Unlocking China's Services Sector

UNLOCKING CHINAS SERVICES SECTOR
UNLOCKING CHINAS SERVICES SECTOR
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Commonwealth of Australia 2005 This work is copyright. Apart from any use permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth available through the Attorney-Generals Department. Requests and inquiries concerning reproduction and rights should be addressed to Commonwealth Copyright Administration, Copyright Law Branch, Attorney-Generals Department, Robert Garran Offices, National Circuit, Canberra ACT 2600 or by email to commonwealth.copyright@ag.gov.au. AusAID and the Insurance Australia Group contributed to meeting the cost of producing this report
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Unlocking Chinas Services Sector. Bibliography. ISBN 1 920959 47 5. 1. Service industries - China. 2. China - Economic conditions. I. Australia. Dept. of Foreign Affairs and Trade. 338.4700951 Editing by Peter Judge. Typesetting by Lyn Lalor. Production by Adcorp Canberra.
Acknowledgements
AcknowledgmentsI
Dr Evanor Palac-McMiken, Director, Economic Analytical Unit prepared this report with the overall direction and guidance of Nicholas Coppel, Executive Director, Economic Analytical Unit. Andrew Flowers provided administrative support. The Economic Analytical Unit would like to thank the Insurance Australia Group and AusAID for their financial contribution towards meeting the cost of producing and launching this report. Within the Department of Foreign Affairs and Trade, we thank Doug Chester, Deputy Secretary; Ric Wells, First Assistant Secretary and Mary McCarter, Director, China FTA Task Force; Lachlan Strahan, Director, Angela Carey and Michael Sadleir, Executive Officers and Marcia Pius, Graduate Trainee, China Economic and Trade Section; Dene Yeaman, Executive Officer, Services Trade and Negotiations Section; Judith Laffan, Executive Officer, Agriculture and Food Branch; Susan Begley, Executive Officer and Karen Medson, Desk Officer, Market Information and Analysis Section. The Australian Embassy in Beijing and the Australian Consulate-General in Shanghai and in Hong Kong coordinated the Economic Analytical Unit visits to Beijing, Shanghai and Hong Kong and provided assistance in producing this report. At the Australian Embassy in Beijing we thank Dr Alan Thomas, Ambassador, Graham Fletcher, Deputy Head of Mission, Stephen Joske, Treasury MinisterCounsellor, Steve Scott, Counsellor (Economic), Ian Macintosh, First Secretary (Economic), Adam Coin, Second Secretary (Economic), Katharine Campbell, Counsellor (Education, Science and Training) and An Wu, Research and Visits Officer. At the Australian Consulate-General in Shanghai we thank Sam Gerovich, Consul-General, Gary Cowan, Deputy Consul-General and Dorothy Li, Executive Assistant. At the Australian Consulate-General in Hong Kong we thank Murray Cobban, Consul-General, Julie Chater, Deputy Consul-General, Peter Osborne, Deputy Consul-General (Commercial) and Senior Trade Commissioner, Damien Kilner, Consul (Immigration), Ivy Ngan, Director, Education, Science and Training Section, Australian Education International and Naomi White, Visits Liaison Officer. In Beijing, we thank Liu Jinming, Deputy PresidentInstitute of International Economy, Ren Wang Bing, Director, Liu Zhong Xian and Guo Huai Ying, Tertiary Industry Research Division, Industrial Development Research Institute, National Development and Reform Commission; Mr Han Mingzhi, Director-General, China Banking Regulatory Commission; Hong Xiaodong, DirectorDivision of Trade in Services, Department for WTO Affairs, Ministry of Commerce; Gao Daping, Deputy DirectorAccounting Regulatory Department, Ministry of Finance; Wei Jigang, Research Fellow and Liu Feng, Senior Research Associate, Development Research Center of the State Council; Xu Yongji, DirectorDivision of Policy and Planning and Yang Jun, DirectorDivision of American and Oceanian Affairs, Department of International Cooperation and Exchanges, Ministry of Education; Min Zhao, Economist, World Bank OfficeBeijing; Richard Harding, Head of IAGChina, Marc Nourse, Senior ManagerStrategic Projects and M&A and Jason Yat-sen Li, General ManagerSales & Marketing, Insurance Australia Group; Paul Y. Au, Group Chief RepresentativeChina, Commonwealth Bank; John Shi, Chief Representative, Mallesons Stephen Jaques; Suyin Lee, General ManagerChina, Flight Centre Comfort Travel Solutions; Alan Eriwata, Vice President, Beijing AustChina Technology
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U N L O C K I N G C H I N A S S E RV I C E S S E C TO R
Ltd; Betty Gu, Deputy Director, IDPChina; Vincent Lo, Chief RepresentativeChina, MLC Limited Beijing Office; Ferdinand Song, AVPPersonal Financial Services, Hong Kong and Shanghai Banking Corporation; Chuck Zhang, Chief Representative , CPAAustralia Beijing Representative Office; Jaye Han, General ManagerChina, Macquarie Property Investment Banking; Eric Chen, Chief Executive Officer, General Management System Organisation; Edward W. Smith, Director, Beijing Consulting Group; Kent Matla, Chief Executive Officer, GNS; Auslan Ishmael, AustCham Beijing; Rebecca Qiu, Chief Executive Officer, Aspiration Trade Co Ltd; and Michelle Jia, DirectorLegal & Government Affairs, WesTrac ChinaBeijing. In Shanghai, we thank Professor Jianping Dong, Deputy Director-General and Hong Yongqing, Assistant Director, Shanghai Intellectual Property Administration; Shi Kang Nei, Vice Chairman, Shanghai Association of International Services Trade; Fang Yao Guang, General Manager, Shanghai Foreign Investment Service Center; Feng Jun, Chief OfficerConsulting, Shanghai WTO Affairs Consultation Center; A. Jock McGregor, PresidentChina, ANZ; Richard David, Chief Executive Officer, First China Property Group; Leigh Zhang, Chief Executive Officer, CommFinance Co Ltd; Chong Lee, General Manager and Michael Yang, General ManagerMarketing Department, China Life CMG Life Assurance Co Ltd; Seamus Cornelius and Nigel Papi, Partners, Allens Arthur Robinson; Martin Snell, Chief Executive Officer, International Education Network; Stuart Costello, DirectorChina Programs, TAFE Global NSW Australia; and Stephen White, Managing Director, Interior Action. In Hong Kong, we thank Clement Leung, Deputy Director-General, Trade and Industry Department, The Government of the Hong Kong SAR; Stephen Selby, Director, Intellectual Property Department, The Government of the Hong Kong SAR; Bonnie Chan, Vice PresidentBusiness Development & Investor Services Division, Hong Kong Exchanges and Clearing Ltd; Kwok Shu Wong, Assistant Director, Office of the Telecommunications Authority; Julia Leung, Executive DirectorExternal Department and Dong HE, HeadExternal, Hong Kong Monetary Authority; Andrew Reilly, Senior Vice PresidentInternational Investments, Telstra Asia; Alan Johnson, Chief Executive Officer, Horwath Hong Kong Group Ltd and Chairman, The Australian Chamber of Commerce in Hong Kong; Anthony Lloyd, Partner and Damien Bailey, Asia Registered Foreign LawyerTechnology & Communications Group, Minter Ellison Lawyers; Paul Chong, Managing DirectorCorporate Finance and Steven Lu Jr., Division DirectorCorporate Finance, Macquarie (Hong Kong Ltd); Allard M Nooy, DirectorChina and Chris Gordon, General ManagerGroup Communications, Leighton Asia; Freddy Li, General ManagerGreater China and Nancy Mak, Regional Business Manager & Financial Controller, Qantas Airways Ltd; Gayle Gledhill, Head of Private BankHong Kong, Westpac; Stuart Valentine, Clifford Chance; Michael Tracey, Associate DirectorRegional Marketing and Distribution, International Financial Services, North Asia, Commonwealth Bank Group; Alex Cho, DirectorChina & Business Services, Horwath Management Services Ltd; Catherine YW Tse, Senior Manager, Ernst & Young; Paul Belcher, Operations Manager, United ConinanHong Kong, Deborah Biber, Chief Executive and Terry Grose, Director, The Australian Chamber of Commerce in Hong Kong. Finally, we thank Professor Christopher Findlay, Australian National University; Peter Judge for editing services; Lyn Lalor for typesetting; and Adcorp Canberra for publishing services.
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Economic Analytical
Unit
economIc AnAlYtIcAl UnIt I
The Economic Analytical Unit (formerly the East Asia Analytical Unit) is part of the Department of Foreign Affairs and Trade and is responsible for publishing reports analysing major trade and economic issues of relevance to Australia. The Economic Analytical Unit is staffed with six economists and has produced 42 major reports since its establishment in 1990. Executive summaries of recent reports, electronic copies of many previous reports and information on how to purchase reports are on the Units website.
Contact details:
Economic Analytical Unit Department of Foreign Affairs and Trade RG Casey Building John McEwen Crescent Barton ACT 0221 Australia Telephone: +61 2 6261 2237 Facsimile: +61 2 6261 3493 Email: economic.analytical@dfat.gov.au Internet site: www.dfat.gov.au/eau Executive Director of the Unit Nicholas Coppel Directors Evanor Palac-McMiken Robert Walters Deputy Director Gita Nandan Office Manager Andrew Flowers
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Contents
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ACKNOWLEDGEMENTS ECONOMIC ANALYTICAL UNIT
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EXECUTIVE SUMMARY CHAPTER 1 OVERVIEW Of CHINAS SERVICES SECTOR Services sector is important for sustained growth A competitive services economy has yet to emerge in China Chinas services sector has enormous potential Performance and sectoral structure Increasing foreign investor interest in Chinas services sector Chinas trade in services growing Services sector generates an increasing number of jobs Implications CHAPTER 2 LIbERALISATION Of CHINAS SERVICES SECTOR Chinas services liberalisation: WTO commitments, achievements and reform challenges Financial services Telecommunications Transport, logistics and distribution services Education services Professional and other services sectors Intellectual property rights Above and beyond WTO commitments: Mainland Hong Kong Closer Economic Partnership Agreement (CEPA) Overriding importance of legal and regulatory reforms Implications Appendix 2.1 Chinas WTO accession commitments on trade in services CHAPTER 3 ACCESSING CHINAS SERVICES MARKET: AUSTRALIAN bUSINESS EXPERIENCE Financial services Education and training services Telecommunications Tourism and travel-related services Transport and logistics Legal and other professional services Construction and related engineering services Implications
ix 1 2 4 11 12 15 17 18 20 21 23 26 34 40 45 46 47 49 51 53 54
61 63 74 76 79 82 84 86 87
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CHAPTER 4
AUSTRALIA AND CHINA: SERVICES TRADE AND INVESTMENT Australias services exports to China Chinas services exports to Australia Australias investment in China Chinas investment in Australia Summary and prospects
89 90 92 95 96 99 101
REfERENCES
ECONOMIC ANALYTICAL UNIT PUbLICATIONS
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Executive
Summary
execUtIve sUmmArYI
chInAs servIces sector hAs Yet to reAch Its potentIAl

Chinas services sector is opening up, but further reform is needed. The services sector in China should account for a much greater proportion of the countrys total output than it currently does given the countrys level of per capita income. The services sector needs to grow and expand its share of the national economy to help strengthen the business sector, address unemployment pressures, accelerate trade and technological progress and increase overall economic efficiency. Chinas services sector grew strongly in the 1990s as per capita income soared. However, an efficient and competitive services economy has yet to emerge. The development of the services sector has been constrained by the countrys development strategy, which has focused on manufactured exports, and by the substantial barriers to trade and investment in the services sector. While Chinas share of merchandise trade to GDP jumped from 45 per cent in 1993 to over 60 per cent in 2004, its share of commercial services trade to GDP only increased slightly from 5 per cent to 7 per cent of GDP over the same period. However, China has started to address its neglect of the services sector. In its Tenth Five-Year Plan, 200105, the Government announced plans to develop the services sector and substantially expand its presence in the national economy. China committed to a dramatic opening of its services sector when it acceded to full membership of the World Trade Organization (WTO) in December 2001. Chinas trade in services has increased significantly since its WTO accession. Foreign investors interest in the services sector has been increasing. Transport, storage and telecommunications services recorded unprecedented growth in 2004. Education, health and social services are growing in importance reflecting the increasing value China and its people are placing on human capital investment a critical ingredient for the emergence of competitive service industries.
lIBerAlIsAtIon oF chInAs servIces sector

Chinas market opening commitments in services have been considered possibly the most comprehensive liberalisation ever negotiated in the WTO. These commitments were far-reaching, although there remain restrictions on ownership, business scope and geographical coverage. China has made significant progress in implementing its liberalisation commitments in many services. But implementation is not yet complete and has not been without problems. At times China has shown difficulty in adhering to WTO rules. Its commitment to market access, for example, is being undermined by administrative measures. An opaque regulatory process and overly burdensome licensing and operating requirements continue to frustrate foreign providers of services.
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China also has committed to broad legal reforms in the areas of transparency, uniform application of laws and judicial review. While there are episodes of increasing transparency, Chinas basic compliance with notice-and-comment commitments continues to be uneven. China has established an internal review mechanism to monitor non-uniform application of law, but problems persist. Unlocking the enormous potential of services requires wide ranging and deeper reforms of the legal and enforcement system, the financial system, labour markets and state-owned enterprises. Complementary reform of the regulatory and legal enforcement system is necessary to give effect to Chinas commitments and ensure durability of liberalisation measures. Reform of the hukou system (Chinas household registration system, which places limits on the mobility of Chinese citizens) will be crucial in enhancing labour mobility and maximising the employment gains from the expansion of service industries.
Financial Services
Foreign banks now face no geographic restrictions in the conduct of foreign currency business. Since the end of 2004, China has allowed foreign banks to conduct local currency business in 18 cities. The insurance market is now also largely open to foreign competition although foreign insurers remain prohibited from statutory insurance business. Market access is constrained by high capital requirements and prudential requirements which are beyond international norms. Concerns about discriminatory treatment in branch approval processes also are being raised.
Transport, Logistics and Distribution Services

At the time of Chinas WTO accession, China had already introduced liberalisation measures along various points in its logistics chain. Today, China is benefiting from the partial opening of some distribution services, which has contributed to the development of modern organised food retailing and food service industries in the country. Some of the remaining restrictions on establishment, geographic scope and products are being removed in accordance with Chinas schedule of specific commitments. China has liberalised road and auxiliary services and issued regulations permitting wholly foreign-owned firms in storage, warehousing and in freight transport services. However, in practice substantial establishment and operational barriers remain, and at the provincial level, there is an additional layer of regulation.
Telecommunications
China took tentative first steps in 1994 to introduce competition in its telecommunication sector. More significant reforms were introduced from 1998 in anticipation of Chinas WTO accession. Since accession, China has relaxed foreign equity and geographic restrictions, although it has not committed to allowing more than 49 per cent foreign ownership in mobile telephony and fixed line services. Chinas restrictive interpretation of value-added services has also limited the opportunities for foreign firms to undertake innovation and development in value-added services. Overall, Chinas telecommunications sector remains highly restrictive with healthy competition being constrained by an unclear licensing system, compromised pricing regulations, inadequate regulations on interconnection and high capital requirements. Further reforms are needed to give effect to Chinas telecommunications services commitments.
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Executive
Summary
Education Services
Foreign majority ownership is now permitted in joint ventures providing education services, but there is no guarantee that foreign educational institutions will receive national treatment. China still maintains a number of regulatory barriers restricting the delivery of education and training in relation to crossborder supply, commercial presence and the movement of educational professionals.
Professional Services
China eliminated geographic and quantitative limitations on legal services in 2002 but legal firms are not permitted to enter into joint ventures with local firms. Accounting, engineering and construction providers also face continuing restrictions. China has agreed to allow wholly foreign-owned subsidiaries to operate accounting, taxation, architecture and urban planning services by 2007, but some restrictions will remain, especially in legal and medical services.
Tourism and Travel-Related Services

Market access restrictions on foreign-invested travel service providers were lifted in 2004 much earlier than promised, but competition remains constrained by licensing requirements including extremely high turnover requirements and restrictions on business scope.
Intellectual Property Rights

China has amended its intellectual property rights regime to comply with the Agreement on TradeRelated Aspects of Intellectual Property Rights. However, enforcement remains problematic, with counterfeiting and piracy still at very high levels.
AUstrAlIAn BUsInesses AccessIng chInAs servIces mArket

Australian companies are taking advantage of services liberalisation in China and are positioning themselves to gain access to Chinas rapidly expanding services markets. Despite the improved environment, Australian firms still face major challenges from entrenched domestic players, high capital requirements and a lack of transparency in a rapidly changing regulatory and administrative situation. China has to be viewed as a long-term market. Before entering the China market, businesses need to assess the risks along with the opportunities. Financial sector revenues in the Asia-Pacific region are projected to grow from US$390 billion in 2004 to US$1.8 trillion by 2020. China will be the driving force of this growth. Australian banks have positioned themselves in anticipation of the potentially huge market and in light of Chinas commitment to fully liberalise the sector by 2006. The ANZ and the Commonwealth Bank have each taken equity stakes in local banks and the Macquarie Group is actively involved in property development, funds management and stock trading businesses. However, competition is constrained by the entrenched dominance of state-owned banks, high operating requirements and the constantly changing regulatory environment.
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China is the worlds largest consumer of international education. Australia has made significant gains in increasing its share of the market in recent years. Griffith University, the International Education Network (a consortium of Australian Universities) and TAFE NSW Global are just some of the many active providers of education services to Chinese students in Australia and in China. Regulatory barriers, including restrictions on recognition of overseas qualifications remain major challenges to foreign education providers. China overtook the United States in 2002 to become the worlds largest telecommunications market. This market still has huge potential for further growth given Chinas relatively low telecommunications penetration rate. Telstra is currently providing services as a consultant or facilitator to Chinese telecommunication companies looking to improve efficiency and service quality or to introduce new products and services. Telstra looks forward to greater regulatory liberalisation, including the enactment of a Telecoms law that would put in place a more transparent legal environment conducive to the development of competitive industry structures. By 2020, China will become the worlds largest tourist destination and the fourth largest source of tourists. Flight Centre, through a joint venture with an established agency, China Comfort, has gained a strategic opportunity to enter Chinas rapidly growing corporate travel market. Qantas has recommenced flights to Shanghai and will commence flights to Beijing in January 2006. While China has liberalised its travel agency market ahead of schedule, current licensing and business scope restrictions severely hamper foreign tour operators. Many international firms have established sizeable professional practices in China to service the increasing needs of their clients. In 2004, seven Australian firms were among the 114 foreign law firms licensed to operate in China. One of the key issues for legal firms remains the restriction on entering into partnership with Chinese firms. China will become the worlds second largest trading entity by 2020, overtaking Germany and Japan. Linfox, one of Australias largest transport and logistics management companies, has operated in China since 1984. Linfoxs operations in China recently received a boost with the signing of a five-year contract with Chinas largest private construction material and department store chain, the Home World Group. While significant openings have occurred in the logistics and transport market, establishment remains hampered by regulations both at the national and provincial levels. China is undergoing a boom in construction. Leighton, Australias largest construction-oriented company has taken a cautious approach to its activities in China. It operates as a wholly foreignowned project company focusing on build-operate-transfer (BOT) schemes in environmental and infrastructure projects, rail and tunnelling, contract mining and petrochemical and power industries. But changes to regulations were introduced in 2002 and in 2004 that are seen by many contractors as a step backwards, being less cost effective and less flexible.
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Executive
Summary
AUstrAlIA chInA servIces trAde And Investment growIng

Resources and rural exports are the core of Australias exports to China, but the combination of rising real incomes and reform of the services sector are boosting significantly services trade and investment between the two countries. Bilateral trade in services has expanded from A$1.47 billion in 2000 to A$2.34 billion in 2004, with Australia recording a surplus over the past five years. China was Australias 6th largest services export market in 2004, up from 13th largest in 1995. Australias services exports to China have almost quadrupled from A$350 million in 1995 to A$1.3 billion in 2004, representing 3.7 per cent of Australias total services exports. China is now Australias number one source of overseas students and fifth largest source of tourists. China was Australias 8th largest source of services imports in 2004, up from 12th largest in 1995. China exported services worth over A$1.0 billion to Australia in 2004, representing around three per cent of Australias total services imports. Transport and travel dominate Chinas exports to Australia. Over the past decade, the number of Australian short-term visitors to China has grown over twice as fast as the total number of Australian overseas tourists. Bilateral foreign investment has remained fairly modest relative to overall growth in bilateral trade between Australia and China. But there has been a significant turnaround in Australian investors sentiment during the past two years and in 2004, Australian investors signed over 700 agreements committing over US$2 billion worth of foreign direct investment in China. Meanwhile, Chinas investment in Australia rose from A$1.2 billion in June 1997 to over A$3.4 billion in June 2000 but dropped to just under A$2.0 billion in 2004. The reasons for this drop are not fully understood but it is not interpreted as a trend because of the very lumpy nature of Chinese investment and the sometimes lengthy period between investment approval and actual cross-border transaction. Chinas largest and high profile Australian investments are in the resources sector reflecting Chinas aim to secure upstream resources for its ongoing rapid industrialisation. The free trade agreement currently being negotiated between China and Australia will enhance bilateral trade in services and investment. It will provide an opportunity to reduce barriers further, streamline and improve transparency of regulatory requirements and facilitate improved mutual recognition of professional qualifications further enhancing trade in professional services.
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Chapter
overviewofchinasservicessectort
KeyPoints
Chinas services sector has enormous potential. Along with rising per capita incomes, greater services sector liberalisation is expected to contribute significantly to the expansion of the sector and encourage the emergence of competitive service industries. Chinas services sector grew strongly in the 1990s as income levels soared but an efficient and competitive services economy has yet to emerge. The development of the services sector in China has been constrained by the countrys focus on manufactured exports and the substantial barriers to trade and investment in the services sector. China needs to continue to liberalise and reform its services sector to meet its development objectives. While China has taken steps to liberalise and reform some of its services, much remains to be done. The services sector in China needs to grow further and expand its share of the national economy to help strengthen the business sector, address unemployment pressures, accelerate trade and technological progress and increase overall economic efficiency. Transport, storage, post and telecommunications recorded unprecedented growth in 2004. The structure of the services sector is changing in China, with education, health and social services growing in importance. Foreign direct investment is growing in Chinas services sector. Chinas trade in services has accelerated since the countrys accession to the World Trade Organization.
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Chinas services sector is opening up, but further reform is needed. Since 979, Chinas economic reform program has been focused mainly on agriculture and manufacturing, especially export-oriented manufacturing in coastal cities and special economic zones (SEZs). Until recently, little attention had been paid to the services sector services were seen primarily in terms of consumption and redistribution rather than production. Chinas accession to the World Trade Organization (WTO) has changed this. In December 00, China committed to a dramatic opening of its services sector. This report analyses these commitments, Chinas progress on its path to liberalisation of its services sector and the implications for Chinas economy and Australian business.
servicessectorisimPortantforsustainedgrowth
Services matter. As economies grow, achieve higher levels of income and become more urbanised, consumer demand and production capability shift towards services and more sophisticated services-embedded goods. Service industries tend to develop on a large scale after agricultural and manufacturing sectors have reached a certain stage of development. Along with growth of the services sector, growth of manufacturing continues and a two-way spill-over effect induces growth in the whole economy. The development of service industries reinforces growth, as it supports and makes possible increasing efficiency in other sectors (see Box Role of Services in the Growth Process). The proportion that services contribute to the Gross Domestic Product (GDP) tends to rise with the level of income. In high-income countries (average per capita Gross National Income (GNI) greater than $8 600) services contribute on average 69 per cent to GDP, while in the upper middle (average per capita GNI of US$5400) and lower middle income countries (average per capita GNI of US$490) services contribute 55 per cent and 5 per cent respectively to GDP (WTO 003). Employment in the services sector also increases with per capita income. The services sector on average accounts for 70 per cent of total employment in high-income countries compared with 54 per cent in upper middle-income and per cent in lower middle-income countries (WTO 003).
Special economic zones (SEZs) are development zones established by the Chinese government since the 980s to encourage foreign investment, bring in much needed jobs, technical knowledge and future tax revenues in return for significant tax concessions at start up and over a number of years. Current SEZs are located in Guangdong province, Fujian province, Hainan (whole province), Hunchun and Pudong New Zone (Shanghai) (China Internet Information Center 005a). Studies (such as Fisher 935, Kuznets 966, Chenery 960 and Fuchs 980) have documented the positive association between growth and share of services in the distribution of the labour force based on Pettys law which states that the proportion of the working population engaged in services increases as an economy develops (Banga 2005).
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Overview
roleofservicesinthegrowthProcess
The most common explanation put forward to explain the increasing share of services in GDP, investment and employment relates to the high-income elasticity of demand for final product services. That is, the demand for services rises more than the demand for goods as real per capita income increases. Some also point out that the increased use of consumer durables increases the need for intermediate services such as servicing and repair of household equipment. Demand for services also comes from the producers side. Growth in manufacturing leads to increasing demand for producer services as structural changes make contracting out cheaper and more efficient. Increasing expenditure on producer services enhances efficiency of production by allowing higher level of specialisation. Growth in the services sector in turn stimulates growth in manufacturing, since it leads to higher demand for new products and brings about improvement in productivity in the manufacturing sector. Economic growth is enhanced and sustained by the spill-over effects between the manufacturing and the services sector. This interdependence is reinforced by factors such as: technological progress, which makes services even more crucial in coordinating production processes and in creating and absorbing new innovations increasing complexities of modern industrial organisations, which make manufacturing activities become more services oriented both upstream (e.g. design and research and development) and downstream (e.g. marketing and advertising) increasing competition, which makes firms become more dependent on providing specialised services like financing and after-sales facilities to maintain competitive edge. Trade liberalisation, foreign direct investment and improvements in technology have led to higher use of services and reinforced the growth-enhancing effects of services. Liberalisation of services leads to enhanced competition. Increased competition and greater foreign participation more often lead to larger scale activities providing greater scope for generating the special growth-enhancing effects from services. Even without scale effects, the increasing use of foreign factors could still have positive effects because they are likely to bring with them more advanced management and technical know-how.
Sources: Gershuny 1978, Greenfield 1966, Katouzian 1970, Francois 1990, Pilat 2000, Gordon and Gupta 2004, and Banga and Goldar 2004, cited in Banga 2005.
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acomPetitiveserviceseconomyhasyettoemergeinchina
An efficient and competitive services economy has yet to emerge in China. Until recently, China had failed to recognise the important role services can play in economic development. This partly reflects the ideological bias which has dominated the thinking of central planners in the past that services only perform a redistributing function and so should be treated as unproductive (Fukasaku et.al 1999). As a result, the services sector has remained relatively underdeveloped and has structural weaknesses that could impede Chinas sustained development in coming years (Fukasaku et.al 999).
chinaservicessectordefined
The term services covers a wide range of intangible and different products and activities such as transport and logistics, telecommunications and computer services, construction, financial services, wholesale and retail distribution, hotel and catering services, insurance, real estate, health and education, professional, marketing and other business support, government, community, audiovisual, recreational and domestic services.3 In China, the term tertiary industry is used typically to represent the services sector as it includes all other industries not included in primary (agriculture, forestry, animal husbandry and fishery) or secondary industry (mining and quarrying, manufacturing, production and supply of electricity, water and gas and construction). More specifically, tertiary industry in China includes transportation, storage, postal and telecommunications, wholesale and retail trade, catering trade, banking, insurance, geological survey, water conservancy management, real estate, services for residents, services for agriculture (including for forestry, animal husbandry and fishery), subsidiary services for transportation and communications, comprehensive technical services, education, culture and arts, broadcasting, movies, television, public health, sports, social welfare, scientific research and services for public needs (including government agencies, political parties, social organizations, military and police service). In this report, Chinas services sector includes all the activities in the tertiary industry as well as construction.
Sources: NBSC 2005a, WTO 2003.
Government services are excluded in the WTO General Agreement on Trade in Services (see Chapter ).
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Overview
The past 5 years have seen rapid industrialisation in China. Over the period 990 to 004, the contribution of the industrial sector to the total output increased from 37 per cent to 46 per cent (Figure .). The increase came entirely from the diminution of the primary sector, whose contribution has declined from 7 per cent to 5 per cent. The contribution of the services sector, on the other hand, increased slightly from 36 per cent to 39 per cent over the same period.
Figure . Chinas services sector contribution to total output has increased slightly over the past 5 years Sector shares in GDP, in per cent, 19902004
100
80 Per cent of GDP
60
40
20
1990
1992
1994
1996 Primary
1998 Industry
2000 Services
2002
2004
Note:
The industrial sector refers to the secondary industry less construction. This figure is referred to in Chinese statistics simply as Industry.
Source: CEIC 005.
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The contribution of services to Chinas overall output is substantially lower than in many economies of comparative levels of income and falls below the curve that plots per capita GNI against the share of services in GDP (Figure .). Chinas per capita GNI was US$00 in 003 and the contribution of services in Chinas total output was 33 per cent (World Bank 2005). Even if construction was included in services (as in this report), the contribution of services in Chinas total output was only 39 per cent in 004. In the Philippines (with a per capita GNI of US$080) services represented over 53 per cent of GDP and in India, where per capita GNI was US$540, services also represented over 50 per cent of GDP. In the context of world development experience, the services sector in China should account for a much greater proportion of the countrys total output than it currently does, given Chinas level of per capita income.
Figure . Chinas services sector contribution to GDP is lower than in many economies of similar income level Per capita GNI in US$ and services value-added as per cent of GDP, 2003
90 80 Services as per cent of GDP 70 60 50 40 30 20 0 Mexico Philippines India Australia France United Kingdom High-income United States
Greece
Singapore
Upper middle-income
Thailand Malaysia CHINA
lower middle income
5 000
10 000
15 000
20 000
25 000
30 000
35 000
40 000
Per capita GNI US$

Notes: For purposes of consistency, the data for the cross-country comparison were taken from the same source, i.e. the World Bank. The World Banks statistic on Chinas services sector contribution to GDP is lower than the figure used in this report because it only included the tertiary sector.
Sources: World Bank 2005, Nicholson and Thompson 2005 (using GDP per capita in PPP US$ terms showed similar results).
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Overview
The state of the services sector in China reflects the countrys development strategy, which has been focused mainly on industry and manufacturing for export. Service industries were seen as consumption and redistributing activities rather than production and hence were overlooked as growth drivers. Substantial barriers to foreign participation and the entrenched dominance of stateowned enterprises (SOEs) have constrained competition and the overall development of the services sector. New players both domestic and foreign service providers found it difficult to break into the market, given government monopolies and a difficult regulatory environment. Service industries also need a critical mass of demand to thrive. China has experienced rapid increases in income levels but urbanisation has been relatively slow.4 Compared with other countries, Chinas current level of urbanisation is relatively low given its level of per capita income (Figure .3). In municipalities such as Beijing, Shanghai and Tianjin, where urbanisation has been massive, the services sector is relatively more advanced.
Figure .3 Chinas urbanisation is low relative to the countrys level of per capita income Per capita GDP in US$ and proportion of urban to total population in per cent, 2002
Urban population as per cent of total population 120 100 80 60 40 20 0 Bolivia Philippines Malaysia Australia New Zealand Korea United Kingdom United States
Indonesia India 0 CHINA Thailand 10 000 20 000 30 000 GDP per capita in US$ 40 000 50 000
Note:
Urbanisation is defined as the process in which there is an increase in the proportion of people living in the urban areas. Data are based on national definitions of what constitutes a city or metropolitan area, cross-country comparisons should be made with caution.
Source: UNDP 005.
While the proportion of urban population in major municipalities such as Beijing, Shanghai and Tianjin (i.e., 77.5 per cent, 88 per cent, and 7 per cent respectively) is much higher than the countrys level of urbanisation of 36 per cent, a large number of medium and small size regions and provinces still have relatively low urban population (NBSC 2005b cited in Song and Yu 005).
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Chinas low urban growth can be attributed to two major factors. First, Chinas one child policy has been more rigorously enforced in the major cities than in rural areas. In rural areas, peasant families whose first child is a girl are allowed to have a second child after four years. Chinese minority groups which are predominantly rural are also allowed to have more than one child. Secondly, Chinas hukou system has restricted rural to urban mobility because rural peasants who move to the cities are not afforded access to basic services such as education and health.5
Substantial barriers to trade and investment in the services sector

Chinas substantial barriers to trade and investment in the services sector have constrained the development of an efficient and competitive services sector. In 2000, the tax equivalent of restrictions to output and capital of foreign affiliates in Chinas services sector were estimated at over 36 per cent and 50 per cent respectively (Table .) (Dee and Hanslow 000). These additional cost burdens arose from restrictions on market access and on national treatment.6 Even domestic firms were not immune they too were subject to market access restrictions affecting both establishment and ongoing operations. Sectoral analyses of restrictions also have shown that China has relatively high barriers in the services sector (for example in telecommunications sector, see Chapter for details).
Hukou is a household registration system introduced by the Chinese government in the 1950s to control the influx of rural migration to the cities and the intra-rural and intra-urban population movement (Liu 004). Market access restrictions are restrictions to entry that apply to locally and foreign-owned firms. Restrictions on national treatment mean that foreign-owned firms are treated less favourably than domestic firms (for more details see the Box on Chapter on The General Agreement on Trade in Services and Modes of Supply).
PAGE 8
Overview
Ta b l e . High barriers to trade and investment in Chinas services sector Tax equivalents of post-Uruguay barriers to trade and investment in the services sector in per cent, 2000
Barriers to ongoing operation Tax equivalent in % Domestic output China Indonesia Philippines Malaysia Thailand Singapore Korea Chile Taiwan Australia Mexico Canada Hong Kong New Zealand United States Japan 8.75 3.3 8.38 3.58 4.69 3.40 5. .97 .88 0.00 .7 0.5 .39 0.00 0.07 3.59 Foreign affiliates output 36.40 8. .65 0.0 3.36 8.3 6.78 4. 4.90 0.69 5.59 .67 .36 0.67 .08 4.75 Barriers to establishment Tax equivalent in % Domestic capital 3.46 .69 7.40 5.35 .6 .4 .9 4.5 .90 0.6 0.68 0.53 .35 0.4 0.00 0.33 Foreign affiliates capital 50.66 68.06 54.8 37.58 36.49 4.50 .0 0.36 9.9 4.79 .99 6. 5.4 4.8 3.83 3.0
Notes: Tax equivalents estimated using FTAP, a version of the General Trade Analysis Project (GTAP) model with foreign direct investment (see Hertel 997 for more details on GTAP). The FTAP model distinguishes barriers to establishment from barriers to ongoing operation. This was reported as analogous to the distinction between commercial presence and other modes of delivery under the General Agreement on Trade in Services since barriers to establishment are a component of the barriers to commercial presence (see Chapter ). Barriers to establishment have been modelled as taxes on capital. Barriers to ongoing operation, on other hand may affect either foreign-owned firms or those supplying via other modes and have been modelled as taxes on output (see Dee and Hanslow 000 for more explanation). Hong Kong refers to Hong Kong, Special Administrative Region of the Peoples Republic of China. Source: Dee and Hanslow 000.
PAGE 9
The past decade witnessed the further opening up of the Chinese economy to international trade. However, the opening has been largely limited to merchandise trade. The share of merchandise trade to GDP in China jumped from 45 per cent in 993 to over 60 per cent in 004 (Figure .4). Trade in commercial services, on the other hand, over the same period, increased slightly from 5 per cent to 7 per cent of GDP.
Figure .4 Unlike the trade in goods, Chinas economy has not been very open to trade in services Openness index, trade in goods and trade in services as per cent of GDP, 19932003
70 60 50 Per cent of GDP 40 30 20 10 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Commercial services trade Merchandise trade
Source: WTO 004.
China is yet to develop strength and depth in services with high-value added, such as various professional services and information-technology related services. Barriers to market entry for foreign competitors still exist. Frequently applied restrictions on the establishment of service enterprises include restrictions on the form of establishment; restrictions on geographic scope; and regulatory requirements. These restrictions have a long history in China, but are currently undergoing significant changes following Chinas WTO accession. China has also taken important steps to reform some of its services, but much remains to be done (see Chapter ).
P A G E 0
Overview
chinasservicessectorhasenormousPotential
The manufacturing sector will remain the main powerhouse of economic growth in China for some time to come. However, the services sector also is now being touted as the countrys next main engine of growth that will provide a solution to Chinas serious employment challenges, sustain economic growth and raise living standards. Chinas accession to the WTO in 00, with its commitment to liberalise services, is expected to herald a new era in the countrys services trade (see Chapter for details). Two forces, mutually reinforcing each other, will propel Chinas real take-off as a services economy in the future: first, the result of rising incomes; and secondly, the dramatic liberalisation of the services sector. The transformation of China to a services-oriented economy will depend on the extent to which ongoing liberalisation and deeper economic reforms are pursued and effectively implemented. China has acknowledged the importance of services. According to the then Vice-Premier (now Premier) Wen Jiabao, the expansion of Chinas service industry over the past two decades had played an important role in increasing employment, improving industrial structure, upgrading the peoples quality of living, boosting economic growth and maintaining social stability (Peoples Daily 4 April 00). In its Tenth Five-Year Plan (20012005), the Government announced that great efforts must be made to develop the services sector and substantially expand its presence in the national economy (China Internet Information Center 00).7 The Plan highlighted Chinas determination to develop producer service industries by introducing new forms of enterprises and advanced technology; developing chain operations, logistics and distribution, agency systems and multi-modal transportation; and upgrading the transportation industry and postal services (Li & Fung Research Centre 004). China sees a number of solutions to speed up the development of the services sector. These include: increasing foreign participation to promote competition and improve efficiency; accelerating urbanisation; and continuing with industrial development that will in turn encourage the expansion of service industries (NDRC 005).
According to the Plan, the share of the services sector in GDP (China uses a much narrower definition of services which does not include construction) is to rise to 36 per cent by 005 from 33 per cent in 000; employment in the services sector is targeted to increase to 4 per cent per year on average and account for 33 per cent of total employment by 005 (China Internet Information Centre 00).
P A G E
Performanceandsectoralstructure
Over the past 5 years, the services sector, stimulated by rapid increases in real per capita income, has grown by around 9 per cent per year. This rate is well below industrial sectors growth of .4 per cent per year over the same period, although since 998, the growth differential between the two sectors has started to diminish (Figure .5).
Figure .5 Services sector less dynamic than the industrial sector Industry and services real value added, growth in per cent and real GDP per capita, index (1978=100), 19902004
24 20 16 Per cent 12 8 4 0 800 700 600 500 400 300 200 100 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 GDP per capita (rhs)
Source: CEIC 005.
Services (lhs)
Industry (lhs)
Chinas services sector is projected to expand significantly as rising per capita incomes are now being accompanied by substantial removal of restrictions in the services sector. The services sector in China was projected to be 33 per cent larger if the relatively large barriers to entry (referred to in Table .) were removed than if these barriers had remained in force (Dee and Hanslow 000). The removal of particularly stringent services sector restrictions alone was forecast to increase Chinas real GDP by over US$90 billion after 0 years (Dee and Hanslow 000 also cited in McGuire and Findlay 005)
P A G E
Index, 1978=100
Overview
Even in a highly restrictive environment, transport, storage, post and telecommunications recorded remarkable growth of around per cent per year over the period 990000 fuelled by demand from industry and consumers. While growth slowed in the first three years of Chinas WTO accession, in 2004, the sector grew by an unprecedented 5 per cent as China started to implement liberalisation measures in transport, storage, post and telecommunications sector (Figure .6) (see Chapter for details). After expanding by per cent in 99, growth in construction declined and reached a low of less than 3 per cent in 997, as the Asian crisis accentuated the economic slowdown that followed the investment boom of the early 990s (IMF 000).8 The sector started picking up again in 000 and recorded . per cent growth in 003. Growth has remained robust in 004; and the prospects over the near-to-medium term remain positive as China prepares for the 008 Olympics and implements its ongoing liberalisation measures.
Figure .6 Transport, storage, post and telecommunications recorded unprecedented growth in 004 Annual (real) rate of growth of the three largest service sectors in per cent, 19902004
25 20 15 Per cent 10 5 0 -5 -10
Notes:
1990
1992
1994
1996
1998
2000
2002
2004
Construction Transport, storage, post & telecommunications Wholesale & retail trade & catering services
Value-added data in real terms are only available for the three largest sectors of services.
Sources: CEIC 2005 and NBSC 2005b.
The structure of Chinas services sector is changing with the growing importance of education, health and social services, which altogether have increased its share from 4.6 per cent in 996 to over 9 per cent in 00 (Figure .7a). Over the same period, the two sectors more than doubled in value from RMB 364 billion to RMB 852 billion (Figure 1.7b). This sectoral change reflects the increasing importance China and its people are placing on human capital investment, a critical ingredient for the emergence of competitive service industries.9
8
To support economic activity, China introduced a fiscal package amounting to 2.5 per cent of GDP of infrastructural spending in 998 and interest rates were progressively lowered (IMF 000). The sectoral share of education, health and social services in China is now comparable to that of Australia. In Australia, the share of education, health and community services in total services has averaged close to 8 per cent over the past two decades (ABS 2005a).
P A G E 3
The implementation of liberalisation measures may pose a serious challenge to highly protected firms in the services sector, including a number SOEs. However, sustained improvement in Chinas services sector can only be ensured by highly efficient and competitive firms operating in a liberalised environment.
Figure .7 Education, health and social services are expanding a) Sectoral breakdown of services, per cent share, 1996, 2002 and 2004
Wholesale and retail trade and catering services Construction Transport, storage, post and telecommunications Finance and insurance Health and social services Education Government agencies and social organisations Real estate Other services 0 5 1996 10 15 Per cent of total services 2002 20 2004 25
b) Sectoral breakdown of services, RMB billion, 1996, 2002 and 2004

Wholesale and retail trade and catering services Construction Transport, storage, post and telecommunications Finance and insurance Health and social services Education Government agencies and social organisations Real estate Other services 0 200 400 1996
Notes:
600 RMB billion 2002
800 2004
1000
1200
Other services also include: scientific, research & technical services; and services related to agricultural and mineral sectors. Health and social services include provision of healthcare, sports, social welfare and other social services. Latest 004 data are only available for the three largest service sectors.
Sources: CEIC 2005 and NBSC 2005b.
P A G E 4
Overview
increasingforeigninvestorinterestinchinas servicessector
Since 997, foreign direct investment (FDI) in Chinas services sector has accounted for around a quarter of total FDI per year.0 While FDI in services was reported to have reached only around US$ billion each year since 00, the amount of contracted (but not yet fully utilised) FDI in the services sector has increased significantly since 2001 (Figure 1.8). Rising levels of contracted FDI suggest increasing foreign investor interest in Chinas services sector.
Figure .8 Increasing FDI in services yet to be fully utilised Sectoral distribution of FDI, US$ billion, 19972003
40 35 30 US$ billion 25 20 15 10 5 0 1997 1998 1999 2000 2001 2002 2003 Agriculture, mining and others Manufacturing Services Contracted (but not fully utilised) FDI in services 40 35 30 US$ billion 25 20 15 10 5 0
Source: CEIC 005.
0
CEIC reports two types of FDI data from China (originally taken from National Bureau of Statistics of China), namely contracted (i.e. foreign capital indicated in signed agreements) and utilised (i.e. foreign capital actually utilised) both in US dollars. The figures reported here refer to utilised FDI unless otherwise stated.
P A G E 5
Real estate continues to attract the largest share of FDI in services although its share has decreased from 47.4 per cent in 999 to 44.8 per cent in 003 (Table .). FDI in social services, on the other hand, reached US$3. billion in 003, up from US$.6 billion in 999, and increased its share from .7 per cent to 7. per cent over the same period.
Ta b l e . Real estate and social services attract the most FDI in services Distribution of FDI in services, by sector, US$ billion and per cent share, 1999 and 2003
1999 Sectors Real Estate Social Services Wholesale, Retail and Catering Transport, Storage and Telecom Construction Scientific Research and Polytechnical Finance and Insurance Health Care, Sports and Social Welfare Education, Culture and Broadcasting Geological Prospecting & Conservancy Total Per cent of total FDI
Source: CEIC 005.
2003 % share 47.4 .7 8. 3. 7.8 0.0 0.0 .3 0.5 0.0 100.0 US$ billion 5. 3. . 0.9 0.6 0.3 0. 0. 0. 0.0 11.7 % share 44.8 7. 9.6 7.4 5. . .0 . 0.5 0. 100.0 .8
US$ billion 5.6 .6 .0 .6 0.9 0.0 0.0 0. 0. 0.0 11.8 6.4
Chinas services sector is seen as the next battle ground for many multinational corporations as the opening of the sector offers enormous market opportunities (Luo 00). China has allowed multinational corporations to enter into a variety of Chinese service industries, albeit under strict regulations. By the end of 00, the number of service enterprises with foreign investment reached 5 699, while capital invested by foreign partners stood at US$. billion, accounting for around 74 per cent of the total registered capital of foreign-invested enterprises in the services sector (NBSC 2005b).
P A G E 6
Overview
chinastradeinservicesgrowing
Chinas trade in commercial services has increased significantly since the countrys WTO accession in 00, which saw the removal of some of the barriers to trade in services (Figure .9). This trade reached US$0 billion in 003, up from US$7 billion in 00, and in the same period commercial services exports increased from US$3.9 billion to over US$46.3 billion and imports from US$39.0 billion to US$54.8 billion. In 003, China was the worlds 9th largest exporter and 8th largest importer of commercial services, accounting for around 3 per cent of global services trade (WTO 004). In spite of these increases, Chinas trade in commercial services remains relatively modest, accounting for less than 0 per cent of its total trade. It is expected to grow considerably as China implements its accession commitments and pursues further reforms.
Figure .9 Chinas trade in commercial services accelerated since its WTO accession Commercial services exports and imports, US$ billion, 19932003
120 100 80 US$ billion 60 40 20 0 Exports Imports
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Source: WTO 004.
Transport and travel, which account for more than half of Chinas trade in commercial services (54.5 per cent of exports and 60.9 per cent of imports) are expected to continue to dominate Chinas growing commercial services trade. China is projected to become the worlds biggest tourist destination and fourth largest source of tourism by 00 (see Chapter 3). Computer and information services and insurance are also becoming important drivers of Chinas trade in services. China exported US$. billion of computer and information services in 003 and the sector increased its share from less than half a per cent of Chinas total commercial services exports in 997 to .4 per cent (Table .3). Chinas import of insurance services, on the other hand, reached US$4.6 billion in 003, increasing its share from 3.8 per cent to 8.3 per cent of the countrys total commercial services imports. Chinas trade in other business services, which accounts for a third of exports and a quarter of imports, is also expected to expand significantly with the ongoing liberalisation of the sector.
P A G E 7
Ta b l e . 3 Transport and travel dominate but computer and information services and insurance are also driving Chinas trade in services Chinas trade in commercial services, US$ billion and per cent share, 1997 and 2003
Exports US$ bn 2003 Transportation Air transport Sea transport Other transport Travel Other commercial services Communication services Computer and information services Construction services Financial services Insurance services Other business services Personal, cultural, and recreational services Royalties and licence fees Total Per cent of world commercial services trade
Source: WTO 004.
Imports US$ bn 2003 8. ... ... ... 5. .4 0.4 .0 . 0. 4.6 0.4 0. 3.5 54.9 % Share 1997 35.9 6.5 4.5 4.8 9.3 34.8 .0 0.8 4.4 . 3.8 .5 0. .0 100.0 2003 33. ... ... ... 7.7 39. 0.8 .9 . 0.4 8.3 8.9 0. 6.5 100.0
% Share 1997 . .7 4.0 5.3 49.3 38.7 . 0.3 .4 0. 0.7 33.7 0.0 0. 100.0 2003 7.0 ... ... ... 37.5 45.4 .4 2.4 .8 0.3 0.7 37.6 0. 0. 100.0
7.9 ... ... ... 7.4 . 0.6 1.1 .3 0. 0.3 7.4 0.0 0. 46.4
.6
3.
servicessectorgeneratesanincreasingnumberofjobs
While the services sector in China still remains largely underdeveloped, the sector has been very important in addressing Chinas employment challenges and over the past two decades, it has been the fastest growing source of new jobs in China. In 00, over 0 million people were employed in service industries, accounting for over 35 per cent of total employment (Figure .0). While the primary sector still employs the greatest number of people, employment in the sector has been falling since 990. Since the mid-990s, the manufacturing sector has also been shedding jobs. The increasing capacity of the services sector to generate jobs has been extremely important in offsetting job losses from the primary and manufacturing sectors and in absorbing new workers entering the market. The regional pattern of employment shows a positive correlation between the share of tertiary industry employment and GDP per capita (Figure .). This relationship serves to highlight the potential benefits that could flow from further expansion of services in the other provinces.
P A G E 8
Overview
To maximise employment gains from the expansion of services, China must also pursue further reform to enhance the functioning of the labour market. Reform of the hukou system, better information on job opportunities, improved education and training, and steps to enhance labour mobility would add to labour market efficiency.
Figure .0 Services creating more jobs Sectoral employment, million persons, 19902002
400 350 300 Million persons 250 200 150 100 50 0 1980 1982 1984 1986 1988 Primary
Source: CEIC 005.
1990
1992
1994
1996
1998
2000
2002
Services
Manufacturing
Figure . Services employment predominant in provinces and municipalities with highest per capita GDP Per capita GDP in US$ and share of tertiary industry employment in total employment in per cent, 2002
Per cent share of tertiary industry in total employment 70 60 50 40 30 20 10 0 0 500 1000 1500 2000 2500 3000 3500 4000 4500 Liaoning Tianjin Zhejiang Guangdong Beijing
Shanghai
..
GDP per capita in US$

Source: CEIC 005. P A G E 9
imPlications
Despite rapid growth in Chinas services sector, it remains a relatively weak part of the economy. China will need to develop a stronger services economy to sustain high rates of economic and employment growth and to increase overall economic efficiency. Gradual liberalisation of financial services, telecommunications, logistics and professional services is seen by the authorities as central to the development of the sector and the economy as a whole. Unlocking the enormous potential of services also requires wide ranging and deep reform of the legal and enforcement system, the financial system, labour markets and SOEs. Labour market reform, in particular, will be crucial in maximising the employment gains from the expansion of service industries. Plans and progress in services liberalisation and reform are analysed in the following chapter.
P A G E 0
Chapter
liberalisationofchinasservicessector.
KeyPoints
Chinas World Trade Organization (WTO) commitments for trade in services are far-reaching. Over the next few years, China has promised to eliminate most restrictions on foreign entry and ownership and most forms of discrimination against firms. China has promised to fully open cross-border supply (Mode 1) and consumption abroad (Mode 2) for most services, although there are significant exceptions in a number of areas. China has promised to guarantee entry of managers, executives and specialist employees of foreign-invested enterprises (Mode 4). In recent years, China has made significant progress in implementing its liberalisation commitments in many services and more openings are anticipated over the next few years. Market openings, however, are being frustrated by burdensome licensing and operating requirements particularly in financial services, telecommunications, construction services, and tourism and travel-related services. Lack of transparency of regulations and laws is constraining the establishment and the scope of operations of firms. Conflict between national and sub-national laws is creating problems for service providers particularly in the areas of legal services, telecommunications and distribution services. Implementation is not yet complete. Complementary reforms of the regulatory and legal enforcement system are necessary to give effect to Chinas commitments and sustain liberalisation efforts.
P A G E
Reforms have to be implemented to rehabilitate state banks and the rural financial system and address problems facing Chinas fledgling capital markets.
In telecommunications, authorities have overlapping policy setting and regulatory functions which contribute to non-transparent and unpredictable outcomes.
In logistics, further reforms are needed to remove both discrimination against particular types of enterprise and local protectionism.
Above and beyond its WTO commitments, China also has agreed to further relax market access conditions to its services market for Hong Kong companies under the Mainland Hong Kong Closer Economic Partnership Agreement.
China has strengthened its legal framework and amended its intellectual property rights regime to comply with the Agreement on Trade-Related Aspects of Intellectual Property Rights. However, enforcement remains problematic, with counterfeiting and piracy still at very high levels.
P A G E
Liberalisation
of
Chinas
Services
Sector
chinasservicesliberalisation:wtocommitments, achievementsandreformchallenges
In December 00, the worlds sixth largest trading nation, the Peoples Republic of China, became a full member of the World Trade Organization (WTO), the culmination of a 5-year negotiation process.
thegeneralagreementontradeinservices(gats)andmodes ofsuPPly
The WTO General Agreement on Trade in Services (GATS) is the first set of multilaterally negotiated and enforceable rules covering international trade in commercial services, excluding government services and certain rights in the aviation sector. The Agreement entered into force on January 995. GATS defines international trade in services as the supply of services through any of four modes. Mode , cross-border supply, only the service crosses the border. The delivery of the service can take place, for example, through telecommunications (telephone, fax, television, internet, etc) or the sending of documents, disks and tapes. Mode , consumption abroad occurs when consumers travel outside their country and consume services abroad. Visits to museums in a foreign country as well as medical treatment and language courses taken abroad are typical examples. Mode 3, commercial presence involves foreign direct investment, for example, when a foreign bank or telecommunications firm establishes a branch or subsidiary in the territory of a country. Mode 4, movement of individuals occurs when an individual has moved temporarily into the territory of the consumer to provide a service, whether self-employed or as an employee. Examples are computer consultancy services or the temporary employment of construction workers. The core liberalising provisions of GATS relate to market access (Article XVI) and national treatment (Article XVII). These provisions only apply to sectors explicitly included by a Member in its schedule of commitments a positive list approach and are subject to the limitations that the member has scheduled. Where commitments have been made, the market access provision prohibits six types of limitations: on the number of suppliers; on the total value of service transactions or assets; on the total number of service operations or on the total quantity of services output; on the total number of natural persons that may be employed; on measures that restrict or require specific types of legal entity or joint venture and on the participation of foreign capital. The national treatment principle is defined as treatment no less favourable than that accorded to like domestic services or service suppliers.
Source: WTO 005a.
This report provides greater detail of Chinas commitments on trade in services and updates a major report the Economic Analytical Unit released in 00 on Chinas WTO entry reform, China Embraces the World Market. China also submitted a schedule under GATS in April 994 but the schedule did not have legal status because China was not then a member of the WTO (Mattoo 004).
P A G E 3
Trade in services was a key area in Chinas WTO accession negotiations, and Chinas commitments represent perhaps the most thoroughgoing liberalisation of services trade ever negotiated in the WTO (Mattoo 004). So far, Chinas implementation of its WTO accession commitments has generally been good. Reviews of Chinas WTO services commitments find that considerable progress has been made in implementing key commitments in financial services, trading rights and distribution services.3 However, implementation is not yet complete and at times China has found difficulty in adhering to WTO rules. Market access, for example, is still being closely managed, particularly through the use of administrative measures. China has revised or adopted a wide range of laws, regulations and other measures to ensure the protection of intellectual property rights. However, the enforcement of intellectual property rights is problematic and counterfeiting and piracy in China have been described as at epidemic levels (USTR 2005). Nor have Chinas commitments to open service sectors been fully realised in all sectors. An opaque regulatory process and overly burdensome licensing and operating requirements continue to frustrate foreign providers of services. Sustaining the liberalisation of services and realising the gains from this will require complementary reform of the regulatory framework and enforcement system in addition to other economic reforms (Mattoo 004).
tradePolicyreformsassociatedwithchinasaccession
Chinas accession to the WTO means the country now operates within the terms of the General Agreement on Tariffs and Trade (GATT) and General Agreement on Trade in Services (GATS) and other WTO agreements. These include the five principles of: nondiscrimimination [most favoured nation treatment (MFN)] ensures that the best market access given to any one Member is extended to all other Members. In the case of China, the application of this general principle has involved some additional commitments, including the elimination of dual pricing systems, phasing out of restrictions on trading and the introduction of more uniform administrative arrangements and judicial review. These agreements are important, not just for the central authorities, but also for the lower tiers of government, which are often involved in internal trade and regulation market opening is reflected in Chinas commitment to open its services sector, abolish nontariff barriers and reduce tariffs undistorted trade involves general disciplines in areas such as subsidies and countervailing measures, antidumping and safeguards transparency and predictability require among other things, that each member publish promptly all trade rules and regulations and other specific commitments. Chinas specific
As part of Chinas Protocol of Accession, a special WTO procedure, the Transitional Review Mechanism was established. The 2002 review saw significant progress and did not reveal any major source of contention with regard to Chinas implementation of its WTO commitments, and specific difficulties reflected primarily technical problems rather than a broad pattern of noncompliance. However, implementation was seen as uneven. The 003 review noted some positive developments but Chinas WTO implementation efforts were seen to have lost a significant amount of momentum. The 2004 review noted more positive developments although serious problems remain and new problems emerged regularly (Rumbaugh and Blancher 2004, USTR 003, USTR 004).
P A G E 4
Liberalisation
of
Chinas
Services
Sector
commitments include: provision for uniform application of the trade regime and for independent judicial review; putting in place a mechanism whereby parties can bring problems of local protectionism to the attention of the central government; binding its entire tariff schedule for goods, almost always at tariff levels below previous applied rates thereby increasing predictability by ruling out tariff increases in the future; phasing out restrictions on trading rights for all products except for a short list of commodities that may remain subject to state trading; and allowing the entry of foreign and domestic suppliers into distribution and wholesale services Preferential treatment for developing countries means that China has full access to the WTO developing country provisions although, in particular cases, it faces tighter restrictions than other developing countries. Although China has a much lower per capita income than many economies in the WTO classified as developing, its size and growth performance made existing WTO members reluctant to accord it full developing country status.
Source: Martin et al. 004.
Chinas services commitments wider and deeper than those of many countries
In its accession to WTO, China committed to the substantial opening of a broad range of service sectors through the elimination of many existing limitations on market access, at all levels of government, such as banking, insurance, telecommunications and professional services. Chinas commitments were far-reaching, particularly when compared to the services commitments of many other WTO members (USTR 004). Indeed, China has made more commitments in more service sectors than a number of industrialised countries, other developing countries, or other countries that have recently acceded to the WTO (Mattoo 004).4 However, Chinas commitments on commercial presence were subject to a number of restrictions, including restrictions on form of establishment (the requirement to form a joint venture with foreign ownership frequently restricted to specified levels), geographic scope (allowed only in specified cities or in the Special Economic Zones), business scope (permitted only in a subset of consumers) and regulatory requirements (minimum capital requirements and requirement to establish a representative office prior to full business operations). At the time of accession, the number of sectors with a guarantee of full access in Chinas schedule was less than those for the other country groups, but by 008, when all liberalisation measures should have been phased in, Chinas market access commitments will be more extensive and its commitments on national treatment will be deeper and broader than those of all country groups (Mattoo 004).5 Phased liberalisation has already taken place in the important areas of financial services, telecommunications, logistics, tourism and travel-related services and in some professional services. While more openings are anticipated over the next few years, there is still much more room for further liberalisation. These developments are discussed in more detail in the succeeding sections.
4
China has made commitments in 356 sectors, high-income countries in 93 sectors, low- and middle-income countries in 00 sectors and large developing nations in 39 sectors (Ianchovchina 00 cited in Mattoo 004). See Mattoo (004) for details on numerical estimates of the breadth and depth of Chinas services commitments vis--vis other groups of countries.
P A G E 5
chinaslegalsystemandthewto:ProsPectsforcomPliance
China undertook to meet its WTO commitments by revising its existing laws and enacting new laws in full compliance of the WTO Agreement. The extent to which China revises its existing laws and promulgates new laws is something that can be monitored with relative ease. But clearly it is not enough simply to promulgate new regulations. They must be applied and enforced. There are at least two major issues of concern. The first is the extent to which local governments will engage in WTO-inconsistent practices that the central government is unable or unwilling to stop. Under Chinas constitutional system, local governments are bound by the central government. But in practice, sub-national governments in China enjoy considerable de facto autonomy from Beijing. China has numerous barriers to international trade that the central government is struggling to remove.The second issue is that of the capacity of Chinas courts to handle a substantial workload of reasonably complex cases. Chinas courts are weak and its judges, on the whole, are poorly qualified and lacking in experience. Even assuming the utmost good faith on the part of the central government, there are bound to be WTO-inconsistent measures and practices, many of which may persist. It is unlikely, however, that such problems will amount to more than routine frictions.
Source: Clarke 00.
financialservices
The liberalisation of financial services in China has been gradual reflecting the authorities attempt to keep it in harmony with the speed and process of the countrys overall economic reform. Banking was the first financial sector to allow the involvement of foreign investors; it was followed by insurance.6 Their entry was subject to a range of restrictions particularly on business scope and geographical coverage. Chinas tradable corporate securities markets formally opened in the 990s.7 To tap foreign investment sources under a closed capital account regime, China developed a B share market exclusively for foreigners. Foreigners can also invest in Chinese firms through H shares and Red Chips stocks (these are Hong Kong firms with most of their cash flows derived from mainland Chinese operations and are essentially considered Chinese stocks by the market) listed in Hong Kong and N shares listed on the New York Stock Exchange (Hasenstab 1999) (see Box Listing of Chinese Companies in Hong Kong A Mutually Beneficial Relationship).
6
China first allowed foreign banks to open representative offices in 1981 (Hasenstab 1999). During the period 1992-1996, China extended life and non-life insurance licenses to foreign firms but with tighter product and geographic restrictions than for domestic providers (Bhattasali et al. 2004). China opened the Shanghai Stock Exchange in December 990 and the Shenzhen Stock Exchange in April 99. Once the exchanges were opened, domestic investors were restricted to the A share markets. Tradable A shares, which make up a minimum of 5 per cent of total shares at the time of initial public offering but rarely make up a controlling stake, are the only class of shares that can be traded. The government often holds the controlling interest in listed firms through direct ownership of non-tradable shares, while the remaining shares are distributed between other non-tradable legal person shares owned by domestic institutions and employee shares (Hasenstab 999).
P A G E 6
Liberalisation
of
Chinas
Services
Sector
listingofchinesecomPaniesinhongKongamutually beneficialrelationshiP
The listing of Chinese enterprises in Hong Kong has contributed significantly to the development of the financial sector in Hong Kong and has helped sustain Hong Kongs economic recovery. The benefits for China have been equally significant. Hong Kong has provided the regulatory regime, international platform, infrastructure and market capacity for Chinese enterprises to raise funds more efficiently. It has also provided impetus for corporate sector reforms in China. While not fool-proof, Chinese enterprises have to comply with market discipline to list in Hong Kong in accordance with international standards; they must comply with codes of corporate governance, initial and continuous listing obligations and enforcement by regulators; they must comply with international financial accounting standards; and they must be able to compete against internationally recognised companies. The listing of Chinese companies in Hong Kong has boosted significantly the depth and breadth of the Hong Kong stock exchange. In the early 990s, the daily market turnover in Hong Kong was worth approximately HK$3 billion (A$570 million), similar to Singapore. The daily turnover in 005 is now about HK$5 billion (A$.8 billion), while Singapore turnover has remained in the HK$34 billion range (A$570760 million). The proportion of the increased turnover attributable to trading in China stocks has risen consistently over the past decade. Between 1993 and 2004, total turnover in the Hong Kong stock exchange grew 3.3 per cent. Non-China turnover or the turnover of stocks not officially nominated by the Exchange as Red Chips or H shares grew by .05 times. During the same period, turnover in Red Chips or H shares grew by a massive .8 times. In 993, the turnover of China-related stocks was worth HK$ billion (A$3 billion) or .9 per cent of total turnover. At the end of 004, trading was worth HK$549 billion (A$94 billion) or 46 percent of the total turnover. In April 005, 0 of Hong Kongs top 0 stocks by turnover were Chinese stocks, in particular China Mobile, Petro China, China Life, CNOOC, Bank of ChinaHong Kong, China Telecom, Yanzhou Coal, Huaneng Power and CSCL. In terms of market capitalisation, at the end of September 005, Chinese stocks made up 3 per cent of total market capitalisation (main board), up from 5 per cent in 994; there were 76 listed H shares with a total market capitalisation of HK$ 655 billion (A$ billion) and 85 listed Red Chips with a total market capitalisation of HK$759 billion (A$98 billion). As at the end of September, Chinese stocks also accounted for 0.3 per cent of the market capitalisation of the Growth Enterprise Market.8 In 004, Chinese companies accounted for 78 per cent of all initial share offers in Hong Kong. In 2005, the share offer of the Bank of Communications, the fifth largest bank of China was considerably oversubscribed and accounted for more than half of the capital raised in the Hong Kong Stock Exchange for six months.
Sources: Rule 005, Australian Consulate-General Hong Kong 005, HKSE 005.
The Growth Enterprise Market consists mostly of emerging enterprises with growth potential that could not fulfil the profitability/ track record requirements of the main board of the Hong Kong stock exchange (HKSE 005).
P A G E 7
Chinas WTO accession commitments specify that, by December 006, geographic restrictions limiting where financial institutions may operate will be removed; any non prudential restrictions (for example, on ownership or operation) will also be removed, and foreign financial institutions will be allowed to provide services to all Chinese clients (Appendix .). In the area of banking, at the time of accession, foreign financial institutions were allowed to conduct foreign currency business with all clients with no geographic restrictions on their operations. In December 2003, China allowed foreign financial institutions to conduct local currency business with Chinese enterprises in cities. In December 004, China opened not only the three cities scheduled but also opened two other cities ahead of schedule, bringing the total number of cities open to foreign banks services to 18 (USCBC 2005).9 China was also seen as being transparent in releasing for public comment draft regulations for payment and processing organisations. Chinas compliance on its banking services commitments has not been without problems. Following the WTO accession, the Peoples Bank of China imposed working capital requirements and other prudential norms on foreign banks headquarters and branches that went beyond international norms (USTR 004). In response to pressure, China made reductions in capital requirements in 003 and 004 but further action is needed to align its prudential requirements with international norms. Under current regulations, a foreign bank can take an equity position in a local bank of no more than 0 per cent.0 If the local bank remains unlisted, the maximum combined equity investment of all overseas banks cannot exceed 5 per cent, otherwise the bank would no longer be considered as a Chinese financial institution. Regulations governing foreign-funded financial institutions are much more restrictive, particularly with respect to operating and registered capital requirements (Table .).
These include the cities of Shanghai, Shenzen, Tianjin, Dalian, Guangzhou, Zhuhai, Qingdao, Nanjing, Wuhan, Jinan, Fuzhou, Chengduo, Chongqing, Kunming, Beijing, Xiamen, Shenyang and Xian. Article 8: The equity investment proportion of a single overseas financial institution in a Chinese financial institution shall not exceed 20 per cent. (Order of China Banking Regulatory Commission No 6, 2003, Administrative Rules Governing the Equity Investment in Chinese Financial Institutions by Overseas Financial Institutions, CBRC 2005a). Article 9: Where the combined equity investment proportion of all overseas financial institutions in a non-listed Chinese financial institution is equal to or exceeds 25 per cent, the non-listed Chinese financial institution shall be treated as a foreign-funded financial institution by the regulatory authority. Where the combined equity investment proportion of all overseas financial institutions in a listed Chinese financial institution is equal to or exceeds 25 per cent, the listed Chinese financial institution shall still be treated as a Chinese financial institution by the regulatory authority (Order of China Banking Regulatory Commission No 6, 003, Administrative Rules Governing the Equity Investment in Chinese Financial Institutions by Overseas Financial Institutions, CBRC 2005a).
0

P A G E 8
Liberalisation
of
Chinas
Services
Sector
Ta b l e . Foreign banks subject to a myriad of operating and registered capital requirements Operating and capital requirements of foreign-invested enterprises (FIEs), RMB million
Wholly foreignfunded bank Each branch of wholly foreignfunded bank
Foreign bank branch
Wholly foreignfunded finance company
Forex business with FIEs & prescribed forex business with non-FIEs Operating capital Registered capital Forex business with all kinds of customers Operating capital Registered capital Forex and RMB business with FIEs & prescribed forex & RMB business with non-FIEs Operating capital Registered capital Forex business with all customers, RMB business with FIEs and prescribed RMB business with non-FIEs Operating capital Registered capital Forex business with all kinds of customers & RMB business with FIEs Operating capital Registered capital Forex and RMB business with all kinds of customers Operating capital Registered capital 500 000 300 700 300 600 00 500 300 500 00 400 00 400 00 300 00 400 00 300 00 300 00 00
Source: Order of China Banking regulatory Commission No. 4, 2004 Rules for implementing the Regulation of the Peoples Republic of China Governing Foreign Funded Financial Institutions, CBRC 2005a.
P A G E 9
Upon accession to the WTO in 00, China allowed insurance firms immediate entry into reinsurance and life insurance. China also permitted non-life insurers to open a branch or joint venture with 51 per cent foreign ownership. China allowed non-life insurers to provide master policy insurance, insurance of large scale commercial risks without geographic restrictions and insurance of enterprises abroad as well as property insurance, related liability insurance and credit insurance of foreign-invested enterprises in five cities: Shanghai, Guangzhou, Dalian, Shenzhen, and Foshan. Life insurers, on the other hand, were permitted to provide individual (not group) insurance to foreigners and Chinese citizens in the same five cities. China implemented on schedule its commitments to allow foreigninvested insurance companies to provide health, group and pension/annuities insurance to both foreign and Chinese clients (USCBC 2005). Chinas implementation of its commitments has benefited foreign life insurers and in turn, Chinese consumers have become more sophisticated with exposure to a greater selection of insurance products (USCBC 2005). Foreign-owned life insurers, however, are only permitted to own up to 50 per cent of a joint venture. While China claims to now award licenses solely on the basis of prudential criteria and does not apply quantitative limitations or an economic needs test, problems remain. Shortly after accession, China Insurance Regulatory Commission issued several regulations implementing many of Chinas commitments, but they also created problems in three critical areas capitalisation requirements, transparency and branching (USTR 2004). In 2004, China issued final implementing rules which lowered capital requirements, streamlined licensing application procedures and shortened approval times. However, some procedures remain unclear and issues on branching rights were not adequately addressed by the new rules. The United States has expressed concern about discriminatory treatment in the branch approval process whereby established Chinese insurers are being granted new branch approvals on a concurrent basis (more than one branch at a time) while foreign insurers so far have only received approvals on a consecutive basis (one branch at a time) (USTR 004). While it is true that China has made it easier for foreign insurers to enter the Chinese general insurance market, the WTO accession commitments made no mention of regulatory reforms, capital controls and, critically, excludes foreign insurance institutions from having access to statutory insurance business, principally the third party motor insurance liability market. An insurance institution becomes a foreign insurance institution if foreign investment equals or exceeds 5 per cent (although this cap does not apply if the insurer is listed as in the case of domestic insurers PICC and Ping An, which now have foreign investment greater than 5 per cent). The result is that foreign insurers looking to enter the growing property and casualty insurance are limited to joint ventures with minority investments less than 5 per cent. This is a critical point limiting the ability of foreign property and casualty insurers to enter the Chinese market. Furthermore, because compulsory and non-compulsory insurances are generally sold together, this effectively excludes foreign insurance institutions from taking a stake in the largest portion of the domestic property and casualty insurance market.3

The Detailed Implementing Rules on the Regulations for the Administration of Foreign-Invested Insurance Companies issued in May 2004 lowered capital requirements for national licenses from RMB 500 million to RMB 200 million and for branch offices from RMB 50 million to RMB 20 million (AAR 2004). In China, first party insurance is almost universally taken from the same insurer as part of the same transaction as compulsory third party insurance. Compulsory third party liability in China covers personal injury and property damage, in contrast to Australia where it only covers personal injury (IAG 005).
3
P A G E 30
Liberalisation
of
Chinas
Services
Sector
In the securities markets, at the time of WTO accession, China allowed foreign securities firms immediate entry into trading in foreign-denominated securities and within three years into joint ventures trading in domestic shares. At the time of accession in 00, China permitted joint ventures with up to 33 per cent foreign ownership to conduct business in domestic securities investment funds management but raised this in 004 to 49 per cent. In the same year, China also permitted joint ventures with up to 33 per cent foreign ownership to underwrite domestic equity issues and underwrite and trade in international equity and all corporate and government debt issues. The expansion of foreign financial institutions in China is expected to break financial monopolies and improve financial efficiency, which should benefit consumers. Foreign institutions participation in Chinas financial sector is also expected to bring in advanced management experience and promote financial innovation. Already, the opening up of the countrys fast growing finance sector to greater foreign participation is creating greater impetus for much needed restructuring.
Increased pressure for further reform

Chinas WTO commitment to fully open its banking sector to foreign participation from 007 is providing the impetus for further reform in Chinas financial sector. Market opening has already put pressure on financial institutions to operate more efficiently. Premier Wen Jiabao stated at the close of the National Peoples Congress in March 004, that China was engaged in a battle to reform banking and it could not afford to fail (China Daily 5 March 004). China has made good progress in improving the strength and institutional setting of the financial sector over the last decade but much remains to be done. Banking sector reform The Chinese authorities had already begun reforming the banking sector in the 990s, limiting government-directed credit allocation, freeing up interest rates, making the banks management more responsible for their commercial decisions, establishing asset management companies to purchase and dispose of older non-performing loans, lifting standards of accounting, credit risk and disclosure, improving staff incentives and increasing bank management responsibility (EAU 00). In 2003, the Government established the China Banking Regulatory Commission to take over the supervisory and regulatory responsibilities for banks from the Peoples Bank of China. The Commission set as its near-term priorities the reduction of non-performing loans and quicker reform of the rural financial system. Non-performing loan ratios in Chinas big four state banks have declined markedly in recent years although they are still relatively large.4 Between 1998 and 2002, the four state banks also reduced their payroll by about 50 000 employees, but the painful streamlining is far from over, with their staff still exceeding .4 million (China Daily 3 December 003).
4
Non-performing loan (NPL) ratio is the share of the outstanding balance of non-performing loans (i.e. classified as substandard, doubtful and loss in Chinese bank statistics) to total loans. Chinas big four state banks are the Bank of China, the China Construction Bank, the Industrial and Commercial Bank and the Agricultural Bank of China. As of 31 March 2005, their NPLs stood at RMB1.57 trillion representing an NPL ratio of 15 per cent, or 10 per cent more than the countrys joint-stock commercial banks and even more than the foreign banks; the latter jointly recorded an NPL ratio of only 1.2 per cent (CBRC 2005b).
P A G E 3
In late 2003, the Government injected a total of US$45 billion into two of the big four state banks, the Bank of China and China Construction Bank, to help boost their balance sheets following a massive debt write-off. The recapitalisation of two major state banks was an important step forward. It now needs to be accompanied by recapitalisation of other banks and enforcement of capital requirements and adequate loan-loss provisioning throughout the banking system (IMF 004). The Government made a subsequent injection of US$15 billion into Industrial and Commercial Bank of China in April 2005. On the basis of their experience with the pilot shareholding reforms of the Bank of China and the China Construction Bank, the Government also approved the implementation of shareholding reform in the Industrial and Commercial Bank of China (PBOC 2005a).5 The restructuring of the state banks is being followed by stock listing as another platform for enhancing the market-based operation of the banks.6 However, the lack of efficient internal control and risk management systems remains a matter of concern. Meanwhile, Chinas Asset Management Companies are reported to have disposed of 57.3 per cent of their accumulated non-performing loans, worth RMB717.4 billion, achieving a cash recovery ratio of 20.7 per cent as of 30 June 2005 (CBRC 2005c). China would like to repeat the success of its Asian neighbours in eradicating its non-performing loan problems.7 But to do so, it must make improvements in several key areas: the low asset quality of its non-performing loans, a weak legal framework surrounding debt recovery and poor governance in the asset management companies (Tay 005). Insurance market reform The opening up of Chinas insurance industry has been accompanied by internal reforms that include the separation of property insurance, life insurance and reinsurance; reform of export credit insurance services; shareholding reorganisation of state-owned underwriters; and reform of the regulatory system. In 003, Chinas three largest state-owned insurance companies, Peoples Insurance Company of China (PICC), China Life and China Reinsurance, all conducted joint-stock reorganisations.8 They hired international consultants to redesign their structure, established insurance asset management companies and explored new ways of managing their assets. A market-oriented premium rate reform was launched
5
The Government announced that the core capital adequacy ratio of the Industrial and Commercial Bank of China will reach six percent with the capital replenishment and its overall capital adequacy ratio will exceed 8 per cent with the issuance of subordinated debt (PBOC 2005a). China Construction Bank listed in late October 2005 while the Bank of China is planning a float in 2006 (AME Info 005 and Business Week 3 October 005). The Korea Asset Management company resolved over 60 per cent of its acquired NPLs and made a profit in the final sale of its NPL portfolio. Thailand Asset Management Corporation and Corporate Debt Restructuring Advisory Committee allowed Thailand to successfully reduce its non-performing loans from 45 per cent to per cent by 004. Malaysias two recovery agencies Danaharta and Danamodal were also successful in maximising the recovery value of acquired assets and in recapitalising undercapitalised banking institutions (Tay 005). In November 2003, the new PICC listed in Hong Kong and became the first mainland state-owned financial institution to go public overseas. In December 2003, the New China Life Insurance listed in Hong Kong and in New York. The New China Life initial public offering was the biggest in the world in 003 with its stock oversubscribed 6 times globally and 68 times in Hong Kong. China Re was reformed into China Reinsurance (Group) Corporation with three subsidiaries, namely, China Continent Property & Casualty Insurance Co Ltd, China Property Reinsurance Co Ltd, and China Life Reinsurance Co Ltd. Foreign and domestic private investors have equity stake in the three subsidiaries: 0 per cent of China Continent Property and Casualty Insurance; 6.3 per cent of China Property Reinsurance; and 44.9 per cent of China Life Reinsurance. The International Finance Corporation, the private sector arm of the World Bank group also bought 7.5 per cent of China Life Re (China Daily 0 July 004).
6
7
8
P A G E 3
Liberalisation
of
Chinas
Services
Sector
nationwide. Chinas Insurance Regulatory Commission also enacted new rules to broaden the scope of insurance companies bond investments, formerly permitted in only four industries but now permitted in all corporate bonds with AA or higher credit ratings. The new rules also allowed insurers to invest up to 0 per cent of their assets in corporate bonds, increased from 0 per cent previously. Despite significant reform in recent years, China is yet to achieve an insurance regulatory regime that is in line with international best practice. Some companies have weak internal control mechanisms and are frequently found giving fraudulent data and misleading clients, especially when promoting new products (Peoples Daily 7 October 004). The supply of underwriting capacity and capability remains inadequate. Although investment channels for insurance companies were broadened in 003, they are still largely restricted to domestic bank deposits and low-yield products like bonds. To build a modern, credible and competitive insurance industry, China needs good solvency monitoring, information disclosure and efficient supervision of the market conduct of insurers. Securities market reform At the end of 2004, the Shanghai and Shenzhen stock exchanges together listed 1415 firms, mostly former state-owned enterprises (SOEs), with a tradable capital mostly in the form of A shares worth RMB1.2 trillion, equivalent to less than 10 per cent of Chinas GDP (CEIC 2005). The development of the equity market in China has been hampered the by fact that equities in Chinas listed companies are generally in the form of non-tradable shares (68 per cent as of July 005), most of which are in the hands of the state. The situation has led to poor governance and many instances of outright fraud (AFR 7 June 005). Commentators point to Chinas equity market as the weakest area of the countrys financial development (AFR 5 May 005). The weakness of the equity markets in turn has held back the development of other financial markets, such as derivatives and corporate bonds (The Economist 005). Chinas Securities Regulatory Commission is making important progress in improving listing rules, regulation and governance oversight; it is also vigorously enforcing delisting procedures, boosting minority shareholder protection and upgrading its regulatory and surveillance capacities. Chinas disclosure requirements remain comparatively weak by international standards. In May 005, the authorities embarked on a share reform plan to address the issue of non-tradable shares. The authorities initially announced four companies to list their non-tradable shares. This was expanded to include 4 more companies in June 005. The latter announcement included large stateowned groups such as the Baoshan Iron and Steel Company, Yangtze Electric Power Company and Shanghai Port and Container (AFR June 005). In August 005, the authorities announced further that all companies with shares traded in Shanghai and Shenzhen should move ahead with plans to shift their state-held non-tradable shares worth about US$70 billion into the market (Lateline News 5 August 005). After an initial lukewarm response to the Governments share reform plan, both markets rallied after specific company reform plans reassured investors that a glut of newly tradable shares would not overwhelm the markets.9 While the share reform plan is currently limited only to domestic investors holding shares denominated in Chinese yuan, it is expected to push Chinese firms to become more accountable by giving all shareholders a stake in corporate performance.
9
Companies have been offering compensation plans to shareholders in the form of non-tradable shares and warrants agreements to sell shares for a fixed price at a future date. Companies need to get the two-thirds support from their public shareholders for their share reform plans to go ahead (Lateline News 5 August 005).
P A G E 33
telecommunications
The introduction of competition and regulatory reforms in Chinas telecommunications sector is expected to lower prices, improve quality of service, stimulate further growth and increase telecom penetration rates, and result in major changes to the structure of the industry. Until 994, China Telecom was the only telecommunications services provider in China and new players were effectively kept out. The Ministry of Posts and Telecommunications acted as both the regulator and the operator of telecommunication services. Reforms began to be introduced in 994 but more significant reforms only started in 1998 in anticipation of the countrys WTO accession (see Box Pre-WTO Accession Telecom Liberalisation and Reforms). By the time China acceded to the WTO in December 00, the country had seven major state-owned telecommunication operators, including Jitong and had more than 3000 different enterprises engaged in internetrelated and other value-added business (Pangestu and Mrongowius 004) (Figure .).
Figure . China broke up China Telecoms monopoly by creating several state-owned operators Restructuring of Chinas telecommunications industry, 19942003
China Telecom Mll CT (all fixed-line, south) CMCC (GSM, long dist. IP) CSAT (satellite comm.)
China Telecom
China Mobile
China Satellite
Guoxin Paging
Unicom
Unicom (all, CDMA)
China Netcom
CNC (internet, fixed-line,north)
Jitong China Railcom CRR (fixed line, long dist, internet)
994
Note:
998
000
00
004
MII refers to the Ministry of Information and Industry.
Source: Pangestu and Mrongowius 004.

P A G E 34
Liberalisation
of
Chinas
Services
Sector
Pre-wtoaccessiontelecomliberalisationandreforms
In 1994, China took the first tentative steps to introduce competition in its telecommunications sector, creating the China United Telecommunications Corporation (Unicom) with the aim of improving service quality through managed competition. It also established Jitong, initially aiming to provide data services via satellite connections and provide competition to China Telecom.0 The Government then created the Ministry of Information Industry in 998 to separate the regulatory and operational function of the Ministry of Posts and Telecommunications and to respond to changes in technology and administrative reforms. The Ministry of Information Industry was created by merging the Ministry of Posts and Telecommunications, the Ministry of Electronics Industry and parts of the State Administration of Radio, Film and Television, China Aerospace Industry Corporation and China Aviation Corporation. The Ministry of Information Industry worked closely with the State Economic and Trade Commission in setting policies for the information industry. Reforms introduced up to 998 were significant first steps but competition remained constrained, service quality remained poor, and prices, which continued to be set by the Ministry of Posts and Telecommunications, the State Pricing Board and the State Development Planning Commission, were uncompetitive by global standards. The independence of the Ministry of Information Industry and China Telecom was not convincingly demonstrated in part because many of the senior staff at the Ministry of Information Industry came from the Ministry of Posts and Telecommunications. In 999, the Ministry of Information Industry launched major restructuring efforts by splitting China Telecom into three state-owned companies and reinvigorating Unicom. The three companies to emerge from China Telecom were China Telecom for fixed lines business, China Mobile Communications Corporation for mobile phone business and China Satellite. In addition, China established China Netcom Corporation to build a broadband internet protocol network. In 000, China also issued a license to Railcom, a part of the Ministry of Railways to provide all basic telecommunications services except mobile. Despite major reform from 998, in anticipation of Chinas WTO accession, as well as in response to technological advances and the gradual commoditisation of telecommunications services, competition remains constrained, and there is a lack of clear and concise legislation, regulatory implementation and regulatory independence.
0
Most of Jitongs services have now been shifted to an Internet Protocol network infrastructure. These services include: internet access and gateway services; value-added services such as website hosting, server management and e-commerce solutions; and voice over internet protocol (Pangestu and Mrongowius 004).
P A G E 35
In 00, Chinas trade in telecommunication services was highly restrictive. Restrictions applied on establishment (i.e. on ability of services suppliers to establish physical outlets) and on ongoing operations of both domestic and foreign services suppliers (McGuire and Findlay 005). On a scale of zero to one (with one being most restrictive), Chinas foreign trade restrictiveness index was calculated at 0.60 (Figure . includes an explanation of this index). As an index, the number and severity of trade restrictions against foreign service suppliers in China were estimated to be of the same magnitude as those found in Indonesia. While Thailand and Vietnam had higher restrictions on foreign service suppliers than China and Indonesia, the index for trade restrictions on domestic service suppliers in China was the highest in East Asia.
Figure . Chinas trade in telecommunications services is highly restrictive Trade restrictiveness index, telecommunications services, selected Asian economies, 2001
Vietnam Thailand Indonesia China Malaysia Korea Philippines Singapore Japan Australia New Zealand Hong Kong 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 Domestic restrictiveness index Foreign restrictiveness index
Notes: Trade restrictiveness index measures the number and severity of restrictions on trade in services for foreign and domestic service suppliers. The foreign trade restrictiveness index and the domestic trade restrictiveness index include restrictions on establishment and ongoing operations. Index scores generally range from zero to one. The higher the score the more restrictive is the economy. Domestic trade restrictiveness index is a measure of all non-discriminatory restrictions that apply to all services suppliers. Foreign trade restrictiveness index is a measure of all non-discriminatory and discriminatory restrictions on foreign services suppliers. The foreign index includes the domestic index. For more details on methodology, see McGuire and Findlay 005. Source: McGuire and Findlay 005.
The introduction of reforms in Chinas telecommunications sector has seen substantial increases in the number of fixed and mobile phone subscribers and internet users although penetration rates are still well below many Asian economies (Figure .3). Telecommunications prices also have declined in recent years, more through mandated price reductions rather than pure competition.
P A G E 36
Liberalisation
of
Chinas
Services
Sector
Figure .3 Telecom penetration rates in China are still relatively low Total telephone subscribers per 100 inhabitants in 2004 and internet users as per cent of population, July 2005
180 160 140 120 100 80 60 40 20 0 China Philippines Thailand Malaysia Japan Korea Singapore Australia Taiwan Hong Kong Total telephone subscribers per 100 inhabitants Internet users as per cent of population
Sources: International Telecommunications Union 005 and Internet World Stats 005.
Chinas WTO commitments if fully implemented would be deeper and more significant than the reforms that preceded its WTO accession. Chinas WTO commitments in the telecommunications sector aim to open the market to foreign participation and to bring the domestic regulatory and business environment into line with international standards (see Appendix .). These commitments are of particular importance because China is the largest market for telecommunications in the world with enormous potential for further growth (see Chapter 3). However, four years after accession, many commitments remain to be implemented. Chinas WTO commitments have two main components. The first is the removal of limitations on market access by allowing right of establishment and removal of limitations on national treatment. These cover fixed line services and value-added services such as voice mail and online information services; mobile voice and data services; and domestic and international services, such as private leased circuit services. Most of these services are initially subject to a combination of ownership restrictions and geographic restrictions (Table 2.2). But for some services China has committed to phase out all geographic restrictions and relax equity restrictions by 007. China however, has not committed to allowing more than 49 per cent foreign ownership of important services such as mobile telephony and fixed line services. China took a step backward in 2003 by restricting the definition of services that could be provided under its Classification Catalogue. This restrictive interpretation has limited the opportunities for foreign providers of value-added services.
P A G E 37
Ta b l e . China phasing out geographic restrictions and allowing foreign ownership in telecommunications Chinas commitments schedule for telecommunications
Geographical restrictions (GR) and permitted level of foreign ownership in a joint venture in per cent
Upon accession Value-added services 30% Basic services 30% Mobile 3 cities 5% Fixed No foreign-ownership allowed Paging 3 cities 3 cities 4 more cities 49% 4 more cities 49% 4 more cities 35% 49% 3 cities 5% 4 more cities 35% 49% No GR 50% No GR 50% No GR No GR 00 003 004 005 006 007
Source: Compiled from China: Sector Specific Commitments, Services Database Output, WTO 2005b also cited in OECD 2003a and Mattoo 004. Notes: The three major cities are Beijing, Shanghai and Guangzhou: The 14 other cities are Chengdu, Chongqing, Dalian, Fuzhou, Hangzhou, Nanjing, Ningbo, Qingdao, Shenyang, Shenzhen, Xiamen, Taiyuan, Xian and Wuhan.
The second component requires China to adhere to the WTOs 996 reference paper on the regulatory framework for telecommunications. These disciplines aim to ensure a competitive environment that allows interconnection between systems under reasonable and non-discriminatory conditions and allows for universal provisions. The framework also requires the existence of a regulator, who will be independent of the telecom provider, and a set of criteria for licensing of entry and allocating scarce commodities such as the mobile telephone spectrum. Despite some significant reforms since WTO accession, Chinas telecommunications sector remains one of the most restricted and regulated among major developing countries in the region. Healthy market competition is being hindered by an unclear licensing system, compromised pricing regulations, inadequate regulations on interconnection and very high minimum capital requirements. Foreigninvested telecom suppliers of basic services and value-added services are subject to registered capital requirement of RMB 2 billion and RMB 10 million, respectively (Ure 2002). The current regulator, the Ministry of Information and Industry, while nominally separate from the current telecommunications

A review of capital requirements around the world shows essentially no capital requirements in many WTO member markets, including for example, Argentina, Australia, Brazil, Chile, the member States of the European Union, Japan and the United States (USTR 004).
P A G E 38
Liberalisation
of
Chinas
Services
Sector
operators, maintains excessive influence and control over their operations and continues to use its regulatory authority to disadvantage foreign firms (USTR 2004). Further reforms are needed to ensure the independence of the regulator, to improve interconnection and to promote effective tariff competition. If regulatory reform continues to proceed slowly, the impact of Chinas WTO accession in liberalising Chinas telecommunications market will be limited.
telecomsregulatoryframeworKisliKeamaze
In China, the Ministry of Information Industry supervises the telecom network, the State Administration of Radio Film and Television presides over cable markets and other departments regulate the internet. In response to growth of internet service and computer crimes, the State Information Leading Group was created in the mid-990s to approve and where necessary to amend the framework for industry regulations and measures to implement policy. The State Council Informatization Office was created under this Group to serve as its executive arm, with a mandate to explain and carry out government policy. Issues of censorship and security arise from the use of the internet and in consequence the State Secrets Bureau, Ministry of Public Security (network security) and the State Administration for Industry and Commerce are also involved in regulating the sector, with the latter responsible for registering internet service providers and internet content providers. With approval from the State Council, the Ministry of Information Industry, the National Development and Reform Commission and the Ministry of Finance determine prices and rates. In 00, provincial telecommunications authorities were set up to conduct regulatory functions within each province. In June 003, the minister of the Ministry of Information Industry was appointed director of the State Council Informatization Office. This was seen as a step towards merging the two agencies overseeing the countrys telecom, electronics and information technology industries, with the Office becoming the new independent regulatory agency. Given the number of authorities, it is often not clear who is in charge of policies, guidelines and regulations. This problem is compounded by the gap between national and local policies. While in the short-term Chinas telecommunications regulatory and policy setting arrangement may be effective in making use of a wide range of expertise across different government agencies, in the long term, as competition matures, the Ministry of Information Industry needs to be fully independent. Consistent with the general trend adopted in other developed countries, the government needs to consider the separation of policy formulation from the regulation of the sector.
P A G E 39
Telecoms Law is yet to be enacted

Since 000, Chinas telecommunications industry has been governed by Telecommunications Regulations (2000), a set of administrative regulations issued by the State Council, and telecom specific foreign investment regulations. These regulations and some follow-up regulations were very important steps toward developing a comprehensive and competitive regulatory framework. However, issues of interpretation, clarity and implementation remain. The regulations fail to adequately address new problems and situations arising from the spectacular growth of the industry in recent years. For example, issues of interconnection between network operators have arisen, detrimental to the development of telecommunications in China. These issues include: the physical destruction of competitors networks and equipment; deliberate disruption of the communications software applications of a competitor; malicious changing of signals; setting of restrictions or blockage of services operated by competitors and malicious delay; and rejection or avoidance of settlement payments between operators (Minter Ellison 004). The adoption of a telecoms law in China would remove institutional uncertainties, increase administrative efficiency and deal with negative issues arising from interconnection between different network operators. The current Telecommunications Regulations (2000) no longer meet the needs of Chinas telecommunications market. A more comprehensive legislation to regulate issues arising from the telecommunications industry reform has been under consideration for some time (Minter Ellison 004). A draft Telecommunications Law of the Peoples Republic of China (Telecoms Law) was completed in mid-004, aiming to eradicate monopolies, encourage competition, optimise existing resources and strengthen the regulatory and administrative role of the Ministry of Information Industry (Minter Ellison 004). However, a telecommunications law is unlikely to come into effect in 005 (China Internet Information Center, 005b).
transPort,logisticsanddistributionservices3
The development of transport and distribution services is important for Chinas overall economic development and social stability. In particular, efficient and reasonably priced logistics and distribution services will improve the integration of China agrifood markets and help to ensure that the countrys low-income farmers benefit from Chinas rapidly growing higher-income cities.

Draft legislation was submitted to the State Council at the end of July 004 and has been reviewed twice by its Legal Affairs Office but has yet to be submitted to the National Peoples Congress Standing Committee. The National Peoples Congress is the countrys top legislature. The National Peoples Congress Standing Committee is required to deliberate a draft law in full session at least three times before a vote for release. The Committee convenes in full every two months. The draft Telecommunications Law has yet to be submitted for deliberation. Even if the law is promulgated, it is uncertain when the new legislation will become fully effective (Minter Ellison 004). Logistics is the process of planning, implementing and controlling the efficient flow and storage of goods, services, and related information from the point of origin to the point of consumption to meet customers requirements. The provision of logistics services requires inputs from various service providers including the providers of transport and warehousing as well as valueadding activities (Luo and Findlay 004).
3
P A G E 40
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The Chinese government has invested heavily in the development of transportation infrastructure but China still lacks an integrated logistics industry and a regulatory framework at the national level (USDA 2003). The latest available figures from 2000 show that the logistics cost, which includes transportation, inventory storage, and loss and breakages accounted for about 20 per cent of Chinas GDP, a figure much higher than those of the United States, Europe and Japan (Figure .4). Transport and logistics costs in China were also estimated to account for 0 per cent or more of general retail prices and as much as 5060 per cent in the case of fresh produce, (USDA 00 and Luo and Findlay 004).
Figure .4 Logistics costs in China are much higher than those of United States and Japan Logistics spending as per cent of GDP, 2000
25 Logistics cost as per cent of GDP
20
15
10
United States
Europe
Japan
China
Source: Li & Fung Research Centre 004.
China is already benefiting from the partial opening of some distribution services which has contributed to the development of modern organised food retailing and services (see Box Partial Opening of Some Distribution Services Has Spurred On Emergence of Modern Food Retailing and Food Service in China). The implementation of Chinas WTO commitments for further liberalisation of most of its transport and distribution sector, especially allowing for greater foreign participation, is expected to stimulate considerable improvement in efficiency, intermodal linkages and costs and improve logistics services as a whole (Table .3).
P A G E 4
PartialoPeningofsomedistributionserviceshassPurredon emergenceofmodernfoodretailingandfoodserviceinchina
There has been a remarkable development of modern organised food retailing and food service in China, since the late 980s, spurred on by growing urban populations and consumer demand for more varied, better quality and more convenient food and beverage products and the partial opening up of the sector. The first individual supermarkets appeared in China around 1990 in Shanghai and in several other eastern cities, operated by local SOEs. A partial opening of food retailing and food service to foreign investment at around the same time led a number of leading Western agrifood players in food retailing and food service to establish their first joint ventures in the major eastern cities of Shanghai, Guangzhou, Beijing and Tianjin. American Yum! Brands Inc set up its first KFC joint venture in Beijing in 1987 and its first Pizza Hut joint venture in 1990. By 2005, it had over 1300 KFC outlets in 280 cities and 180 Pizza Hut outlets in 40 cities in China. French food retailer Carrefour opened its first joint venture (with two SOEs) hypermarkets in Beijing and Shanghai in 1995. By 2005, Carrefour was operating 64 Carrefour hypermarkets, 8 Champion supermarkets and hard discount stores, with partners and franchisees. The growing presence of foreign food retailers and food service operators has introduced new performance benchmarks into Chinas food retailing and services industry, including more efficient sourcing and inventory management and more streamlined supply chains from farmers and food and beverage manufacturers to retailers and food service operators. With around 90 to 95 per cent of food and beverage products sold in foreign-invested food retail and food service outlets sourced locally within China, the demand by foreign-invested firms for new standards from its suppliers has had an important impact on Chinas agrifood producers and processors. Leading local SOEs and private sector players in food retailing (such as Lianhua, Hualian, and Nonggongshang) and food service (such as Dongbeiren, Zhenggongfu, and Malam Noodle restaurant chains) have also been adopting many of the modern operational practices introduced by McDonalds, KFC, Carrefour, Wal-Mart, 7-Eleven and other foreign companies.
Sources: DFAT 2002 and 2006 (forthcoming), USDA 2002, Yum! Brands 2005, Carrefour 2005.
P A G E 4
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Services
Sector
Ta b l e . 3 Logistics services expected to improve Assessment of direct impacts of WTO accession on Chinas logistics services
Expected direct impact three years after WTO accession Low
Area Air transport
Starting position Relatively closed in both domestic and international routes Inland shipping open to domestic companies; coastal and international shipping relatively closed Inland shipping open to domestic companies; coastal and international shipping relatively closed No restriction for domestic entry; foreign entry only by joint venture
Water transport
Low
Road transport (3)
High
Rail transport (6) Forwarding (4)
State monopoly International: licensing system applies; foreign participation only via joint venture Domestic: relatively open for domestic companies; not open to foreign companies
Low High
Storage and warehousing (3) Integrated services- 3PL
No restriction for domestic entry; foreign entry only by joint venture Determined by the above
High High
Courier service
No restriction for domestic entry; foreign entry only by joint venture
High
Other (packaging)
No restriction for domestic entry; foreign entry only by joint venture
High
Source: Luo and Findlay 004. Notes: The number in parentheses shows the number of years after accession when wholly foreign-owned establishments will be permitted.
P A G E 43
The General Agreement on Trade in Services (GATS) categories do not exactly match the business structures used to provide logistics services. The GATS includes a category called distribution with some activities that might normally be associated with logistics, such as warehousing and inventory management. However, distribution refers to activities undertaken in the context of wholesaling and retailing, a much narrower coverage than what is typically referred to as logistics. In examining Chinas WTO commitment on logistics, concordance is made possible by examining the range of service activities that make up the logistics chain which also include packaging and courier services, maritime and rail transport, freight forwarding, and storage and warehousing services (Luo and Findlay 004). In its WTO accession commitments, China has agreed to liberalise logistical services, including packaging and courier services, maritime and rail transportation, freight forwarding, and storage and warehousing services. The commitments made in these sectors promise to increase competition in some key areas, including road transport, rail transport, warehousing, and freight forwarding. The breadth of these commitments provides a much stronger basis for the development of integrated third-party logistics (3PL) firms which will reduce costs and increase the quality of logistics services in China.4 Some liberalisation had already taken place in various parts of Chinas logistics chain at the time of accession. Remaining restrictions on establishment, geographic scope and products (except distribution of salt and tobacco) are also being removed on schedule. In the transport sector, the change has been on the depth of commitment across the whole range of transport and auxiliary services which will facilitate significantly the provision of multimodal transport services. In road, rail, and key auxiliary services, notably storage and warehousing and freight forwarding agency services, joint ventures with foreign partners were allowed at the time of accession. China liberalised road and auxiliary services in 004, issuing new regulations permitting wholly foreign-owned enterprises in storage and warehousing and in freight transportation services (USCBC 2005). China has committed to fully liberalise rail transport by 007. The exceptions are agreements in air transport, which are excluded from the scope of the GATS. Restrictions remain in areas of distribution and retailing services. China claims to have implemented its WTO commitments on distribution services but in practice regulations still create substantial barriers to establishing operations, particularly at the provincial level where there are additional regulations. After failing to comply with its timetable for gradually phasing in of wholesaling services, commission agents services and retailing services provided by foreign-invested enterprises, China issued regulations in 004 eliminating market access and national treatment restrictions on wholly foreignowned enterprises and reducing capital requirements as of the scheduled phase-in date of December
4
Third party logistics firms (3PLs) are essentially supply chain managers who subcontract some of their logistics requirement to container lines, trucking firms and airfreight companies. Many own assets such as distribution centres, warehouses and trucking fleets and a growing number of providers offer across-the-board services (USDA 2003).
P A G E 44
Liberalisation
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Services
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004. However, China has yet to issue rules for implementation to show how the central and provincial approval system will work. Regulations allowing foreign companies to retail or wholesale pharmaceuticals have not yet materialised, due to lack of regulatory clarity (USCBC 2005). Cross-border supply of commission agents services, wholesale trade services and retailing services (except for mail order) remains unbound, and salt and tobacco are also excluded from the scope of commitments on commission agents services and wholesalers.5 China has complied with its commitment to open franchising. China circulated draft rules permitting wholly foreign-owned franchising operations for comment before they took effect on January 005. But the final version of the regulations placed numerous restrictions, such as high capital contributions and local presence requirements on foreign companies. Nonetheless, some 75 per cent of foreign investment in franchising in China is now 100 per cent foreign-owned companies, reflecting the increasing market access in the sector (USCBC 2005). China has made some steps to encourage the development of an integrated logistics industry. In 003, China established a logistics authority, the National Committee for Standardisation of Logistics Information Management in recognition of the importance of standardisation in the development of the logistics industry. The committee is responsible for formulating, revising and implementing standards in logistics information fields such as information groundwork, systems, security management and information applications (China Daily 3 August 003). The adoption of information standards will help domestic firms and especially logistics companies share databases, quicken capital circulation, lower costs and obtain greater economic efficiency and boost international competitiveness.
educationservices
In education services, Chinas commitments, while qualified in some modes of service supply (they exclude special education such as military, political and national compulsory education) have broad sectoral coverage in primary, secondary, higher, adult and other education services (including English language training). Chinas commitment is technically unbound under GATS, but cross-border delivery of educational services is now open. However, China does not recognise foreign qualifications which are gained through distance education. Foreign providers can establish a commercial presence in China through joint ventures; foreign majority ownership is permitted, but national treatment is not guaranteed for foreign educational institutions. Movement of individuals is allowed in education services if invited or employed by Chinese institutions and other education institutions subject to requisite qualifications. The Ministry of Education approves schools or institutions that are operated jointly by Chinese and foreign providers.
5
An unbound commitment means that a Member wishes to remain free in a given sector/sub sector and mode of supply to introduce or maintain measures inconsistent with market access or national treatment (WTO 005c).
P A G E 45
Professionalandotherservicessectors
In professional services, China has committed to allow cross-border supply of professional services, and to allow wholly foreign-owned subsidiaries to operate accounting, taxation, architecture, engineering and urban planning services by 007. Quantitative limitations will no longer apply to accountancy firms. Taxation services can be offered outside of economically developed areas and there are also meaningful commitments in urban planning and legal services. But in medical services, hospitals cannot be fully foreign-owned and are subject to quantitative limitations in line with Chinas assessed needs. In legal services, foreign firms are not allowed to participate directly in the practice of Chinese law they are only entitled to work on legal affairs related to their home country or to entrust work on behalf of their clients and to provide information on the impact of Chinese legal environment. The restrictions on medical services and legal services will persist beyond 008. China issued implementing rules in 2002 that removed some barriers to access by foreign legal firms, but many of the measures were ambiguous. It appeared that China has established an economic needs test for foreign law firms to establish offices, and has taken an overly restrictive view of the type of legal services that foreign law firms can provide (USTR 2004). Procedures for establishing new offices have also been found to be unnecessarily time-consuming. So, despite the supposed market openings in some areas of professional services, there are currently ongoing problems for foreign firms seeking to provide services. China has imposed limitations and burdensome requirements on accounting, engineering and construction and other services providers. When China acceded to the WTO in 00, it allowed commercial presence (mode 3) to construction and engineering services, through joint ventures with foreign majority ownership in foreign-invested construction projects. In 004, China permitted full foreign ownership, subject to certain restrictions on business scope. Market access to the construction sector in China remains highly problematic. The construction industry is becoming one of the most heavily regulated industries in China. Although not subject to the same degree of government oversight and control as, say, telecommunications, the establishment and operation of construction related businesses is subject to a multitude of regulations, procedures, certificates and approvals (Minter Ellison 2005a). China issued new conditions in November 00 that were more restrictive than those existing before its WTO accession.6 The new rules restrict foreign construction firms to working on a project-byproject basis; they require foreign firms to obtain qualification certificates and to incorporate in China; and impose high minimum capital requirements and foreign personnel residency requirements (see Chapter 3). The Ministry of Construction also issued in November 004, the Construction Project Management Interim Measures (known as Decree 00), which took effect on December 004, resulting in China becoming one of only a handful of countries that is trying to formally regulate
6
The Ministry of Construction and the Ministry of Foreign Trade and Economic Cooperation jointly issued the Rules on the Administration of Foreign-Invested Construction Enterprises (known as Decree 3) and the Rules in the Administration of Foreign Invested Construction Engineering Design Enterprises (known as Decree 4). Decree 3 went into effect in April 004, although foreign providers of construction services were allowed to continue operating on a project-by-project basis until July 005 (Minter Ellison 005b).
P A G E 46
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project management in such a formal way (Minter Ellison 005a). Among other constraints, the Interim Measures require an enterprise engaged in construction project management to hold one or more of the existing construction-related skill qualification certificates and they prohibit the same enterprise from acting as both project manager and main contractor of the same project. In computer-related services, establishment can take place through joint ventures and foreign majority ownership is permitted in software implementation, systems and software consulting and systems analysis services. Cross-border delivery in these services remains unbound, although it is fully open in all other computer and related services. Movement of qualified individuals is also allowed in all areas of computer services. Finally in tourism and travel-related services, at the time of accession China allowed commercial presence in hotels through joint ventures with foreign majority ownership and in travel and agency tour operator services subject to geographic and business scope restrictions. China has committed to full liberalisation of the sector. Hotel services are to be fully liberalised in 005 while travel and agency tour operations are to be fully liberalised in 007. China lifted the ban on foreign-invested travel service providers earlier than promised with the China National Tourism Administration approving the establishment of five fully foreign-funded travel agencies and three overseas-controlled agencies in August 004. However, competition remains constrained by business scope restrictions and high capital and licensing requirements (see Chapter 3).
intellectualProPertyrights
The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is an important aspect of Chinas WTO Accession. Since its accession to the WTO, China has strengthened its legal framework and amended its intellectual property rights laws and regulations to comply with TRIPS.7
7
Since the 980s, China has promulgated dozens of laws and regulations for intellectual property rights protection including Trademark Law, Patent Law, Copyright Law, Regulations for Protection of Computer Software, Regulations for Penalizing Anti-Intellectual Property Rights Crimes and Regulations for Customs Protection of Intellectual Property Rights.
P A G E 47
theagreementontrade-relatedasPectsofintellectual ProPertyrights(triPs)
The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is an integral part of the WTO, involving a number of GATT principles such as non-discrimination. An intellectual property right is an important component of a countrys legal framework and a key factor in facilitating economic development and international trade. The establishment and maintenance of an effective intellectual property rights regime provides incentives to innovate and disseminate ideas and information. It also helps to create an attractive environment for investment and technology transfer. Implementing an appropriate intellectual property rights regime in a developing country is not simply a matter of emulating the state of the art regime of a developed country. Such a regime may inhibit growth by limiting innovation and diffusion, and may result in excessive transfers to foreign producers of intellectual property. Appropriate regulations are needed to ensure that markets remain competitive without excessively reducing the incentive to innovate.
Source: Bhattasali et al (eds) 2004.
Despite stronger statutory protection, China continues to be a haven for counterfeiters (Table .4). In 003, Chinas software piracy rate remained at 9 per cent of all software sold, only 8 per cent was legitimately bought, amounting to piracy losses of over US$3.8 billion. Enforcement measures in China have been hampered by: Chinas reliance on administrative instead of criminal measures to combat intellectual property infringements, corruption and local protectionism limited resources and training available to enforcement officials lack of public education regarding economic and social impact of counterfeiting and piracy (US EmbassyChina 004). The US Trade Representative 005 Special 30 report on intellectual property protection has elevated China to a Priority Watchlist. The report found that China failed to protect intellectual property rights and to meet its commitment to significantly reduce infringement levels, despite efforts by Chinese leadership to do so (USTR 005). The US Trade Representative indicated it would work closely with US industry and other stakeholders, with a view to utilising WTO procedures in bringing China into compliance with its trade obligations. These developments reflect the enormous challenge for Chinas intellectual property laws and enforcement system in deterring intellectual property rights infringement.
P A G E 48
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Ta b l e . 4 China leads the world in software piracy Top 10 pirating countries, piracy rates in per cent and piracy losses in US$ million, 2003
Piracy rates % 3 4 5 6 7 8 9 0
Note:
Piracy losses US$ million 383 4 9 57 04 6 59 47 6 9
China Vietnam Ukraine Indonesia Russia Zimbabwe Algeria Nigeria Pakistan Paraguay
9 9 9 88 87 87 84 84 83 83
Piracy rate is calculated as the proportion of pirated software units over the total number of units put into use.
Source: BSA 2004.
While it is fair to say that Chinas intellectual property rights regime has made great progress in the past 0 years, much remains to be done. The continued high levels of piracy and counterfeiting require more effective and coordinated action. The Chinese government, in its recently released White Paper on intellectual property protection, admits that while it has improved intellectual property protection, it has a long way to go before achieving complete intellectual property protection (State Council Information Office 2005).
aboveandbeyondwtocommitments:mainlandhongKong closereconomicPartnershiPagreement(cePa)
Under the Mainland Hong Kong Closer Economic Partnership Agreement (CEPA), Hong Kong companies can enjoy market access conditions above and beyond Chinas WTO commitments. China, so far has committed to open a total of 7 sectors to Hong Kongs services and service suppliers (Hong Kong Trade and Industry Department 005). Hong Kong-based overseas companies and overseas companies can access the more advantageous CEPA conditions by partnering with, investing in or acquiring CEPA-qualified Hong Kong service suppliers. Under Chinas WTO commitments, the thresholds of entry to Chinas services sector are often prohibitively high. Under CEPA, China has lowered the asset, capital or turnover operational requirements for Hong Kong companies, allowing these companies more effective market access to the mainlands services sector.
P A G E 49
In industries such as logistics, freight forwarding, transport services, management consulting, advertising, and exhibition and convention, Hong Kong companies can establish wholly-owned operations on the mainland ahead of other foreign companies. In audio-visual services, Hong Kong produced Chinese language films are no longer subject to the global import quota of 20 foreign films per year for screening on a revenue sharing basis. Co-production requirements have also been eased. As of 31 July 2005, 873 services firms in Hong Kong have applied for the CEPA Certificate of Hong Kong Service Supplier that would qualify them for greater access to the China market. Of these, 830 have been approved (Table .5). Around three quarters of the applications (and subsequently approved certified Hong Kong suppliers) are providers of distribution, transport and logistics services, reflecting the importance of Hong Kong as the transport and logistics hub for mainland China.
Ta b l e . 5 China grants market access above and beyond Chinas WTO commitments to approved Hong Kong service suppliers Applications for certificate of Hong Kong service supplier as of 31 July 2005
No of applications received 7 46 5 66 39 7 9 4 3 5 399 4 5 873 No of applications approved 7 4 3 6 30 9 35 3 5 388 3 5 830
Services sector 3 4 5 6 7 8 9 0 3 4 5 6 7 8 Legal Construction professional and construction and related engineering Medical and dental Real estate Advertising Management consulting, convention and exhibition Value-added telecommunications Audiovisual Distribution All insurance and insurance-related Banking and other financial Securities and futures Tourism and travel related Transport and logistics Information technology Job referral services and job intermediary Airport Trade mark agency TOTAL
Source: Hong Kong Trade and Industry Department 005.
P A G E 50
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overridingimPortanceoflegalandregulatoryreforms
If China is to make the most of the liberalisation it has committed to undertake, it will be important to improve the legal and regulatory framework. Regulation in services, as in goods, arises essentially from the need to remedy market failure attributable to the problems of natural monopoly and inadequate consumer information and to ensure equitable access. Foreign investors see the inconsistent and arbitrary enforcement of regulations and lack of transparency as major problems to doing business in China (US EmbassyChina 005). In acceding to the WTO, China committed to broad legal reforms in the areas of transparency, uniform application of laws and judicial review. In accordance with these commitments, the State Council Legislative Affairs Office has stated that all of Chinas laws, regulations, rules and policy measures relating to foreign trade and foreign investment will be published. It further announced that China would help other WTO members, individuals and enterprises understand those rules and regulations. China has become quicker in making new or revised laws available to the public through internet and official journals, although translations of these laws continue to lag behind. Chinese Government agencies also begun to publish some trade-related regulations in draft for public comment, including comments from foreign parties a process still in its early stages. Chinas basic compliance with notice-andcomment commitment continues to be uneven it established an internal review mechanism in 00 to review non-uniform application of laws, but problems persist. Chinas legal system remains puzzling for some foreign and local business people. Many businesses report that Communist party and government officials at times interfere in court decisions. The key problem areas in court reform are the qualifications of judges, the willingness and capacity of courts to render fair judgements free from corruption and pressure from local government and Communist party officials, and the ability of the courts to execute those judgements once rendered (Clarke 2002). Effective implementation of the law is fundamental to economic development, because investors, whether foreign or domestic, need to have guaranteed property rights, including intellectual property rights (OECD 003b). Transparency requires the establishment of a legislative and regulatory regime that is stable, internally consistent and publicly available in an understandable form. The existence of internal undisclosed rules governing investment project approval, for instance, is not compatible with the principle of transparency (OECD 003b).
P A G E 5
chinaslegalandarbitrationsystems
The Chinese legal system is still developing and differs substantially from Australian practice. Chinese courts do not use the Anglo-American common law tradition of following precedent and requiring systematic publication of cases. Responsible Ministries determine, interpret and supervise relevant regulations. Judicial and legal training of participants is uneven. Many court judgements are difficult to enforce due to a still-developing property rights regime and a lack of an effective enforcement mechanism. In most cases, foreign and domestic businesses cannot rely on commercial courts for prompt and predictable resolution of disputes or contract enforcement. As a result of these and other uncertainties, foreign businesses in China do not generally favour resolving commercial disputes through the courts. Instead, most foreign investors prefer to submit their commercial disputes to arbitration, a mechanism which is improving and is being used more widely. The China International Economic Trade Arbitration Commission is the primary body used for Sino-foreign arbitrations in China. In addition to the China International Economic Trade Arbitration Commission, there are over 40 local arbitration commissions that were originally established to hear purely domestic disputes but can now handle all kinds of disputes. The most active of these in foreign-related arbitration is the Beijing Arbitration Commission. Whether resolving a dispute through the courts or through arbitration, enforcing awards remains very challenging. Under the local law, foreign-related awards may be challenged only on procedural grounds while domestic arbitration awards can be challenged on substantive grounds. Problems have arisen because certain disputes (which one would expect to be classified as foreign-related) are classified by Chinese as being domestic and open to challenge on substantive grounds. China has made efforts in recent years to improve enforcement but enforcement remains problematic, among others due to local protectionism and lack of experience of local courts in international legal matters. China allows for international arbitration under either Chinese or foreign law. Enforcement of international arbitration is easier than enforcement of a domestic arbitration decision.
Sources: EAU 00, Hunton & Williams 005.
P A G E 5
Liberalisation
of
Chinas
Services
Sector
imPlications
China has made significant progress in fulfilling its WTO commitment to liberalise the countrys services sector. To sustain liberalisation and realise the consequential gains, complementary reforms of the regulatory framework and legal enforcement system must be put in place. The deepening and appropriate sequencing of fundamental economic reforms will also ensure durability of reform in the services sector. Reform in the services sector together with broader economic reforms will lead to significant improvements in services markets, in terms of prices, quality, product variety and the availability of new services. The competitive pressure that comes with liberalisation will result in productivity growth, new management techniques, greater and faster uptake of technological capabilities and new, cheaper and more efficient services for Chinese consumers and producers. The liberalisation of services markets is also expected to affect the integration of the Chinese economy, internally and with the rest of the world. Improvements in telecommunications and transport services will encourage greater diffusion of economic activity away from coastal enclaves. Households in rural areas will benefit as efficiency increases and cross-subsidisation ends. The opening up of Chinas domestic services offers substantial opportunities for foreign companies, including those from Australia, to benefit from the Chinese peoples rising incomes and increasing demand for high quality services and services-embedded goods.
P A G E 53
aPPendix2.1chinaswtoaccessioncommitmentson tradeinservices
(See notes at end for explanations of acronyms and special terms)
Sector Professional services Legal services (excluding Chinese law practice)
By 2001
After 2001 Accession and up to 2008 Continued restrictions on business scope. Mode 3: Geographic and quantitative limitations were eliminated in 00.
Mode : None. Mode : None. Mode 3: Only through one representative office which is allowed to engage in profit making activities, but only in specified cities. Business scope restricted to home country legal affairs for Chinese and China-based clients and to entrusting, on behalf of foreign clients, Chinese law firms to deal with Chinese legal affairs. Fully liberalised except that partnerships and incorporated accounting firms are limited to CPAs licensed by Chinese authorities. Mode : None. Mode : None. Mode 3: Only through CJVs, with majority foreign ownership permitted. Mode : None for scheme design; otherwise, cooperation with Chinese professional organisations is required. Mode : None. Mode 3: Only through an EJV or CJV. Registered in own country and engaged in architecture/ engineering services in home country.
Accounting, auditing, and bookkeeping services
Taxation
Fully liberalised Mode 3: None, wholly foreign-owned subsidiaries by 007. Fully liberalised except for Mode restrictions. Mode 3: Wholly-owned foreign-owned subsidiaries permitted by 006.
Architectural, engineering, urban planning (except general urban planning) services
Medical and dental services
Mode : None. Full foreign ownership not Mode : None allowed and needs-based Mode 3: Foreign majority ownership quotas. explicitly permitted but still subject to quantitative limitations based on a needs test. Mode 4: Unbound, except as indicated in Horizontal Commitments and as follows:. Foreign doctors permitted to provide short-term medical services after they obtain licenses from the Ministry of Public Health.
P A G E 54
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Computer and related services Consultancy services related to the installation of computer hardware. Data processing and tabulation. Time sharing
Mode : None. Mode : None. Mode 3: None. Mode 4: Unbound, except as in indicated in Horizontal Commitments and as follows: Qualifications: B.A. and three years experience. Mode : None. Mode : None. Mode 3: Only through JVs with foreign majority ownership permitted. Mode 4: Unbound except as indicated in Horizontal Commitments and as follows: Qualifications: B.A. and three years experience. Mode : None. Mode : None. Mode 3: Only through JVs with foreign majority ownership permitted. Mode 4: Unbound, except as indicated in Horizontal Commitments and as follows: Qualifications: B.A. and three years of experience. Mode : None. Mode : None. Mode 3: JV with foreign majority ownership permitted. Mode : None. Mode : None. Mode 3: Only in the form of petroleum exploitation in cooperation with Chinese partners.
Software implementation services
Data processing services
Other business services Services incidental to agriculture, forestry, hunting and fishing Related scientific technical consulting services (offshore oil-field, geological, geophysical and other scientific prospecting services, sub-surface surveying services) On-shore oil-field services
Mode : None. Mode : None. Mode 3: Only in the form of petroleum exploitation in cooperation with China National Petroleum Corporation (CNPC) in designated areas approved by the Chinese government. Foreign service supplier required to establish branch, subsidiary or rep offices, with domicile to be determined through consultation with CNPC.
P A G E 55
Telecommunications Value-added services
Mode : See mode 3. Mode : None. Mode 3: Through JVs with a foreign investment limit of 30 per cent only in Shanghai, Guangzhou, and Beijing.
00 - geographic area expanded and foreign investment limit increased to 49 per cent 003 - geographic restriction removed and foreign investment limit increased to 50 per cent. 00 - geographic area expanded and foreign investment limit increased to 35 per cent. 004 foreign investment limit increased to 49 per cent. 006 no geographic restriction. 004 - JVs permitted with foreign investment limit of 5 per cent only in and between Shanghai, Guangzhou and Beijing. 006 geographic area expanded and foreign investment limit to 35 per cent. 007 no geographic restriction and foreign investment limit to 49 per cent.
Basic telecommunications: mobile voice and data
Mode : See mode 3. Mode : None. Mode 3: Through JVs with a foreign investment limit of 5 per cent only in and between Shanghai, Guangzhou and Beijing.
Basic telecommunications: fixed line services
Mode : See mode 3. Mode : None. Mode 3: Unbound.
Construction and related engineering services Mode : Unbound. Mode : None. Mode 3: Through JVs with foreign majority ownership permitted and only in foreign-invested construction projects. Restrictions on business scope of wholly foreign-owned enterprises. Mode 3: By 2004 fully foreign-owned enterprises permitted but only in projects financed by foreign investment and/or grants, or by loans from international financial institutions, or those projects that are technically difficult for Chinese enterprises. Liberalised except cross-border delivery and two products. Mode 3: By 2002 through JVs subject to restrictions on products, to be phased out by 006 (except salt and tobacco). By 2003 foreign majority ownership allowed and no geographic or quantitative restrictions.
Distribution services Commission agents services, wholesale trade services and a full range of subordinate services including after-sales services (excluding salt and tobacco)
Mode : Unbound. Mode : None. Mode 3: Foreign-invested enterprises are permitted to distribute their products manufactured in China.
P A G E 56
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Services
Sector
Retailing and a full range of subordinated services, including after-sales services (excluding tobacco)
Mode : Unbound except mail order. Mode : None. Mode 3: Through JVs (not foreign majority controlled) in five SEZs and eight cities subject to quotas (e.g., four in Beijing and Shanghai), restrictions on products (not books, newspapers, pharmaceuticals, pesticides, chemicals fertilisers, etc.).
Continued restrictions on large chain-stores. Mode 3: By 2003 all provincial capitals, NIngbo and Chongqing open and foreign majority ownership permitted. By 2004 no more geographic restrictions. By 2006 restrictions only on retailing of chemical products; foreign majority control allowed except in chain stores with more than 30 outlets selling a range of products. Fully liberalised by 004. Mode 3: By 2004 none.
Franchising
Mode : None. Mode : None. Mode 3: Unbound.
Educational and environmental services Educational services, excluding special education (e.g., military and political and national compulsory education)
Mode : Unbound. Mode : None. Mode 3: Only through JVs with foreign majority ownership permitted (national treatment unbound). Mode 4: Unbound except as indicated in Horizontal Commitments and the following: Subject to invitation or employment by Chinese institution and possession of B.A., two years of experience and professional title. Mode : Unbound except for consultations services. Mode : None. Mode 3: Through JVs with foreign majority ownership permitted.
Environmental services
P A G E 57
Financial services Insurance (except statutory insurance)
Mode : Unbound except for reinsurance, international marine, aviation, transport insurance and reinsurance and certain types of brokerage. Mode : None, but unbound for brokerage. Mode 3: Form of establishment: non-life: through a branch or JVs with 5 per cent foreign ownership. Geographic limitation: only in five cities. Business scope: only selected forms of non-life insurance. Life only to individuals, not groups. Licenses: no quotas but subject to minimum asset and duration of establishment requirements. Upon accession, a 0 per cent cession required for all lines of the primary risks for non-life, personal accident, and health insurance business with an appointed Chinese reinsurance company. Mode : Unbound except for provision of data, advice, etc. Mode : None. Mode 3: Geographic limitation: none for foreign currency business, but local currency only in four cities. Interregional supply of services permitted. Clients: only foreign currency business. Licenses: Only prudential criteria. Subsidiary and branching rights and establishment of Chinese-foreign joint bank also subject to asset requirements Mode 1: Unbound except B share business. Mode : None. Mode 3: Unbound, except rep offices may become Special Members of Chinese stock exchange and through JVs with up to 33 per cent foreign ownership to conduct domestic securities investment fund management business.
By 2004, Fully liberalised except 50 per cent foreign ownership limit in life insurance. Mode 3: By 2003 no establishment restrictions in non-life. By 2004 no geographic restrictions By 2004 no restrictions on business scope. By 2005 no cession requirement.
Banking
Fully liberalised by 006. Mode 3: Geographic limitation phased out gradually by 006. Clients: local currency business with Chinese enterprises by 003 and all clients by 006.
Securities
Mode 3: By 2004, 49 per cent foreign ownership in JVs to conduct domestic securities investment fund management business and through JVs with up to 33 per cent foreign ownership to underwrite A shares, underwrite and trade B and H shares, as well as government and corporate debts and launch funds.
P A G E 58
Liberalisation
of
Chinas
Services
Sector
Tourism and travel-related services Hotels Mode : Unbound. Mode None. Mode 3: Through JVs with foreign majority ownership permitted. Mode 4: Unbound, except as indicated in Horizontal Commitments and as follows: Foreign managers and specialists with contracts with JV permitted. Travel agency and tour operator Mode : Unbound. Mode : None. Mode 3: Through JVs subject to geographic and business scope restrictions and business turnover requirements.
Fully liberalised by 005.
Fully liberalised by 007.
Transport services Maritime transport International transport
Mode : None. Mode : None. Mode 3: Through JVs subject to 49 per cent foreign ownership limit to operate only a Chinese flag fleet. Mode : Unbound. Mode : None. Mode 3: Through JVs only with foreign majority ownership permitted.
Auxiliary services - Maritime cargo-handling services - Customs clearance services for maritime transport - Container station and depot services Internal waterways transport Freight transport
Mode : Only international shipping in ports open to foreign vessels permitted. Mode : None. Mode 3: Unbound. Mode : Unbound. Mode : None. Mode 3: Through Chinese controlled JVs and subject to an economic needs test.
Air transport services Aircraft repair and maintenance
P A G E 59
Computer reservation system
Mode 1: By connection with Chinese computer reservation system, etc. Mode : None. Mode 3: Unbound. Mode : None. Mode : None. Mode 3: Through JVs with a foreign ownership limit of 49 per cent. Mode : None. Mode : None. Mode 3: Through JVs with a foreign ownership limit of 49 per cent. Mode : Unbound. Mode : None. Mode 3: Through JVs with foreign ownership limit of 49 per cent. Mode : None. Mode : None. Mode 3: Through JVs with a foreign ownership limit of 50 per cent and subject to minimum capital requirements. Fully liberalised by 007. Mode 3: Foreign majority ownership by 004.
Rail transport services
Road transport services Freight transport by rail and by road in trucks or cars
Fully liberalised by 004. Mode 3: Foreign majority ownership by 00.
Auxiliary services Storage and warehousing
Fully liberalised by 004. Mode 3: Foreign majority ownership by 00. Fully liberalised by 005. Mode 3: Foreign majority ownership by 00.
Freight forwarding agency services
JV = joint venture; CJV = contract joint venture; EJV = equity joint venture; SEZ = special economic zone; CPA = certified public accountant. Note: All GATS commitments in a schedule are bound unless otherwise specified. A bound commitment in services means a legal obligation not to make market access conditions for services more restrictive than described in the countrys schedule or commitments on services submitted to the WTO. Where China left its commitments unbound means it wishes to remain free to introduce or maintain measures inconsistent with market access or national treatment in that sector and mode of supply. Unless otherwise specified, for all the services sector/sub sector listed in the table, Mode 4 is unbound except as indicated in Horizontal Commitments. For the complete list of China services commitments check the WTO Services Database, www.wto.org. Source: WTO 005b.
P A G E 60
Chapter
accessingchinasservicesmarKet:australian businessexPerience
KeyPoints
By 2020, Chinas financial services market will be larger than that of Germany and will grow more than twice as fast as the rest of the world. Australian banks are positioning themselves in anticipation of full liberalisation by the end of 2006. China is the worlds largest consumer of international education. Australia has made significant gains in increasing its share of this market. In 2004, China was the top source country for international enrolments in Australian education institutions. In 2002, China overtook the United States to become the worlds largest telecommunications market. Telstras 100 per cent owned CSL is the first Hong Kong registered company to qualify under the Mainland Hong Kong Closer Economic Partnership Agreement, which provides market access above and beyond Chinas World Trade Organization commitments. By 2020, China will become the worlds largest tourism destination and the fourth largest source of tourists. Australian companies are trying to make inroads into Chinas travel industry but are facing stiff competition, high capital requirements and business scope restrictions.
P A G E 6
Chinas demand for transport and logistics services will continue to grow rapidly.
Australian companies high technology and supply chain management know-how can play a key role in developing Chinas industry capacity.
The growing sophistication, transparency and market orientation of Chinas economy is driving strong demand for quality professional services. Australian legal and other professional firms are strengthening their presence in China to service the needs of their clients.
China is undergoing a massive construction boom. Australian property companies are involved in infrastructure and property development.
Despite improving market access foreign firms are facing entrenched domestic competitors, high capital requirements and a rapidly changing regulatory environment.
P A G E 6
Australian
Business
Experience
The services sector is the largest and most vibrant sector of the Australian economy. Australian companies are well placed to benefit from and contribute to the development of Chinas services sector.
financialservices
Financial sector revenues in Asia Pacific will grow from US$390 billion in 2004 to US$1.8 trillion by 00, outpacing GDP growth by as much as 0 per cent. China will be the driving force of this growth (Mercer Oliver Wyman 2004). By 2020, Chinas financial services market will be larger than that of Germany and will grow more than twice as fast as the rest of the world (Mercer Oliver Wyman 005). Foreign banks are jostling to position themselves as liberalisation of foreign ownership in Chinas financial services sector moves forward. Many institutions have positioned themselves by entering into joint ventures with domestic players. Foreign financial institutions have to compete with the entrenched dominance of domestic institutions and with each other.
Banking services: market potential and major players

Profits in Chinas banking sector are expected to continue to grow at an annual rate of 10 per cent (McKinsey 2004a). However, the source of these earnings will change significantly as profits from retail banking increase more quickly than those from corporate banking, which currently contributes the major share but is expected to decline (Figure 3.). Three main forces will propel these developments. Firstly, Chinas strong and increasingly consumption-driven output growth will boost demand for retail-lending products such as car loans, credit cards and mortgages. Secondly, demand for traditional corporate banking products, particularly deposits and loans, will fall over the next ten years, as Chinas capital market develops. Finally, over the next five to seven years, as the Chinese government gradually deregulates interest rates, margins on both deposits and corporate lending will significantly reduce.
Figure 3. Earnings from retail banking forecast to rise Earnings by source for Chinas banking sector, 20032013
1.0 0.8 0.6 0.4 0.2 0.0 -0.2 Loans to small and midsize enterprises 2003 100
Note:
Loans to large and midsize companies Corporate deposits Fee based business Personal savings Personal finance
Compound annual growth rate, 200313, % 1 -1 25 7 35 ..
2005 192
2008 198
2013 252 Index: earnings in 2003=100
2005, 2008 and 2013 figures are forecasts.
Source: McKinsey Quarterly 004a.
P A G E 63
By 2010, Chinas credit card market is forecast to become the fourth largest market in Asia, with revenues expected to reach US$3.4 billion (Figure 3.). Visa International estimates that by 00, 00 million credit cards will be in circulation in China (China Economic Net 6 June 005). Currently, however, China is a cash-based society and only about 0 million cards with revolving credit have been issued. This means only one person in 30 has a credit card. The development of an integrated credit rating system for individuals is seen as the most urgent issue affecting the pace of development of the credit card industry. The Peoples Bank of China recognises the importance of accelerating the development of the bank card industry. It can help reduce transactions costs, boost consumption, increase tax revenues and strengthen efforts to fight money laundering (Beijing Portal 10 May 2005). The Peoples Bank of China is working with other departments on regulations for bank cards, which are expected to be released at the end of 005 after the approval of the State Council (Peoples Daily 4 February 005). The Peoples Bank of China has also announced that the operation of a nationwide credit information database will be introduced across the country by the end of 2005 (PBOC 2005b).
Figure 3. Chinas credit card market 4th largest in Asia by 00 Forecast credit card revenues by 2010 in US$ million and 2001 rankings
Korea Japan Taiwan China Hong Kong Thailand Singapore India Malaysia Philippines Indonesia 0 760 590 330 240 2000 4000 6000 US$ million
Source: McKinsey Quarterly 003.
9900 8900 6400 3400 2200 1300 960
2001 ranking 2 1 3 11 4 5 6 10 7 8 9
8000
10 000
12 000
In May 2005, the Peoples Bank of China issued a circular urging the speedier drafting of bank card regulations, encouraging local government and affiliated entities to use bank cards to pay for travel and administrative expenses and requiring government agencies to come up with preferential policies including tax breaks to support the use of bank cards. The Peoples Bank of China also revealed plans to facilitate acceptance of cards, aiming to connect 60 per cent of merchants that have more than million yuan in annual sales by the end of 008 (China Daily 0 May 005). Pilot operation of the personal credit information database was launched in mid-December 004, offering an on-line credit information inquiry service to state-owned commercial banks, joint-stock commercial banks and city commercial banks in seven cities: Beijing, Chongqing, Shenzhen, Xian, Nanning, Mianyang and Huzhou (PB0C 2005b).
P A G E 64
Australian
Business
Experience
Four major state owned banks continue to dominate the banking sector in China, although local and foreign joint venture competitors now increasingly challenge the market position of these banks (Figure 3.3). China admits the importance of foreign financial institutions in enhancing competition and bringing in much needed know-how. Government departments and research institutions predict foreign banks will seize 5 per cent of Chinas foreign exchange savings market and 5 to 0 per cent of the renminbi savings market by 006. Foreign banks are also set to capture more than one third of Chinas foreign exchange loans market and about 5 per cent of its renminbi loans market (China Daily 4 April 2005). As of June 2005, foreign banks have established 244 representative offices and 214 operational branches or subsidiaries (CBRC 2005d). Fifteen banks have been permitted to engage in internet banking and five foreign bank branches have been allowed to offer custodian services for securities transactions of qualified foreign institutional investors. More than 40 banks have been authorised to offer services in derivative transactions (CBRC 2005d).
Figure 3.3 State-owned commercial banks remain dominant but smaller banks are increasing their market share Share of financial sector loans in per cent of total, 1995, 2000 and 2004
90 Per cent of total financial sector loans 80 70 60 50 40 30 20 10 0 State-owned commercial banks Joint-stock commercial banks Rural credit cooperatives Foreign-funded banks Other financial institutions 1995 2000 2004
Notes: Financial sector loans defined as claims on the nonfinancial sector, claims on other sectors or domestic credit. Other financial institutions include finance companies, urban credit cooperatives and commercial banks. Source: CEIC 005.
P A G E 65
Insurance services: market potential and major players

Over the five years to 2004, life and property insurance business in China has grown by more than 25 per cent each year to RMB 432 billion (US$52 billion) in premiums income (Figure 3.4). Life insurance premiums income amounted to over RMB 323 billion (US$39 billion), accounting for three quarters of Chinas total insurance market. Life insurance premiums are forecast to exceed US$00 billion in 008, with the market in China overtaking those of France and Germany (Figure 3.5) (McKinsey Quarterly 004b). This growth is being underpinned by a household savings rate of about 40 per cent. Limited and deteriorating public pension and health schemes are also generating increasing demand for personal retirement and savings and protection vehicles.
Figure 3.4 Insurance market in China is growing strongly Insurance premium income, RMB billion, 19992004
500
400 Property insurance RMB billion 300 Life insurance
200
100
0
Note:
1999
2000
2001
2002
2003
2004
Life insurance also includes injury and health insurance.
Source: CIRC 005.
P A G E 66
Australian
Business
Experience
Figure 3.5 Chinas life insurance market is expected to grow Total life insurance premiums in US$ billion in China and selected countries
a) China
150 120 US$ billion 90 60 30 0 2002 2005 (forecast) 2008 (forecast)
b) China and selected countries, 2008 (forecast)

800
Individual policies Group policies

US$ billion
600
400
200
0
US UK France Germany
P A G E 67
Japan
Source: McKinsey Quarterly 004b.
More than 80 per cent of Chinas life insurance market is in the hands of three domestic insurers while foreign joint ventures involving 0 leading global insurers command less than three per cent of the national market (Table 3.1). But these foreign joint ventures are now challenging the dominance of the three domestic life insurers. The productivity of domestic insurers huge sales forces (China Life has 650 000 agents) is on average one-fourth that of leading players in Hong Kong and deteriorating (McKinsey Quarterly 004b). At the end of 004, geographic restrictions on where joint ventures can operate were lifted, giving foreign insurers access to the remaining two thirds of the Chinese life insurance market. With this environment, foreign insurers with strong brands, more professional agents and better service are in a good position to increase their share of the affluent and massaffluent markets (McKinsey Quarterly 2004b).
China
Ta b l e 3 . Domestic life insurers dominate the market Chinas life insurance market, market shares as measured by premium incomes, 2004
Type of player Examples Market share (% of premium incomes) Total assets (RMB billion) Competitive advantage
Domestic China Life (Group) & China Life Ltd Ping An China Pacific Life 55. 7. 0.8 455.8 63. 7.5 National sales networks of about one million agents Established brands Experienced management teams
New China Life Taikang Others Subtotal Foreign JVs AIA CITIC Prudential ManulifeSinochem Life Pacific ING Generali China China Life-CMG A dozen or so others
5.9 5.5 .8 97.4
4.4 4.5 8.9 748.3
Up and coming domestic players may be more responsive to market demand
.5 0. 0. 0. 0. 0.02 0.4 2.6
8.8 0.7 . . 0.5 0. 4.9 17.4
Deep industry expertise More professional and service-oriented sales force Brand image
Australian JV
Subtotal
Sources: McKinsey Quarterly 004b and China-Life CMG 005a.
P A G E 68
Australian
Business
Experience
The general (property and casualty) insurance market is also dominated by three major domestic insurers, although their dominance is increasingly being eroded by competition from newly established smaller domestic property and casualty insurers pricing aggressively for market share (Figure 3.6). In 004, the combined market share of the three major domestic insurers dipped to 79.9 per cent from 89.3 per cent in 003 (China Daily 3 March 005). The biggest property insurer is Peoples Insurance Company of China Property and Casualty (PICC), which accounts for more than half of the market and is 0 per cent owned by US insurer American International Group (CIRC 005). China Pacific Property Insurance is the second biggest. Insurance Australia Group was reported to have held discussions with the latter to purchase up to 5 per cent equity in the company (Sydney Morning Herald 0 May 005). The other major player is Ping An Property Insurance, primarily a life insurer but it also has about 9 per cent share of the general insurance market. Hong Kong and Shanghai Banking Corporation announced in May 2005 that it has agreed to increase its equity stake in Ping An to 9.9 per cent from 0 per cent (Ping An 005).3
Figure 3.6 General (property and casualty) insurance dominated by three major domestic insurers Chinas general insurance market, market shares as measured by premium incomes, JanuaryJune 2005
Ping An 9.4% Other local companies 23.4% China Pacific 12.9%
Foreign companies 1.2%
PICC 53.1%
Source: CIRC 005.
The transaction is still subject to approval from the China Insurance Regulatory Commission.
P A G E 69
The insurance market in China remains very challenging for foreign property and casualty insurers because of the structural limitations which effectively keep foreign insurers to no more than 5 per cent of a domestic property and casualty insurer or confined to commercial insurance classes which command a much smaller market share. Many foreign insurance companies, lacking awareness of the local market, have already failed to generate profitable business in China despite their advanced technology and international experience as minority shareholdings in a domestic joint venture do not create sufficient incentive to fully transfer or leverage this technology and experience, or due to their inability to create scale because of limitations on product classes they may write as a foreign-invested insurance company. Some 22 foreign insurance companies and 30 representative offices pulled out of China between February 00 and July 00 (China Daily 4 April 005). Some insurance companies, which had previously opened representative offices in different cities across China, have found the exercise very costly and have been forced to streamline their operations.
Australia and New Zealand Banking Group Ltd (ANZ)

The Australia and New Zealand Banking Group Ltd (ANZ) has had a continuous presence in China since 1986 when a representative office was established in Beijing. ANZ opened a branch in Shanghai in 1993 and upgraded its Beijing representative office to a branch in 1997. The Shanghai branch is authorised to conduct local currency business activities, while the Beijing branch assists and facilitates customers with such requirements. Both branches offer foreign currency deposit accounts; foreign currency, working capital and syndicated loans; inward and outward money transfer and remittance services; travellers cheque issuance and cashing facilities; foreign currency exchange services; capital certification accounts; and a full range of trade-related services including Letters of Credit, pre- and post-shipment financing, bonding and guarantees (ANZ 2005a). ANZs long term alliance with the Shanghai Rural Credit Cooperation Union (now Shanghai Country Commercial Bank) is expected to be converted into an equity stake.4 ANZ is also involved in discussions to secure a stake of up to 0 per cent in an unnamed city bank in the countrys north (Sydney Morning Herald 9 June 005). ANZ stresses that it has carved a clear niche for itself in providing trade finance solutions (ANZ 005b). Its offerings of complete end-to-end solutions for Australian commodity exporters and manufactured goods importers and their Chinese counterparts are enhanced by its extensive Asian and global network. ANZ sees opportunities in mortgage financing and is aiming planned acquisitions at this market. Because a large number of financial institutions are setting up in Shanghai, the demand for management and professional staff is outstripping supply, particularly for the English-speaking staff (ANZ 005b).
The Shanghai Rural Credit Cooperative was a collection of about 30 credit cooperatives that consolidated into a city commercial bank on 25 August 2005 and renamed Shanghai Country Commercial Bank (China Daily 6 August 005).
P A G E 70
Australian
Business
Experience
Commonwealth Bank of Australia (Commonwealth Bank)

The Commonwealth Bank of Australia (Commonwealth Bank) has identified Greater China together with Indonesia and India, as its new key markets and an integral part of its regional strategy focused on Asia Pacific (CBA 2005a). In China, the Commonwealth Bank is extending its presence by acquiring small stakes in local institutions. This is seen as a sound strategy because of the need to learn the market on the ground rather than through consultants. It bought an per cent stake in the Jinan City Commercial Bank in September 2004 5 (AFR -5 April 005) and entered into another strategic cooperation in April 005 by purchasing a 9.9 per cent shareholding in Hangzhou City Commercial Bank (CBA 2005b). Jinan City Commercial Bank and Hangzhou City Commercial Bank are respectively Chinas eighth and fifth largest city commercial bank. In the case of Jinan City Commercial Bank, the Commonwealth Bank has the option to acquire additional equity up to 0 per cent. These acquisitions were covered by three agreements dealing with the framework, the equity injection and the capability transfer program (CBA 2005c). The latter involves technical training in both China and Australia in areas such as credit and internal audit. The Commonwealth Bank is seizing the opportunities arising from the liberalisation of the financial services market in China (see Box on Commonwealth Banks Presence in China).
commonwealthbanKsPresenceinchina
Source: CBA 2005a.
The agreement was subsequently approved by China Banking Regulatory Commission in November 2004 (CBA 2004).
P A G E 7
The Commonwealth Bank also purchased Macquarie Securitisation Shanghai in April 2005. This is now known as CommFinance and operates mainly as a mortgage broking business in Shanghai. Its turnover reached RMB 600 million in 2004, three times the figure of RMB 200 million for the previous year (CommFinance 005). The Commonwealth Bank had an earlier venture in China, in the life insurance business. Colonial Mutual Group (subsequently merged with Commonwealth Bank in 2000) entered into a joint venture with China Life Insurance Company Ltd to establish China Life-CMG Assurance Co Ltd in 000 in Shanghai with a registered capital of RMB200 million (US$24.2 million). The company offers insurance products, including participating insurance, foreign currency insurance for tourists, life insurance and accident insurance. In 004, China Life-CMG was ranked 5th among the 9 joint venture life insurance groups with foreign partners in China, in terms of premium income (China Life-CMG 005a). However, under the terms of China Life Insurance Companys 003 stock market float, China Life Insurance Company agreed to dispose of all its interests in the joint venture to third parties or eliminate any competition between China Life-CMG and itself within three years of the listing on the stock exchange (China Life-CMG 005b).
Macquarie Group (Macquarie)

Macquarie Group (Macquarie) began its operations in China in 1995 with an office in Tianjin providing funds management for residential and retail property development. It introduced funds management and property development management services in Shanghai in 996. In 00, Macquarie opened a mortgage and securitisation operation in Shanghai, which was subsequently bought by the Commonwealth Bank (see above CommFinance). In the same year, Macquarie entered into a joint venture with Schroder Asian Properties LP to form First China Property Group (Macquarie 00). In Shanghai and in Beijing, First China is the only non-Asian developer of residential real estate with local buyers as its target market. First Chinas completed projects include: Waratah Gardens in Shanghai a 77 apartment complex commenced in April 000 and completed in 2003 designed by Australian architectural firm, Woods Bagot four residential and mixed residential developments in Tianjin the Kaili Gardens, Kang Ning Mansion, Bamboo Gardens and Macquarie Gardens (Macquarie 2005a). First Chinas ongoing projects also include a commercial project in East Bund, a residential project (Tianjin Aojing Mansion) in Tianjin, a residential project in Pudong Sanling area (joint venture with Shanghai Pudong Development Group) and a 98-unit residential project in Anting, Shanghai (First China Property Group 005). Macquarie established Investment Advisory (Beijing) Co. Ltd in Beijing in 2004, to provide investment advisory services to Chinese and international clients. The range of specialist advisory services includes domestic and cross-border mergers and acquisitions, project financing, divestments, takeover responses and other corporate, strategic and financial advice (Macquarie 2005a).
P A G E 7
Australian
Business
Experience
In January 005, Macquarie Global Property Advisor completed the purchase of Xin Mao Tower in Shanghai from Singapore-based real estate developer Capital Land for US$98 million (Macquarie 2005b). The 20-storey tower, due to be completed in 2006, has an above the ground floor area of 3 00 square metres. This is seen as an expansion of Macquarie property investment portfolio in China from residential real estate development to the commercial market, the latter being considered less risky and having more solid fundamentals. With its acquisition of ING stock trading businesses Macquarie also has a sales team specialising in Chinese stocks. The team covers 45 listed Chinese companies (including A shares and H shares) representing nearly 80 per cent the total market by value (Macquarie 005a). Macquaries business in China is also conducted through its Hong Kong office, where around 40 per cent of staff time is now devoted to China-related transactions (Macquarie 005c). Recent transactions include acting as financial adviser to the Beijing State-owned Assets Management Co Ltd for the international bidding of the Beijing Olympics National Stadium (Macquarie 2005a). Macquarie is also involved in two initial public offerings in China involving beverage and steel companies (Macquarie 005c).
Insurance Australia Group (IAG)

Insurance Australia Group (IAG), Australias largest insurance company by gross written premium, became the sole owner of China Automobile Association (CAA) in 003, after having been a joint venture partner since 999. IAG brings to China its wealth of experience through its strength as a vehicle insurer, and through IAGs heritage as the insurance arm of Australias main motoring association, the National Roads and Motoring Association, before IAG (then NRMA Insurance Group) demutualised and became an independent and separate company in 000. CAA is Chinas oldest and largest motoring association and road-side assistance provider. CAAs core operations are in Beijing and nearby areas, involving the provision of emergency repairs, parts and replacements and towing services. CAA is also an insurance agent for Chinas three largest non-life insurers, PICC, China Pacific and Ping An, and through this agency provides insurance and claims services to its member and non-member customer base. CAA is exploring a combination of acquisition, franchise and affiliation with other organisations to achieve expanded coverage beyond its core operations in Beijing. CAAs operations are challenged by the relative immaturity of the automobile market in China and a general lack of market awareness for motoring services. The increasing provision of road-side assistance by the automotive industry also impacts on CAAs operations. In October 2005, IAG was granted approval by CIRC to establish an insurance representative office in Shanghai, to provide a platform to build relationships and explore opportunities in the insurance market in Shanghai and nearby regions (IAG 005).
P A G E 73
educationandtrainingservices6
China is the worlds largest consumer of international education and rapid economic growth over the past decade has intensified the countrys demand for higher education. In 2002, China accounted for almost 0 per cent of all international students studying in OECD countries (OECD 004). China now encourages private provision in higher education in certain areas. China has adopted the Law on Private Education Promotion 2003 intended to ensure quality of education and protect the interests of students. China also puts emphasis on the importance of vocational education and training in supporting sustainable economic development and in reducing the serious skill shortages that are found in centres of strong economic growth. marketcompetitionandmajorplayers The United States is the number one destination for international students seeking higher education, and over the last decade, it has seen a significant increase in the number of students from China. Australia has made significant gains in market share in recent years and by 2001 had become the second largest supplier after the United States of higher education to international students from the Asia Pacific region. China was the top source country for international enrolments in Australian education institutions in 004, contributing the greatest share of all fees from international education earned by Australian institutions (AEI 005a, see Chapter 4 Australia and China: Services Trade and Investment). China has 8 private higher education institutions in 005, mainly offering three-year advanced diplomas, but with a small number offering undergraduate degrees (AEI 005b). Foreign private participation in higher education is encouraged, in the form of partnerships with local institutions, which are perceived as a means by which Chinese institutions can improve the quality and scope of their courses. Interim provisions administering joint ventures between Chinese and foreign institutions were announced in 995, and since then there has been a rapid increase in the number of Chinese Foreign partnership arrangements in higher education. Australian institutions are at the vanguard of international program delivery in China, with an estimated 30 000 Chinese students studying in Chinese-Australian joint education institutions in 005 (AEI 005b). Australian education in China includes English language schools, vocational education and training, with the largest share of enrolments being in higher education. Joint diploma and foundation studies programs are common, having been established with the aim of widening recruitment. Students view these courses as a pathway to degree studies that can be completed in Australia. Of the 64 joint degree programs approved by the Ministry of Education in 004, 48 were with Australian universities (AEI 005b).
The contents of this section were drawn from EAUs report, Education Without Borders: International Trade in Education released in September 005.
P A G E 74
Australian
Business
Experience
Griffith University Griffith University has been active in its links with China for over ten years. The University has Memorandums of Understanding and Exchange Agreements with more than 38 institutions in China. Some of these links include: a Memorandum of Understanding with Tongji University for the development of the Tongji/UN Environment Program Institute for Environment and Sustainable Development twinning programs with Shenyang University of Technology for degree programs in international business, with China University of Political Science for Master of Public Administration programs and with the Shanghai Institute of Foreign Trade for business training an agreement with Beihai City Government to provide technical and academic training programs for government officials and its nominees, including workshops and short courses in engineering, science and technology, education and the arts, business and trade, nursing and health sciences. In 2004, Griffith University signed a number of agreements with Chinese institutions including the Beijing University of Posts and Telecommunications, Shanghai Second Medical University, China Academy of Science Beijing Suicide Research and Prevention Centre, Wuhan University and Shandong College of Arts and Music (Griffith University 2005). The International Education Network The International Education Network consortium of Australian universities consists of the University of Tasmania, La Trobe University, Macquarie University, Flinders University, Northern Melbourne Institute of Technology and an education recruitment company in Shanghai. The Australian universities provide infrastructure, establish institutes in cooperation with Chinese institutions and deliver Australian undergraduate university courses including English language training (IEN 005). At present, the University of Tasmania is the only university in the consortium delivering degree programs while other partners deliver diploma programs. The University of Tasmania has been delivering undergraduate programs in three sites in China since 003 as part of the International Education Network consortium. By the end of 2005, the University will have enrolled over 1500 students in China (University of Tasmania 005).
P A G E 75
tafenswglobal TAFE NSW institutes first engaged in China through twinning style arrangements with local Chinese vocational schools and colleges eight years ago (TAFE NSW Global 005). Today, TAFE NSW institutes in conjunction with partner institutes in China offer vocational education and training programs. These include vocational schools, colleges, polytechnics and universities, with the majority in the public sector under provincial/municipal government control. A broad range of courses is delivered, including English Certificate Programs to facilitate student entry to TAFE diploma level courses and advanced diplomas in accounting, international business, information technology, logistics management, tourism, hospitality and marketing. These courses for students in China include pathways to numerous Australian university degree programs and enhanced employment prospects in the local labour market. TAFE students in China receive a Chinese graduate diploma (Associate Degree level) through recognition of TAFE modules.
telecommunications
China overtook the United States in 00 to become the worlds largest telecommunications market (OECD 003a). At the end of 004, Chinas telecommunications business turnover reached over RMB 900 billion (US$112 billion) in 2000 prices (CEIC 2005). As of June 2005 China had 337 million fixed line and 363 million mobile telephony subscribers (Figure 3.7). China expects the number of phone users to reach 750 million by the end of 005. One hundred and three million Chinese also now use the internet, second only to the United States (Internet World Stats 005). Chinas telecommunications market is now facing a transition from a period of explosive growth to a period of mature growth. Between 1995 and 2004 Chinas telecommunications market grew by around 30 per cent per year (in business volume terms), almost triple the countrys GDP growth and the fastest in the world (CEIC 005). The annual growth rates which peaked in 997 for mobile users (95 per cent) and in 2000 for fixed line users (33 per cent), have stabilised in 2004 to about 4 and 9 per cent respectively (CEIC 005). Since recording a growth of over 75 per cent in 00, growth of internet users has also moderated in the last two years (CEIC 005 and Internet World Stats 005).
P A G E 76
Australian
Business
Experience
Figure 3.7 Chinas telecommunications market the largest in the world Fixed and mobile phone subscribers and internet users in millions and penetration rate per 100 people, 19952005
400 350 Subscribers/users in millions 300 250 200 150 100 50 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 5 0 Fixed line (lhs) Mobile phone (lhs) Internet services (lhs) Fixed line penetration rate (rhs) Mobile phone penetration rate (rhs) Internet penetration rate (rhs) 30 25 20 15 10
Note: Data for 005 are as of June 005. Sources: CEIC 005, Internet World Stats 005.
China still has a low broadband penetration, but it ranks second to the United States in 004, with 53 million broadband subscribers (China Internet Network Information Center 005, Internet World Stats 005). International capacity allocated for internet access out of China grew from 5Gbits in 003 to over 42Gbits at mid-2004 (Bashi 2004). While the capacity requirements have driven impressive network growth, considering the countrys relatively low broadband penetration rate, market potential remains robust. Value-added telecommunications have a very high potential for growth with rapid expansion of interrelated industries such as internet telephone services. Promising areas include internet telephony solutions, internet content, internet equipment and wireless internet business (OECD 003c). marketcompetitionandmajorplayers The telecommunications sector in China offers new opportunities and huge potential as the market opens further in line with Chinas WTO commitments. While Chinas four major state-owned companies remain the dominant players, strategic alliances through equity stakes with foreign partners are being formed. China Telecom and China Netcom provide fixed-line services with nation-wide licenses, while China Mobile (GSM) and China Unicom are the major mobile carriers. There has been some entry of foreign firms in value-added services as China has lifted geographic restrictions and liberalised foreign ownership in this sub sector. But restrictions prevent operations in a number of value-added
P A G E 77
Per 100 people
telecom services where foreign firms have an interest. The industry is seen as moving towards fixed-mobile convergence. Chinas carriers are awaiting industry restructuring designed to streamline the industry, curb cut-throat competition and set the stage for the introduction of third generation (3G) wireless services (China Information Industry 005a). It is anticipated that at least three licences will be awarded in time for services to be up and running by the time of the Beijing Olympics in 2008. The government has indicated it plans to sell at least four licences (China Information Industry 005b). Hong Kongs fixed line phone company, PCCW recently announced its takeover of a small mobile carrier, Sunday; which has a 3G mobile license.7 PCCW intends to use Sunday as a platform for entry to the Mainland in partnership with China Netcom Group which paid US$ billion for a 0 per cent stake in PCCW in early 005 (China Information Industry 005b). China Netcom Group is the parent of overseas-listed China Netcom Group Corp and is expected to get a mainland 3G license. China Netcom also plans to launch Internet Protocol TV with its joint venture partner PCCW. China Telecom was reported recently to be looking for an international strategic partner to raise its profile in global telecommunications (Indiantelevision 26 May 2005). China Telecom currently does not have any mobile services, but it offers a localised wireless service known as Personal Handy Phone System, or Xiaolingtong. It has now 40 000 customers and sees its over 5 million broadband users as its natural market. In late 003, China Telecom began a trial run of an Internet Protocol TV. Strategic partnerships are also forming between telecom equipment manufacturers and telecom providers. China Telecom recently announced a cooperative agreement with ZTE Corporation, Chinas second-largest telecom equipment maker, to develop the worlds largest next generation network (China Information Industry 005c).
Telstra Asia
Telstra Asia manages and optimises yields from its Asian assets, and identifies and evaluates investment opportunities that could position Telstra for future growth, especially in China. With its key strength as an integrated carrier, Telstra is providing high quality services as a consultant or facilitator to Chinese telecommunication companies looking to improve efficiency and service quality or to introduce new products and services. Since 2003 Telstra has provided telecommunications advisory services to the Beijing Organizing Committee for the Olympic Games on a consultancy basis. This work, for a project of national priority, has strongly enhanced Telstras positioning in Chinas telecommunications industry. Telstra is also involved in Chinas telecommunications sector through its mobile company in Hong Kong, CSL, and its international voice and data joint venture REACH.
PCCW is an integrated communication company and the incumbent telecommunications provider in Hong Kong. PCCW is listed on the Stock Exchange of Hong Kong with an ADR listing on the New York Stock Exchange (PCCW 005).
P A G E 78
Australian
Business
Experience
CSL is a 00 per cent Telstra owned company operating mobile communications in Hong Kong, including substantial inbound and outbound roaming traffic with China. CSL was one of the first Hong Kong telecommunications operators to receive certification under the Mainland Hong Kong Closer Economic Partnership Agreement (CEPA). CEPA provides Hong Kong telecom operators more up-to-date and somewhat broader definitions of the scope of value-added services than those available to foreign-invested telecommunications operators. CSL is currently exploring options to provide mobile content and application services under CEPA provisions for value-added services. CSL also provides consultancy services in network planning and optimisation to operators in a number of Chinas cities and provinces, including Beijing and Guangdong. REACH is an international voice and data company established in 00, when Telstra formed a strategic alliance with PCCW to create a fifty-fifty joint venture. REACH products and services include an extensive portfolio of voice, data, Internet Protocol and satellite connectivity solutions. REACH currently also has the fastest gateway to China and Taiwan with over 0.5 Gbits of capacity from its hub in Hong Kong (REACH 005). China has adopted a highly restrictive interpretation of its WTO commitments and, while this interpretation may be legally justifiable, it is ultimately to the detriment of the Chinese economy in keeping foreign competition out. For example, the restrictive interpretation of value-added services has meant that there are very limited opportunities for value-added innovation and development in China. The delays in the issue of the Telecoms Law, and the absence of this legal and regulatory foundation is holding back development of competitive industry structures. Telstra looks forward to greater regulatory liberalisation and certainty to allow all operators the opportunity to develop meaningful businesses that will bring benefits to the broader China economy (Telstra 2005).
tourismandtravel-relatedservices
Increasing incomes and looser restrictions on domestic and international travel are driving a boom in Chinas tourism industry (Figure 3.8). Between 1994 and 2004, domestic and international Chinese tourist numbers increased by 0 per cent and 7 per cent per year respectively. Over the same period, the proportion of the Chinese population travelling internally rose from 44 per cent to 85 per cent and the proportion of Chinese population travelling abroad more than quadrupled to . per cent (CEIC 005).
P A G E 79
Figure 3.8 Chinese domestic and foreign tourism booming Chinas domestic and outbound tourism in million persons, 19942004
1200 1000 Million persons 800 600 400 200 0 Domestic tourists (lhs) Chinese outbound tourists (rhs) 35 30 25 20 15 10 5 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 0 Million persons
Source: CEIC 005.
The World Tourist Organisation forecast that by 00, China (not including Hong Kong) will have 0 million inbound tourists and become the worlds biggest tourism destination and the fourth largest source of tourists. By 2020, Chinas tourism sector is projected to generate up to US$302 billion in revenues, accounting for between 8 to per cent of the countrys GDP (World Tourist Organization cited by Asia Times 3 April 005). In 004, China overtook Italy as the worlds fourth most visited destination. China posted a 7 per cent increase in tourist arrivals (to 4 million) and generated US$5.7 billion in tourism receipts (World Tourist Organization 005). In its outbound market, China has become a new fast growing tourist generating country.8 Outbound tourists from China reached 8.9 million in 004. Chinas outbound tourist sector is expected to grow 0 per cent annually with the number of Chinese travellers forecast to reach 49 million by 008, 60 million by 00 and 00 million by 05 (Economic Intelligence Unit cited by Asia Times 3 April 005). While in the short-term Hong Kong is attracting most of Chinas outbound tourists other countries, including Australia, are expected to benefit.
As of May 005, outbound group travel by Chinese nationals was allowed in 66 approved destination countries and regions (World Tourist Organization 005).
P A G E 80
Australian
Business
Experience
Market competition
Chinas tourism market has been open earlier than scheduled but foreign operators still face significant barriers (ChinaAustralia Chamber of CommerceBeijing 2004). Foreign tour operators can access inbound and domestic tourism in China in either by a joint venture with a Chinese partner or a wholly foreign-owned enterprise. Each of these routes, however, requires excessively high annual business turnover (US$40 million for a joint venture and US$00 million for a wholly foreign-owned enterprise). These same conditions do not apply to Chinese tour operators. Foreign tour operators are not permitted to supply outbound travel to Chinese tourists. Chinese consumers currently have low internet and credit card usage. Coupled with poor regulatory measures over credit card and online payments, this is a deterrent to booking online. These restrictions, as well as the entrenched dominance of domestic players, make investing in Chinas market less appealing. Many foreign companies are still watching the market.
Flight Centre Comfort Business Travel Services

Flight Centre has gained a strategic opportunity to enter Chinas rapidly growing corporate travel market through a joint venture with an established and operating vehicle, China Comfort. Rather than establishing a green fields operation, Flight Centre saw acquisition as the ideal way to enter the market with immediate access to the travel business of both Western and Chinese companies. Under the agreement, Flight Centres Corporate Division has assumed day-to-day management, systems and financial control of the joint venture, while China Comfort, Chinas third largest international travel group, contributes local expertise and knowledge. The joint venture, Flight Centre Comfort, has operations in Beijing and Shanghai with a strong client base of local and multinational companies. It also works with China Comforts extensive network of leisure-oriented travel agencies. Flight Centre aims to grow the business by introducing new travel arrangement systems, skills and experience, improved work flow management and working with Flight Centre Comfort offices throughout the region to procure new clients (Flight Centre Comfort 005). While China has liberalised its travel agency market ahead of the agreed WTO schedule, current licensing and business scope restrictions severely hamper the competitiveness of foreign travel agencies. Regulations also tend to lag behind market growth and government approval processes are not very clear at times. Nonetheless, the major challenges faced include not only market access issues but also operational limitations. These include shortages of skills, the need to foster a service culture, educating and creating a demand for travel management services and creating an awareness of their value, creating a brand and developing a strong network of service partners. To address the very competitive market for skilled staff, Flight Centre Comfort has structured remuneration and longterm training programs aimed at retaining staff (Flight Centre Comfort 005).
P A G E 8
Qantas
Qantas recommenced flights to China on 2 December 2004 to cater for the growing travel market between Australia and China and currently flies four times a week to Shanghai. Qantas will resume operation from Sydney to Beijing from 9 January 2006, with three flights a week at the initial stage. In response to the growing trade relationship between Australia and China and increasing demand for leisure in both directions, Qantas plans to offer daily flights to both Beijing and Shanghai within two years. Both Shanghai and Beijing services are timed to suit customers connecting to and from Australian cities and New Zealand. Qantas also serves the mainland China market through its flights to Hong Kong where 14 per cent of disembarking passengers are bound for China. It also operates freighters to Shanghai six times a week. Qantas has sales representatives in Beijing, Shanghai and Guangzhou, but faces restrictions on establishing additional representative offices. Given the size of China, Qantas cannot foresee opening offices throughout the country to issue tickets and service travel agents. It is working closely with Flight Centre Comfort Business Travel in providing services to its clients (Qantas 2005).
transPortandlogistics
By 2020, China will become the worlds second largest trading entity, overtaking Germany and Japan (World Bank cited by Lee 2004). With much of the growth attributed to China, the Asian market will account for some 5 per cent of the worlds air freight in 09 compared to 4 per cent in 999. The turnover volume of Chinas domestic air transportation industry ranked fifth in the world in 2003, after the United States, Germany, Britain and Japan (DFAT 2005a). China is also likely to have an aircraft fleet of more than 1700 by 2012, three times the current number of 550 aircraft. Shanghai is predicted to become the leading hub in the Chinese mainland with double digit growth in the next decade, and to become the Northeast Asia transit hub covering Korea, Japan, Taiwan province and Hong Kong SAR (Xinhua News Agency 7 December 00). International container shipping has developed rapidly in China. In 00, Chinas container ports accounted for 47 per cent of the east bound cargo on the Pacific line, and 48 to 50 per cent of the west bound cargo on the Asia Europe line. In 003, the container capacity of China accounted for 6 per cent of the worlds capacity (DFAT 005a). In 004, the combined value of Chinas logistics industry increased by 9.9 per cent over the previous year to RMB 38.4 trillion (US$4.63 trillion) (China Federation of Logistics and Purchasing 2005). Over the same period, freight turnover increased by 3.8 per cent to 66.7 trillion ton kilometres (China Daily 5 May 005).
P A G E 8
Australian
Business
Experience
Market competition and major players

Chinas growing logistics market has attracted many foreign logistics firms. Foreign giants such as FedEx, APL, DHL and UPS are not only competing but also forming strategic partnerships with stateowned logistics firms such as COSCO and Sinotrans.9 Sinotrans which has a monopoly on Chinas warehousing logistics market set up partnerships with a group of foreign firms including OCS, DHL and UPS. According to the President of Sinotrans, these collaborations have helped them hold on to their dominant position as powerful rivals enter the market (China Daily 5 May 005). Sinotrans and COSCO also have a strategic partnership with Eurogate, Europes largest container terminal logistic network (China Daily 5 June 005). A new wave of investment is also coming as the market opens further to overseas capital logistics, road cargo transport and vehicle maintenance. Over and above the WTO commitments, through CEPA, passenger transport companies from Hong Kong and Macao are also being allowed to operate businesses between the two special administrative regions and some mainland cities through joint ventures. They are also allowed to operate taxi and bus businesses in major cities.
Linfox
Linfox, one of Australias largest transport and logistics management companies has operated in China and Hong Kong since 984, providing logistics services focused on consumer goods and the industrial sector (Linfox 005a). Linfox purchased Mayne Contracts Logistics in 003 and took over Maynes joint venture company in China, China-Australia Cold Store and Warehouse Co Ltd (CACSAW). CACSAW was established in 984 as a joint venture with a prominent local company. The company operates a multi-temperature warehouse in the southern city of Shenzhen. CACSAW has management control while the local partner provides valuable local knowledge and marketing support. The company has operations in Shenzhen and Guangzhou and maintains a strong focus in Guangdong province. The company manages 45 000 square metres of warehousing space controlled by a proprietary warehouse management system. CACSAW also operates a fleet of container haulage equipment operating in the Yantian area but with pan-China capabilities. Apart from its experience in temperature control logistics CACSAW has a proven capability in providing warehousing solutions to the high volume packaging industry. CACSAW provides quality supply chain solutions to manufacturers and retailers in southern China (Linfox 005a). Linfoxs operations in China have received a further boost after signing a five-year contract with Chinas largest private construction material and department store chain, the Home World Group (Linfox 005b).0 Linfox will provide specialised transport fleet management service, initially involving 5 units of Volvo 4 x prime mover dry haul. The inhaul movement will be across north China up to the North Korean border.
APL Logistics is the logistics arm of the Singapore-based NOL Group, a global transportation and logistics company engaged in shipping. In 00, the company signed a shareholding agreement with Legend Group Holdings Co (now known as Lenovo Group Ltd ) to provide supply chain services to Chinas IT businesses (APL Logistics 00). Lenovo is the largest personal computer manufacturer in China (Lenovo 005). Home World is the th largest hypermarket chain in China, currently operating 9 hypermarkets throughout the country. In 2004, the sales of Home World Group reached RMB 7.225 billion (A$1.18 billion) (Linfox 2005b).
0
P A G E 83
legalandotherProfessionalservices
The growing sophistication, transparency and market orientation of Chinas economy is driving strong demand for quality professional services. Many international professional services firms have established sizeable China practices to service the needs of their clients in this new market. But foreign law firms currently are not permitted to enter into joint venture arrangements with local firms. All foreign law firms in China operate with a license which has the same restriction attached. Foreign investors and traders are going increasingly to the courts and arbitration systems for recourse on commercial matters, so creating a growing demand for commercial legal services. In 004, Chinas main arbitral body, China International Economic and Trade Arbitration Commission, handled more arbitrations than the rest of the worlds arbitration bodies combined (MSJ 005). There were 114 foreign law firms in China in 2004, of which seven were Australian legal firms with licenses to operate. Between them, they have set up eight representative offices in Beijing and Shanghai (DFAT 005a). Figures released by Thomson Financial showed the number of mergers and acquisitions (M&A) deals worked on by Australian firms in Asia jumped to 1066 in 2004 from 328 in 2003, with the deals valued at over US$57.4 billion (AFR January 005) (Table 3. next page). These latest figures are a direct result of global companies buying Australian businesses that already have a foot in the China door (AFR January 005).
Allens Arthur Robinson

Allens Arthur Robinson has been operating in China since 994. Allens Arthur Robinson has the largest China team of any Australian law firm. The firm offers expertise in foreign investment, general corporate and regulatory work in Beijing and Shanghai. The firm was named a leading foreign firm in corporate and M&A in China by Chambers Global 20042005 and a leading foreign firm in China in banking and finance, capital markets, corporate and commercial and foreign direct investment by Asia Pacific Legal 500 200405 (AAR 2005). Allens Arthur Robinsons recent projects include: advising Lion Nathan on the sale of its China operations to China Resources Breweries for US$54 million advising Bank of Tokyo-Mitsubishi on the introduction of a new domestic/international multicurrency trade receivable finance product and a new multi-entity RMB funds pooling and cash management product advising Zuellig & Woo, the large European pharmaceutical distributor on a ground-breaking joint venture in China, the first foreign-invested pharmaceutical distribution project allowed by the Chinese authorities acting for First China Property Group Limited, a joint venture between Macquarie Bank and Schroder Asian Properties, in relation to a US$44 million capital-raising for residential property developments in Shanghai
P A G E 84
Australian
Business
Experience
Ta b l e 3 . Australian firms leading M&A work in Asia Leading M&A law firms in Asia by value of announced transaction, 2004
004 rank 3 4 5 6 7 8 9 0 3 4 5 003 rank 7 3 9 3 8 5 7 4 54 4 6 Freehills Allens Arthur Robinson Mallesons Stephen Jacques Minter Ellison Skadden, Arps, Slate, Meagher & Flom Linklaters Atanaskovic Hartnell Blake Dawson Waldron Freshfields Brauckhaus Deringer Clifford Chance Clayton Utz Ashurst Baker & McKenzie LLP Shearman & Sterling Bell Gully Value of deals US$ billion 74.77 58.3 56.07 36.97 3. 3.03 0.4 9.54 3.48 3.0 .46 0.85 0.76 9.4 8.0 Number of deals 8 84 6 84 3 59 6 40 47 33 8 7 88 5 59
Source: AFR January 005.
advising a large resources company which was looking to acquire a US$0 million interest in an oil field in China in Hebei Province
acting for Brambles Industries Limited on projects in Beijing, Xian and Chengdu which involved gaining control of the management of land fill sites, managing the gas emissions and converting the gas emissions to electricity for interconnection to the local mains electricity power supply
advising BlueScope Steel (then BHP Steel) China on the establishment of plants, the restructuring of assets and continuing advice on maximising returns on investments through corporate reorganisation and reinvestment
P A G E 85
advising the Ministry of Labour People's Republic of China on the development of a third tier pension system
advising numerous multinational companies on mergers and acquisitions in China including Schneider Electric, CRL, Iluka, Boral
advising on one of the largest liquidations of a foreign-invested enterprise in China, including serving on the three person liquidation committee responsible for the liquidation (AAR 005).
constructionandrelatedengineeringservices
China is undergoing a boom in construction. Investment in new construction reached RMB 2543 billion (US$307 billion) in 004 and year-on-year growth through April 005 continues rapidly at 34 per cent (CEIC 005). While the government has attempted to encourage a more moderate growth in real estate development, real estate investment reached RMB 1316 billion (US$159 billion) in 2004 and grew by 9 per cent over the previous year, faster than the 5 per cent average growth from 000 to 2003 (CEIC 2005). Australias property industry is well placed to benefit from Chinas booming property industry. In 003, the total assets of Chinese construction enterprises amounted to US$84.4 billion, total revenue was US$266.3 billion with net profits of US$6.3 billion (DFAT 2005a). Many of Chinas own construction companies are globally significant. With fully foreign-owned enterprises permitted only in foreign-invested projects, local construction companies will continue to dominate the market. However, there are opportunities which foreign firms are now trying to access in areas of project management and enhancement, particularly in publicprivate private partnerships through joint ventures or strategic partnerships with local players. On July 005 foreign construction companies started operating under new regulations, which require foreign contractors to set up a construction company in China either alone or as a joint venture, in order to engage in projects in China (Minter Ellison 005b). The capital investment requirement varies according to the class skill qualification certificate and the size of the business being pursued in China. Under previous rules (that is, Decree 3), foreign contractors only needed to obtain a skill qualification from the Ministry of Construction and a project-specific business license. Many foreign contractors found the previous system more cost effective as they did not have to set up a company and commit substantial fixed capital. Most foreign contractors undertook projects through project teams, which they redeployed either to a new project in China or elsewhere on completing the project (Minter Ellison 005b). Nonetheless, foreign construction companies with a long-term business strategy are continuing to operate under the new regulations. More than 0 foreign-funded enterprises have already been established, most of them as joint ventures, and more foreign construction contractors are currently setting up companies in China (Minter Ellison 005b).
P A G E 86
Australian
Business
Experience
Leighton Group
Leighton, with a market capitalisation of around A$3 billion is Australias largest project management and contracting group. It has so far taken a cautious approach to its activities on the mainland. It is interested in technically complex projects where the company can add value (Leighton 005a). Several factors are driving their increased attention on the mainland China market: a general maturing of the market Chinas accession to the WTO mining opportunities prompted by Chinas appetite for natural resources, particularly coal Leightons recent success on the LPG terminal expansion for BP in Zhuhai (Leighton 2005b).
Leighton is licensed as a wholly foreign-owned project management company. Leighton also signed an agreement with Thiess to work together to identify and secure open-cut contract mining projects in China (Leighton 005b). Leighton is focusing on four key potential market sectors: build, operate, transfer schemes in environmental and utility infrastructure rail and tunnelling projects contract mining foreign direct investment projects, particularly in the petrochemical and power industries (Leighton 005b). Leighton has secured a contract to construct a submarine gas pipeline linking an LNG receiving terminal in Shenzhen, China to its production plant at Tai Po in Hong Kong. The pipeline is expected to be commissioned in April 006 (Leighton 005b).
imPlications
Australian services companies are focusing on China. Chinas WTO accession is encouraging structural reforms which further enhance the competitive environment of the services sector. However, the entrenched dominance of domestic players, high capital requirements and the rapidly changing regulatory and governance settings present major challenges to many companies. China has to be viewed as a long-term market. Before entering the China market, businesses obviously need to critically assess the risks as well as the opportunities. In many cases, the approach of Australian companies is to enter into a joint venture with local companies to benefit from their local knowledge and existing share of the market. Selecting a reliable and suitable trading or joint venture partner can be crucial to success. Entering the China market needs patience, perseverance and a considered strategy.
P A G E 87
P A G E 88
Chapter
australiaandchina:servicestradeandinvestmentt
KeyPoints
China is now Australias sixth largest services export market and eighth largest source of services imports. Rising incomes and services sector liberalisation in China are boosting significantly services trade and investment China is Australias number one source of overseas students around 70 000 Chinese students are enrolled in Australian education institutions. China is Australias fifth largest source of tourists and sixth most popular tourist destination. Over 250 000 Chinese visited Australia and over 180 000 Australians visited China in 2004. There has been a dramatic turnaround in Australian investors sentiment over the past two years. Australian investors signed over 700 agreements in 2004, committing over US$2 billion worth of foreign direct investment in China. Chinas investment in Australia is growing, with significant investment in resources reflecting Chinas desire to secure resources for its ongoing rapid industrialisation. The free trade agreement currently being negotiated between China and Australia will enhance bilateral services trade and investment. It provides an opportunity to further reduce barriers, streamline and improve transparency of regulatory requirements and it could facilitate improved mutual recognition of professional qualifications and further enhance professional services trade.
P A G E 89
Resources and rural exports are the core of Australias exports to China. But the combination of rising real incomes and services sector reform in China are boosting significantly services trade and investment between the two countries. Bilateral trade in services has expanded from A$1.47 billion in 2000 to A$2.34 billion in 2004, with Australia recording a surplus over the past five years.
australiasservicesexPortstochina
China was Australias 6 th largest services export market in 004, up from 3 th largest in 995 (Figure 4.). Over the past ten years, Australias services exports to China has almost quadrupled from A$350 million in 995 to A$.3 billion in 004, representing 3.7 per cent of Australias total services exports. Taken as a whole, the value of Australias services exports to China has now overtaken Australias second largest export to China, namely wool (DFAT 2005b and ABS 2005b).
Figure 4. China Australias sixth largest services export market Australias top services export markets, A$ million, 1995, 2000 and 2004
United States United Kingdom Japan New Zealand Singapore China Hong Kong Indonesia Malaysia Korea 0 1000 2000 3000 A$ million
Source: ABS 2005b.
2 3 1 4 5 13 1995 2000 2004 7 8 9 6 4000 5000 6000
Education and tourism dominate Australias services exports to China, accounting for 74.5 per cent of services exports in 00304 (Figure 4.). As noted in Chapter 3, China is now Australias number one source of overseas students. The number of Chinese students has grown dramatically from fewer than 4000 in 995 to around 70 000 in 004 (Figure 4.3).
Exports of education are recorded by the OECD and the Australian Bureau of Statistics under receipts from travel services, as education-related expenditures, which include fees and living expenses.
P A G E 90
Bilateral
Services Trade
and
Investment
Figure 4. Education and tourism top Australian services exports to China Composition of Australian services exports to China, 200304
Transport services 13%
Education-related travel 36.6%
Business and other misc services 12.5% Business travel 6.1%
Other personal travel 31.8%

Source: ABS 2005c.
Figure 4.3 China Australias number one source of overseas students Overseas students in Australian education institutions in thousands, 1995, 2000 and 2004
China Korea Hong Kong India Malaysia Japan Indonesia Thailand United States Singapore 0 10 20 30 40 50 60 70 80 Number of overseas students in thousands Source: AEI 005a. 1995 2000 2004
P A G E 9
There has been dramatic growth in international Chinese tourism, with Australia one of the major destinations outside of East Asia. China is now Australias 5th largest source of short-term visitors, with over 50 000 Chinese visitors arriving in Australia in 004, up from only 4 600 in 995 (Figure 4.4).
Figure 4.4 Chinese tourists in Australia growing dramatically Australias top sources of tourists, short-term arrivals in thousands, 1995, 2000 and 2004
New Zealand Japan United Kingdom United States China Singapore Korea Malaysia Germany Hong Kong 0 200 400 600 800 1000 1200 Number of tourists in thousands
Source: ABS 2005d.
1995
2000
2004
As China continues to liberalise and develop its services sector, their demand for other services exports is also emerging. Australian exports of business and miscellaneous services, which also include personal, cultural and recreational services and government services, grew from A$0 million in 99495 to A$49 million in 00304 (Figure 4.5). Sectors where Australian suppliers are present include financial, legal, telecommunications, transport and logistics, construction and engineeringrelated services.
chinasservicesexPortstoaustralia
Besides merchandise exports of A$17.9 billion, China exported services worth over A$1.0 billion to Australia in 004, representing around 3 per cent of Australias total services imports. Manufactured exports dominate Chinas exports to Australia but services exports, taken as a whole, have now overtaken Chinas third largest exports to Australia of toys, games and sporting goods. In 004, China was Australias eighth largest services import market (Figure 4.6).
P A G E 9
Bilateral
Services Trade
and
Investment
Figure 4.5 Other services exports also emerging Value of major Australian services exports to China, A$ million 199495 to 200304
Notes: Other business and miscellaneous services include communication services, construction services, insurance services, financial services, computer & information services, royalties & license fees, personal, cultural & recreational services, government services and other business services (ABS 2005c). Source: ABS 2005c.
Figure 4.6 China Australias eighth largest services import market Australias top services import markets, A$ million, 1995, 2000 and 2004
United States United Kingdom Singapore Japan New Zealand Hong Kong Germany China Switzerland Thailand 0 1000 2000 3000 4000 5000 6000 7000 A$ million
Source: ABS 2005b.
Rank in 1995 1 2 4 3 1995 2000 2004 6 5 8 12 10 14
P A G E 93
Transportation and travel services accounted for 9 per cent of Chinas services exports to Australia in 200304 (Figure 4.7). Rapidly growing transport and travel services exports reflect strong Australian tourism growth to China between 995 and 004, the number of Australian short-term visitors to China grew by over 5 per cent per year, over twice as fast as the overall 6.4 per cent rate of expansion of total Australian tourists going abroad (ABS 2005c). China is now Australias sixth most popular tourist destination (Figure 4.8).
Figure 4.7 Transport and travel dominate Chinas services exports to Australia Value of Chinas major services exports to Australia, A$ million, 199495 to 200304
Source: ABS 2005c.
Figure 4.8 China Australias sixth most popular tourist destination Australian tourist destinations, resident short-term departures in thousands, 1995, 2000 and 2004
New Zealand United States United Kingdom Indonesia Thailand China Fiji Singapore Hong Kong Malaysia 0
Source: ABS 2005d. P A G E 94
1995
2000
2004
100
200
300
400
500
600
700
800
900
Number of tourists in thousands
Bilateral
Services Trade
and
Investment
australiasinvestmentinchina
Australian foreign investment in China fell in 1999 in the aftermath of the East Asian financial crisis and remains fairly modest given the size and rapid growth in AustraliaChina trade. Australian statistics indicate that the stock of Australian foreign investment in China stabilised in 004 at around A$. billion, but has yet to recover to its June 999 level of over A$. billion. In 004, China was Australias nd largest investment destination accounting for 0. per cent of Australias total foreign investment abroad (ABS 2004d). Chinese statistics, however, present a different picture. They indicate that there has been a dramatic turnaround in Australian investor sentiment towards China, particularly over the past two years (Figure 4.9). Based on Chinese statistics, the contracted value of Australian foreign direct investment (FDI) in China jumped to over US$ billion in 004 from US$90 million in 00, with the number of signed agreements also increasing from fewer than 600 to over 700 over the same period.3 The amount of FDI utilised also increased from US$300 million in 000 to US$663 million in 004. Overall, contracted FDI from Australia has risen to more than three times the utilised FDI, reflecting Australian investors very strong interest to commit more capital in China.4 If this trend continues, foreign investment will become an important part of the AustraliaChina business relationship.
Figure 4.9 Chinese statistics show a dramatic turnaround in Australian investors sentiment towards China Australian FDI in China, contracted and utilised value in US$ million and number of signed agreements, 19952004
Source: CEIC 005.
3
Foreign investment includes foreign direct investment, portfolio and other investment. China reports two measures of foreign investment, namely foreign capital contracted and foreign capital utilised, both expressed in US dollars. The former is the amount of foreign capital committed as per signed agreements and the latter indicates the amount of foreign capital that has been utilised during the year. Both are officially reported as flow figures. Neither of these two measures, however, matches Australian data of Australian investment in China. The ratio of contracted FDI to utilised FDI is used to measure foreign investor sentiment towards China (AME Info 004).
P A G E 95
Chinas improving business environment is expected to encourage small and medium-sized Australian companies to invest in China. In recent years, the mix of Australian investors in China has broadened away from manufacturing (EAU 00). In particular, Australian investment in Chinas services sector is expected to expand as planned reforms are pursued and the sector increasingly drives Chinas economic growth. However, as demonstrated in Chapter 3, the operating environment for business will remain highly competitive and challenging, requiring potential Australian investors to prepare their entry to China carefully.
chinasinvestmentinaustralia
Chinas role as an investor has been growing slowly but steadily since the start of the 990s, overtaking the ASEAN 4 in 995 as a source of FDI. China is now one of the top FDI exporters among developing countries from a two-year average of $US2.5 billion in 199192, Chinas FDI outflows have grown to almost $US5 billion in 000 (UNCTAD data cited by Department of Treasury 003). Australia has been benefiting from Chinas outward investment (Department of Treasury 2003). Chinas investment in Australia rose from A$. billion in June 997 to over A$3.4 billion in June 000 although by December 004, Chinese investment in Australia had fallen to just under A$.0 billion, accounting for less than 0. per cent of total foreign investment in Australia (Figure 4.0). China was Australias 7th largest foreign investor in 004, down from 3th largest in 2001 (ABS 2005c). Little is known why Chinese investment in Australia appears to have fallen, but this can not be interpreted as a trend, because of the very lumpy nature of Chinese investment and the sometimes lengthy period between investment approval and actual cross-border transaction. Chinas largest and high profile Australian investments are in the resources sector, reflecting Chinas aim to secure upstream resources for its ongoing rapid industrialisation (see Box: China Invests to Secure Upstream Resources) (Figure 4.). This is followed by real estate, which includes hotels in major metropolitan centres. Farming and agricultural processing ventures and a variety of general manufacturing are other destinations for Chinese investment in Australia (Foreign Investment Review Board 2005).
P A G E 96
Bilateral
Services Trade
and
Investment
Figure 4.0 Chinas investment in Australia appears to have fallen Annual stock of Chinas investment in Australia, A$ billion, June 1997 December 2004
Notes: In its most recent publication of foreign investment statistics, the ABS has changed its estimates of Australias investment position from financial years to calendar years. Source: ABS 2005e.
Figure 4. Chinese investment in Australia mostly in mineral resources and real estate Approved Chinese investment proposals by industry sector in A$ million as reported in selected fiscal years, 199899, 200001 and 200304
Notes: Data from the Foreign Investment Review Board differ significantly from ABS statistics. The Board figures are restricted to investment within the scope of the Foreign Acquisitions and Takeovers Act 1975 and the Governments foreign investment policy. They are an aggregation of proposals submitted for approval, regardless of the source of finance used, along with the proposed associated expenditures. The ABS data, on the other hand, are a measure of the actual cross-border transactions that have occurred and the level of foreign investment held at a particular time. Source: Foreign Investment Review Board 2005.
P A G E 97
chinainveststosecureuPstreamresources
China has invested in a broad range of Australian sectors since the mid-980s, although its earliest and largest investments continue to be in resources. As was the case with Japanese and Korean firms which invested in these sectors from the 1960s to the 1990s, Chinas growing interest in these sectors in recent years reflects a desire to secure resources for rapid industrialisation. Chinas first major investment in Australia was in the mid-1980s, when China International Trust and Investment Corporation, CITIC Australia, purchased a 0 per cent share in the Portland aluminium smelter in Victoria. In 998, CITIC Australia acquired a further .5 per cent of this operation. In the late 980s, Hamersley Iron, a subsidiary of Rio Tinto, entered into a 60:40 joint venture with CITIC Australia, China Minmetals and China Iron and Steel Industry and Trade Group Corporation (Sinosteel), to develop the large Channar iron ore mine in Western Australia. Under the terms of the contract, Channar supplies 0 million tonnes of blended ore per year to the joint venture partners. In 997, CITIC Australia acquired 0 per cent of the Coppabella coal mine in Queensland, with an annual production capacity of over 3 million tonnes of pulverised coal injection products. CITIC Australia also holds a 50 per cent share in the C&S mineral exploration joint venture in Queensland. In 004, CITIC Australia had consolidated sales revenues of A$609 million and a net profit after tax of A$5.75 million. CITIC Australia is the largest operation of the CITIC Group outside China (including Hong Kong). In late 00, Hamersley Iron reached agreement with Chinas largest steel maker, Shanghai Baosteel Group Corporation, Baosteel, to form an iron ore joint venture operation in Western Australia. Under the A$124 million agreement, Hamersley Iron will supply Baosteel with about 0 million tonnes of iron ore (worth over A$300 million) per year over the joint ventures 0 year life. Baosteel holds a 46 per cent equity share of the venture and Hamersley Iron the remaining 54 per cent. In early 00, Chinese steel producer Shougang agreed to purchase a 5 per cent share in a joint venture (HIsmelt Operations Pty Ltd) with Rio Tinto (60 per cent) Nucor Corporation (5 per cent) and Mitsubishi Corporation (0 per cent) to construct and operate a merchant pig iron facility in Kwinana, Western Australia. In 004, China National Offshore Oil Corporation (CNOOC) completed a joint venture agreement with North West Shelf partners for the China LNG venture. The latter was created when North West Shelf won the deal to supply Chinas Guangdong province 3.3 million tonnes of LNG per year for 5 years from 006. Under the agreement, CNOOC holds a 5 per cent stake in the China LNG joint venture and CNOOC is also allowed to use North West shelf infrastructure to process gas and associated liquids. As part of the deal, CNOOC also secured a 5.3 per cent equity stake in the North West Shelf gas reserves, which underpin the Guangdong project.
Sources: EAU 00, CITIC Australia 005, Hamersley Iron 005, HIsmelt 005 and The Australian 4 December 004.
P A G E 98
Bilateral
Services Trade
and
Investment
summaryandProsPects
Chinas burgeoning demand for a wide variety of business and consumer services offers significant business opportunities for Australian service suppliers. Australian companies are already present in a variety of fields including finance, education, tourism, telecommunications, logistics and professional services. As China continues to open, to grow and to upgrade and restructure industries, expertise will be required in a wide variety of fields. Australias rich raw material and agricultural endowments and proven resource and service industry capability are likely to attract strong inflows of Chinese investment. The bilateral free trade agreement currently under negotiation is expected to further enhance services trade and investment between the two countries.
australia-chinafreetradeagreementnegotiationscommenced
Australia could be the first developed country to conclude a Free Trade Agreement (FTA) with China. The first round of negotiations on an FTA between Australia and China began in Sydney on 3 May 005. Further rounds of negotiations are being held periodically. Liberalising services trade will be an important and necessary component of the FTA between Australia and China. Both countries have a mutual interest in expanding existing strong trade in education and tourism services and in other services. An FTA provides an opportunity to improve regulatory transparency, reduce barriers that impose additional costs and create opportunities for greater Australian investment in Chinas services sector. In particular, FTA negotiations could seek to facilitate improved mutual recognition of professional qualifications and enhance further trade in professional services. At a minimum, an FTA would need to go beyond each countrys commitments in the WTO to maximise economic integration between the two countries. An AustraliaChina joint feasibility study into an FTA, completed in March 005, concluded that there would be significant economic benefits for both countries. The FTA has the potential to boost Australias economy by US$8 billion and Chinas economy by US$64 billion over the next decade. Through liberalisation of commercial presence alone, Australian real GDP would be US$1.2 billion higher in 2015 than without an FTA. Liberalising services would have flow-on effects in other sectors, particularly in manufacturing from lower costs of services inputs. By 05, an FTA covering goods, services and investment would be expected to increase total bilateral trade by US$5. billion, Australian direct investment in China by US$477 million and Chinas direct investment in Australia by US$38 million. DFATs website, www.dfat.gov.au/geo/china provides details and updates on the progress of the AustraliaChina FTA negotiations, latest changes to market access arrangements and data on bilateral trade and investment.
Source: DFAT 005a.
P A G E 99
P A G E 00
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P A G E 0
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P A G E 0
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P A G E 03
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P A G E 04
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P A G E 05
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P A G E 06
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P A G E 07
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P A G E 08
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P A G E 09
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P A G E 0
EAU
Publications
alsobytheeconomicanalyticalunitt
Education Without Borders: International Trade in Education Published September 2005 (ISBN 1 920959 51 3), 69 pages, A$20 More Than Oil: Economic Developments in Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates Published September 2005 (ISBN 1 920959 46 7), 95 pages, A$20 Australia and the United States: Trade and the Multinationals in a New Era Published May 2005 (ISBN 1 920959 36 X), 85 pages, A$20 Malaysia: An Economy Transformed Published February 2005 (ISBN 1 920959 25 4), 119 pages, A$20 Papua New Guinea: The Road Ahead Published December 2004 (ISBN 1 920959 23 8), 172 pages, A$20 Solomon Islands: Rebuilding an Island Economy Published July 2004 (ISBN 1 920959 08 4), 139 pages, A$20 SouthSouth Trade: Winning from Liberalisation Published May 2004 (ISBN 1 920959 07 6), 42 pages, no charge Combating Terrorism in the Transport Sector: Economic Costs and Benefits Published May 2004 (ISBN 1 920959 00 9), 52 pages, no charge African Renewal: Business Opportunities in South Africa, Botswana, Uganda, Mozambique and Kenya Published November 2003 (ISBN 0 646 42822 5), 135 pages, A$20 Chinas Industrial Rise: East Asias Challenge Published October 2003 (ISBN 0 9750627 4 3), 75 pages, A$10 Globalisation: Keeping the Gains Published May 2003 (ISBN 0 646 42270 7), 103 pages, A$20 Connecting With Asias Tech Future: ICT Export Opportunities Published November 2002 (ISBN 0 642 50244 7), 191 pages, A$20 China Embraces the World Market Published November 2002 (ISBN 0 642 50227 7), 200 pages, A$39 Changing Corporate Asia: What Business Needs to Know (2 parts) Published March 2002 (ISBN 0 642 48780 4/0 642 48781 2/0 642 48779 0), 87 and 230 pages A$40 set India: New Economy, Old Economy Published December 2001 (ISBN 0 642 56583), 172 pages, A$25 Investing in Latin American Growth: Unlocking Opportunities in Brazil, Mexico, Argentina and Chile Published August 2001 (ISBN 0 642 51879 3), 294 pages, A$20
P A G E
Indonesia: Facing the Challenge Published December 2000 (ISBN 0 642 70501 1), 205 pages, A$20 Accessing Middle East Growth: Business Opportunities in the Arabian Peninsula and Iran Published September 2000 (ISBN 0 642 47659 4), 160 pages, A$20 Transforming Thailand: Choices for the New Millennium Published June 2000 (ISBN 0 642 70469 4), 216 pages, A$20 Asias Financial Markets: Capitalising on Reform Published November 1999 (ISBN 0 642 56561 9), 376 pages, A$25 Korea Rebuilds: From Crisis to Opportunity Published May 1999 (ISBN 0 642 47624 1), 272 pages, A$15 Asias Infrastructure in the Crisis: Harnessing Private Enterprise Published December 1998 (ISBN 0 642 50149 1), 250 pages, A$15 The Philippines: Beyond the Crisis Published May 1998 (ISBN 0 642 30521 8), 328 pages, A$15 The New ASEANs - Vietnam, Burma, Cambodia and Laos Published June 1997 (ISBN 0642 27148 8), 380 pages, A$15 A New Japan? Change in Asias Megamarket Published June 1997 (ISBN 0 642 27131 3), 512 pages, A$15 China Embraces the Market: Achievements, Constraints and Opportunities Published April 1997 (ISBN 0 642 26952 1), 448 pages, A$15 Asias Global Powers: China-Japan Relations in the 21st Century Published April 1996 (ISBN 0 642 24525 8), 158 pages, A$10 Pacific Russia: Risks and Rewards Published April 1996 (ISBN 0 642 24521 5), 119 pages, A$10 Iron and Steel in China and Australia Published November 1995 (ISBN 0 642 24404 9), 110 pages, A$10 Growth Triangles of South East Asia Published November 1995 (ISBN 0 642 23571 6), 136 pages, only available online Overseas Chinese Business Networks in Asia Published August 1995 (ISBN 0 642 22960 0), 372 pages, A$15 Subsistence to Supermarket: Food and Agricultural Transformation in South-East Asia Published August 1994 (ISBN 0 644 35093 8), 390 pages, A$10 Expanding Horizons: Australia and Indonesia into the 21st Century Published June 1994 (ISBN 0 644 33514 9), 364 pages, A$10 Indias Economy at the Midnight Hour: Australias India Strategy Published April 1994 (ISBN 0 644 33328 6), 260 pages, A$10
P A G E
EAU
Publications
ASEAN Free Trade Area: Trading Bloc or Building Block? Published April 1994 (ISBN 0 644 33325 1), 180 pages, A$10 Changing Tack: Australian Investment in South-East Asia Published March 1994 (ISBN 0 644 33075 9), 110 pages, A$10 Australias Business Challenge: South-East Asia in the 1990s Published December 1992 (ISBN 0 644 25852 7), 380 pages, A$10 Southern China in Transition Published December 1992 (ISBN 0 644 25814 4), 150 pages, A$10 Grain in China Published December 1992 (ISBN 0 644 25813 6), 150 pages, A$10 Korea to the Year 2000: Implications for Australia Published November 1992 (ISBN 0 644 27819 5), 150 pages, A$10 Australia and North-East Asia in the 1990s: Accelerating Change Published February 1992 (ISBN 0 644 24376 7), 318 pages, A$15 Prices cited are current discounted prices inclusive of GST
Reports and full publication catalogues can be obtained from: Jane Monico Market Information and Analysis Section Trade and Economic Analysis Branch Department of Foreign Affairs and Trade RG Casey Building, John McEwen Crescent Barton ACT 0221, Australia Telephone: +6 66 34 Facsimile: +6 66 33 Email: jane.monico@dfat.gov.au Internet: www.dfat.gov.au/eau gives access to executive summaries, tables of contents, many full reports, details of briefing papers and order forms.
P A G E 3
China committed to a dramatic opening of its services sector when it acceded to the World Trade Organization in 2001. The sector has grown strongly, but it is still smaller than it should be for an economy at Chinas stage of development. Unlocking the enormous potential of the services sector is needed to strengthen the business sector, provide jobs for a rapidly growing labour force, facilitate trade, accelerate the adoption of advanced management methods and increase overall economic efciency. This report analyses Chinas commitments to open the services market and nds that implementation of liberalisation measures is not yet complete and has not been without problems. The regulatory process and overly burdensome licensing and operating requirements continue to frustrate foreign providers of services. Further reform in both liberalisation and implementation is needed. The free trade agreement currently being negotiated between China and Australia provides an opportunity to reduce barriers further and enhance trade in services.
www.dfat.gov.au/eau

Unlocking China&#39;s Services Sector

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UNLOCKING CHINAS SERVICES SECTOR