
operators, non-vessel operating common carriers (NVOCC)373, international shipping agents or 
international shipping management operators (Table IV.9);  requirements to engage in international 
liner services;  the business scope of international shipping agents or international ship management 
operators;  and issues related to foreign investment in international shipping services.  The regulations 
also replaced the "economic needs test" with a registration requirement.374 
                                                      
372 In 2002, total freight carri ed by Chinese international maritime companies reached 
298.9 million tonnes, and total turnover was 217.3 b illion tonne-kilometres, increases of 8.4% and 4.1%, 
respectively, over 2001. 
373 Article 7 of the Maritime Transportation Regula tions defines NVOCC as:  "such international 
maritime transportation busi ness operations in which a non-vessel operat ing common carrier accepts shipments 
from the shipper as a carrier, issues its own lading b ills or other shipping documents, procures through the 
international shipping operator the carriage of goods by sea against payment of freight by the shipper, and 
assumes the responsibility as a carrier".  Through NVOCCs, small and medium cargo owners may be able to 
sign contracts with shipping line rs at preferential freight rates. 
374 Under the previous central-planned economy, the "economic needs test" involved the Government 
deciding whether to approve a project based on its analysis of demand and supply.  This test was abolished in 
2002 when the Maritime Transportation Regulations entered into force.  These regulations and the 
"Implementing Rules of Regulations on International Maritime Transportation" are available online at:  
http://www.moc.gov.cn/zhuanlan/haiyunzl/t20031231_7807. htm [1 July 2005] and http://www.moc.gov.cn/ 
zhuanlan/haiyunzl/t20031231_7808.htm [1 July 2005], respec tively.  The latter, effective 1 March 2003, define 
terms used in the Maritime Transportation Regulations as well as more detailed requirements and application 
procedures for enterprises to engage in international maritime transport. China WT/TPR/S/161 
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Table IV.9 
Registration requirements and application procedures in maritime transport services  
Qualification requirements Application requirements  Application procedures 
International shipping operators  
Suitable vessels, among which  vessels of Chinese 
nationality; 
vessels in compliance with the State's technical 
standards for maritime traffic safety; bills of lading, passenger tickets or multimodal transportation documents; senior executives with pr ofessional qualifications  Application letter;  feasibility study 
report;  investment agreement;  business registration document;  
photocopy of the vessel's ownership, 
nationality or inspection document;  sample bill of lading, passenger ticket or multimodal transport document;  certificates of senior executives' 
professional qualifications Application submitted to the MOC, 
and a duplicate to MOC designated departments in provincial 
governments;  MOC decides whether 
to grant permission within 30 working days;   applicants informed of negative decision in writing along with reasons 
International shipping agencies 
At least two senior executiv es with no less than three 
years’ experience in international maritime transport business operations;  
fixed place of business and necessary business 
facilities Application letter;  feasibility study 
report;  investment agreement;  business registration document;  proof of a fixed place of business;  
documents certifying the business 
experience of the senior executives;  electronic data interchange (EDI) agreement with ports and Customs, or other documents issued by relevant 
ports or Customs Application submitted to the MOC, 
and duplicate sent to MOC designated departments in provincial governments;  MOC decides whether 
to grant permission within 15 working 
days; MOC issues permission, or notifies negative decision in writing along with reasons 
International shipping management operators 
At least two senior executiv es with no less than three 
years’ experience in international maritime transport business operations;  Some staff members with master's qualifications and 
chief engineer's qualifications appropriate to the ships 
and trading zones under their management; equipment and facilities appropriate to international ship management services Application letter;  feasibility study 
report;  investment agreement;  
business registration document;  proof of a fixed place of business;  documents certifying the business 
experience of the senior executives;  
photocopies of the master's, and the chief engineer's certificates Application submitted to the MOC 
designated departments in provincial 
governments;  desi gnated departments 
decides whether to grant permission within 15 working days;  they issue 
permission or notify negative decision 
in writing along with reasons 
Non-vessel operating common carriers 
An enterprise must be es tablished within Chinese 
territory;  and pay a surety bond of Y 800,000, and an 
additional Y 200,000 for each subsequent branch, to a 
designated bank account in China Application letter;  feasibility study 
report;  business registration document;  sample bill of lading;  
photocopy of receipt certifying 
payment of the surety bond Application submitted to the MOC, 
and duplicate sent to the MOC designated departments in provincial 
governments;  MOC decides whether 
to grant permission within 15 working days; MOC issues permission or notifies negative decision in writing along 
with reasons 
International liner operator 
Must be qualified as an international shipping 
operator, and other requirements Name;  registered place of business;  
photocopy of business licence;  and 
information about main investors and main management staff;  particulars of the vessels;  description of the 
intended shipping lines, schedules and 
ports of call;  the freight tariff;  and a sample bill of lading, passenger ticket or multimodal transport document Application submitted to the MOC;  
MOC decides whether to grant 
permission within 30 working days;  MOC issues permission or notifies negative decision in writing along 
with reasons 
Wholly foreign-owned shipping company 
Engaged in shipping for more than 15 years;  
established its resident representative office for more 
than three years in the por t city where the intended 
wholly-owned shipping compan y is to be located;  its 
liner vessels must stop at least once a month at the port where the intended wholly-owned shipping company is to be located;  foreign shipping companies 
engaged in tramping servi ces must possess stable 
cargo sources in China;  ensure its business operations did not violate Chinese law, administrative regulations or rules in China for two consecutive years Application letter;  feasibility report; 
company's charter;  legal documents and credit certifying documents;  
appointment letter of the legal 
representative and the names and resumes of the board directors; sample bill of lading;  photocopies of the document approving the operation 
of the liner service and that approving 
the establishment of the resident representative office; other documents required by MOFCOM and MOC Application submitted to the 
designated departments of MOFCOM in provincial governments, and a 
duplicate copy sent to the MOC; 
MOFCOM, after consulting with the MOC, examines and decides whether to approve the application.  With the approval document, the applicant then 
registers with the SAIC, and obtains a 
permit from MOC before starting operation 
Source:  Regulations on International Maritime Transportation;  Implementing Rules of Regulations on International 
Maritime Transportation;  and Interim Provisions on Examination and Approval of Wholly-Foreign-Owned 
(WFO) Shipping Companies. WT/TPR/S/161 Trade Policy Review 
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251. Examination and verification by the MOC is requi red for an international shipping operator to 
engage in international liner services.  After approval  by the MOC, the operator must start its services 
within 180 days;  an extra 90 days may be given in case of force majeure .  Photocopies of all liner 
conference agreements, operational agreements, or fre ight rate agreements related to China's ports, 
signed by international liner companies, must be submitted to the MOC for registration;  according to 
the authorities, the objective is to prevent unfair trade practices.  The MOC or other relevant government agencies may investigate these agreemen ts, and, if necessary, take restrictive or 
prohibitive measures.
375  By the end of July 2005, 17 agreem ents had been submitt ed to the MOC for 
registration;  according to the authorities, no restri ctive or prohibitive measures have been taken by 
the MOC.  China signed the United Nations Conven tion on a Code of Conduct for Liner Conferences 
(the Liner Code) in 1974.  However, according to the authorities, as Chinese shipping companies are not members of any liner conferences, the cargo-sharing principle under the Liner Code has not been applied in practice in China. 
252. According to the authorities, bulk shipping, if ca rried by international liner services, is also 
regulated by the Maritime Transportation Regulations.  The authorities did not indicate which 
regulations governed carriage of other bulk shipping. 
253. Under the Maritime Code, cabotag e is open only to national carriers:  shipping and towing 
between domestic ports must be undertaken by sh ips flying the national flag, except if otherwise 
stipulated by laws or administrative rules and regulations. 
254. The "Regulation on Vessel Registration", effectiv e 1 January 1995, stipulates that, to fly the 
national flag, a vessel must be registered in China and obtain Chinese 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 residence 
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 part ner.  According to the authorities, there are no 
exclusivity rights or subsidies for ships flying the national flag. 
255. 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
376;  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 international container multi-modal transport;  100% foreign equity 
ownership was permitted from 11 December 2005.   
Foreign direct  investment 
256. In 2004, 247 international shipping companies were  registered in China;  50 were engaged in 
container liner shipping, and the remainder we re involved in irregular bulk cargo, oil, and 
miscellaneous shipping services.  Foreign participa tion in international liner services was about 80%.  
                                                     
 
375 The MOC may conduct investigations on:  liner conference agreements, operational agreements or 
freight rate agreements.  Examples of unfair practices include:  companies providing services at lower freight 
rates than normal;  secret rebates, not reflected in bookkeeping, for the purpose of soliciting cargoes;  dominant 
carriers arbitrarily imposing discriminatory freight rates or other measures on the other party to the transaction.  
376 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. China WT/TPR/S/161 
 Page 243 
 
 
At the end of 2003, there were 25 wholly foreign-owned shipping companies, and 
1,109 representative offices of overseas enterprises in China.377 
257. In addition to Article 32 of the Maritime Transportation Regulations, which provides a 
general regulatory framework for foreign invest ment, detailed regulations are provided in the 
"Administrative Rules on Foreign Investment in th e International Maritime Transportation Industry", 
effective 1 June 2004.378  Under the Rules, the MOC, and MO FCOM are the competent authorities for 
approval and administration of FIEs in international maritime transport.  Joint ventures with FDI may 
engage in international shipping services,  international shipping agency services379, international ship 
management services, loading and unloading of inte rnational shipments, and international maritime 
container freight station and container yard servi ces;  joint ventures and wholly foreign-owned 
enterprises may offer routing services for their own or operated vessels380, and international maritime 
cargo warehousing services.  Requirements, applica tion documents and procedures are in general 
similar to those for domestic enterprises (Table IV.9).  Additional requirements for FIEs include, 
inter alia :  the proportion of foreign investment in international shipping operators may not exceed 
49%, and the chairperson of the board of direct ors and the general mana ger are appointed, after 
consultation, by the Chinese partner;  foreign i nvestors in NVOCCs must obtain approval from the 
MOFCOM, after registering and obtaining a "R egistration of Non-vessel-operating Services 
Qualification" from the MOC.381 
258. Under the "Catalogue for the Guidance of Forei gn Investment Industries", FDI is encouraged 
in international liner and tramp maritime transport, and in inte rnational container multi-modal 
transport business.  For the former, foreign investme nt may not exceed 49% of total equity;  for the 
latter, 100% foreign equity owne rship was permitted from 11 Decembe r 2005.  Foreign investment in 
shipping agencies, freight forwarding agencies382, and cargo handling for foreign vessels are in the 
"restricted" category:  for shipping agencies, th e proportion of foreign investment may not exceed 
49% of total equity;  for freight forwarding ag encies, 100% foreign ownership has been permitted 
since 11 December 2005;  and for cargo handling for foreign vessels, foreign investment may only be 
in the form of joint ventures. 
259. For wholly foreign-owned shipping companies,  the examination and approval procedure is 
specified in the "Interim Provisions on Examina tion and Approval of Wholly Foreign-Owned (WFO) 
Shipping Companies", issued by the MOC and MOFTEC and effective 28 January 2000 
                                                      
377 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.  Among these 1,109 representative offices, 445 were from Hong Kong, 
China;  132 from the Republic of Korea;  and 104 from Japan (Ministry of Communications, 2004). 
378 Ministry of Communications online informa tion.  Available at:  http://www.moc.gov.cn/ 
zhengwu/zhengwu/t20040428_10154.htm [1 July 2005]. 
379 By the end of 2004, there were more than 1,000 international shipping agencies in China, of which 
20 had foreign investment.  The Shanghai Fortune International Shipping Agency is the first FIE engaging in 
international shipping agency services.  It is jointly owned by China Marine Shipping Agency Company and 
P&O Nedloyd.   
380 Routing services include canvassing of cargoes, issuing bills of lading, settling freight, and signing 
service contracts.   
381 By the end of 2004, 1,502 NVOCC firms had been registered in China, more than 230 of which 
were foreign-invested joint ventures, and nearly 100 were wholly foreign owned.   
382 The "Measures for the Administration of Foreign-invested International Freight Forwarding 
Agencies", effective 1 January 2003, amended the "Regulations on the Administration of Foreign-invested 
Freight Forwarding Agencies".  Under the measures, fo reign investors are permitted majority ownership in 
freight forwarding companies;  foreign-invested intern ational freight forwarding agencies are permitted to 
establish by means of equ ity purchases in domestic enterprises (W TO document S/C/N/257, 1 December 2003). WT/TPR/S/161 Trade Policy Review 
Page 244 
  
(Table IV.9).383  Additional requirements include:  minimum registered capital of US$1 million;  more 
than 85% of employees must have Chinese citizensh ip;  and a report on business operations must be 
submitted to the MOFCOM and MOC before the end of April each year.384  A WFO shipping 
company may engage in:  soliciting cargo, issuing bills of lading, settling freight charges, and 
concluding service contracts.  It may establish bran ch companies in other port cities after satisfying 
certain requirements set by the Interim Provision.  Fo r example, the company must have paid in full 
its registration capital, and been in operation for no less than one year;  for each branch company it 
opens, a WFO shipping company must increase its registered capital by at least US$120,000. 
Auxiliary services 
260. Tally services in China used to be monopoli zed by the China Ocean Shipping Tally 
Company.385  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. 
261. 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 pr actice is not discriminatory, as it is for national 
security, safety, and envir onmental protection purposes.386  All pilotage staff must be Chinese 
nationals.387  They note that reform in pilotage services is to proceed by, inter alia,  separating the 
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.388   
Port services 
262. As ports are the conduit for around 90% of China's rapidly growing international trade, their 
efficient functioning is essential for facilitating such trade.  There were 1,430 ports in China in 2003, 
of which 132 could deal with international trade.  International trade throughput in the ports was 
970 million tonnes, up 23.7% over 2002;  international container throughput at key ports registered 
47.36 million TEUs, up 30.9%.  Eight coastal ports  have a throughput exceeding 100 million tonnes;  
thus, half of the world's ports with a throughput ov er 100 million tonnes are located in China.  China's 
top-ten coastal ports handled 71.7% of tota l cargo handled the country's coastal ports. 
263. There are 34,000 "production" berths in China, of which 899 have a handling capacity of over 
10,000 tonnes.  In 2004, the goods handling capacity  at China’s ports was 4 billion tonnes.  On 
average, ships stop at major ports in China for 1.1 days (the average turnover time).  
264. China's ports used to be governed at three levels of government:  ports under the Central 
Government, i.e., the MOC;  those under the shared  control of the MOC and local governments;  and 
                                                      
383 Ministry of Communications online information.  Available at:  http://www.moc.gov.cn/zhengwu/ 
zhengwu/3.doc [1 July 2005]. 
384 The report must include:  the liner routes to and from the Chinese ports;  total number of employees 
and number of Chinese employees;  volume of cargoes, number of containers, and freight revenues;  and the 
total turnover, profit, and taxes for the year.  
385 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. 
386 UNESCAP (2002). 
387 Ministry of Communications online informa tion.  Available at:  http://www.moc.gov.cn/ 
zhengwu/zhengwu/2003_01_20_5551.htm  [4 July 2005]. 
388 According to the authorities, it is not appropriate to privatize or corporatize pilotage entities, for 
reasons of national secu rity and port safety. China WT/TPR/S/161 
 Page 245 
 
 
those under 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.   
265. The main legislation is the Port Law, which en tered into force on 1 January 2004.  Under the 
Law, both domestic and foreign investment in port construction and operation are encouraged.  
"Regulations on Administration of Port Operation", e ffective 1 June 2004, stipulate that, to engage in 
port operation, enterprises are required to obtain operation licences from port administration 
authorities.389  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 licences. 
266. Amendments to SOLAS (International Convention for the Safety of Life at Sea) 1974 were 
passed in December 2002, and the In ternational Ship and Port Facilit y Security Code (ISPS) became  
effective on 1 July 2004.  In order to implemen t 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 security personnel had to undergo security training.  The Maritime Safety Administration, 
under the MOC, is the competent authority for safety issues;  its "Guide for Ship's Implementation of ISPS", assists small and medium-sized companies to implement these international conventions.  The MOC also formulated the "Regulations on Port Facility Security" on 14 November 2003, based on which it set up special working groups to evaluate po rt facilities across the country.  The evaluation of 
large ports was completed by 31 March 2004 and of ot her ports by 30 April 2004;  562 port facilities 
in China had obtained a "Port Facilities' Sa fety Certificate" by 30 June 2004. 
267. Foreign investment in port construction and management is listed as "encouraged" in the 
"Catalogue for the Guidance of Foreign Investment I ndustries".  The authorities stated that, foreign 
investors may establish wholly owned port operators or set up joint ventures.
390  In 2005, there were 
over 200 FIEs involved in port services in China;  total investment was over Y 20 billion, of which 
more than Y 11 billion was foreign.  A port's harb ours may be owned and operated by state-owned 
harbour companies, FIEs, or private enterprises.  Under the Port Law, private enterprises and FIEs 
that satisfy certain requirements have the same access to all port services as state-owned companies.  Port administrative functions are under the port admi nistration authorities;  enterprises are responsible 
for daily operation and maintenance. 
268. Port charges are decided by the MOC and th e NDRC, taking into consideration cost and 
market competition;  the charges are applied unifo rmly across the country.  Port operators may set 
some fees, such as for warehousing and container ya rd services.  According to the authorities, China 
has never carried out comparisons of port charges with other countries. 
269. In China, a port may have more than one stevedoring company, but each stevedoring 
company is confined to one port.  When establis hing stevedoring companies, approval is required 
(from provincial governments for domestic co mpanies and from the MOC for FIEs).  
                                                     
 
389 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".  
390 Before the enactment of the Port Law, foreign oper ators were restricted to less than 50% equity in 
port construction investment, and port investment needed Central Government approval, which could be time-consuming. WT/TPR/S/161 Trade Policy Review 
Page 246 
  
Bilateral and international agreements 
270. Under the GATS, China made specific commitments in maritime transport, auxiliary services, 
internal waterways, and services auxiliary to a ll modes of transport (Table AIV.2).  Its MFN 
exemptions include:  establishment of subsidiari es by foreign shipping companies and cargo-sharing 
arrangements.  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.
391  The 
authorities stated that these arrangements would be phased out in the future.   
271. China is a Class-A member of the International Maritime Organization (IMO).  It participates 
in the drafting and amending of international rules,  such as the ISPS Code, and held the International 
Maritime Forum, in 2003, at the Shanghai Shippi ng Exchange.  By the end of 2004, China had 
concluded bilateral maritime transpor t agreements with 68 countries.392  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. 
272. China and the United States signed an Agreement on Maritime Transport on 
8 December 2003.  U.S. shipping companies are now  permitted to establish joint-venture shipping 
agencies and wholly owned shipping companies, container transport service companies and logistic service companies in China, while Chinese shi pping companies are no longer labelled "controlled 
carriers" by the United States. 
273. Under the Closer Economic Partnership Arrangements (CEPA) with the Special 
Administrative Regions of Hong Kong and Macao servi ce suppliers in these regions are permitted to:  
set up wholly owned companies in China to cond uct international ship management, seaborne cargo 
storage and warehousing, container yard, containe r freight stations, and NVOCC business;  offer 
services 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 for domestic enterprises. 
                                                     
 
391 The authorities state that cargo-sharing arra ngements with these countries have not been 
implemented in practice. 
392 According to the authorities, these agreements incl ude all the coastal countries that have diplomatic 
relations with China;  some of the agreements are confidential.  China WT/TPR/S/161 
 Page 247 
 
 
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