RESTRICTED  WORLD TRADE  
ORGANIZATION  S/C/W/274 
11 October 2006 
 
 (06-4885) 
Council for Trade in Services  Original:   English 
  
 
COMMUNICATION FROM THE EUROPEAN COMMUNITIES 
 
Transitional Review Mechanism Pu rsuant to Paragraph 18 of 
 
the Protocol of Accession of the People's Republic of China ("China")  
 
 
 The following communication, dated 10 October 2006, from the delegation of the European Communities is being circulated to the Members of the Council for Trade in Services.  
 
 
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  1. The EC would like to transmit the following qu estions and comments on the implementation 
by China of its commitments on trade in services, in  advance of the meeting of the Council for Trade 
in Services. 
2. The EC’s questions and comments relate to the following services sectors:  legal services, 
postal and courier, including express delivery services, telecommunications, construction, 
architectural and engineering services, tourism, distribution services, and air transport services. 
3. The EC reserves its right to raise additiona l questions, upon receipt of responses to its 
questions and comments by China,  in accordance with paragraph 8 and paragraph IV.3 (a) of 
Annex 1A of the Protocol of Accession of China. 
I. LEGAL SERVICES 
4. The EC recognises the ongoing efforts of China in implementing its WTO commitments in 
the area of the legal services.  The EC notes, howev er, that certain measures which are incompatible 
with China's GATS commitments are being maintained in the legal services sector.  The EC wishes to 
enquire when China will remove these requirements. 
5. The Administrative Regulations on Representati ve Offices of Foreign Law Firms in China , 
which are in effect since 1 January  2002 state in its Article 7 (3) that, as a condition for applying to 
establish a representative office, foreign law firms need  to demonstrate an "actual need to establish a 
representative office in China to conduct legal service business." The Implementation Rules of the 
Administrative Regulations on Representative Offices of Foreign Law Firms in China , in effect since 
1 September 2002, set out in its Article 4 the specifi c factors used to assess this  "need". Such a need 
requirement, seen in conjunction with the conditions  for the determination of a need, constitutes a de 
facto e conomic needs test (ENT). Such a requirement is not listed in China's Schedule of Specific 
Commitments. China argued in last year's Trans itional Review Mechanism that this requirement is 
maintained to assess the actual "recep tivity" of legal services in China. This explanation confirms the 
EC's understanding that the measure referred to am ounts to an economic needs test (ENT). Another 
reason that China quoted to maintain this "need" me asure is that it is deemed necessary to analyse a 
foreign law firms' legal practice history, professi onal capability etc. The EC fails to understand how S/C/W/274 
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  China can verify the need of a foreign law firm to  supply legal services on the basis of such measures, 
i.e. do the professional capabilities of a law firm indi cate anything on a firm's "need" to establish in 
China?  
(a) Can China explain when it will remove this ENT?  
(b) Can China explain how many applications  for the establishment of representative 
offices of foreign law firms have been rejected since 2002 on the grounds of a failure 
to demonstrate the need requirement in Ar ticle 7(3) and Article (4) of the above-
mentioned legislation? 
II. POSTAL & COURIER SERVICES, INCLUDING EXPRESS DELIVERY SERVICES 
6. The EC has at previous occasions already raised a number of questions and comments with 
regard to the reform of postal law in China. Th e EC would like to understand what progress China has 
made in reforming its postal law. Is it correct that  China has adopted an eighth revision of its draft 
postal law? Does China intend to make th is draft available to WTO Members?  
7. China explained in last year's Transitional Revi ew Mechanism that a plan of the postal system 
reform was approved by the State Council. When will China publish this plan of the postal system 
reform? 
8. Based on the information that has been circulat ed on the drafts of the postal law, the EC 
would like to raise a number of questions regardin g this reform, on which it would be grateful to 
receive detailed replies: 
(a) The revised draft postal law would seem to include express delivery of addressed letters 
weighting less than 150 grams in the reserve d area. Outside this threshold, domestic 
express delivery of letters would remain open to non-postal Chinese companies, but not to 
foreign-invested express delivery operators. Is this correct? Can China explain if foreign-
invested express delivery operators will under the revised postal law be able to handle 
letters in China? 
(b) Can China confirm that the new postal law will provide for a definition of express 
delivery that is in line with international practices, such as by adding a reasonable price 
criterion to the weight criterion used to define the monopoly?   
(c) Article 91, paragraph 2 of the seventh draft postal law forbids the operation of delivering 
letters, printed matters and parcels except in  the form of express delivery service. Can 
China explain how such a provision is compa tible with its specific commitments for all 
courier services listed under CPC 75121, which includes, inter alia,  the handling of 
parcels and newspapers, periodicals and mag azines, since these do not mention national 
treatment limitations other than foreign-equity  caps? Can China explain if this provision 
is removed in a new draft law? 
(d) The licensing procedures for express delivery operators are reportedly modified in the 
postal reform. Furthermore, it would seem that express delivery businesses and Express 
Mail Service (EMS) will be supervised by different regulatory authorities, and that EMS 
will be supervised by the relevant postal uni versal service section. Could China please 
confirm that it will ensure that (i) existi ng licences will be grandfathered? (ii) the 
licensing procedure will be managed at centr al level for foreign or foreign-owned 
operators? (iii) the impartiality of the licensi ng procedure will be guaranteed, for instance 
by ensuring the independence of the regulator from all operators, including China Post  S/C/W/274 
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  and its subsidiaries? (iv) EMS and other postal units engaged in  competitive business 
operations will be separated from universal ser vice, and will have the same status as non-
postal express companies?  
(e) Several proposed provisions of the draft law wh ich grant China Post and its subsidiaries a 
preferential treatment have been maintained or introduced, even for activities which could 
be understood as being outside the scope of the universal service and opened to 
competition. They reportedly include an exemption of business tax, State compensation of losses, specific liability regime and ex emption from licensing for express delivery of 
addressed letters. China’s current commitm ents in courier services do not mention 
national treatment limitations other than a fo reign-equity cap. Could China please confirm 
that it will ensure, in the final draft law, th at foreign and foreign-owned operators shall 
have no less favourable treatment than China Po st and its subsidiaries for their activities? 
(f) When would China submit for consultation a new draft postal law that takes account of 
the above-mentioned comments?  
III. TELECOMMUNICATIONS 
9. Can China confirm that it does not maintain a requirement for foreign investors to venture 
with a main Chinese partner in the "basic" tele com sector, in accordance with paragraph 314 of the 
Working Party report? 
10. The Regulation on the Administration of Fore ign Invested Telecommunications Enterprises 
sets an excessively high minimum registered cap ital requirement (RMB two billion for a nationwide 
provider). Is a reduction of these require ments under consideration in China?   
11. In the area of “value-added” telecom services, more than 15.000 licences have been issued to 
domestic operators, whereas only five licenses have been issued to foreign-invested enterprises. 
Foreign-invested enterprises report that they en counter impediments in obtaining licences and are 
more restricted than domestic enterprises in the type of "value-added" services which they may be 
able to supply.   
(a) In this context, can China confirm that  its licensing procedures for value-added 
services follow the principles on licensing criteria provided for by the Reference Paper on Basic Telecommunications and are st reamlined, in line with international 
practice, so as to be reflected in the number of licences issued?  
(b) Can China provide information on the type  of value-added services that domestic 
suppliers can provide and in particular wh ether foreign services suppliers can provide 
the same value-added services as domestic operators? 
(c) Can China provide the EC with information on the regulatory authority responsible 
for telecommunications and especially, on the requirements guaranteeing the independence of its regulator? 
IV. CONSTRUCTION, ARCHITECTURAL AND ENGINEERING SERVICES 
12. The EC remains very concerned by the market access barriers existing in China's construction 
and design markets. Although China claims that foreign and domestic companies are subject to 
similar regulatory requirements, the situation on  the ground proves to be discriminatory and has 
deteriorated for foreign companies since the repeal  of the Registered Foreign Contractor status S/C/W/274 
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  granted by the former Decree 32. In addition, resi dency requirements for construction companies and 
construction and engineering design companies are still not WTO-compliant.  
13. First, although Wholly Foreign Owned Construc tion Enterprises (WFOCE) have to satisfy all 
the requirements which Chinese contractors have to satisfy, including the minimum amount of registered capital, management a nd technical personnel requirements, number of projects to be carried 
out each year etc., their scope of activity is limite d to the four categories of construction projects 
specified in China's WTO schedule. As a consequen ce, the requirements that these companies have to 
satisfy in comparison with the market access they  are granted are heavier (in particular capital 
requirements) than those of Chinese contractors of the same grade that do not face any restriction as 
regards the kind of projects they are allowed to undertake. In addition, the Chinese qualification 
system does not generally take into considerati on those references obtained outside of China, and 
Circular 159, which introduced some changes to De cree 113, was not drafted in a way that provides 
foreign contractors with a systematic  recognition of their performance ga ined outside China, leaving a 
large amount of discretion to the competent Chinese  authorities and a great uncertainty for foreign 
contractors wishing to apply for setting up a WFOCE. 
14. These specific constraints on WFOCE could be an incentive for foreign contractors to set up 
joint-ventures with Chinese partners. However, th e qualification grade of a Joint-Venture under the 
new qualification system is the lowest of both individu al grades, even if one of the partner contractors 
brings to the joint-venture the technical staff and skills that would be sufficient to qualify the 
consortium for the higher of both grades. As a consequence, foreign contractors with high 
qualifications are constrained to find only high ly qualified Chinese construction companies as 
partners in order to undertake projects in China corresponding to their abilities.   
15. The freedom of foreign contractors to set up companies in China under the new system is 
therefore very limited and does not provide the appr opriate conditions for foreign investors willing to 
develop a new business in China. The EC would lik e to know when China does intend to solve this 
issue through a fair assessment of  the discriminatory effects of the concerned provisions of its 
qualification system? 
16. Regarding in particular the long-standing issu e of burdensome capital requirements, the EC 
would like to know whether China is considering to replace registered capital and net assets 
requirements with the possibility of alternative fi nancial instruments such as letters of guarantees, 
insurance bonds or bank guarantees, solutions that th e banking market in China can already offer and 
which would better serve the purpose of providing safe guarantees by contractors? 
17. Resulting from such barriers to market access, foreign dredging companies consider it almost 
impossible to set up foreign-invested companies in  China and are therefore operating as chartering 
companies, renting foreign dredgi ng vessels to Chinese dredging comp anies. However, in such a case, 
and for a same project, a foreign company chartering a dredging vessel is subject to far higher taxes than a local dredging company directly importing a fo reign dredging vessel, thus resulting in a strong 
unbalance in the respective competitiveness of lo cal and foreign dredging companies. When does 
China intend to solve this particular issue? 
18. The EC would like to be informed of the pl anned timetable for the issuance of the draft 
implementing rules for Decree 114, which was announ ced to be released very soon. Would these 
implementing rules state that the overseas experience of foreign-invested design enterprises applying 
for qualification under Decree 114 would sy stematically be taken into account? 
19. China's WTO commitments in the constructi on services sector do not mention any limitation 
as regards national treatment in mode 3. However, the residency requirements imposed by point IV.5 
of Notice No 73 for foreign personnel of construction enterprises of three months a year have not been  S/C/W/274 
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  removed by Circular 159. Similarly, although WT O commitments in architectural, engineering and 
integrated engineering and urban planning services do not mention residency requirements, they still 
exist for construction engineering and design enterprises pursuant to Article 16 of Decree 114 
(six months a year). Could China please confir m when it intends to abolish these residency 
requirements in order to comply with its GATS commitments? 
20. Requirements in terms of numbers of foreign professional (architects/engineers) staff still 
exist for foreign-invested enterprises qualifying under the regime of Decree 114, as China has 
confirmed in its previous reply to the question ra ised by the EC about construction and engineering 
design. Such limitations to national treatment do not appear in China's GATS commitments: could 
China please indicate when it intends to comply with  its GATS commitments regarding this issue?  
V. TOURISM 
21. Article 11 of the Regulations on Administration of Travel Agencies,  dated 11 December 2001, 
reads as follows:  
"The tourism administration depa rtment shall, after receipt of an application, carry out the 
examination according to th e following principles: 
1. whether or not it conforms to the tourism development planning, 
2. whether or not it meets the need of tourist market, and 
3. whether or not it satisfies the conditions as  specified in article 6 of these Regulations. 
[…]" 
22. The EC understands that this Article 11 of the Regulations on Administration of Travel 
Agencies  establishes an economic needs test (ENT) for th e authorisation of new travel agencies. This 
market access limitation is not listed in China’ s GATS schedule of commitments. This limitation has 
been brought to the attention of the Chinese au thorities on several occasions, including during the 
2003, 2004 and 2005 Transiti onal Review Mechanism. 
23. Would China please provide Members with info rmation about its plans for aligning the 
regulation of travel agencies with China’s GATS commitments in the sector? 
VI. DISTRIBUTION SERVICES 
24. The Chinese authorities produced in 2004 legislatio n affecting the distribution sector in order 
to implement the corresponding phase of market  liberalisation in lin e with China’s GATS 
commitments. In particular, a text of Measures fo r the Administration of Foreign Investment in the 
commercial sector was approved in April 2004, being effective as of June. Several questions remain 
about this legislation and how the adjustment to subsequent phases of trade liberalisation will be done. 
25. This law affects, among others, retail distri bution services of several products for service 
suppliers with more than 30 stores. The law i ndicates 49% foreign ownership until December 2006 
for distribution of books, pharmaceutical, and other pr oducts.  Although this is currently in line with 
China’s GATS commitments, the situation will ch ange as of January 2007, when China’s WTO 
commitments to allow full foreign control will appl y. Would China please explain how it is planning 
to manage this transition? 
VII. AIR TRANSPORT SERVICES 
26.  China has undertaken commitments under GA TS Article XVI and Article XVII for mode 1 
on Computer Reservation Systems (CRS). The EC notes that a regulation is still under preparation to cover this area.  CRS providers need certainty about the legal environment under which they are S/C/W/274 
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  operating, and a guarantee on their scope of busin ess and on non-discriminatory principles to be 
applied. The EC already asked China about the timing of this legislative process in previous 
Transitional Review Mechanisms, but so far no pr ogress seems to have been achieved. Could China 
please update Members on the progress of the long-awaited legislation that will create a legal 
framework for the sector? Can China explain how many applications have been made for CRS 
licenses, how many have been rejected and ho w many have been awarded in the last year? 
 
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