Front. Econ. China (2006) 3: 311−372 DOI 10.

1007/s 11459-006-0011-8


LI Xiaoxi

A report on the development of China’s market economy 2005

©Higher Education Press and Springer-Verlag 2006

Abstract This paper dicusses on the issue of the development of China’s market economy from six aspects. (1) Basic Content and Conclusions on the development of China’s market economy. (2) Further progress in building market-oriented economy in China. (3) Assessment of the degree of market economy development in China. (4) New progress in 2004 in developing market economy in China. (5) A general analysis of twelve key questions concerning market economy. (6) Resolution of the “non-market economy” issue: a win-win option. Keywords China, market-oriented economy, win-win option, finance, trade
JEL Classification B22 D4 D23 E5 Q21



Following China’s accession to the WTO, the number of antidumping investigations initiated involving Chinese products has risen rapidly, instead of decreasing. One of the key grounds relied upon by the initiating countries is
Received March 5, 2006 LI Xiaoxi( ) Institute of Economic and Resources Management, Beijing Normal University, Beijing 100875, China E-mail: Notes: This project was presided by LI Xiaoxi and finished by Institute of Economic and Resources Management, Beijing Normal University.


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China’s being characterized as a “Non-Market Economy (NME)”. However, thanks to over two decades of reform and opening-up, a market economy system has already taken shape in China. In order to contribute to the knowledge of foreign friends with regards to China’s market economy, we drafted the Report on Development of China’s Market Economy 2003 (hereinafter the Report of 2003). And at the request of friends from overseas, we recently completed the Report on Development of China’s Market Economy 2005 (hereinafter the Report of 2005). As the Report covers developments up till the end of 2003, we compiled a supplementary report entitled the Latest Developments in 2004 in China’s Market Economy. To facilitate the understanding of foreign readers, this abridged Report of 2005 incorporated the key elements of the two afore-mentioned reports and is translated into the English language as reference for foreign friends. This abbreviated version of the Report contains the basic elements and conclusions in the Report of 2005, which gives an account of the further achievements in China’s market economy process, present the results of the assessment of market economy degree in China and provide a general analysis of some of the key issues concerning market economy. Here we must note with emphasis that in the Report of 2003, according to our calculation, the market economy degree in China reached 69% in the year 2001. In the Report of 2005, we continued to apply the comparable index measurement system and methodology and reached the conclusion that the market development degree in China reached 72.8% and 73.8% in 2002 and 2003, respectively, which once again proved that China is already a market economy as a developing country. It should be noted that the calculation of China’s market economy development degree is based on the same criteria, i.e., the five criteria based on the specific circumstances of the developments in China and developed by drawing upon the criteria for market economy status (MES) under the antidumping laws of the US, EU and Canada.


The role of the government

Issues of interest to the EU and the US include the possession, allocation and control by government of natural, capital and human capital resources, the control and management by government of the national economy, production decisions (such as, who produces what in what amounts and for whom, which involves the ownership structure, profit distribution and bankruptcy mechanism), international and domestic trade, and intermediaries (such as chambers of commerce and trade associations), etc. All these questions boil

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down to the role of the government, or to be more precise, the role of the government in the market economy and its relations with the firms. In the final analysis, it involves such questions as who allocates the resources and makes decisions regarding the use and pricing of resources, the government or the market; whether the government respects and protects the right of economic entities in their operations; whether it treats enterprises unfairly and etc. We summed up this criterion as “rules-based government behavior”.


Rights and behavior of enterprises

The US Department of Commerce is interested in whether the government intervenes in the enterprises making decisions concerning output quantities and prices, whether enterprises are independent in their operations and free to export, whether they are free in choosing their management, allocating profits and making up for the losses, whether they are free to negotiate and sign the terms of contracts, and particularly whether exporters enjoy those rights. The EU is also interested in the right of the enterprises in determining export price and volume, whether their basic accounting books are up to the international standards, whether they have the right to financing and remitting profits abroad as well as the form of enterprise ownership and progress in SOE reforms. All these questions relate to the rights and behavior of enterprises. All in all, what they care about is whether the enterprises’ behavior in their production and operations is market-based or administrative-led. We sum it up as “liberalization of economic entities”.


The cost and pricing of input factors

The US Department of Commerce is interested in the degree of control exercised by a government over the allocation of resources and whether the price paid for inputs are market-based. The EU is interested in whether the price of input factors is determined by the market and the authenticity of the costs of firms. In short, they all take an interest in whether the factors of production such as raw materials and labor are market-based. This is quite understandable as the price of inputs is related to the cost of products and has a direct impact on their price, which is relevant to antidumping investigations. Therefore, all importing countries would look carefully at the authenticity of the costs and the rules under which the products are prices with regard to products from an exporting country. This may be termed “marketization of production factors”.


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Trade environment

The EU, US and others are interested in such issues as whether transactions are free or suppressed in both international and domestic trade, whether market infrastructures and market legislation and judicial system are well-functioning, whether market intermediaries are independent and what role they play, whether enterprises are independent in pricing their products under a country’s trade policies, how the government administers exports and exporters and whether enterprises are free in their commercial activities. All these relate to trade environment and conditions and we name this criterion “fair trade environment”.


Financial parameters

The EU, US and others are particularly interested in whether the interest rate and exchange rate of the investigated country are shaped by the market, if there are differences in terms of interest rate among different enterprises, domestic trade, foreign trade and various industries, whether financials of an enterprise are not subject to distortions by the previous non-market economic system, whether enterprises may remit profits or capital abroad, whether they are free to transact in and deposit foreign exchange etc. To sum up, they are concerned with the fairness of the formation and scope of the two major financial parameters of interest rate and exchange rate and, further, the reasonableness of the basis on which these parameters are established, i.e., the financial institutions. These criteria may be summed up as “rationalization of financial parameters”. It is clear that the above five factors for judging a market economy are put forward within the context of fair trade, based on our understanding of the modern theories and realities of market economy and by drawing upon the market economy criteria contained in antidumping rules of the EU and the US. We consider them to be pragmatic market economy measurements to be used for comparisons and discussions. We welcome comments from readers from both home and abroad, particularly those from abroad on the developments in China’s market economy. We will adhere to an objective and scientific approach in seeking the truth, having full exchanges and reaching consensus so as to do our part for a comprehensive resolution of China’s “non-market economy status”, accelerating the process of improving China’s market economy and advancing non-discriminatory global trade.

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2 Basic content and conclusions of the Report of 2005 on Development of Market Economy in China 2.1 Basic content of the report

The Report of 2005 on Development of Market Economy in China contains three sections, ten chapters, twelve questions and six appendices. The introduction to the report gave a summary of the developments concerning China’s market economy during 2002 and 2003, analyzed the efforts of China and the results in resolving the non-market economy issue, expounded on the researchers’ basic views on this issue and briefly presented the main content and views in the Report of 2005. Section I, entitled “Latest Developments in Market Economy 2002–2003”, has ten chapters. Following the structure of the Report of 2003, the first nine chapters gave an empirical analysis on the latest developments in nine aspects of China’s market economy in 2002 and 2003, namely the reform of government administration, operation of enterprises under market conditions, market-based labor flow and wages levels, market-based capital transactions, market-based land transactions, market-based trade, scale of intermediary organizations and their market-based operations, market-based currency and financial institutions and improvement in China’s market economy legal framework. Chapter 10 “Measurement of the Development Degree of China’s Market Economy” improved further the evaluation indices system and found the market development degree of China to be 72.8% and 73.8% for 2002 and 2003, respectively. This section, combining qualitative analysis with quantitative analysis, lays the foundation for the entire Report. Section II, entitled “Development of China’s Market Economy by Western Standards”, contains altogether 12 questions. In light of the needs of both research and negotiations, and given the European and American criteria for MES, the Report summed up those major theoretical and practical points of contention during the process of China’s market economy development and particularly the questions the EU and the US have for China’s MES into twelve questions, i.e., extent of RMB convertibility, extent of the independence of financial sectors, freedom of employees in negotiating with employers regarding their wages, the extent to which foreign investment is permitted, the extent of possession or control by government over means of production and enterprises, the extent of government regulation over enterprises in determining their output, pricing and sales and over resource allocation, protection of property rights and the bankruptcy law, enforcement of laws and regulations on investment and taxation, company law and corporate


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governance, laws on accounting and auditing standards and their enforcement, the use and disposal of the assets of SOEs and other factors. This section explained and replied to the twelve listed questions. Section III “the Appendices” contains six appendices, including “explanation of the indices for evaluating market development”, “introduction to the economic freedom index”, “latest developments in the development of the market economy in China’s rural areas 2002–2003” and “laws and regulations promulgated or taking effect in 2002 and 2003”. The appendices may serve as reference for comparative studies.


Basic conclusions and main features of the report

The Report of 2005 on Development of Market Economy in China made a comprehensive analysis of the development of market economy in China in 2002 and 2003 by applying the five tests of “rules-based government behavior”, “liberalization of economic entities”, “marketization of production factors”, “fair trade environment” and “rationalization of financial parameters”. The basic conclusion is that China’s market economy was developing in both breadth and depth during 2002 and 2003. Compared with the Report of 2003, Report of 2005 has the following three features. First, the Report of 2005, though based on the results of the Report of 2003, emphasized the changes and problems that have taken place in the last two years so that the continuity of the entire research is maintained. The calculation by the Report of the degree of China’s market economy development in 2002 and 2003 with the latest data, combined with the results of 2001, can reveal the development and changes in China’s market economy during this period of time. The calculation followed the approach adopted by the Report of 2003, thus ensuring continuity and comparability. The ten chapters in Section I of the Report of 2005 correspond to the first ten chapters of the Report of 2003 in terms of contents. However, “market-based domestic trade” and “market-based international trade” were merged into one chapter to better reflect the integral nature of trade activities under market conditions, help people overseas to better understand and faithfully reflect the results of China’s economic restructuring efforts. Secondly, as the Report looks at the development of China’s market economy by Western standards and tries to respond to the questions of foreign governments particularly those of the leading developed countries concerning China’s MES in a more direct and focused manner, the Report takes special care to integrate its research aspects with its practical purposes.

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Compared with the Report of 2003, a new section (Section II) was added to examine, assess and illustrate the actual situation in China in light of each and every MES criterion of the European and American sides. It responded to some of the major theoretical and practical controversies concerning the development of China’s market economy and addressed with balanced comments some of the doubts and criticisms of Western scholars in particular. In its analysis, the Report tried to address some of the “difficult issues”, such as the convertibility of RMB and independence of China’s financial sectors. Given China’s specific conditions and the way academic issues are presented in China, in order to make the communication as effective as possible, the Report used to the extent possible concepts and statistics that are comprehensible to all sides to explain the current state of affairs in China. Aided by comparative international study and an in-depth examination of China’s actual situation, the Report gave an objective analysis of the efforts and progress China has made over the recent years in building its market economy system. Thirdly, as far as the analytical method is concerned, the Report is more scientific and standardized in that it combined both quantitative and qualitative analysis, and Chinese features with international standards. As usual, the Report is based on large amounts of research and study, drew upon various methods of research and calculation from both home and abroad, had them improved and readjusted in light of China’s national conditions and features so that the methodology and indices are more scientific and complete. At the same time, it paid special attention to harmonizing the international standards for analyzing market economy development by fully absorbing the outcomes of relevant research efforts both at home and abroad. In another word, the issue of the development of China’s market economy should first and foremost be viewed within the context of China while international standards must be applied to the assessment and analysis of the degree of such development. The Report once again assessed the market development degree of the main components of China’s economic system. For example, it assessed and analyzed again the consistency of the structure of government administration and the extent of market-orientation in terms of the enterprises, means of production and the financial sector and, on that basis, assigned a value to the overall progress in China and identified the development degree of China’s market reforms in recent years. By listing large amounts of facts, statistics, policies as well as laws and regulations, the Report gave an institutional inspection and a well-structured theoretical explanation to the level of market economy in China, which corresponds with the results of quantitative calculations. Such detailed empirical analysis has provided in a timely fashion comprehensive information for judging the devel-


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opment of market economy in China and an objective basis for friends both in and outside China in identifying the level of such development.

3 2002−2003: Further progress in building market-oriented economy in China
The years of 2002 and 2003 are the first two years after China’s accession to WTO and an important time period for China’s economic development and restructuring. The Report of 2005 analyzed in detail the five aspects of government, enterprises, means of production, trade environment and financial parameters.


More rules based government behavior

-- Government restructuring was carried out further resulting in continued cut in government size. In 2002, the number of units under the State Council was reduced from 40 to 29. In March 2003, the new administration cut the figure from 29 to 28 and reduced the number of review and coordinating agencies and interim agencies from 33 to 27. Administrative staff was cut by a big margin with a total of 74,000 posts eliminated at the provincial level governments, 890,000 posts or 19.4% in Party, Administrative and Social agencies at the city, county and township levels with another 430,000 extra-budget posts cleared up. Government employees as a percentage of the urban employed dropped from 17.86% in 1992 to 12.59% in 2003. Government expenditure as a percentage of GDP has all along been kept at a relatively low level, 12.64% in 2003 which was close to one percentage point down from the year 2001. -- With continued in-depth reform in the regime of administrative approval, the number of items subject to administrative approval in the field of economic activities has been greatly reduced. In 2002 and 2003, China achieved initial progress in its reform aimed at canceling administrative approval subjects. The State Council in October 2002 cancelled the first group of 804 issues requiring approval involving 56 departments and units under the State Council, in which 567 or 70.5% were related to regulation of economic activities, 169 or 21% to regulation of social affairs and 68 or 8.5% to administrative and other affairs. In 2003 a second batch of 406 issues requiring government approval were cancelled and another 82 were left for industrial associations or other intermediary organizations to regulate. With more issues removed from the approval list and the approval procedures streamlined,

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there has been a noticeable improvement in the environment for enterprise operations and residents consumption. -- Government investment regime was better disciplined. The Plan for Reforming Investment Regime was adopted in December 2003 and implemented in 2004, which established the role of enterprises as the main investing entity and disciplined further government investment behaviors. In 2003, domestic loans as a percentage of total national investment in fixed assets rose rapidly to a record-high of 24.4%. Funds raised by the enterprises themselves rose from 45.7% in 2002 to 47.8% in 2003. Government investment accounted for 7.02% of GDP in 2003, 2.71 percentage points higher than in 2002, as a consequence of the changes in the macro-economic situation at home and abroad, particularly Beijing’s successful bid for hosting the Olympics of 2008 and the need for diverting more resources to combating SARS that required the government to step up its investment in infrastructural sectors such as transport, construction, energy and raw materials and public services and facilities in fields of public health and medical studies. -- Direct government intervention in production activities of enterprises was by and large eliminated. Price subsidies as a share of GDP in China continued to go down, from 1.21% in 1992 to 0.53% in 2003 with minimal coverage in terms of both scope and quantity. Products are priced in accordance with market supply and demand. Government set the price of only 3.0%, 1.9% and 9.9% in 2003, showing a very low involvement of the government. Total amounts of subsidies to SOEs for their losses declined from RMB 44.496 billion yuan in 1992 to RMB 22.439 billion yuan in 2003, with their share in GDP down from 1.67% in 1992 to 0.19% in 2003. SOEs have gradually been freed from state intervention and become independent economic operators responsible for their own profits and losses. In addition, the Standing Committee of the National People’s Congress (NPC) adopted in August 2003 the Law of the PRC on Administrative Approval which specified both the role and limits for the government under market conditions. The Provisional Regulation on the Supervision and Administration of State Assets of Enterprises promulgated by the State Council in May 2003 clearly characterized the relationship between the Government and SOEs as one between investor and invested enterprises. The reform was stepped up to transform SOEs with shares and corporate systems and involvement of non-public capital is encouraged so as to accelerate the ownership diversification process. -- Restrictions continued to ease on market access to Government-monopolized sectors. In 2002 and 2003, the Chinese Government sped up reforms in sectors of administrative monopoly, such as power, telecommunications and civil aviation. In December 2002, establishment of eleven


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new or restructured power companies was announced. Through industrial restructuring, China’s power industry achieved “the separation of power plants with power grid” and competitive and open regional power markets took form. Also in 2002, China Telecom was broken up along geographic lines into the new China Telecom Group and China Netcom Group (CNC), two landline telecom networks that cover the whole country. By the end of 2003, a competitive telecom market participated in by China Mobile, China Telecom, China Netcom and China Unicom was put in place. The monopoly in the civil aviation sector was also broken. Since October 2002, the General Administration of Civil Aviation was de-linked from the carriers that used to be directly managed by the former and three air transport groups and three air logistics groups were established anew or by restructuring. Market access was eased up, allowing foreign and private investment to enter into this sector.


Freer economic entities

-- Continued rapid growth of non-SOEs. In 2003, the added value created by non-public sectors accounted for 69.0% of GDP, 2.74 and 5.63 percentage points higher than 2002 and 2001, respectively, representing an average annual growth rate of 2.82 percentage points. Fixed asset investment by non-public sectors accounted for 63.01% of total fixed asset investment, 6.41 and 10.32 percentage points higher than 2002 and 2001, respectively, representing an average annual growth rate of 5.16 percentage points. Urban employment in non-public sectors took up 73.18% of the total urban employment, 2.09 and 5.09 percentage points higher than 2002 and 2001 respectively, representing an average annual growth rate of 2.55 percentage points. Tax revenues from non-public sectors made for 71.76% of the total tax revenues of the country, up by 3.18 and 7.34 percentage points from 2002 and 2001, respectively, representing an average annual growth rate of 3.67 percentage points. The share of imports and exports by non-public sectors in China’s total import and export trade was 67.06%, 5.29 and 9.58 percentage points higher than 2002 and 2001 respectively, achieving an average annual growth rate of 4.79 percentage points. -- Greater market access for non-public sectors. After China’s accession to the WTO, with the exception of few industries explicitly closed to non-public entities (such as arms manufacturing and gold production) and a small number of industries where access requires approval, there have been no special restrictions on non-public entities. In line with China’s WTO commitments, the State opened further to foreign investors such sectors as

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banking, insurance, securities, telecom, tourism and intermediary services. With eased market access, private businesses started to enter heavy industry and sectors in the tertiary industry, such as financial services, education and culture, urban infrastructure and public utilities. In 2003, another 41,081 foreign invested enterprises (FIEs) including those with investment from Hong Kong, Macao and Taiwan were established in China, up by 20.22% and 57.16% on 2002 and 2001, respectively, representing an average annual growth rate of 25.36%. A total of USD 53.505 billion in foreign investment was utilized, up by 1.44% and 14.14% over 2002 and 2001, respectively, or 6.83% in terms of average annual growth rate. -- Enterprise ownership and equity structure were further diversified. Diversification of SOE ownership has been achieved mainly by transforming SOEs into limited liability or shares limited companies with diversified equity structure as well as joint ventures. In 2003, there were 1,619 State-owned large enterprise groups among which 1,212 saw their parent companies restructured with corporate system, or 74.86% of the total. For 749 or 61.80% of the restructured groups, the parent company was transformed into a wholly State-funded company, down by 1.44 and 0.93 percentage points on 2002 and 2001, respectively. Parent companies in 463 or 38.20% of them were transformed into non-wholly-State-funded companies, up by 1.44 and 0.93 percentage points on 2002 and 2001, respectively. The percentage of restructured companies over which the State has absolute control was dropping while the percentage of companies where the State exercises a relative control was rising. Compared with unlisted companies, there was even a clearer pattern of equity diversification in listed companies. In 2002 through 2003, the number of companies in which the State gave up all its shares rose from 23 to 61. Companies with no State equity as a share of all listed companies rose from 18.96% to 23.5%, a 4.54 percentage point increase. The percentage in all listed companies of companies in which the State takes a non-controlling position rose by 0.92 percentage points, from 12% to 12.92% while the percentage of State-controlled companies dropped by 5.46 percentage points, from 69.04% to 63.58%. -- Market-based production and operations by enterprises. As far as financing is concerned, the SOEs mainly rely on their own funds, bank loans, bond or equity issue for operational funds. In 2001 through 2003, their equity financing on the stock market rose from RMB 125.234 billion yuan to RMB 135.775 billion yuan, representing an average annual growth rate of 4.12%. Corporate bond issue rose from RMB 14.7 billion yuan to RMB 35.8 billion yuan, by an annual average of 56.06%. Added bank loans rose from RMB 1,243.941 billion yuan to RMB 2,770.230 billion yuan, by an annual average of 49.23%. In 2002, the State investment continued to withdraw


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from under-performing SOEs with merger & acquisition, bankruptcy and writing-off of non-performing loans focusing on military, non-ferrous, coal and defense logistics enterprises as well as local SOEs that urgently needed to be closed down or liquidated. In 2002, a total of 533 SOEs were closed down or went bankrupt. In 2003, the figure rose to 3307. With regard to SOEs in ordinary competitive sectors, the non-SOEs, private citizens and overseas investors were encouraged to participate in their restructuring and transformation by way of State equity transfer and were allowed to take a controlling position. Many SOEs including some large-sized SOEs were thus transformed into non-State controlling companies with a diversified ownership structure.

3.3 Notably higher level of market orientation for factors of production
-- Funds allocation is increasingly market-based. In 2002 and 2003, channels for enterprise project financing were widened further to allow enterprises of different kinds, the private businesses in particular, to raise funds by way of equity financing. A multi-tiered capital market featuring various instruments complementing each other was gradually taking shape. The number of private businesses going listed on the securities market was on the increase. Foreign investment, FDI in particular, had continued to grow rapidly in scale. In 2003 the foreign investors contributed to 74.8% of the total combined registered capital of all foreign funded enterprises, up by nearly 4 percentage points over 2001. In 2002 through 2003, the amount of funds raised overseas and their share in the utilized foreign investment were both rising. Particularly the share went up to 12.07% in 2003, 7.9 percentage points higher than 4.17% of 2002, which reflects the improvement in the international securities markets as well as international investors’ recognition of the strengths of China’s domestic enterprises. China’s bond market has been developing steadily. Government bonds and policy financing debt rose by RMB 523.77 billion yuan in 2002 over 2001 and by RMB 486.34 billion yuan in 2003 over 2002. The balance of bonds as a share of GDP rose by 2.87 percentage points and 1.16 percentage points in 2002 and 2003, respectively over the previous year. The expansion in the balance of bonds, the expansion in government bonds and policy financing debt in particular, shows the market-oriented development of China’s capital market in terms of the means and size of financing as well as the constant improvement in the level of securitization in China. -- Steady improvement in the market conditions for labor mobility and

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wages determination. The right of employment of SOEs was further consolidated. Labor contract coverage in large-sized enterprise groups reached 87.89% and 94.20% in 2002 and 2003, respectively, expanding by a big margin over 2001. By yearend of 2003, there were 2.6 million layoffs from SOEs, 2.55 million less than 2001. Non-SOEs enjoy the same treatment as SOEs in terms of employment policies. By the end of 2003, employment with non-SOEs accounted for 66.3% of total urban employment. Starting from 2002, various provinces, municipalities and autonomous regions launched reform of the residence registration system with the focus on “canceling quota restriction and implementing access system” and “breaking down the urban–rural boundary and integrating urban–rural residence registration system”, which has helped to facilitate the orderly flow of labor. Inter-regional and cross-sectoral labor mobility has accelerated. The by-region “difference of permanent residents and registered residents”-to-“registered residents” ratio rose from 3.4% in 2001 to 3.6% in 2003. The “inter-sectoral job reallocation variance ratio” rose from 4.1% in 2001 to 6.3% in 2003. In 2002 and 2003, governments at various levels made great efforts in promoting the establishment of the collective bargaining system in foreign funded enterprises. In 2003, the system was introduced in as many as over 290,000 enterprises, 270,000 more than in 2002. The number is still increasing rapidly. -- Market-based land transaction system has hit a fast-track. The policy for developing a land market featuring “bidding, auctioning and listing” was implemented. By the end of 2003, the system for transferring land use right by bidding, auctioning and listing had been introduced in all of China’s thirty-one provincial regions. Remarkable progress was made in 2003 in building a market-based land transaction system. A comparison of the State-owned land supply transfer in 2001 through 2003 shows that the share of land use granted by government declined from 41.4% to 22.8%, down by 18.6 percentage points. Paid transfer of land use right rose by 17 percentage points from 50.6% to 67.6%. The share of land use transfer by bidding, auctioning and listing rose by 20.7 percentage points from 7.3% in 2001 to 28% in 2003. As far as the types of land are concerned, land transferred with payment was used for building villas/high-class apartments, warehousing, ordinary commercial housing and commercial and services facilities, accounting for 97.5%, 85.4%, 81.1% and 72.8% of the land supplied under the categories, respectively, all of which are much higher than the national average of 67.6%. The share of land transferred by “bidding, auctioning and listing” as a percentage of total land supplied in the above categories was also much higher than the national average. Land transferred by grant was mainly used for public purposes, such as transportation, public buildings and


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A fairer trade environment

-- Major progress made in the reform of the trade administration regime. The Ministry of Commerce (MOFCOM) was established and charged with the administration of domestic and foreign trade and international economic cooperation, which would help to speed up the integration of domestic and foreign trade. A pattern featuring diversified trade operators came into being. The process of reforming the trade-related approval system was hastened. A total of 46 items requiring administrative approval were cancelled in 2002, including the examination of applications for increasing registered capital in foreign funded projects, approval of application for trading rights and labor services projects by commercial and materials enterprises and approvals for the production and trading in certain specific products. In 2003, MOFCOM issued the Views of Guidance on Expanding Market and Stimulating Domestic Demand, which proposed to further deepen the reform of the commodity circulating system and actively develop various kinds of modern means and forms of circulation such as agency and franchised operations. -- Domestic market was opened further. An economic and trade legal framework that meets the needs of a market economy and conforms with the WTO rules has taken shape. Pursuant to its WTO accession commitments, China has opened further its market, eased up market access and allowed foreign businesses to set up cooperative firms engaged in commission agency, wholesaling, retailing and licensed operations and services and deal in the import, wholesaling and retailing businesses of products other than tobacco and its products, edible salt, publications, medicines, pesticide, agricultural film, fertilizers, crude oil and finished oil products. Foreign investors, large transnational corporations in particular, started to flock into China’s domestic market. About 40 of the top 50 retailers in the world have entered into China’s market. The net sales of foreign funded retailers as a share of the total retail sales in 2003 already reached 6.92%. -- Process of liberalizing import and export trade was accelerated. Since 2002, China’s foreign trade has seen dramatic increases. In 2003, China’s imports totaled USD 412.84 billion, taking China up to the third place in the world, after the US and Germany. Since 2002, China has continued to make deep cuts into its tariffs and taken steps to eliminate non-tariff measures in the area of trade in goods. The arithmetic average tariff rate dropped to 11% in 2003. As for non-tariff measures, China removed in January 2002 quota, license or designated bidding management over eight categories of products,

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namely, grains, wool, cotton, acrylic, polyester, PET, fertilizers and certain tires. China cut the number of products under import license management from 26 to 12 in 2002 and then to 8 in 2003. In 2003, China cancelled all non-tariff measures over agricultural products. In terms of improving the order of import and export trade, China, in accordance with WTO rules, has set up a state trading regime and designated trading regime. Currently there are ten categories of imports that fall under state trading and five categories under designated trading. There are 13 categories of exported products under state trading and 2 under designated trading. Since 2002, China has fulfilled its WTO accession commitments in a number of service sectors, such as business services, telecommunications, construction, distribution, financial, tourism and transport, and opened them further to the outside world. -- Composition of trading entities is further diversified. Foreign trading rights have been made widely available and trading entities have become more diversified. Since 2002, SOEs have taken a decreasing share in import and export trade while foreign invested enterprises and private enterprises have seen their share rising rapidly. SOEs’ share dropped from 42.52% in 2001 to 32.95% in 2003 while that of foreign invested enterprises went up from 50.83% in 2001 to 55.48% in 2003, making them the leading force in China’s foreign trade. At the same time, private businesses have emerged as a new growing force in trade. Their share in total import and export trade in 2003 grew by 307.69% over 2001. -- The legal framework of market economy has been further improved. Laws promulgated or implemented during 2002 and 2003 include: (1) with regard to government administration, the promulgation of the Law of PRC on Government Procurement and the Law of PRC on Administrative Approval; (2) with regard to foreign trade, the implementation or promulgation of the Regulation of PRC on Import and Export Administration of Goods, Regulation of PRC on Import and Export Administration of Technologies, Provisional Measures on Establishment of China-Foreign Joint Venture Trading Companies, Regulation of PRC on Import and Export Tariffs, Customs Measures for Determining Customs Value of Imported and Exported Goods and the Law of PRC on Inspection of Imported and Exported Goods; (3) with regard to foreign investment, the promulgation or revision of the Rules for Guiding Foreign Investment Destinations, Industrial Catalogue of Guidance for Foreign Investment, Provisional Measures on Investment in Domestic Securities by Qualified Foreign Institutional Investors, Circular on Relevant Issues Concerning Transfer to Foreign Investors State-Owned Shares and Legal Person Shares of Listed Companies, Provisional Rules on Restructuring SOEs with Foreign Investment, Provisional Rules on Merger & Acquisition of Domestic Enterprises and Rules on Foreign Investors


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Establishing Investment Companies; (4) with regard to protection of intellectual property rights, revisions to the Regulation for Implementing the Law of PRC on Trademarks, Regulation for Implementing the Law of PRC on Copyright, Regulation of PRC on Customs Protection of Intellectual Property Rights, the promulgation of Measures of Implementation on Administrative Penalties for Copyright Violations, Rules on Certification and Protection of Famous Trademarks, Measures on Compulsory Licensing of Patents and Measures on Administering Patent Agency; (5) with regard to banking and insurance, revisions to the Law on People’s Bank of China, Law on Commercial Banks and Law on Insurance, the promulgation of the Law of PRC on Securities Investment Funds, Law of PRC on Regulation of the Banking Industry and Rules on Solvency Margin and Regulatory Targets for Insurance Companies; (6) with regard to fair trade, the promulgation of the Regulation on Safeguard Measures, the Regulation on Countervailing Measures and the Regulation on Antidumping Measures, Rules on Industrial Injury Investigation and Determination of Safeguard Measures, Rules on Industrial Injury Investigation and Determination of Countervailing Measures and Rules on Industrial Injury Investigation and Determination of Antidumping Measures. -- Intermediary organizations have grown stronger. The size of the intermediary sector in China continued to expand in 2002 and 2003. They operated more professionally and by the market rules. By 2003, there were 25,109 industrial associations nation-wide, in which 362 were national associations in the fields of industry and commerce organized by the Government and they, as a whole, had dwindled drastically in size. The number of local industrial associations and chambers of commerce established voluntarily by enterprises reached over 2,000. They were concentrated in regions where non-SOEs and private businesses had developed to an advanced degree. Insurance intermediaries were developing rapidly. By the end of 2003, 707 insurance intermediaries were open for business, up by 340% over 2002, showing a pattern of high-speed development. Intermediaries in legal and financial consultancy services grew stronger. There were over 60,000 practicing CPAs and close to 80,000 non-practicing CPAs in 2003 as well as nearly 5,000 accounting firms, all higher to varying degrees than 2002. By the end of 2003, there were 72 accounting agencies and 102 appraisal agencies qualified for handling securities. In 2003 there were 155 securities investment consultancy agencies in the country with 1,599 practicing analysts. The Chinese intermediaries in the field of legal and financial consultancy developed further and were better disciplined in 2002 through 2003.

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A more rational mechanism for determining financial parameters

-- A higher degree of monetization and financialization. In 2002 through 2003, entities on the financial market were more diversified and the money market developed further in China. Monetization and financialization are measured by the ratio of M2 and GDP (M2/GDP) and the ratio of financial aggregates and GDP (FA/GDP), respectively. In 2003, the ratio of M2 and GDP was 74.18%, 4.44 percentage points higher than 2001 and the ratio of financial aggregates and GDP was 255.57%, 22.27 percentage points higher than 2001. -- More intensified competition among the banks. The banking sector is more open to the outside world. By the end of 2003, the banking regulatory authorities of China had approved the establishment of 28 rep offices, 12 branches and 6 subsidiaries of foreign banks in China. The share of the State-owned commercial banks in the total banking assets in China was 55.5% in 2003, 5 percentage points lower than that of 2001. State owned commercial banks received 59.58% of savings in 2003, 1.4 percentage points lower than 2001. As the financial sector is more open to the outside world, competition has heated up. -- New progress was made in the reform for market-based interest rate. Since 2002, the reform for market-based interest rate in China has made marked progress. In September 2002, the interest rate reform of rural credit cooperatives on a pilot basis was expanded to cover all provinces and autonomous regions with the exception of municipalities. In December 2003, the People’s Bank of China (PBOC) decided to once again broaden the float band for the loans of financial institutions starting from 1 January 2004. The band for commercial banks and urban credit cooperatives was broadened to [0.9, 1.7] and that for rural credit cooperatives to [0.9, 2]. The band is no longer based on the ownership nature or size of the recipients. In addition to the broadened float band, a number of supporting measures have been taken to remove restrictions over the way RMB loan interest is calculated and settled and to lift the cap over interest rate for five years and longer loans. -- Restraints over RMB convertibility under capital account have been noticeably relaxed. In 2002 through 2003, China further deregulated its forex regulations over RMB under the capital account. While continuing with the policy of attracting investment, China vigorously promoted the strategy of “going global”. The IMF groups capital transactions into 43 items. According to China’s existing laws, regulations, policies and practices, the 43 items may be grouped into four categories, namely the fully convertible, basically convertible, the more restricted and the strictly controlled. Compared with 2001, the capital account became clearly more convertible. Another seven


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items were added to the fully convertible and basically convertible categories, up by 58%. The number of items under the strictly restricted category was cut from 15 to 6, down by 60%. -- The market-based exchange rate determination mechanism has taken shape. In 1994, China replaced the double-track exchange rate system of the country’s RMB yuan with a market supply-and-demand-based, unitary and managed floating exchange rate system and preliminarily established the prominent role of the market in allocating forex resources. In June 2002, the inter-bank lending business was introduced into China’s forex market. Starting from October 1, 2003, two-way transactions have been permitted on the inter-bank market, which has contributed to the convergence of the domestic and international markets and helped to further improve the RMB exchange rate regime. China took further steps in 2004 to improve its forex market by allowing more entities to participate, the China Forex Transaction Center to officially open its forex transaction business and more banks to engage in enlarged forward settlement and delivery services on a pilot basis. On July 21, 2005, the exchange rate between the USD and RMB yuan was changed to 1:8.11 and it was announced that the float band would be readjusted in light of the developments on the market and the changing economic and financial situation. Hence, the exchange rate of RMB is no longer pegged to the USD and a more flexible RMB exchange rate mechanism has taken shape. The above analyses have shown that in 2002 through 2003, major progress has been made in China’s market economy in the following five fields: rules-based government administration, liberalized economic entities, market-based reallocation of means of production, fair trade environment and rationalized financial parameters. The market economy in China has grown in greater breadth and depth, which has come as both the result of China’s faithful fulfillment of its WTO accession commitments and the logical outcome of the reform and development of China’s economic system.

4 2002−2003: Evaluation of the degree of China’s market economy development
This research team has developed a system of factors and indices for measuring market development within the context of antidumping investigations, in light of the European and American criteria for MES in antidumping proceedings, general theories of market economy and the system for measuring economic freedom, after taking into full account the state of China’s market economy. We have developed the scoring standard and index formula for

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measuring market development by drawing on the criteria of the Heritage Foundation’s economic freedom survey. On this basis, we calculated the score of market development of China for the years 2002 and 2003. To ensure the continuity and dynamic comparability of the market index, the criteria used by the Report of 2005 stays the same as the Report of 2003. By “the same”, it means in the following four ways: first, the number of indices remains 33; secondly, the 11 subsets and 5 categories on the basis of the 33 indices remain unchanged; thirdly, the method of calculation remains unchanged; and fourthly, the names of the 33 indices stay unchanged. Based on the ratings system which is still based on that of the Heritage Foundation (a band of five points, the lower the value, the higher the market development level, one being the highest, five being the lowest), we had results in terms of the variable indices, factors and overall levels.


Ratings of the indices

According to the presumed criteria for measuring market development, we rated the various indices for 2001−2003 and the results are shown in Table 1.
Table 1 Scores of the indices of market development level
Indices 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Government Consumption as Share of GDP Average Income Tax of Enterprises Government Investment as Share of GDP Transfer of Payment and Government Subsidies as Share of GDP Government Employment as Share of Urban Employment Added Value by Non-SOEs as Share of GDP Fixed Asset Investment by Non-SOEs as Share of Total Fixed Asset Investment Urban Non-SOE Employment as Share of Urban Employment Tax Revenues Contributed by Non-SOEs as Share of Total Tax Revenues Trade Volume of Non-SOEs as Share of Total Trade Volume Subsidies for SOEs Losses as Share of GDP Large SOEs’ Independence in Recruiting Executives Large SOEs’ Independence in Operations By-Region Difference Between Permanent Resident and Registered Residents as Share of Registered Residents Inter-Sectoral Job Reallocation Variance Ratio Labor Contract Coverage in Large Enterprises 2001 2 3 3 3 3 2 3 2 2 3 2 2 2 3 3 2 2002 2 3 3 3 3 2 3 2 2 2 2 2 3 3 4 2 2003 2 3 4 3 3 2 2 2 2 2 1 2 2 3 4 2


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Indices 2001 1 1 3 1 1 2 4 3 3 2 4 3 4 1 3 4 2 2002 1 1 3 1 1 2 3 2 2 3 4 3 4 1 1 3 1 2003 1 1 1 1 1 2 3 2 2 2 4 3 4 1 1 3 4

17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33

Foreign Investment, Self-Raised Funds and Other Funds as Share of the Total Fixed Asset Investment Foreign Capital as Share of the Total Registered Capital of Foreign Invested Enterprises Auctioned Urban Land Use Right as Share of Total Land Use Right Transferred Market-Based Pricing as Share of Total Consumer Retails Market-Based Pricing as Share of All Agricultural Product Purchases Market-Based Pricing as Share of All Means of Production Sales Average Tariff Levels Revenues from International Trade as Share of Total Trade Volume Closed Cases as Share of Case Initiated for Contravention of Laws and Regulations on Unfair Competition Closed Cases as Share of IPR Case Initiated Assets of Non-State Owned Banks as Share of Total Bank Assets Savings with Non-State Owned Financial Institutions as Share of Total Savings with Financial Institutions Short-Term Loans to Foreign Invested, Self-Employed and Private Businesses as Share of All Short-Term Loans Issued by Financial Institutions Average of Inflation Rates in the Most Recent Five Years Range Co-efficient of Interest Rate of One-Year Loans of Financial Institutions Unrestricted Items as Share of All Items under Capital Account Deviation Between RMB/US Dollar Exchange Rate and Monthly Average Absolute Difference of Singapore Non-Deliverable Forward (NDF)

An analysis of the 33 indices has shown that from 2001 through 2003, 19 of the indices were going up, indicating improvements in market development and 7 were going down, indicating negative impact on the market development. Among the remaining 7 indices, 5 got worse in 2002 over 2001 but improved in 2003 over 2002, and 2 improved in 2002 over 2001 and worsened in 2003 over 2002. The overall performance of the 33 indices has shown that the economy is increasingly market-oriented.


Ratings of the subsets for assessing market development

The 11 sub-sets are based on the above 33 indices and they have covered all the various aspects of market development assessment.

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Table 2 Scores of sub-sets 2002–2003
Sub-Set 1. 2. 3. 4. 5. 6. 7. 8. 9. Fiscal Burden of Government Government Intervention in the Economy Contribution by Non-SOEs Enterprise Operations Labor and Wages Capital and Land Freedom in Pricing Traded Products Freedom of External Trade Legal Protection of Fair Trade 2001 2.5 3 2.4 2 2.67 1.67 1.33 3.5 2.5 3 3 2002 2.5 3 2.2 2.33 3 1.67 1.33 2.5 2.5 3 1.67 2003 2.5 3.33 2 1.67 3 1 1.33 2.5 2 3 2.67


10. Banking and Currency 11. Interest Rate and Exchange Rate

Note: This table is compiled based on the sub-set classification of the Report and the results of Table 1.


Categories and aggregate index

The Report lists five categories of factors, namely, rules-based government behavior, liberalized economic entities, market-based allocation of factors of production, fair trade environment and rational financial parameters. These five aspects have encompassed the above 11 subsets. The score of each of the five categories is the simple arithmetic average of the scores of the subsets under the category and then the scores of the categories are added up and then averaged to get the aggregate indices of 2002 and 2003.
Table 3 Scores of categories and the overall index
Index 1. Rules-Based Government Behavior 2. Liberalized Economic Entities 3. Market-Based Allocation of Factors of Productions 4. Fair Trade Environment 5. Reasonable Financial Parameters Overall Index ble 2. 2001 2.75 2.2 2.17 2.44 3 2.51 2002 2.75 2.27 2.34 2.11 2.34 2.36 2003 2.92 1.84 2 1.94 2.84 2.31

Note: This table is compiled based on the categories classification of the Report and the results of Ta-

The results of the above tables have shown that the market index of China in 2002 and 2003 was 2.36 and 2.31, respectively on the five-point scale of


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the economic freedom index of the U.S. Heritage Foundation. To give readers both inside and outside of China a more direct understanding, we have converted the above scores based on the five-point scale into scores on the 100-point scale by dividing the 100 points into five zones, i.e., 0–20, 20–40, 40–60, 60–80, 80–100. According to the index system of the heritage foundation, 3 points and plus indicates freedom for the most part and thus are set as 60 points on the 100-point scale. On this basis, zone 1 corresponds to 5 points on the five-point scale, zone 2 to 5–4 points, zone 3 to 4–3 points, zone 4 to 3–2 points and zone 5 to 2–1 points. Clearly, the overall market indices for 2001 to 2003 fall within zone 4 (60–80 points). The indices may be easily converted into indices on the 100-point scale by interpolation, i.e., to insert a point (x, y) between point (2, 80) and point (3, 60) to satisfy the condition that (x-2)/(3-2)=(80-y)/( 80-60) which is simplified to y=120-20x. Based on this formula, the market indices for 2002 and 2003 are 72.8% and 73.8%, respectively (see Table 4).
Table 4 Overall index on two scales
Year Score on 5-Point Scale Score on 100-Point Scale 2001 2.51 69 2002 2.36 72.8 2003 2.31 73.8

This is a very important table and shows the final results of multi-layered computations. We may find from the table the concrete progress made in the market economy of China in 2002 and 2003.

4.4 4.4.1

Analysis of the changes in indices of 2002 and 2003 Dynamic comparison of the overall index

The level of market development in China continued to increase in 2002 and 2003. According to Table 4, the index went higher than 70% in 2002 and close to 74% in 2003. This is proof that the market economy in China has not only gone far beyond the critical level of 60% but also, without any doubt, made China a market economy as a developing country. At the same time, it also shows that two years after China’s accession to the WTO at the end of 2001, the market economy was growing in both width and depth, particularly in terms of providing a fair trade environment. China has, following its WTO accession, fulfilled its accession commitments and worked to promote the fair competition and development of enterprises of different own-

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ership structures. At present, non-SOEs contribute to 69% of the GDP, over 90% of the products have their prices determined entirely by the market, tariff level has dropped below the average of developing countries and China’s policies, laws and regulations on foreign trade and economic cooperation are in line with the international rules. In order to verify the accuracy of the market indices, we have compared them with the findings of some international institutions over freedom of different economies. The findings in 2000 through 2002 of the US Heritage Foundation in its Index of Economic Freedom and the Canadian Frazer Institute in its Economic Freedom of the World Report on the economic freedom of China are given in Table 5.
Table 5 Findings on economic freedom of China
Heritage Foundation’s Index of Economic Freedom Year 2000 2001 2002 Score 3.55 3.64 3.46 Ranking 127 128 112 Frazer Institute’s Economic Freedom of the World Report Year 2000 2001 2002 Before Adjustment Score 5.28 5.49 5.7 Ranking 101 100 90 After Adjustment Score 5.8 5.9 Ranking 85 84

Note: A total of 156 countries and Note: A total of 123 countries and regions were ranked regions were ranked Data source: Online information in Economic Freedom of the World: Annual Reports 2002, 2003 and 2004 at and Index of Economic Freedom 2003, 2004 and 2005 at www.heritage. org.

Table 5 has shown clearly that economic freedom of China after its WTO accession has improved notably. The findings of the Heritage Foundation indicated that China climbed 16 places in 2002 on 2001, and 10 places if measured by Frazer’s results. Such a speed of development is in keeping with that of market development index of this Report. It must be noted that both international indices were based on information up to the year of 2002 only, lagging by two years.


Dynamic comparison of the factors

Improvement in China’s market development index is reflected in various fields, which is supported by the scores of the various indices, subsets and categories given in the Report. The improvement in the overall index of 2002 and 2003 came as a result of the positive movements of most of the indices towards market orientation.


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Let’s begin by probing deeper into the eleven subsets of factors. Judging from the assessment of the eleven subsets, compared with 2001, six subsets improved in 2003, in which, the grade of “contribution by non-SOEs” improved from 2.4 to 2, “enterprises’ operations” from 2 to 1.67, “capital and land” from 1.67 to 1, “legal protection of fair trade” from 2.5 to 2, “interest rate and exchange rate” from 3 to 2.67, and “freedom in foreign trade” from 3.5 to 2.5. The level of 2 subsets remained unchanged, namely, “banking and currency” and “fiscal burden of government” which remained 3 and 2.5, respectively for the past three years. In addition, scores of two subsets deteriorated, one being the “government intervention in the economy” which went from 3 in 2001 to 3.33 in 2003, mainly as a result of the increased share of the government investment in GDP. This reflected the expansionary fiscal policy of the Chinese Government and the accelerated pace of government investment in response to the SARS epidemic. However, this was the result of short-term macro-economic policy and would not last for long. The other deteriorating factor is “labor and wages” which went from 2.67 to 3. This was mainly caused by inappropriate statistical methodologies. The “by-region ratio of the difference between permanent residents and registered population to registered population” is calculated based on the total net national change. This index declined from 2.57% in 2001 to 2.53% in 2003. However, calculated on the basis of the absolute values of provincial changes, the index has kept rising since 2001, from 3.40% in 2001 to 3.43% in 2002 and then 3.60% in 2003. Although the absolute value approach is more objective, the previous method was adopted to keep the stability of the index. The “inter-sectoral job reallocation variance ratio”, another index under the “labor and wages” subset, has a similar problem. The score was calculated based on the overall net change in the sector and thus was made lower. But if calculated based on the overall variance ratio, the value would rise from 4.10% in 2001 to 6.30% in 2003. If calculated on the basis of the overall scale, the market development level of the “labor and wages” subset would have been higher. We hold that, compared with calculation by net amounts, calculation by aggregates is more accurate in reflecting the labor flow between different regions and sectors. Therefore, we are contemplating modifying the method of calculation of the above two indices in future annual reports. An analysis of the five category-indices has shown that all factors, except for “rules-based government behavior” have improved in terms of market development and contributed to the overall market development index. The downward readjustment of the score of “rules-based government behavior” was mainly the consequence of the expansionary fiscal policy of the government and the increased government investment as a result of the SARS

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epidemic. And with changes in the economic policies, this index is expected to change significantly. Based on the above, we may reach the following conclusions: First, findings of the sub-sets and categories of market development factors in 2002 and 2003 were positive. Negative results of a small number of indices came mainly as a result of special macro-economic policy changes and different statistical methodologies. Secondly, development of the market economy has been uneven in different sectors. The fastest-improving factor is “freedom in external trade” whose score was down by one point in 2003 over 2001. “Capital and land” came second, down by 0.67 points, followed in descending order by “legal protection of fair trade”, “contribution by non-SOEs”, “interest rate and exchange rate” and “enterprises’ operations”, all of which have improved to varying degrees. If calculated based on the aggregate values of labor flow, the score of “labor and wages” would have improved by a bigger margin. Thirdly, the standstill or decline in the value of a small number of factors is quite normal and shall not be construed as indicating the deterioration of the overall market development level, as the intensity of government intervention in the economy would change with time as a result of the fluctuations in the macro-economy or certain contingencies. At the same time, there are statutory limits to government intervention. In addition, even though macro-control was strengthened in China, the overall level of market development has shown a pattern of improving.


Latest developments in China’s market economy in 2004

The facts and data in the Report of 2005 on Development of Market Economy in China were up to the end of 2003. Here we summarize as follows the latest developments in China’s market economy in 2004.


Government intervention in the economy was reduced further

5.1.1 Administration by law enjoyed all-round development and the efficiency of government services improved significantly
-- The legal framework was further improved. On 1 July 2004, the Law of the PRC on Administrative Approval was officially implemented. To better implement this law, the State Council issued the Guidelines for Implement-


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ing the All-Round Promotion of Administration by Law, which clearly provided that the objective of building a government that acts by law shall be achieved after about ten years of unremitting efforts. -- Items requiring administrative approval were cut back.

5.1.2 The government further relaxed its regulation over means of production
-- Markets of means of production were opened further to the outside world. On 30 November 2004, the State Development and Reform Commission (SDRC) and the Ministry of Commerce (MOFCOM) jointly issued the Industrial Catalogue of Guidance for Foreign Investment (revision 2004), which came into effect on 1 January 2005. The revised Catalogue, in response to the need for opening-up and attracting advanced technologies, added new industries and products that urgently need development as encouraged categories or modified the existing encouraged categories to add new contents, particularly in the fields of raw materials and basic means of production. -- The market-based coal price reform entered into a new stage of development. The Circular No. 47 issued by the General Office of the State Council in June 2004 provided that after readjustment of electricity price, price of power coal shall be negotiated between the supplier and purchaser, be it “key contract” or not. In December 2004, the SDRC issued the Circular on Establishing the Coal and Power Price Linkage Mechanism, which proposed the establishment of the mechanism linking the price of coal and the price of power along the line of “market orientation, coordination by mechanisms, price linkage and integrated regulation”. -- Market-based water price reform fully unfolded. On 1 January 2004, the Measures for Regulating the Water Supply Price of Water Conservancy Projects jointly issued by the SDRC and the Ministry of Water Conservancy entered into effect, which signified that the water supply price of water conservancy projects was incorporated into a system based on law, standards and science and that the water price reform embarked on a new stage of development.

5.1.3 Reform of the monopolistic sectors and urban utilities accelerated
-- Reform of the monopolistic sectors. Thanks to the reform of the power

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regime, power generation plants and power grids have been by and large separated and a pattern of power generating plants competing with each other came into being. The power grid in south China was established. The power markets in the northeast and east China came into simulated operations. The direct power purchase by key customers program already took off on a pilot basis. The power price forming mechanism continued to be improved. With regard to reform of the civil aviation sector, price of air cargo services is now guided instead of set by the Government. With regard to reform of the railway regulation regime, the reform of five transport enterprises with the shares system was carried out on a pilot basis, efforts to have enterprises spin off their social functions made steady progress and the program of separating the main business from the supporting business and restructuring the supporting business was launched on a pilot basis in three Railway Bureaus (or Sub-Bureaus). -- Reform of urban utilities. The State Council introduced the water price reform plan that has allowed the price mechanism to play a more prominent role in saving water and protecting water resources. The Ministry of Water Conservancy continued to improve the price determination mechanism and regulatory system of water supply by water conservancy projects. The Ministry of Construction opened further the urban public transport market. In Beijing, Hebei, Henan and Guizhou, intensive efforts were made to separate administrative affairs from enterprise functions and social affairs and to separate social affairs from enterprise functions with regard to the public utilities and to open these sectors to investment, management and operations

5.2 5.2.1

Freedom of economic entities improved somewhat Reform of SOEs has accelerated

-- Shares system reform and efforts to implement a modern corporate system continued. So far, 1464 of the 2903 State-owned and State-controlled large-sized enterprises were restructured into corporate enterprises with multiple shareholders, accounting 50.4% of the total. Reform of large SOEs with the shares system was hastened. Such Central Government controlled companies as China Shipping Containers Lines (CSCL), China Power International Holding Limited, and China Netcom (CNC) launched their overseas IPOs. A group of large companies including China Mobile, China Telecom and Wuhan Iron & Steel achieved public listing of their main business as a whole. A total of 14 Central Government controlled enterprises such as


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China National Aviation Holding Company (CNAH), Shenhua Group and Dong Feng Motor Company were restructured into limited shares companies. Bao Steel successfully took over Shanghai Baojian, blazing a new trail in transforming large SOEs in their entirety. -- Reform of small- and medium-sized SOEs deepened further. Over 80% of the small- and medium-sized SOEs in such provinces as Shanxi, Liaoning, Hubei, Hunan, Guangdong, Chongqing, Sichuan, Yunnan, Shan’xi and Ningxia were transformed. After transformation, these local SOEs diversified their ownership, changed their structure and updated the capacity of their employees, which resulted in notable improvement in economic returns.

5.2.2 Non-public owned enterprises such as the self-employed and the private businesses developed rapidly
-- The policy framework for encouraging the healthy development of non-public owned enterprises was further improved. In February 2004, the State Council formulated the Suggestions of the State Council for Encouraging, Supporting and Guiding the Development of the Non-Public Owned Enterprises Including the Self-Employed and Private Businesses. The Suggestions put forward that market access for non-public owned enterprises be eased, that their capital be allowed into industries and sectors not prohibited by laws and regulations and into those industries and sectors where foreign investment is allowed and that shares percentage restrictions be relaxed. Non-public owned enterprises shall be treated the same as all enterprises of other ownerships in terms of investment approval, financing services, fiscal and taxation policies, land use, foreign trade and economic and technological cooperation. -- The number of newly established self-employed and private businesses along with their strength increased rapidly. From January through September 2004, the number of private businesses in the country rose by 530,200 to 3,535,700, up by 17.64% over the same period last year. They employed a total of 49,069,100, adding 6,277,700, up by 14.14%. Their total registered capital added another RMB 99,750,500 yuan to RMB 4.53 trillion yuan, up by 28.25%. The number of self-employed industrial and commercial entities amounted to 23,395,500,136,400 or 0.58% less than the same period last year. Their capital totaled RMB 47,448,000 yuan, adding 5,578,100 or 13.32%. While growing quantitatively, non-public owned enterprises are extending from traditional tertiary industries such as catering and services to emerging industries such as specialty sectors and high- and new-technology

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sectors, with an increasingly salient feature of being industrialized.

5.2.3 The utilization and disposal of SOE assets were more market-based
-- The regulatory framework for SOE assets took shape. State Asset Commissions in all 31 provinces and the Xinjiang Production and Construction Corps were established. By the end of 2004, State asset regulatory bodies had been established in 203 cities, accounting for 45.3% of the total, in which state asset commissions had been set up as a separate body in 176 of them, or 39.3% of the total. The framework of law and regulations were improved further. Budgetary work of the State owned assets took off. The supervisory board of SOEs was strengthened. Some provincial State asset commissions began to experiment with combining supervisory board supervision with other means and ways of supervision. -- Market-based State owned shares transfer of publicly listed companies was promoted further. In December 2004, the Shanghai Stock Exchange, Shenzhen Stock Exchange and China Securities Depository & Clearing Corporation Limited jointly issued the Rules for the Transfer of Non-Circulating Shares of Publicly Listed Companies. The Rules provide that transfer of the shares of publicly listed companies must be made at stock exchanges and handled by the Shanghai Stock Exchange, Shenzhen Stock Exchange and the China Securities Depository & Clearing Corporation Limited. Illegal OTC shares transactions are strictly prohibited. The introduction of the Rules played a positive role in regulating transactions in State owned shares of listed companies and in promoting the market-based approach for their transfer.

5.3 Allocation of factors of productions continued to be more market-based 5.3.1 Determination of labor issues and wages was notably more market-based
-- Determination of wages at SOEs was more market-based. The State-owned Assets Supervision and Administration Commission (SASAC) introduced in June 2004 the Provisional Measures for Regulation of Remuneration of Responsible Officials of Enterprises under the Central Govern-


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ment. The Measures stipulated that the remuneration of the executives of those enterprises shall be composed of base salary, performance bonus and mid- and long-term incentives. The Measures made it clear that the remuneration must be linked with the results of performance audits and proposed specific measures for regulation and linkage of the remuneration, thus achieving substantive breakthroughs in the remuneration system reform. -- Protection of the lawful rights and interests of workers was strengthened. On 1 November 2004, the State Council promulgated the Regulation on Labor Security Supervision. The implementation of the Regulation has helped to further step up the enforcement and supervision of labor security, standardized the enforcement, protected the lawful rights and interests of workers and promoted the harmonious development of labor relations.

5.3.2 Allocation of financial resources was significantly more market-based
-- Enterprises were more actively investing and financing overseas. In September 2004, the Ministry of Commerce (MOFCOM) promulgated the Rules on Issues Requiring Verification and Approval Concerning Overseas Investment and Establishment of Enterprises which encouraged financially-sound Chinese enterprises to enhance their investment overseas. In July 2004, the China Securities Regulatory Commission (CSRC) issued a Circular on Issues Concerning Regulating the Overseas Listing of Subsidiaries of Domestically Listed Companies, which encouraged domestic enterprises to enter into the international market. By 10 December 2004, 38 listed companies had invested a total of approximately RMB 7 billion yuan overseas, up by 217% over the same period of the previous year. In addition, 2004 witnessed more large-scale overseas investment projects. Altogether, 8 projects involved the investment of more than RMB 100,000,000 yuan, twice the number of such projects in the previous year. -- Reform and opening-up continued to move forward in the securities market and developed steadily. In February 2004, the State Council issued the Suggestions on Promoting the Reform, opening-up and Steady Development of the Capital Market. In August 2004, the State Council promulgated and implemented the revised Securities Law which, in response to the ever-changing capital market, made new provisions with regard to the determination of IPO price and the issue of corporate bonds. -- The SME board was launched, expanding channels of financing. On 27 May 2004, with the approval of the State Council, the SME board was officially launched in the main board market of the Shenzhen Stock Exchange

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and the verification process of the implementation plan for the SME boards was kicked off. This was a symbol of the beginning of the process of fostering the development of SMEs with good growth potential and high technology content by making use of the capital market. On 2 June 2004, Zhejiang Xinhecheng Co. Ltd (002001) became the first company listed on the SME board. By the end of 2004, a total of 37 enterprises had raised funds at the SME board. -- The bond market had developed rapidly. The Measures for Regulating Short-Term Financing by Securities Firms, implemented in November 2004, further expanded the financing channels of securities firms, specified the issue and transaction of short-term bonds by securities firms, promoted the further development of the currency market and protected the lawful rights and interest of investors. In December 2004, the People’s Bank of China (PBOC) introduced the Detailed Rules on Examination of Inter-Bank Bonds Transactions and Circulation, which, in order to promote the issue of corporate bonds, encourages qualified enterprises to issue bonds and provides the necessary conditions for inter-bank deposit and circulation of the bonds, thus creating a development opportunity for the corporate bonds.


Process of market-based allocation of land accelerated

-- The policy environment for market-based land administration was optimized further. China introduced, on 22 October 2004, the Decision of the State Council on Deepening Reform and Tightening Land Administration, a landmark document on administration of land resources after China’s accession to the WTO at the end of 2001. The Decision set out clear provisions for promoting market allocation of land resources, thus eliminating at the institutional level the artificially lower price of land use in the market and the “hidden land market” and reinforcing the market-based pricing mechanism for land transactions The “bidding, auction and listing”-based land transaction system was fully implemented and land transactions became more market-based. In March 2004 the Ministry of Land Resources and the Ministry of Supervision jointly issued a circular that required that by 31 August 2004 all issues left over from before the implementation of the Rules on Transfer the State-Owned Land Use Right by Bidding, Auction and Listing must be resolved. This meant the end of the model of for-profit land transfer by agreement and the bidding, auction and listing system, a fully market-based land transaction system, was thus fully implemented.


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Notable improvement in trading environment

5.4.1 Freedom in conducting foreign trade would be noticeably improved
-- Further cuts in tariff rates. Since 2004, China’s average tariff level in trade in goods dropped progressively from 15.3% at the time of China’s WTO accession to 10.4%. The average tariff level for industrial products in particular dropped from 14.8% to 9.5% and that for agricultural produce from 23.2% to 15.6%. Non-tariff measures were reduced further too. By the end of 2004, the import quotas and licensing requirement for 342 of the 377 committed tariff lines of products had been cancelled in successive stages or transformed into tariff quotas or automatic import licenses in conformity with the WTO rules. Import quotas and licensing requirements for the electro-mechanic products (automobiles and their key components) under the remaining 35 tariff lines were also cancelled as of 1 January 2005. -- Trading rights were fully opened up. The newly revised Foreign Trade Law explicitly replaced the requirement for approval to engage in foreign trade with a filing requirement and removed requirements with regard to operation qualifications. Starting from 1 July 2004, approval was not needed for any foreign trade entities and only filing for registration was required. Individual citizens, after fulfilling statutory procedures, may also engage in foreign trade. From 1 July to 1 December 2004, a total of 28,387 foreign trade operators filed for registration, in which 26,729 were domestic enterprises, 348 were enterprises with investment from Hong Kong, Macao and Taiwan, 972 were foreign-invested and 338 were self-employed. -- The legal framework for foreign trade regulation was improved further. The Standing Committee of the Tenth National People’s Congress (NPC) passed the revised Law of the PRC on Foreign Trade. The revised law placed a special emphasis on the important role of the Government in foreign trade regulation, e.g., in terms of intellectual property protection, foreign trade investigation and trade remedies, establishing a public information services system for trade, aggravating penalties for violations and building a surveillance and monitoring system for domestic and international markets. All this made clearer the important responsibilities and orientation of the Government in foreign trade and gave full expression to the important role of the Government in appropriately participating in foreign trade regulation.


Intermediaries have enlarged constantly in scale and coverage

-- Opening of the intermediaries market was greatly accelerated. The

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Ministry of Commerce (MOFCOM) issued in January 2004 the Provisional Rules on the Establishment of Foreign Invested Conference and Exhibition Companies, which encourages foreign investors to set up within China foreign invested conference and exhibition companies. The Measures for the Regulation of Representative Offices in China of Foreign Insurance Institutions that went into effect in March 2004 placed the opening of the insurance intermediary market on a clearer and rules-based path. Regulations issued in 2004 that involved the opening of intermediary market also covered such areas as cargo agency, auction houses, advertisement agency, shipping agency, trademark agency and goods sales agency and brokerage. -- Intermediaries grew rapidly in scale. By now non-Government groups have come to form a nation-wide system that covers a full range of forms, levels and areas of social life. By the end of 2004, non-Government groups of various kinds in China numbered over 280,000 in which nearly 150,000 were social groups, up by 5.4% over the previous year, 133,000 were non-enterprise entities, up by 6.7% over the previous year and 902 were foundations.

5.4.3 The legal framework for market economy in China was improved further
-- With regard to the protection of private property, the Second Session of the Tenth National People’s Congress (NPC) adopted the Amendment to the Constitution of the PRC on 14 March 2004, which provides that the lawful private property of the citizens is inviolable. The State protects the private property and the right to inherit of the citizens according to law. Out of need for public interest, the State may take or use according to law the private property of citizen, and make compensation. The above clauses at the constitutional level provided for the private property of citizens and greatly improved the private property protection system in China. -- In terms of financial law, the State Banking Regulatory Commission promulgated in 2004 the revised Detailed Rule for the Implementation of the Regulation of the PRC on Foreign Invested Financial Institutions, which was officially implemented on 1 September 2004. Its promulgation marked a new step in the process of the opening of China’s banking sector and regulation of foreign invested financial institutions. -- In terms of foreign trade law, the Standing Committee of the Tenth National People’s Congress (NPC) adopted the revised Law of the PRC on Foreign Trade on 6 April 2004, which came into effect on 1 July 2004. Revisions mainly fall within the following three areas: modifying provisions in


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the existing Law on Foreign Trade that were not in conformity with the WTO rules; providing for the mechanism and procedures for implementing China’s rights as a WTO Member in accordance with China’s accession commitments and WTO rules; and revisions made in order to adapt the existing Law on Foreign Trade in light of the developments since it came into force and the need for promoting the healthy development of foreign trade.

5.5 5.5.1

The banking sector is steadily more market-based Competition among financial institutions continued to intensify

-- Reform of State-owned commercial banks moved ahead. On 26 August and 21 September 2004 the Bank of China (BOC) and the China Construction Bank (CCB) were successively transformed into limited shares companies where the basic framework of modern corporate governance was established. In the year 2004 the Industrial and Commercial Bank of China (ICBC) and the Agricultural Bank of China (ABC) also made great efforts in improving operation institutions, stepping up internal reforms, improving risk management and improving profitability, laying the groundwork for their reform with shares system -- The share of the assets of non-State owned commercial banks continued to rise. The share of the assets of State owned commercial banks in the combined assets of all financial institutions dropped from 56.1% at the end of the third quarter of 2003 to 54.1% at the end of the third quarter of 2004. During that period, the total assets of State-owned commercial banks rose by 8.9%, while 11 shares commercial banks rose by 21.7%, urban commercial banks by 17.3%, foreign invested banks by 51.8%, urban credit cooperatives by 19.5% and rural credit cooperatives by 15.5%.


Market-based interest reform registered remarkable progress

On 1 January 2004, the People’s Bank of China (PBOC) lifted the upper limit of the float band of the lending interest rate of commercial banks and urban credit cooperatives to 1.7 times the base rate, that of the rural credit cooperatives to two times the base rate and lifted the restrictions on the way the lending interest rate is determined and how the interest is settled. On 25 March of the same year, PBOC announced the float of the re-lending interest rate. On 29 October, PBOC announced the lifting of the upper limit of the

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lending interest rate of commercial banks, that the interest rate of both urban and rural credit cooperatives was enlarged to 2.3 times the base rate and that the downward float system for RMB deposit interest rate be implemented. This marked another important step in the process of steadily moving the market-based interest rate forward and would help the lending interest rate to better cover the risk premium, ease the difficulty facing SMEs in securing loans and at the same time create the conditions necessary for financial innovations.


The financial sector was opened further to the outside world

The newly revised Detailed Rules for the Implementation of the Regulation on Foreign Invested Financial Institutions that officially came into effect on 1 September 2004 relaxed further the market access standards for foreign invested banks. By the end of December 2004, foreign banks had set up a total of 211 for-profit entities in China, in which there were 167 branches, 14 foreign invested legal person entities and 220 representative offices. A total of 111 foreign invested banks had been licensed for RMB business, 61 had been licensed for RMB business of domestic enterprises, 13 had been permitted to launch online bank services, 33 had received derivatives license and five had been approved as depositors of QFII. Permitted to provide over 100 services, foreign invested banks had USD 67.8 billion dollars in combined assets in China in 2004, up by 37% over the year 2003. Their foreign exchange lending accounted for 18% of all lending by financial institutions in China. Their cumulative profits reached USD 282,000,000 dollars in 2004.


Level of RMB convertibility increased constantly

On 16 April 2004, the State Administration of Foreign Exchange (SAFE) issued the Circular on Issues Related to the Adjustment of Standards for Determining Limits of Foreign Exchange Accounts under the Current Account, which increased the foreign exchange retention ratio of foreign exchange accounts under the current account from 20% of the foreign exchange income under the current account of the previous year to 30% or 50%. On 26 May 2004, the SAFE issued the Circular on Improving the Examination of Foreign Exchange Settlements under the Capital Account by Foreign Invested Enterprises (FIEs) and the Regulation over the Registration of Their External Debt, which improved regulation in terms of implementing the for-


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eign exchange payment and settlement system and improving foreign exchange settlement of FIEs under the capital account as well as in terms of strictly administering the regulatory policies regarding the external debt incurred by FIEs. On 16 November 2004, the PBOC issued the Provisional Measures on Foreign Exchange Sale and Payment for Outward Transfer of Private Property, which eased, starting from December 2004, restrictions over the outward transfer of lawful assets of emigrants by allowing individuals to take the principal of and returns on their property and their assets out of China in the form of cash in foreign exchange.

6 6.1

A general analysis of twelve key questions concerning market economy Degree of convertibility of RMB

During 2002 and 2003, the policy regarding foreign exchange under the current account was improved further and the degree of convertibility under the capital account continued to increase.

6.1.1 RMB under the current account has already achieved complete convertibility
-- Foreign exchange policy of the current account was improved further. After achieving free convertibility, China focused on authenticity checking in regulating foreign exchange under the current account by mainly relying on post-event supervision and indirect management. In September 2002, China implemented the second phase of reform in the foreign exchange accounts under the current account, merging the settlement account and special account into foreign exchange account under the current account, applying further the same policy towards the opening of foreign exchange account by domestic and foreign invested enterprises, simplifying the clearance procedures for import and export transactions, standardizing policy on non-trading foreign exchange sale and payment, increasing the foreign exchange limit for residents, establishing a regulatory system for foreign exchange settlement and sale business of banks and thus greatly improving the foreign exchange regulation and services. -- Efforts were made to foster the foreign exchange market and steadily advance the process of RMB convertibility. The scope of forward foreign exchange settlement and sales business on a pilot basis was expanded to

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cover more market risk management instruments. Starting from 1 October 2003, two-way transactions were instituted on the inter-bank foreign exchange market. At the same time, forward foreign exchange settlement and sale business was promoted.

6.1.2 Convertibility of RMB under the capital account increased significantly
-- Efforts were made to steadily move forward the process of convertibility of the RMB under the capital account. Starting from the year 2002, regulation over the source of overseas investment and the requirement for bond deposit for repatriation of overseas investment profits were relaxed further. Restrictions over purchase of foreign exchange for advance servicing of domestic foreign exchange loans and external debt and over the conversion of external debt into loans were lifted. Procedures for examining foreign exchange loans issued by foreign invested banks in China were simplified, examination of the sale of foreign exchange as capital fund under the capital account and procedures regarding registration, account and servicing of principal and interest for foreign exchange loans in China are now directly handled by qualified designated foreign exchange banks and a Circular On Issues Concerning Improving Regulation of Foreign Exchange in Foreign Direct Investment. The QFII was implemented on a full scale in 2003 and by the year’s end 12 overseas institutions were approved as QFIIs. -- Number of regulated items under the IMF classification decreased gradually. Among the 43 capital transaction items under the IMF classification, 20 or 46.5% were completely convertible or basically convertible (subject to registration or approval) by the end of 2003.


Convertibility of RMB will accelerate

-- The issue of convertibility of a country’s currency must be put in perspective. International experience has shown that complete convertibility of the capital account would require such external conditions as a stable macro-economic environment, robust macro-mechanisms, a healthy financial sector, effective financial supervision and a favorable international environment. Therefore, even developed market economy countries would exercise a certain degree of regulation over the capital transactions. -- The process of RMB convertibility will gradually accelerate with changes in the external conditions. Following the principles of incremental-


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ism, emphasizing planning and coordination, proceeding from easier to more difficult tasks and leaving sufficient room for maneuver, the Chinese government has been opening the capital transactions in a phased and selective manner. Restrictions were eased first on the inflow side and then on the outflow side. Long-term capital movements were opened up before the short-term movements. Restrictions were lifted over financial institutions before non-financial institutions and residents. Deliverable transactions were allowed first and then the non-deliverables.


Independence of financial sector

During 2002 and 2003, the reform of China’s financial sector accelerated, resulting in greater market orientation and independence.

6.2.1 The legal framework that ensures the independence of the financial sector was established
-- The relevant articles in the Law on the People’s Bank of China clearly set forth the independence of the central bank in terms of policy-making, funds and financials. The Law on Regulation of the Banking Sector promulgated in December 2003 provides that the China Banking Regulatory Commission (CBRC) regulates independently and according to law financial institutions including the banks and their business activities. The General Rules of Loans and the Law on Commercial Banks provide that the commercial banks shall operate under the principles of safety, liquidity and earnings and do so independently, bear the risks, be responsible for profits and losses and exercise self-discipline.

6.2.2 The commercial banks were more independent in terms of pricing and making business decisions
-- Reform for market-based interest rate provided China’s banking sector with autonomy in pricing. Since 1996, the inter-bank rate, securities repurchase rate, rediscount rate and the rate of state bonds and policy financial bonds were deregulated successively and the float band and coverage of loan interest have been expanded on a number of occasions. Towards the end of 2003, the Central Bank expanded further the float band of loan interest and allowed the interest of deposits to move downward. The float band of loan

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interest has met fully the needs of commercial banks and has at the same time helped financial institutions to improve their operations and management, the internal pricing and risk management mechanisms. -- The shares system reform enhanced the independence of the commercial banks in their decision-making process. In December 2003, the Bank of China and the China Construction Bank started shares system reform on a structure of modern commercial bank. So far the two banks have finished asset reevaluation conducted by international accounting standards and implemented reforms to improve the governance structure. Shares system reform of other State-owned commercial banks is also proceeding steadily. Such reform has created conditions necessary for strengthening the independence of the commercial banks in issuing loans. -- The commercial banks follow an independent policy of making loans. Under the Law on Commercial Banks, various kinds of commercial banks no longer provide any enterprise or individual with policy loans or issue government guidance loans and thus have become truly market entities. The General Rules of Loans prohibits exemption of loan repayment without approval of the State Council. Meanwhile requirements by commercial banks for issuing loans for different types of enterprises are uniform and SOEs no long enjoy any privilege in terms of bank credit.

6.2.3 A pattern of competitive and pluralistic financial sector has been formed
-- The commercial banks are engaged in heated competition with each other. By the end of 2003, there were a total of 35,498 financial institutions in China’s banking sector, in which only four were State-owned commercial banks. The combined assets and balance of deposits and loans of shares limited commercial banks and urban commercial banks have increased notably as a share of the total with their share in assets rising from 8.56% in 1995 to 21.1% in 2003. -- Foreign invested banks accelerated their entry into China’s banking sector. They are involved in expanded financial and geographical areas. By the end of 2003, foreign invested banks in China numbered 84 with total assets of USD46.6 billion, up by 36% over the year of 1998.

6.3 The extent of freedom of employees in their collective bargaining with employers over wages
During 2002 and 2003, reform for market-based labor and wages systems


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made major progress. The incidence of collective wages bargaining increased dramatically.

6.3.1 China ranks roughly in the middle in the world’s line-up in terms of government regulation of wages
-- According to Canadian Frazer Institute in its Economic Freedom of the World Report 2004, the score of China under “regulation of the labor market” ranks 62nd place among 95 countries surveyed, at par with Lithuania, Brazil and Belgium.


Supply and demand of labor is market-based

-- The workers enjoy a relatively sufficient freedom in choosing their jobs. The Law of the PRC on Labor provides for the right of the worker to equal employment and choosing jobs and such right is reflected in the law’s implementation. At present, university graduates and newly added labor force in urban areas are employed on market terms. All discriminatory restrictions on employment of rural labor force in urban areas have been eliminated and the free flow of labor from rural to urban areas is accelerating. -- Enterprises of different types recruit independently. Recruitment by non-SOEs has been market-based from the very beginning. By the end of 2002, employment by non-SOEs accounted for as high as 68% of the total urban employment. With the reform of the SOEs and the increasing popularity of labor contracts, SOEs have come to enjoy greater independence in terms of recruitment. They hire and fire employees in light of the market and their own performance. -- Major progress was made in building the labor market. The information network of the labor markets has been completely established. Intermediary agencies in the labor market have grown rapidly. The wages guideline system had been set up in 29 provinces, autonomous regions or municipalities in China by the end of 2002.

6.3.3 The equal wages consultation system between the employer and the employee was forcefully promoted
-- The wages consultation and negotiation system has been established. Such a system is not only one of the means for setting the wages for labor,

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but also a mature practice of the market. In 2000, China promulgated the Provisional Measures on Collective Wages Bargaining, which clearly stipulated the wages consultation and negotiation mechanism between the employee and the employer and further clarified the wage setting by consultation system. By the end of 2003, the collective wages bargaining system was established in nearly 300,000 enterprises in China. Governments at local levels are forcefully promoting the implementation of this system. -- The lawful rights and interests of the employee are protected. The workers may join labor unions according to law to safeguard their own lawful rights and interests. China has also, according to the international practice, established and improved the minimum wages standard so as to protect the most fundamental and reasonable rights and interests of the employee. The workers have their rights awareness constantly reinforced in handling their labor disputes with the employers and the results of the disputes are increasingly in their favor.


The extent to which foreign investment is allowed into China

During 2002 and 2003, the freedom with which foreign investment entered into China was greatly enhanced.

6.4.1 Blanket elimination of restrictions over the establishment of foreign invested enterprises (FIEs)
-- Restrictions were gradually relaxed. China’s law contains no discriminatory provisions for the amount of registered capital by foreign investor(s) in a FIE. Over the past two years, China’s legislature revised such basic laws governing direct foreign investment as the Law on China-Foreign Equity Joint Ventures, the Law on China-Foreign Cooperation Ventures and the Law on Wholly Foreign Owned Enterprises and their detailed rules of implementation and thus reaffirmed protection of the rights and interests of foreign investors. -- FIEs are allowed to merge with or acquire SOEs. China introduced in November 2002 the Circular on Issues Concerning Transfer to Foreign Investors of the State Owned Shares and Legal Person Shares of Listed Companies and the Provisional Rules on Reorganization of SOEs with Foreign Investment (effective 1 January 2003). FIEs were allowed to merge with or acquire Chinese enterprises on the capital market of China and both foreign investors and enterprises with foreign investment may become a party to the


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merger or the acquiring party.


FIEs have full access to the various fields

-- Fields accessible to foreign investment were enlarged. At present, with the exception of a few sectors such as weapons and gold production, which are explicitly off limits to non-SOEs or which require approval for entry, there are no special restrictions for FIEs and their participation is even encouraged by the Government policy. The revised Industrial Catalogue of Guidance for Foreign Investment that took effect in 2002 listed 262 sectors for which investment is encouraged, up from 186, and 75 sectors where investment is restricted, down from 112, showing a clearly higher degree of opening-up. -- During 2002 and 2003, foreign investment in various industries increased. The highest growth was seen in the transportation sector, 26.29% in average annual growth rate, followed by the banking and insurance sector, 25.97% in terms of the average annual growth rate of the amount of foreign investment. The banking and insurance sector also saw high growth in the number of enterprises, the average annual growth rate for the two years being 30.45%. At present, direct foreign investment in China has involved a wide range of areas, covering almost all sectors of the three industries. -- Foreign investment in China will show an even stronger momentum. As the transitioning period for China’s WTO accession draws to an end, the Chinese Government will continue its positive approach towards foreign investment. The investment environment in China has continued to improve and the existing FIEs are now capable of expanding further in China. All this will help to attract more investment into China.

6.5 The extent of government ownership or control over means of production and the enterprises
After over two decades of development, Chinese markets of means of production have achieved diversity in market entities and the pricing and trading have become market-based.


Supply of means of production is market-based

-- Market entities in the field of the production of means of production are

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diversified. Of the 42 categories of commonly-used means of production excluding land, the share of SOEs exceeds 50% only in four categories, namely, water, power, heating and fuel gas, while private businesses and enterprises of other ownership structures produce over 50% of the remaining 38 categories. From 2002 to 2003, the share of SOEs continued to drop. -- Market entities in the field of circulation of means of production are also diversified. In the case of minerals, construction materials and chemical wholesale, which sell mainly means of production, SOEs accounted for only 26.46% of all the enterprises in the industry in 2003 while enterprises of other ownership types such as FIEs and private businesses took up 73.54%. -- Direct intervention by the Government in the producers and sellers is eliminated. This has been achieved by the following three ways: first, by restructuring the SOEs and attracting investment by private businesses and FIEs so as to diversify the market entities; second, by establishing and improving the modern corporate system in the SOEs and replacing the traditional administrative control with a new type of “Government-SOE” asset management relationship; and third, by restricting the power of the Government with legal means.

6.5.2 The Chinese Government regulates a small number of means of production in accordance with international practice
-- The great majority of the commonly-used means of production are subject to no restriction in terms of production or pricing. By the end of 2003, of the 42 categories, production restrictions existed for only natural gas and timber, accounting for only 4.6% of the total. As for price regulation, Government pricing or Government guided pricing only apply to a small number of products such as natural gas, water, electricity, fuel gas, heating and oil products while 74.42% of the common means of production are subject to no price regulation of any form. All means of production under regulation are those with a significant impact on the bio-environment, naturally monopolistic and related to public good. -- The Chinese Government has been constantly easing price regulation over the means of production and price regulated means of production take up a very small share in the total economic aggregates. In 2003, the sales of Government-priced means of production accounted for only 9.9% of the total sales, those under Government-guided pricing accounted for only 2.7% while the market-priced reached 87.4%.


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6.5.3 The Government no longer directly intervenes in the operations of the enterprises
-- Non-SOEs operate independently and by law, free from control of the Government. Non-SOEs in China such as the equity enterprises, private enterprises and foreign invested enterprises are natural products of the market economy. Ever since their birth, they have been free from the direct control of the Government. The relationship between the Government and SOEs is one of asset management. The SOEs, as legal persons, are entitled to invest, provide guarantees and import and export products independently and free from Government intervention. -- Enterprises of various types may access means of production by way of the market without discrimination. Both SOEs and private and foreign invested enterprises must access means of production via the market, including those means of production that are under Government control. Some individual enterprises purchase raw materials at a low price as part of their normal operational tactics.

6.6 The extent of Government regulation over production volume, pricing, sales and resource allocation of the enterprises
Direct intervention by the Chinese Government in the production and sales of enterprises has been eliminated and resources are allocated by means of the market.

6.6.1 Direct Government intervention in production and sales by enterprises has been eliminated
-- Limited restriction is in place for the production and sale of only a very small number of products. Guidance plans have all been eliminated for agricultural products. As for industrial products, the State only implements guidance plans for five products, namely tobacco, edible salt, timber, gold and natural gas and all other products are produced under market conditions. -- Direct Government intervention in monopolistic sectors has also been eliminated. The Chinese Government stepped up the market-based reform of such monopolistic sectors as telecommunications, aviation, power, grain and cotton. On the one hand, market access has been made easier to allow multiple market players to compete with each other. On the other hand, the traditional administrative system has been replaced with the modern regulatory

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system under market conditions. The Government no longer intervenes in the production and sale of these enterprises.


Production and sale are priced by the market

-- The great majority of the products are priced by the market. In 1992, the Government set the prices of 5.6% and 10.3% of the total consumer retail sales and total purchases of agricultural products. The figures dropped to 3.0% and 1.9%, respectively in 2003. -- The Chinese Government exercises price regulation over a small number of products in line with the international practice. Under the Price Law of China, when necessary, the Government may set out a Government guided price or Government set price on the following five categories of commodities and services: (1) a very small number of commodities of vital importance to the national economy and people’s livelihood; (2) a small number of commodities that are rare resources; (3) commodities under natural monopoly; (4) important public utilities; and (5) important public services. -- Price regulation has been eased up further. The pricing mechanism for natural gas is moving towards a market-based one. Urban water price is to be floated. The reform for power suppliers to compete in price has continued to be deepened. The purchase price of grains and cotton is already market-based. The regulation over aviation pricing has become indirect.

6.6.3 Products and means of production are allocated by means of the market
-- The supply of products has become market-based. The production and circulation of the great majority of consumer products and means of production are now market-based. The supply and demand sides make transactions and allocate the products through the market. Even for the very small number of products under regulation, they are subject to only production volume and price regulation, not allocation regulation. Their allocation is market-based. -- The means of production must be allocated by means of the market. Land transactions are much more market- and rules-based. Bidding, auctioning and listing for transfer have become the main models of transaction. The market has played a significantly greater role in determining labor and wages. Allocation of funds is much more market-based too with the domes-


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tic loans and self-raised funds taking up a rising share of the total national investment in fixed assets.


The guarantee of property rights and the law on bankruptcy

During 2002 and 2003, substantial progress was made in China in building the legal framework for the protection of property rights.

6.7.1 The property rights of China’s private businesses are protected by law
--. The law has been improved further. The Amendment of 2004 to China’s Constitution explicitly provides that the lawful private property of citizens is inviolable, further improving and developing the regime for protecting private property. The draft Civil Code contains a special chapter on property rights that clearly stipulates for the protection of the private property. Local regulations have been adopted in 26 provincial jurisdictions in China that protect the property rights of private enterprises. -- Thanks to the support of law and policies, the private enterprises in China have enjoyed exceptionally rapid growth. The total wealth created by them since 1992 have been growing at an annual average rate of over 30%. In 2003 they created a total of RMB 1,896.45 billion yuan in industrial output, up by 31% over the previous year, 91.5 folds higher than the year of 1992.

6.7.2 Protection of intellectual and land property rights has been strengthened
-- The protection of intellectual property rights (IPR) has been stepped up. Over ten laws and regulations such as the Detailed Rules for the Implementation of the Law on Trademarks and the Regulation on Protection of Computer Software have been revised or promulgated since 2002, resulting in a more complete legal system for IPR protection. IPR tribunals have been established in courts at different levels. The IPR cases accepted by the judicial agencies cover all the areas under the TRIPS Agreement. A parallel two-track system for IPR protection involving enforcement by the courts and administrative agencies has been established. -- The protection of the land property rights has been strengthened. The

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Law of the PRC on Land Administration and the Provisional Regulation of the PRC on the Transfer and Reassignment of the Right to Land Use clearly spell out the protection of the land ownership and right to use. During 2002 and 2003, the Chinese Government stepped up the protection of the land use right of private businesses and foreign invested enterprises. Now the private businesses acquire the right to use of land and pay the fees in exactly the same way as other investors.

6.7.3 Enterprises of various types implement uniform bankruptcy procedures
-- A relatively complete legal system for bankruptcy has been formed in China. The Law of the PRC on Bankruptcy of Enterprises, the Law of the PRC on Civil Procedures and the Rules of the Supreme People’s Court on Certain Issues Concerning the Trial of Enterprise Bankruptcy Cases constitute China’s legal system for bankruptcy. Be it SOEs or private businesses, when meeting the statutory causes for bankruptcy, they would go bankrupt according the relevant legal procedures. In addition, the revised Law on Bankruptcy will be introduced very soon. -- In China, enterprise bankruptcy is common and normal. From 1994 through 2003, China’s court system tried a total of 61,464 enterprise bankruptcy cases, closed 50,806 such cases, representing an average of 5,080 cases annually and a case closure rate of 82.6%, in which 33,313 cases involved the bankruptcy of SOEs, accounting for 54.2% of all the cases accepted.

6.8 The implementation of the laws and regulations relating to investment and taxation
Various types of enterprises in China are subject to practically the same law in terms of investment and taxation.

6.8.1 Enterprises of different types are equal before the law on investment and taxation
-- As for taxation, apart from the tax on enterprise income, foreign and domestic funded enterprises are subject to the same law. Such laws and regulations as the Provisional Regulation on Value-Added Tax, Provisional


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regulation on Consumption Tax, Provisional Regulation on Business Tax, Law on Individual Income Tax, Regulation on Import and Export Tariff Duties and the Law on Administration of the Levy of Taxes apply uniformly to both domestic and foreign invested enterprises. -- Enterprises of different types enjoy the right to make investment-related decisions and the equal right to financing. The Decision of the State Council on the Structural Reform of Investment issued in July 2004 clearly provides that the principle of having the investors make the decision and bear the risks shall be applied to categories of projects encouraged or allowed by the State, i.e., it is up to the enterprises themselves to invest within the bounds of the law.

6.8.2 Private businesses enjoy “national treatment” for investment and taxation
-- The areas open to investment by private enterprises have been constantly broadened. In December 2002, the former State Development and Planning Commission promulgated the Rules on Promoting and Guiding Private Investment, which clarified that capital of the private businesses may be invested in all areas where foreign investment is encouraged or permitted. At present the State law and regulations impose no special restrictions over the non-SOEs with the exception of a small number of sectors such as weapons production and gold production, which must be monopolized and therefore are explicitly closed to non-SOEs. -- Private businesses and SOEs are subject to a uniform set of taxation laws and policies. The Chinese Government applies taxation laws and policies uniformly to SOEs and non-SOEs and the law is not discriminatory against private businesses in terms of taxation. The law also applies uniformly and stringently to the collection of taxes. -- The environment for the private enterprises has also been greatly improved. The improvement in the policy and legal framework has resulted in the rapid development of private companies. During the period from 1992 to 2003, the added value contributed by non-SOEs as a share of the GDP rose from 53.6% to 69%.

6.8.3 Foreign invested enterprises enjoy national treatment for investment and taxation
-- Areas open to foreign investment have been constantly broadened. The

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newly revised Industrial Catalogue of Guidance for Foreign Investment issued by the Chinese Government in March 2002 increased the number of encouraged categories from 186 to 262 and reduced the number of restricted categories from 112 to 75. It relaxed the restrictions on equity ceiling for foreign investment in enterprises. It opened up new areas to investment, listing for the first time in history such sectors as telecommunications and urban piping systems, including fuel gas, heating and water supply and sewage where investment used to be prohibited from foreign investment. It opened further such service sectors as banking, insurance and commerce. -- As far as taxation is concerned, the FIEs enjoy more preferential treatment than the domestic enterprises. In the case of income tax, the basic tax rate is 33% for domestic enterprises and 30% for FIEs. In special economic zones, economic and technological development zones and coastal economic open zones, FIEs generally enjoy a 15% preferential tax rate while domestic enterprises may enjoy the 15% rate only in high and new technology development zones. Qualified FIEs may also enjoy a two-year tax holiday followed by a three-year half-tax rate treatment starting from the first year when they turn a profit.


Company law and corporate governance

A relatively complete legal system on corporations in China has been established and corporate governance has been increasingly rules-based.


Company law is in line with that of developed countries

-- The establishment, organizational structure and the issue of stocks of companies in China are in line with those in developed countries. The Company Law of China was promulgated in 1993. As there had been no legislative practice on the company law, the Law was written by drawing upon and being compared with the successful experience of other countries in legislation. The majority of the provisions of the Law reflects the international practice. On the establishment of limited shares companies, there are no substantive differences between China and Western countries. They share the same basic legislative principles and objectives. The provisions over the organizational structure of limited shares companies are also basically the same. On the issue and transfer of shares, China’s Company Law not only follows the principle of equality among shareholders but also implements even stricter controls to protect the interests of investors.


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Corporate governance became more rules-based

-- There has been constant improvement in the legal framework. Over the past decade and more, the Chinese Government, drawing upon the internationally accepted rules, has introduced a series of important laws and regulations such as the Company Law, Securities Law, Rules on Governance of Listed Companies and the Guidelines on the Establishment of the System of Independent Directors, which have played a fundamental promoting role for improving the governance of companies in China. -- The mechanism of corporate governance was further improved. In 2003, among the large enterprise groups in which the parent company had already been restructured, 90.63% established the conference of shareholders system, 97.16% established the board of directors and 81.18% established the board of supervisors. Information disclosure of listed companies was improved too, providing greater protection for the rights and interest of investors. -- The Board became more independent. A great majority of the listed companies had independent directors and nearly half of all listed companies established special committees under the board. The right of shareholders to elect Board members was strengthened with over half of the listed companies prescribing in their Constitution the election of Board members by cumulative vote. The deliberation function of the Board was gradually improved as over 90% of the listed companies have developed rather detailed rules for Board deliberations. -- The ratings of China’s corporate governance by authoritative foreign agencies are higher than some market economy countries and regions. In the report on corporate governance across the global emerging markets issued by Credit Lyonnais Securities Asia (CLSA) in 2001, the score for China’s mainland was 49.1 (on a 100-point scale), higher than such countries as ROK, the Philippines and Indonesia. In the Standard & Poor’s report that assessed corporate governance of 1,600 listed companies across the world, the score for China’s mainland was 5 (on a 100-point scale), which was higher than Indonesia, the Philippines and Chinese Taipei, at par with ROK, but higher than ROK in terms of financial transparency and disclosure.

6.10 Law on enterprise accounting and auditing standards and its enforcement
The accounting and auditing standards of China are already in conformity with the international standards and have been effectively implemented.

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Law on accounting standards is effectively enforced

-- By the end of 2003, a relatively complete four-tiered accounting legal system with the Law on Accounting as the core had been formed in China, the first tier being the Law on Accounting, followed by the Regulation on Enterprise Financial Accounting Report, the Enterprise Accounting System and its detailed standards and the Basic Working Standards of Accounting. There are essentially no major discrepancies between the existing accounting law and regulations of China and the international accounting standards in terms of the basic accounting concepts, principles and the specific methods of determination and calculation. -- The Chinese Government has taken a number of measures to ensure the full implementation of the accounting laws and regulations. First, training and inspection have been stepped up. Financial authorities at and above the county level are in charge of regular inspections and the Ministry of Finance is responsible for organizing nation-wide enforcement inspections. Secondly, requirements for the enterprises to implement the laws and regulations have been enhanced. It is made clear that the senior management shall be responsible for the accounting of the enterprises. Book-keeping rules have been improved. Professionalism of accounting personnel has been improved, and accounting computerization and network-building have been accelerated. Thirdly, the role of CPA firms and other intermediaries as supervisors has been strengthened. -- The authenticity of the books of the enterprises is guaranteed. First, the judicial organs have been trying cases of accounting violations to safeguard the dignity of law and regulations and ensure that accounting activities and acts are conducted according to law. Secondly, administrative supervision has played its role in restraining and regulating the accounting activities and acts of the enterprises. Thirdly, CPAs are entrusted by their clients to audit the latter’s accounting statements and make auditing comments and rectify their accounting activities and acts. Lastly, the violating enterprises and intermediaries would be penalized severely.


The law on auditing standards is effectively implemented

-- In China a complete independent auditing legal system has been established. From 1993 to 2003, a series of laws and regulations on auditing were formulated and enacted that resulted in an auditing legal system centering on the Law of the PRC on Auditing. In addition, China’s auditing standards are moving towards the international auditing standards.


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-- Enterprises are more independent in auditing. Since its inception in 2003, the State-owned Assets Supervision and Administration Commission has stepped up the auditing of the Central Enterprises by formulating the Provisional Measures on Auditing and Regulation of Economic Liabilities of Central Enterprises, which stipulates that the senior management of enterprises shall be subject to economic liability audit upon leaving office or expiry of their terms. China’s National Audit Office adopted a more targeted approach towards different types of enterprises in its Audit Work Development Program from 2003 to 2007. -- Independent auditing standards have come to play an increasingly important role. It is mandatory to have CPAs audit the accounting statements of listed companies and provide investors with reliable information. The standards for independent audit have been revised and improved all the time. The intermediaries are playing a more and more important role in audit.


The use and treatment of SOEs’ assets

The Chinese law has set forth rules for the accounting treatment and use of the State-owned assets that are clear and consistent with the international practice.

6.11.1 The way the use of SOEs’ assets is treated in the accounting books is in conformity with the rules of the market economy
-- With regard to the depreciation of fixed assets, the Enterprise Accounting Standards: Fixed Assets that came into force in January 2002 set out clear provisions for the definition and depreciation scope of fixed assets and how depreciation shall be calculated. Its basic principles and methods are already in line with the international practice. For example, on the accounting treatment of the land, the Enterprise Accounting Standards: Fixed Assets provides that land that is entered into the books as fixed assets after being separately valuated shall not be depreciated. The IAS 16: Property, Plant and Equipment provides that land normally has an unlimited useful life and therefore it shall not be depreciated. It can be seen that the two are in conformity with each other. -- On amortization of assets, China’s Enterprise Accounting Standards: Basic Standards and Enterprise Accounting Standards: Intangibles set out provisions for the amortization of the assets and are aligned with the international accounting standards. For example, the Enterprise Accounting Stan-

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dards: Intangibles requires that all intangibles including goodwill must be amortized within the expected period of use. Both the IAS 22: Business Combinations and the IFRS 3 that took effect on January 1, 2005 require that the goodwill bought be amortized. The stipulations are the same.


The State-owned assets are treated by the market rules

-- On appraisal of the State-owned assets. The State Council of China issued in 1991 the Measures on Regulating the Appraisal of State-Owned Assets, which provides that the assets shall be appraised if the unit that possesses the State-assets engages in one of the following activities: auction or transfer of the assets, or enterprise merger and acquisition, buyout, joint operations and operation with a shares structure. The Provisional Measures on Regulating the Transfer of State-Owned Property Rights by SOEs also requires that the State-owned assets to be transferred must be appraised by a qualified assets appraiser in accordance with the relevant rules of the State. The valuation report, upon approval or being filed, shall be the reference for the determination of the price for the State-owned assets to be transferred. In order to improve the quality of the service of China’s appraisers the China Appraisal Society adopted the Provisional Guidelines on Appraising Enterprise Value by drawing upon the international appraisal standards. -- On the reform and asset transfer of SOEs. The Chinese Government formulated in 2003 the Suggestions on Regulating the Reform of SOEs and the Provisional Measures on Regulating the Transfer of State-Owned Property Rights of Enterprises, which made clear stipulations on the reform and asset transfer of SOEs. The reform of SOEs shall take the forms of reorganization, alliance, merger, transfer of State-owned assets or shares cooperation. The assets, including the intangibles, and the land use right must be appraised. State-owned assets must be transacted on the floor. The transferring party shall organize the enterprise that transfers the asset to verify its assets and capital and hire an accounting firm to execute a comprehensive audit. The transaction must be disclosed to the public and conducted by competition.

6.12 6.12.1

Others (including corruption, trade relations etc.) Corruption

-- Corruption has little effect over dumping. As a common challenge to the


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countries in the world, corruption would exert a huge impact on the domestic political life and economic development. However, it has little effect on dumping as it has no direct impact on the cost and price of products. Even if it has an impact, the result is uncertain as it may either raise or lower the cost or price. For example, in industries such as color TV set and furniture where competition is fierce and the profit margin is thin, acts of corruption such as bribery may only drive up the cost, add to the burden for the enterprises and dull their competitiveness. -- China has taken seriously the fight against corruption and stepped it up. First, by streamlining the government structure, introducing laws and regulations to restrict government intervention and reducing administrative approval, China has sought to stem corruption at its root. Secondly, China has further regulated and improved the bidding procedures for projects, introduced a comprehensive system for bidding, auction and listing for transfer of the right to use land for profit and implemented the government procurement system to make the market regulation more transparent and open. Lastly, a relatively complete system that balances and restrains power and a legal framework that fights corruption have been established.


Export Administration

-- China has improved its trade laws and regulations according to the WTO rules. China has fully opened up the access to the import and export trade right. All domestically invested enterprise registered in China are subject to a uniform policy in terms of qualifications regulation for import and export trade and all of them may apply for the trade right, which is obtained by registration and filing. Rules such as the Provisional Measures on Enquiry to China-WTO Notification and Enquiry Center have been formulated to increase the transparency of foreign trade administration. -- Export rebate rates have been significantly reduced. In October 2003, China reformed the existing export rebate system. The revised export rebate rates were set at five levels, i.e., 17%, 13%, 11%, 8% and 5%. The average rebate rate was three percentage points lower. -- The export license system is more rules-based. The Regulation of the PRC on Imported and Exported Commodities that became effective in January 2002 implements a classification-based system for managing the import and export of commodities and requires public bidding for exported commodities subject to quota and license management. The Chinese Government has also constantly cut back the restrictions on import and export trade. By the end of 2003, the number of commodities subject to export license man-

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agement had been reduced to 52.


Barter trade

-- Barter trade takes up a very small percentage in China’s overall trade and is on the decline. This share in total trade dropped from 0.021% in 2000 to 0.014% in 2001 and further down to 0.005% in 2003. Barter trade is also dwindling drastically in absolute terms. Its volume dropped by more than half, from USD 98.54 million in 2000 to USD 47.43 million in 2003. -- Modern barter trade is still in its inception in China. Compared with the traditional barter trade whose share is going down, modern barter trade has developed somewhat in some large- and medium-sized cities in China. At present, there are only a few barter traders in China, such as the Dalian Barter Exchange Center, China International Barter Network and Huaxia Barter Trade Co. On the whole, the sector is still in the start-up stage.


Resolution of the “Non-Market Economy” issue: a win-win option

To resolve China’s “Non-Market Economy” issue would, on the one hand, require the Chinese side to provide information to prove otherwise and, on the other hand, take a whole new approach on the part of the EU, the US and other countries, i.e., to examine their trade ties with China from a mutual benefit point of view. Moreover, discussions at the technical level must be combined with decision-making at the political level. Absent facts and theories at the technical level, it would be difficult for the decision to be taken at the political level. Without the vision and courage at the political level, the work at the technical level would be shelved. Therefore, it is utterly critical that a consensus be reached at the political level. On the political plane, a reversal of the traditional perceptions and mindset is of primary importance. The traditional or old thinking holds that if China is kept on the list of NMEs, its competitiveness in exporting would be undercut. The market would remain the way it was carved up, which is good for the trade interest of the existing players. Such a line of thinking actually betrays a lack of vision. Nor does it hold water. The new thinking would argue that bilateral or multilateral economic exchanges and trade must be viewed in the bigger context with considerations given to one’s own interest and that of others so as to achieve mutual benefit and win-win results. Top priority shall be given to development and differences shall be resolved by expanded economic cooperation and trade. Bilateral economic and trade co-


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ordination mechanisms must be allowed to play their role to facilitate communication and consultations and avoid escalation of tensions. Consultations must be held on an equal footing by seeking greater converging interests while putting aside minor differences, instead of willfully jumping to restrictive measures or sanctions. At the same time, economic and trade issues shall not be politicized1. The above five principles are set in the WTO framework and based on the basic principles of international trade. Their essence is development, equality and mutual benefit. Development is the driving force, equality is the precondition and mutual benefit is the purpose. To be more specific, the benefits that arise from treating each other as equals outweigh those from straitjacketing and containing China’s development. This is the new thinking that needs to be advocated in the context of fair trade. International trade benefits all. This has been borne out by theories and practices of the Western countries over the past hundreds of years. It is partial and shallow to equal trade deficit with interest lost. It is a consensus in the theory of international trade that a country pursues balance of international payments, not just surplus. In another word, one must look comprehensively at the relationship between trade accounts and capital accounts, not just the surplus or deficit in the trade accounts alone. For example, the US has deficit in its trade with China. But much of China’s foreign reserve is spent buying the US Government bonds, which in itself is a contribution to the balance of international payments of the US. Even if we look at the trade only, the export of large quantities of Chinese products to the US causes no injury to the latter’s economic interest. The products of China provided at an affordable price but with a good quality have contributed significantly to meeting the needs of the Americans in their lives. And many of the products from China are produced by enterprises invested by the US or other countries or purchased or ordered by American merchants in China after careful selection. What Chinese workers get is very low processing fee while the firms in the US makes profits, including the logistics companies, wholesalers and retailers who profit from the transport and sales of Chinese commodities. Therefore, the China–US trade is mutually beneficial. It is normal that some US firms that compete with Chinese exports have come to feel some pressure. Such an imbalanced structural distribution of commercial interests exists in all countries in the world. The visionary statesmen would make their judgment from a strategic point of view. It is unreasonable and impossible for a major power to demand that it enjoy surplus in its trade with all other
1 Speech entitled “Work Together to Write A New Chapter in China-US Economic Cooperation and Trade” made by Premier of China Wen Jiabao at luncheon hosted by American Bankers Association on December 8, 2003 in New York. In the speech, Premier Wen put forward five principles for advancing fair trade between the two countries.

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countries or in all lines of products. Not all China’s firms or industries are happy with foreign imports into China either. But China is aware that trade is done by the firms and the choice of millions of consumers. The increase or decrease in trade volume is governed by economic and market laws. There are bound to be profits and losses in the competition. China incurs a long-term deficit in its trade with ROK and South-East Asian countries. Has China ever expressed complaint or raised any excessive requests with these countries? The answer is negative. The developing trends show an even clearer picture of complementary trade ties between China and other countries. China’s import volume in 2003 ranked the third in the world. It is expected that the annual import of China by the year 2010 will top one trillion USD2. The frequent resort to trade barriers to roll back China’s export may, in the short run, serve the interest of some enterprises in Europe and the US. However, it may cause greater long-term losses for China’s trade partners in terms of reduced exports to China. It is fair to say that to give support to China’s economic development today, putting trade with China in perspective and playing by fair rules are actually supporting their exports to China in the future. Some developed countries have always claimed that they support China in its reform and opening-up and its transition to a market economy. However, when it comes to specific economic interest, they more often than not would develop their fair trade policies by proceeding from their own interest only. If every country should act this way, international rules would be non-existent. What we recognize is the fair trade under the WTO rules, not the fair trade under the rules of one single country. It is hoped that those developed countries which have manifested a strong inclination for unilateralism in their fair trade policies will not only protect their domestic enterprises, but also set an example in safeguarding the internationally recognized rules. It is important that in addressing China’s MES, they will show a truly fair approach and give their support to China’s economic reform with concrete action. From a technical point of view, to recognize a country’s market economy status, though it may simplify somewhat the antidumping procedures, does not preclude antidumping investigations. In fact, to grant China the market economy status does not impede, and may even facilitate antidumping proceedings by China’s trade partners targeting Chinese firms. First, by requesting the status, China is not asking for some preferential treatment, but for the right to trade on an equal footing. Therefore, it is not against anti2

Speech by China’s Minister of Commerce Bo Xilai at the International Forum on Common Development of China’s Economy and the World Economy jointly organized by the Ministry of Commerce, UNCTAD and Renmin University of China on September 10, 2004.


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dumping, but rather against unfairness. To be more specific, China is opposed to antidumping proceedings conducted in violation of the fair trade principles and supportive of normal antidumping proceedings. Secondly, we have seen that the antidumping investigations targeting firms of market economies are direct investigations, while those targeting NME firms are indirect ones. The scope of the former is a given firm in a given country while the scope of the latter is world-wide. In terms of findings, those of the former are definitely more real, accurate and true to the reality. The former approach is also far less expensive in terms of the cost of investigation. Given the above, we are of the view that the issue of NME has actually complicated things. To plant too much seed of trouble to the counterpart in the detailed provisions of laws, regulations or treaties would excessively complicate the trade terms and increase the transaction cost for international trade. Antidumping is a double-edged sword which, if overused, may backfire. Free trade used to be the banner of industrialized nations represented by Britain when they made their way into the markets of agricultural countries. However, when export from developing countries started to peak, developed countries acted swiftly to develop their fair trade policies ahead of the developing countries and to counter free trade with fair trade. This is a noteworthy historical phenomenon. Generally speaking, the developed countries provide assistance and support to developing countries not only to win support of the world but also to create a better framework for their own future development. This would bring mutual benefit and win–win results. Conversely, there would be criticism and boycott by developing countries. On April 15, 1994, representatives of 124 governments and the EU that participated in the Uruguay Round of Negotiations adopted the Marrakesh Declaration in Marrakesh, Morocco which stressed the special and differential treatment for developing countries and took particular note of the special situation of the least developed countries (LDCs). However, as we have seen over the past few years, in the antidumping investigations involving products of China, no effective actions have been taken to explore possibilities of constructive remedies before applying antidumping duties where they would affect the essential interests of developing country Members as required by the WTO ADA. Of course, it must be pointed out that over the past couple of years, the EU and the US have had exchange of views and discussions with China over the NME issue, which is a good start to recognizing China’s market economy status. In 2004, the European Commission, in its response to the formal request for MES by China’s Ministry of Commerce (MOFCOM), set up an experts group on NME and made a preliminary assessment report on the Report of 2003 on Progress in China’s Market Economy provided by the

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Chinese side. At the Fifteenth Session of the China–US Joint Committee of Commerce and Trade (JCCT), the two sides agreed to consult on China’s MES issue and had an in-depth exchange of views over the work plan of the working group. Canada decided to presume all Chinese industries to be market-oriented industries (MOI). By the end of 2004, a total of 34 countries had publicly recognized China’s market economy status. Still though, there remain lots of issues to be studied and views and data to be exchanged before China’s NME issue can be fully resolved. We will continue to work for an early consensus among all the parties.

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