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    Country profile: China



    Note: This text provides brief description of the conditions foreign business will encounter in trade with China. It is based on a WTO Trade Policy Review for China, early June 2010. Readers wishing for deeper analysis should turn to the original Trade Policy Review available on the WTO website. (www.wto.org/english/tratop_e/tpr_e/tp330_e.htm)

    Trade Policy Reviews are an exercise, mandated in the WTO agreements, in which member countries' trade and related policies are examined and evaluated at regular intervals.



    SUMMARY


    Since its previous Trade Policy Review in 2008, China has continued the gradual liberalization of its international trade and investment regime. According to the Government, gradualism in economic reform is motivated by the need to maintain economic and social stability.

    China's dependence on export-led growth left it vulnerable to the effects of the global economic recession that began in late 2008. In 2009, China's exports fell by 16%. Imports fell by 11%, reflecting the high import-intensity of its manufactured exports. Real GDP growth declined from 9.6% in 2008 to a year-on-year rate of 6.2% in the first quarter of 2009, the lowest rate in more than a decade. However, growth rebounded in subsequent quarters so that in 2009 overall, China achieved real GDP growth of 8.7%. In January 2010, China overtook Germany to become the world's largest exporter. China remains the world's second largest importer, behind the United States.

    China's evident success in competing for global markets and its continued heavy dependence on manufactured exports leaves it vulnerable to trade friction with its trading partners. Membership in the WTO provides China with considerable legal security against a significant tightening of restrictions on its exports. Like other WTO Members, China resisted a protectionist response to the effects of the global economic recession.

    The Chinese Government responded to the effects of the global economic recession by introducing expansionary fiscal and monetary policies to offset the sharp decline in external demand, putting more emphasis on domestic demand to drive GDP growth. In particular, China announced a Y 4 trillion (13% of GDP in 2008) economic stimulus package in November 2008, covering a period of two years. Partly reflecting the temporary increase in government expenditure, the surplus of domestic savings over domestic investment declined, and China's current account surplus, the international counterpart of China's domestic saving and investment balance in its balance of payments, narrowed from 9.4% in 2008 to 5.8% in 2009.

    The Government recognizes that temporary measures alone are not sufficient to correct imbalances in China's pattern of economic growth and development, which are macroeconomic and structural in nature. Achieving a better balance between external and domestic demand to drive its growth, and further liberalization of its import and export policies multilaterally will reinforce China's leadership role in helping, together with other WTO Members, to manage periodic trade and economic imbalances of international importance in ways that minimize the risk to global growth and prosperity.

    The crisis has reinforced China's intention to undertake more longer-term structural reforms that are needed to strengthen its social safety net, reduce precautionary saving by households, diversify its economic structure, and to improve its underdeveloped capital market, which has contributed to high enterprise saving and thus impeded the Government's efforts to boost domestic demand.

    In order to rely less on manufacturing, the Government has relaxed FDI restrictions on some services sectors and is promoting the expansion of agriculture by providing production subsidies and phasing out agricultural taxes.

    China's heavy reliance on manufacturing has resulted in over-investment and hence excess capacity in certain industries, which became obvious when external demand declined. Over-investment is partly the consequence of the absence of a sufficiently well-functioning capital market, monetary policy that is not entirely based on market instruments, and the Government's "guidance" in allocating resources to specific manufacturing activities.

    On China's exchange rate, between July 2005 (when its exchange rate reform started) and September 2008, the renminbi (RMB) appreciated by 21.4% against the U.S. dollar, 13.6% against the yen, and remained practically unchanged against the euro. Since then, the RMB has remained stable against the U.S. dollar and depreciated against some major currencies (for example, the euro) in 2009. At the time of its most recent examination of this issue, the IMF welcomed the important progress made in the past few years in increasing the market's role in determining the exchange rate, as well as the consequent substantial real appreciation that has been achieved since the exchange rate reform in 2005. Some IMF directors nevertheless supported the view that the RMB remains "substantially undervalued". The Peoples Bank of China (PBC) maintains that under China's "managed floating" exchange rate regime, the RMB rate is based on supply and demand of the market and is adjusted with reference to a basket of currencies; it wishes to maintain the exchange rate of the RMB basically stable at an adaptative and balanced level.

    While China has recently intensified its pursuit of bilateral/regional free-trade agreements, preferential margins provided by China are still small and trade with FTA partners still accounts for a minor share of its total trade. During the review period, direct cross-straits links were established between China and Chinese Taipei in terms of air and maritime transport and postal services.

    China's average applied MFN tariff was 9.5% in 2009, slightly lower than in 2007 (9.7%). Bound rates are close to the applied rates, giving the tariff a high degree of predictability. Nonetheless, the tariff could be complex, as, for example, the applied MFN tariff contains 60 different ad valorem rates.

    China still uses various non-tariff border measures, such as import and export licensing or state trading to "guide" the allocation of resources. China's trade remedy activity is assuming increasing importance, while China remains the most frequent target of anti-dumping measures.

    Around 15% of China's national standards are mandatory. The rest are voluntary, although their implementation can be complex. Some 46% of its national standards are equivalent to international standards. Its SPS regime on the testing of dairy products for domestic consumption and for exports has been strengthened, and China has suspended its quality inspection exemption system.

    China's Government Procurement Law stipulates that the Government should procure domestic goods, projects, and services, although there are no provisions on local content or rules of origin to determine whether a product is produced domestically. China applied to join the WTO GPA in December 2007. Parties have expressed their willingness to work with China to facilitate its accession process, although some parties have expressed concerns in the WTO GPA Committee regarding, inter alia, China's indigenous innovation initiative. China's accession to the GPA should bring fundamental changes to its government procurement framework.

    China's export barriers have not been falling at the same pace as its import barriers. It still uses various export restrictions, including prohibitions, licensing, quotas, taxes, and less-than-full VAT rebates, to manage certain exports on grounds of natural resource and energy conservation. However, export restraints tend to reduce export volumes of the targeted products and divert supplies to the domestic market, leading to downward pressure on the domestic prices of these products, and thus may implicitly assist domestic downstream processing of the products concerned. China is starting to consider more suitable internal (rather than trade) measures to conserve natural resources, save energy, and protect the environment. For example, it is considering levying an environmental tax on the production/extraction of natural resources during the 12th Five-Year plan period (2011-15).

    China has continued to review, revise, or amend its trade and related laws. These include the Anti-Monopoly Law (effective 1 August 2008), China's first comprehensive competition law and the Patent Law (effective 1 October 2009), which strengthened patent protection by, inter alia, increasing penalties against infringement. China has also reformed its tax system to render it more neutral; in particular, this involved the unification of enterprise income tax rates for all companies (domestic and foreign), and the transformation of VAT from a production-based tax to a consumption-based one.

    China has continued to improve its legislative framework and intensify the enforcement of IPR protection, and has identified the promotion of innovation as a national development strategy. The country has become increasingly aware of the importance of IPR protection in facilitating domestic innovation. Enforcing IPRs at the border is the responsibility of Customs, and China pays special attention to IPR protection in respect of exports. Following a dispute at the WTO on the enforcement of IPRs, China notified that it is revising its Copyright Law based on recommendations and rulings of the DSB.

    Since its previous review, China has relaxed restrictions on FDI in services, notably in telecommunications and tourism, and the Central Government has been delegating to local governments licensing authority for the establishment and modification of operations of "encouraged" foreign-invested enterprises (FIEs) and certain selected sectors, as well as certain types of FIEs, such as foreign invested joint-stock companies. Nonetheless, there are still significant restrictions, such as foreign participation limits, on foreign investment in some sectors and private-sector activities.

    In banking, stringent qualification requirements remain, including high minimum asset requirements on sole or controlling shareholders and high minimum paid-up capital amounts, restrictions on the supply of credit-card services, and restrictions on the business scope of foreign banks branches. The stock market in China has continued to develop during the period under review, and the process of converting shares of SOEs to be traded in the market has progressed.



    Previous Trade Policy Reviews:
    Albania

    Armenia

    Croatia

    El Salvador

    Malaysia

    Niger - Senegal

    Southern African Customs Union (SACU)

    Chile

    Guyana
    Morocco
    New Zealand

    Mozambique

    European Communities
    Brazil

    Japan
    Guatemala
    Switzerland & Liechtenstein
    Dominican Republic
    Jordan
    Norway
    Korea
    Barbados
    Singapore
    Oman
    USA
    China
    Mauritius
    Madagascar
    Brunei Darussalam
    Mexico
    Ghana
    Pakistan
    Turkey
    Thailand
    Organisation of Eastern Caribbean States