unlocking china’s services...

www.dfat.gov.au/eau UNLOCKING CHINA’S SERVICES SECTOR

UNLO

CKING CH

INA’S SERVICES SECTO

RDFAT

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 China’s 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 efficiency.

This report analyses China’s commitments to open the services market and finds 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’S SERVICES SECTOR

©Commonwealth of Australia 2005

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Unlocking China’s Services Sector.

Bibliography.

ISBN 1 920959 47 5.

1. Service industries - China. 2. China - Economic

conditions. I. Australia. Dept. of Foreign Affairs and

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Editing by Peter Judge. Typesetting by Lyn Lalor. Production by Adcorp Canberra.

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P A G E iii

A c k n o w l e d g e m e n t s

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 Minister-

Counsellor, 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 President–Institute 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, Director–Division

of Trade in Services, Department for WTO Affairs, Ministry of Commerce; Gao Daping, Deputy

Director–Accounting Regulatory Department, Ministry of Finance; Wei Jigang, Research Fellow and

Liu Feng, Senior Research Associate, Development Research Center of the State Council; Xu Yongji,

Director–Division of Policy and Planning and Yang Jun, Director–Division of American and Oceanian

Affairs, Department of International Cooperation and Exchanges, Ministry of Education; Min Zhao,

Economist, World Bank Office–Beijing; Richard Harding, Head of IAG–China, Marc Nourse, Senior

Manager–Strategic Projects and M&A and Jason Yat-sen Li, General Manager–Sales & Marketing,

Insurance Australia Group; Paul Y. Au, Group Chief Representative–China, Commonwealth Bank;

John Shi, Chief Representative, Mallesons Stephen Jaques; Suyin Lee, General Manager–China,

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 R V I C E S S E C T O R

Ltd; Betty Gu, Deputy Director, IDP–China; Vincent Lo, Chief Representative–China, MLC Limited

Beijing Office; Ferdinand Song, AVP–Personal Financial Services, Hong Kong and Shanghai Banking

Corporation; Chuck Zhang, Chief Representative , CPA–Australia Beijing Representative Office; Jaye

Han, General Manager–China, 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, Director–Legal & Government

Affairs, WesTrac China–Beijing.

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 Officer–Consulting, Shanghai WTO Affairs

Consultation Center; A. Jock McGregor, President–China, 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 Manager–Marketing 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, Director–China 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 President–Business Development &

Investor Services Division, Hong Kong Exchanges and Clearing Ltd; Kwok Shu Wong, Assistant

Director, Office of the Telecommunications Authority; Julia Leung, Executive Director–External

Department and Dong HE, Head–External, Hong Kong Monetary Authority; Andrew Reilly, Senior Vice

President–International 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 Lawyer–Technology & Communications

Group, Minter Ellison Lawyers; Paul Chong, Managing Director–Corporate Finance and Steven Lu

Jr., Division Director–Corporate Finance, Macquarie (Hong Kong Ltd); Allard M Nooy, Director–China

and Chris Gordon, General Manager–Group Communications, Leighton Asia; Freddy Li, General

Manager–Greater China and Nancy Mak, Regional Business Manager & Financial Controller, Qantas

Airways Ltd; Gayle Gledhill, Head of Private Bank–Hong Kong, Westpac; Stuart Valentine, Clifford

Chance; Michael Tracey, Associate Director–Regional Marketing and Distribution, International

Financial Services, North Asia, Commonwealth Bank Group; Alex Cho, Director–China & Business

Services, Horwath Management Services Ltd; Catherine YW Tse, Senior Manager, Ernst & Young;

Paul Belcher, Operations Manager, United Coninan–Hong 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.

P A G E v

E c o n o m i c A n a l y t i c a l U n i t

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 Unit’s 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: [email protected]

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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P A G E vii

T a b l e o f C o n t e n t s

tABle oF contentsI

ACKNOWLEDGEMENTS iii

ECONOMIC ANALYTICAL UNIT v

EXECUTIVE SUMMARY ix

CHAPTER 1 OVERVIEW Of CHINA’S SERVICES SECTOR 1

Services sector is important for sustained growth 2

A competitive ‘services economy’ has yet to emerge in China 4

China’s services sector has enormous potential 11

Performance and sectoral structure 12

Increasing foreign investor interest in China’s services sector 15

China’s trade in services growing 17

Services sector generates an increasing number of jobs 18

Implications 20

CHAPTER 2 LIbERALISATION Of CHINA’S SERVICES SECTOR 21

China’s services liberalisation: WTO commitments, achievements

and reform challenges 23

Financial services 26

Telecommunications 34

Transport, logistics and distribution services 40

Education services 45

Professional and other services sectors 46

Intellectual property rights 47

Above and beyond WTO commitments: Mainland Hong Kong

Closer Economic Partnership Agreement (CEPA) 49

Overriding importance of legal and regulatory reforms 51

Implications 53

Appendix 2.1 – China’s WTO accession commitments on trade in services 54

CHAPTER 3 ACCESSING CHINA’S SERVICES MARKET: AUSTRALIAN

bUSINESS EXPERIENCE 61

Financial services 63

Education and training services 74

Telecommunications 76

Tourism and travel-related services 79

Transport and logistics 82

Legal and other professional services 84

Construction and related engineering services 86

Implications 87

P A G E viii


CHAPTER 4 AUSTRALIA AND CHINA: SERVICES TRADE AND INVESTMENT 89

Australia’s services exports to China 90

China’s services exports to Australia 92

Australia’s investment in China 95

China’s investment in Australia 96

Summary and prospects 99

REfERENCES 101

ECONOMIC ANALYTICAL UNIT PUbLICATIONS 111

P A G E ix

E x e c u t i v e S u m m a r y

execUtIve sUmmArYI

chInA’s servIces sector hAs Yet to reAch Its potentIAl

China’s services sector is opening up, but further reform is needed. The services sector in China

should account for a much greater proportion of the country’s total output than it currently does given

the country’s 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.

China’s 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 country’s development strategy, which has focused on manufactured

exports, and by the substantial barriers to trade and investment in the services sector. While China’s

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,

2001–05, 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.

China’s 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 chInA’s servIces sector

China’s 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.

P A G E x


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, China’s 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

China’s commitments and ensure durability of liberalisation measures. Reform of the hukou system

(China’s 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 China’s 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 China’s 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 China’s 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. China’s restrictive interpretation of value-added services has also limited the opportunities

for foreign firms to undertake innovation and development in value-added services. Overall, China’s

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 China’s telecommunications

services commitments.

P A G E xi


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 cross-

border 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 Trade-

Related Aspects of Intellectual Property Rights. However, enforcement remains problematic, with

counterfeiting and piracy still at very high levels.

AUstrAlIAn BUsInesses AccessIng chInA’s servIces mArket

Australian companies are taking advantage of services liberalisation in China and are positioning

themselves to gain access to China’s 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 China’s 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.

P A G E xii


China is the world’s 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 world’s largest telecommunications market.

This market still has huge potential for further growth given China’s 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 world’s 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 China’s 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 world’s second largest trading entity by 2020, overtaking Germany and Japan.

Linfox, one of Australia’s largest transport and logistics management companies, has operated in

China since 1984. Linfox’s operations in China recently received a boost with the signing of a five-year

contract with China’s 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, Australia’s largest construction-oriented

company has taken a cautious approach to its activities in China. It operates as a wholly foreign-

owned 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.

P A G E xiii


AUstrAlIA – chInA servIces trAde And Investment growIng

Resources and rural exports are the core of Australia’s 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 Australia’s 6th largest services export market in 2004, up from 13th largest in 1995. Australia’s

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 Australia’s total services exports. China is now Australia’s number one

source of overseas students and fifth largest source of tourists.

China was Australia’s 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

Australia’s total services imports. Transport and travel dominate China’s 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, China’s

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. China’s largest

and high profile Australian investments are in the resources sector reflecting China’s 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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P A G E �

C h a p t e r �

overview of china’s services sectort

Key Points

• China’sservicessectorhasenormouspotential.

– 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

competitiveserviceindustries.

• China’sservicessectorgrewstronglyinthe1990sasincomelevelssoared

but an efficient and competitive ‘services economy’ has yet to emerge.

– ThedevelopmentoftheservicessectorinChinahasbeenconstrained

bythecountry’sfocusonmanufacturedexportsandthesubstantial

barrierstotradeandinvestmentintheservicessector.

• Chinaneedstocontinuetoliberaliseandreformitsservicessectorto

meetitsdevelopmentobjectives.WhileChinahastakenstepstoliberalise

andreformsomeofitsservices,muchremainstobedone.

• TheservicessectorinChinaneedstogrowfurtherandexpanditsshare

ofthenationaleconomytohelpstrengthenthebusinesssector,address

unemploymentpressures,acceleratetradeandtechnologicalprogress

and increase overall economic efficiency.

• Transport,storage,postandtelecommunicationsrecordedunprecedented

growthin2004.

• ThestructureoftheservicessectorischanginginChina,witheducation,

healthandsocialservicesgrowinginimportance.

• ForeigndirectinvestmentisgrowinginChina’sservicessector.

• China’stradeinserviceshasacceleratedsincethecountry’saccession

totheWorldTradeOrganization.

P A G E �


China’s services sector is opening up, but further reform is needed. Since �979, China’s 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. China’s 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, China’s progress on its path to liberalisation of its services sector

and the implications for China’s economy and Australian business.

services sector is imPortant for sustained growth

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 Petty’s law which states that the proportion of the working population engaged in services increases as an economy develops (Banga 2005).

P A G E 3

O v e r v i e w

role of services in the growth Process

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.

P A G E 4


a comPetitive ‘services economy’ has yet to emerge in china

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 China’s sustained development in coming years (Fukasaku et.al �999).

china services sector defined

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, China’s services sector includes all the activities in the ‘tertiary industry’ as well

as construction.

Sources: NBSC 2005a, WTO 2003.

3 Government services are excluded in the WTO General Agreement on Trade in Services (see Chapter �).

P A G E 5

O v e r v i e w

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.

F i g u r e � . �

China’s services sector contribution to total output has increased slightly over the past �5 years

SectorsharesinGDP,inpercent,1990–2004

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.

0

20

40

60

80

100

1990 1992 1994 1996 1998 2000 2002 2004

Per c

ent o

f GD

P

Primary Industry Services

P A G E 6


The contribution of services to China’s 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 �.�). China’s per capita GNI was US$��00 in �003 and the contribution of

services in China’s 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 China’s 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 country’s total output than it currently does, given China’s level

of per capita income.

F i g u r e � . �

China’s services sector contribution to GDP is lower than in many economies of similar income level

PercapitaGNIinUS$andservicesvalue-addedaspercentofGDP,2003

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 Bank’s statistic on China’s 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).

Serv

ices

as

per c

ent o

f GD

P

20

30

40

50

60

70

80

90

0 5 000 10 000 15 000 20 000 25 000 30 000 35 000 40 000Per capita GNI US$

CHINA

United States

High-income

Upper middle-income

lower middle income

India

ThailandMalaysia

Philippines

Singapore

United KingdomFranceGreeceMexico Australia

P A G E 7

O v e r v i e w

The state of the services sector in China reflects the country’s 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 state-

owned 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, China’s 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.

F i g u r e � . 3

China’s urbanisation is low relative to the country’s level of per capita income

PercapitaGDPinUS$andproportionofurbantototalpopulationinpercent,2002

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.

4 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 country’s 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).

0

20

40

60

80

100

120

0 10 000 20 000 30 000 40 000 50 000GDP per capita in US$

Urb

an p

opul

atio

n as

per

cen

t of t

otal

pop

ulat

ion

CHINA

AustraliaKorea United States

United KingdomNew Zealand

India

Malaysia

Philippines

Thailand

Indonesia

Bolivia

P A G E 8


China’s low urban growth can be attributed to two major factors. First, China’s 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, China’s 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

China’s 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 China’s 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).

5 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).

6 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).

P A G E 9

O v e r v i e w

T a b l e � . �

High barriers to trade and investment in China’s services sector

Taxequivalentsofpost-Uruguaybarrierstotradeandinvestmentintheservicessectorinpercent,2000

BarrierstoongoingoperationTaxequivalentin%

BarrierstoestablishmentTaxequivalentin%

Domesticoutput

Foreignaffiliates’

output

Domesticcapital

Foreignaffiliates’

capital

China �8.75 36.40 ��3.46 �50.66

Indonesia �3.�3 �8.�� .69 68.06

Philippines 8.38 ��.65 7.40 54.�8

Malaysia 3.58 �0.�0 �5.35 37.58

Thailand 4.69 �3.36 ��.�6 36.49

Singapore 3.40 8.3� �.4� �4.50

Korea 5.�� 6.78 �.9� ��.0�

Chile �.97 4.�� 4.�5 �0.36

Taiwan �.88 4.90 �.90 �9.�9

Australia 0.00 0.69 0.6� �4.79

Mexico �.�7 5.59 0.68 ��.99

Canada 0.�5 �.67 0.53 6.��

Hong Kong �.39 �.36 �.35 5.4�

New Zealand 0.00 0.67 0.4� 4.�8

United States 0.07 �.08 0.00 3.83

Japan 3.59 4.75 0.33 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 People’s Republic of China.

Source: Dee and Hanslow �000.

P A G E �0


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.

F i g u r e � . 4

Unlike the trade in goods, China’s economy has not been very open to trade in services

Opennessindex,tradeingoodsandtradeinservicesaspercentofGDP,1993–2003

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 China’s WTO accession. China has also taken important steps to reform some of

its services, but much remains to be done (see Chapter �).

0

10

20

30

40

50

60

70

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Per c

ent o

f GD

P

Commercial services trade Merchandise trade

P A G E ��

O v e r v i e w

china’s services sector has enormous Potential

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 country’s next main engine

of growth that will provide a solution to China’s serious employment challenges, sustain economic

growth and raise living standards. China’s accession to the WTO in �00�, with its commitment to

liberalise services, is expected to herald a new era in the country’s services trade (see Chapter �

for details).

Two forces, mutually reinforcing each other, will propel China’s 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 China’s service industry over the past two decades had played an

important role in increasing employment, improving industrial structure, upgrading the people’s quality

of living, boosting economic growth and maintaining social stability’ (People’s Daily �4 April �00�). In

its Tenth Five-Year Plan (2001–2005), 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 China’s 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).

7 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 ��


Performance and sectoral structure

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 sector’s 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).

F i g u r e � . 5

Services sector less dynamic than the industrial sector

Industryandservicesrealvalueadded,growthinpercentandrealGDPpercapita,index(1978=100),1990–2004


China’s 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 China’s

real GDP by over US$90 billion after �0 years (Dee and Hanslow �000 also cited in McGuire and

Findlay �005)

0

8

12

16

20

24

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Per c

ent

0

100

200

300

400

500

600

700

800

Inde

x, 1

978=

100

GDP per capita (rhs) Services (lhs) Industry (lhs)

4

P A G E �3

O v e r v i e w

Even in a highly restrictive environment, transport, storage, post and telecommunications recorded

remarkable growth of around �� per cent per year over the period �990–�000 fuelled by demand from

industry and consumers. While growth slowed in the first three years of China’s 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.

F i g u r e � . 6

Transport, storage, post and telecommunications recorded unprecedented growth in �004

Annual(real)rateofgrowthofthethreelargestservicesectorsinpercent,1990–2004

Notes: 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 China’s 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

-10

-5

0

5

10

15

20

25

1990 1992 1994 1996 1998 2000 2002 2004

Per c

ent

ConstructionTransport, storage, post & telecommunicationsWholesale & retail trade & catering services

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).

9 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 �4


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 China’s services sector

can only be ensured by highly efficient and competitive firms operating in a liberalised environment.

F i g u r e � . 7

Education, health and social services are expanding

a)Sectoralbreakdownofservices,percentshare,1996,2002and2004

b)Sectoralbreakdownofservices,RMBbillion,1996,2002and2004

Notes: ‘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.

0 5 10 15 20 25

Other services

Real estate

Government agencies andsocial organisations

Education

Health and social services

Finance and insurance

Transport, storage, post andtelecommunications

Construction

Wholesale and retail trade andcatering services

1996 2002 2004

Per cent of total services

0 200 400 600 800 1000 1200RMB billion

1996 2002 2004

Other services

Real estate

Government agencies andsocial organisations

Education

Health and social services

Finance and insurance

Transport, storage, post andtelecommunications

Construction

Wholesale and retail trade andcatering services

P A G E �5

O v e r v i e w

increasing foreign investor interest in china’s services sector

Since �997, foreign direct investment (FDI) in China’s 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 China’s services sector.

F i g u r e � . 8

Increasing FDI in services yet to be fully utilised

SectoraldistributionofFDI,US$billion,1997–2003


�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.

0

5

10

15

20

25

30

35

40

1997 1998 1999 2000 2001 2002 2003

US$

billi

on

0

5

10

15

20

25

30

35

40Agriculture, mining and othersManufacturing

ServicesContracted (but not fully utilised) FDI in services

US$

billi

on

P A G E �6


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.

T a b l e � . �

Real estate and social services attract the most FDI in services

DistributionofFDIinservices,bysector,US$billionandpercentshare,1999and2003

1999 2003

SectorsUS$

billion%

shareUS$

billion%

share

Real Estate 5.6 47.4 5.� 44.8

Social Services �.6 ��.7 3.� �7.�

Wholesale, Retail and Catering �.0 8.� �.� 9.6

Transport, Storage and Telecom �.6 �3.� 0.9 7.4

Construction 0.9 7.8 0.6 5.�

Scientific Research and Polytechnical 0.0 0.0 0.3 �.�

Finance and Insurance 0.0 0.0 0.� �.0

Health Care, Sports and Social Welfare 0.� �.3 0.� �.�

Education, Culture and Broadcasting 0.� 0.5 0.� 0.5

Geological Prospecting & Conservancy 0.0 0.0 0.0 0.�

Total 11.8 100.0 11.7 100.0

Per cent of total FDI �6.4 ��.8


China’s 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 �7

O v e r v i e w

0

20

40

60

80

100

120

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

US$

billi

on

Exports Imports

china’s trade in services growing

China’s trade in commercial services has increased significantly since the country’s 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 world’s 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, China’s 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.

F i g u r e � . 9

China’s trade in commercial services accelerated since its WTO accession

Commercialservicesexportsandimports,US$billion,1993–2003

Source: WTO �004.

Transport and travel, which account for more than half of China’s trade in commercial services

(54.5 per cent of exports and 60.9 per cent of imports) are expected to continue to dominate China’s

growing commercial services trade. China is projected to become the world’s biggest tourist destination

and fourth largest source of tourism by �0�0 (see Chapter 3). Computer and information services

and insurance are also becoming important drivers of China’s 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 China’s total commercial services exports in �997 to �.4 per cent (Table �.3).

China’s 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 country’s total commercial services imports. China’s

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 �8


T a b l e � . 3

Transport and travel dominate but computer and information services and insurance are also driving China’s trade in services

China’stradeincommercialservices,US$billionandpercentshare,1997and2003

Exports Imports

US$bn

%Share US$bn

%Share

2003 1997 2003 2003 1997 2003

Transportation 7.9 ��.� �7.0 �8.� 35.9 33.�

Air transport ... �.7 ... ... 6.5 ...

Sea transport ... 4.0 ... ... �4.5 ...

Other transport ... 5.3 ... ... 4.8 ...

Travel �7.4 49.3 37.5 �5.� �9.3 �7.7

Other commercial services ��.� 38.7 45.4 ��.4 34.8 39.�

Communication services 0.6 �.� �.4 0.4 �.0 0.8

Computer and information services 1.1 0.3 2.4 �.0 0.8 �.9

Construction services �.3 �.4 �.8 �.� 4.4 �.�

Financial services 0.� 0.� 0.3 0.� �.� 0.4

Insurance services 0.3 0.7 0.7 4.6 3.8 8.3

Other business services �7.4 33.7 37.6 �0.4 ��.5 �8.9

Personal, cultural, and recreational services

0.0 0.0 0.� 0.� 0.� 0.�

Royalties and licence fees 0.� 0.� 0.� 3.5 �.0 6.5

Total 46.4 100.0 100.0 54.9 100.0 100.0

Per cent of world commercial services trade

�.6 3.�

Source: WTO �004.

services sector generates an increasing number of jobs

While the services sector in China still remains largely underdeveloped, the sector has been very

important in addressing China’s 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 �9

O v e r v i e w

0

50

100

150

200

250

300

350

400

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Milli

on p

erso

ns

Primary Services Manufacturing

0

10

20

30

40

50

60

70

0 500 1000 1500 2000 2500 3000 3500 4000 4500GDP per capita in US$

Per c

ent s

hare

of t

ertia

ry in

dust

ry in

tota

l em

ploy

men

t

..

Beijing

ShanghaiTianjinLiaoning

Zhejiang

Guangdong

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.

F i g u r e � . � 0

Services creating more jobs

Sectoralemployment,millionpersons,1990–2002


F i g u r e � . � �

Services employment predominant in provinces and municipalities with highest per capita GDP

PercapitaGDPinUS$andshareoftertiaryindustryemploymentintotalemployment

inpercent,2002


P A G E �0


imPlications

Despite rapid growth in China’s 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 ��

C h a p t e r �

liberalisation of china’s services sector.

Key Points

• China’sWorldTradeOrganization(WTO)commitmentsfortradein

servicesarefar-reaching.

– Overthenextfewyears,Chinahaspromisedtoeliminatemost

restrictionsonforeignentryandownershipandmostformsof

discrimination against firms.

– Chinahaspromisedtofullyopencross-bordersupply(Mode1)

andconsumptionabroad(Mode2)formostservices,although

there are significant exceptions in a number of areas.

– Chinahaspromisedtoguaranteeentryofmanagers,executivesand

specialistemployeesofforeign-investedenterprises(Mode4).

• In recent years, China has made significant progress in implementing

itsliberalisationcommitmentsinmanyservicesandmoreopenings

areanticipatedoverthenextfewyears.

• Market openings, however, are being frustrated by burdensome

licensing and operating requirements particularly in financial

services, telecommunications,constructionservices,and tourism

andtravel-relatedservices.

• 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

problemsforserviceprovidersparticularlyintheareasoflegal

services,telecommunicationsanddistributionservices.

• Implementationisnotyetcomplete.

– Complementaryreformsoftheregulatoryandlegalenforcement

systemarenecessarytogiveeffecttoChina’scommitmentsand

sustainliberalisationefforts.

P A G E ��


– Reformshavetobeimplementedtorehabilitatestatebanksandthe

rural financial system and address problems facing China’s fledgling

capitalmarkets.

– Intelecommunications,authoritieshaveoverlappingpolicysetting

andregulatory functionswhichcontribute tonon-transparentand

unpredictableoutcomes.

– Inlogistics,furtherreformsareneededtoremovebothdiscrimination

againstparticulartypesofenterpriseandlocalprotectionism.

• Above and beyond its WTO commitments, China also has agreed to

furtherrelaxmarketaccessconditionstoitsservicesmarketforHongKong

companiesundertheMainlandHongKongCloserEconomicPartnership

Agreement.

• Chinahasstrengtheneditslegalframeworkandamendeditsintellectual

propertyrightsregimetocomplywiththeAgreementonTrade-Related

AspectsofIntellectualPropertyRights.However,enforcementremains

problematic,withcounterfeitingandpiracystillatveryhighlevels.

P A G E �3

L i b e r a l i s a t i o n o f C h i n a ’ s S e r v i c e s S e c t o r

china’s services liberalisation: wto commitments, achievements and reform challenges

In December �00�, the world’s sixth largest trading nation, the People’s Republic of China, became a

full member of the World Trade Organization (WTO), the culmination of a �5-year negotiation process.�

the general agreement on trade in services (gats) and modes

of suPPly

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 China’s commitments on trade in services and updates a major report the Economic Analytical Unit released in �00� on China’s 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 �4


Trade in services was a key area in China’s WTO accession negotiations, and China’s commitments

represent perhaps the most thoroughgoing liberalisation of services trade ever negotiated in the

WTO (Mattoo �004).

So far, China’s implementation of its WTO accession commitments has generally been good.

Reviews of China’s 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 China’s 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).

trade Policy reforms associated with china’s accession

China’s 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 China’s 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. China’s specific

3 As part of China’s 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 China’s implementation of its WTO commitments, and specific difficulties reflected primarily technical problems rather than a broad pattern of non-compliance. However, implementation was seen as uneven. The �003 review noted some positive developments but China’s 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 �5


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.

China’s 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. China’s 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, China’s 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 China’s schedule was less than those for the other

country groups, but by �008, when all liberalisation measures should have been phased in, China’s

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).

5 See Mattoo (�004) for details on numerical estimates of the breadth and depth of China’s services commitments vis-à-vis other groups of countries.

P A G E �6


china’s legal system and the wto: ProsPects for comPliance

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 China’s 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 China’s courts to handle a substantial workload of reasonably

complex cases. China’s 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�.

financial services

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 country’s 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. China’s 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).

7 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 �7


listing of chinese comPanies in hong Kong – a mutually

beneficial relationshiP

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 Kong’s 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$3–4 billion range (A$570–760 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 Kong’s top �0 stocks by

turnover were Chinese stocks, in particular China Mobile, Petro China, China Life, CNOOC,

Bank of China–Hong 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.

8 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 �8


China’s 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.

China’s compliance on its banking services commitments has not been without problems. Following

the WTO accession, the People’s 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 �.�).

9 These include the cities of Shanghai, Shenzen, Tianjin, Dalian, Guangzhou, Zhuhai, Qingdao, Nanjing, Wuhan, Jinan, Fuzhou, Chengduo, Chongqing, Kunming, Beijing, Xiamen, Shenyang and Xi’an.

�0 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).

P A G E �9


T a b l e � . �

Foreign banks subject to a myriad of operating and registered capital requirements

Operatingandcapitalrequirementsofforeign-investedenterprises(FIEs),RMBmillion

Foreignbank

branch

Whollyforeign-fundedbank

Eachbranchofwhollyforeign-

fundedbank

Whollyforeign-funded finance

company

Forex business with FIEs & prescribed forex business with non-FIEs

Operating capital �00 �00

Registered capital 300 �00

Forex business with all kinds of customers


Registered capital 400 300

Forex and RMB business with FIEs & prescribed forex & RMB business with non-FIEs



Forex business with all customers, RMB business with FIEs and prescribed RMB business with non-FIEs

Operating capital 300 �00


Forex business with all kinds of customers & RMB business with FIEs

Operating capital 300 �00


Forex and RMB business with all kinds of customers

Operating capital 500 300

Registered capital �000 700

Source: Order of China Banking regulatory Commission No. 4, 2004 – Rules for implementing the Regulation of the People’s Republic of China Governing Foreign Funded Financial Institutions, CBRC 2005a.

P A G E 30


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 foreign-

invested insurance companies to provide health, group and pension/annuities insurance to both

foreign and Chinese clients (USCBC 2005). China’s 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 China’s

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).

�3 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).

P A G E 3�


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

China’s financial sector is also expected to bring in advanced management experience and promote

financial innovation. Already, the opening up of the country’s fast growing finance sector to greater

foreign participation is creating greater impetus for much needed restructuring.

Increased pressure for further reform

China’s WTO commitment to fully open its banking sector to foreign participation from �007 is providing

the impetus for further reform in China’s 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

People’s 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.

Bankingsectorreform

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 People’s 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 China’s ‘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. China’s ‘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 country’s 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, China’s 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).

Insurancemarketreform

The opening up of China’s 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, China’s three largest state-owned insurance companies, People’s 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).

�6 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).

�7 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. Malaysia’s 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).

�8 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).

P A G E 33


nationwide. China’s 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 (People’s 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.

Securitiesmarketreform

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 China’s GDP (CEIC 2005).

The development of the equity market in China has been hampered the by fact that equities in China’s

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 China’s equity market as the weakest

area of the country’s 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). China’s 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. China’s 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 state-

owned 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 Government’s 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 34


telecommunications

The introduction of competition and regulatory reforms in China’s 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 country’s 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 internet-

related and other value-added business (Pangestu and Mrongowius �004) (Figure �.�).

F i g u r e � . �

China broke up China Telecom’s monopoly by creating several state-owned operators

RestructuringofChina’stelecommunicationsindustry,1994–2003

Note: MII refers to the Ministry of Information and Industry.

Source: Pangestu and Mrongowius �004.

China Telecom

China Telecom China Mobile

China Satellite

Guoxin Paging

Unicom

Jitong

China Netcom

China Railcom

CT (all fixed-line, south)

CMCC (GSM, long dist. IP)

CSAT (satellite comm.)

Unicom (all, CDMA)

CNC (internet, fixed-line,north)

CRR (fixed line, long dist, internet)

Mll

�994 �998 �000 �00� �004

P A G E 35


Pre-wto accession telecom liberalisation and reforms

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 China’s 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 Jitong’s 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 36


In �00�, China’s 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), China’s 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.

F i g u r e � . �

China’s trade in telecommunications services is highly restrictive

Traderestrictivenessindex,telecommunicationsservices,selectedAsian

economies,2001

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 China’s 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.

0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80Hong Kong

New ZealandAustralia

JapanSingaporePhilippines

KoreaMalaysia

ChinaIndonesiaThailandVietnam

Domestic restrictiveness index Foreign restrictiveness index

P A G E 37


F i g u r e � . 3

Telecom penetration rates in China are still relatively low

Totaltelephonesubscribersper100inhabitantsin2004andinternetusers

aspercentofpopulation,July2005

Sources: International Telecommunications Union �005 and Internet World Stats �005.

China’s WTO commitments if fully implemented would be deeper and more significant than the reforms

that preceded its WTO accession. China’s 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.

China’s 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.

0

20

40

60

80

100

120

140

160

180

China Philippines Thailand Malaysia Japan Korea Singapore Australia Taiwan Hong Kong

Total telephone subscribers per 100 inhabitants

Internet users as per cent of population

P A G E 38


T a b l e � . �

China phasing out geographic restrictions and allowing foreign ownership in telecommunications

China’scommitmentsschedulefortelecommunications

Geographicalrestrictions(GR)andpermittedlevelofforeignownershipinajointventureinpercent

Upon

accession

�00� �003 �004 �005 �006 �007

Value-added

services

3 cities

30%

�4

more

cities

49%

No GR

50%

Basic

services

Paging 3 cities

30%

�4 more

cities

49%

No GR

50%

Mobile 3 cities

�5%

�4 more

cities

35%

49%

No GR

Fixed

No foreign-ownership allowed

3 cities

�5%

�4 more

cities

35%

No GR

49%

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, Xi’an and Wuhan.

The second component requires China to adhere to the WTO’s �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, China’s 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. Foreign-

invested 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 39


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 China’s WTO accession

in liberalising China’s telecommunications market will be limited.

telecoms regulatory frameworK is liKe a maze

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 country’s 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 China’s 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 40


Telecoms Law is yet to be enacted

Since �000, China’s 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 China’s

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 People’s 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, logistics and distribution services �3

The development of transport and distribution services is important for China’s 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 country’s

low-income farmers benefit from China’s 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 People’s Congress Standing Committee. The National People’s Congress is the country’s top legislature. The National People’s 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).

�3 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 value-adding activities (Luo and Findlay �004).

P A G E 4�


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 China’s 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 50–60 per cent in the case of fresh produce, (USDA �00� and Luo and Findlay �004).

F i g u r e � . 4

Logistics costs in China are much higher than those of United States and Japan

LogisticsspendingaspercentofGDP,2000

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 China’s 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).

0

5

10

15

20

25

United States Europe Japan China

Logi

stic

s co

st a

s pe

r cen

t of G

DP

P A G E 4�


Partial oPening of some distribution services has sPurred on

emergence of modern food retailing and food service in china

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 China’s 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 China’s 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 43


T a b l e � . 3

Logistics services expected to improve

AssessmentofdirectimpactsofWTOaccessiononChina’slogisticsservices

Area

Starting position

Expecteddirectimpactthree

yearsafterWTOaccession

Air transport Relatively closed in both domestic and international routes

Low

Water transport Inland shipping open to domestic companies; coastal and international shipping relatively closed

Low

Road transport (3) Inland shipping open to domestic companies; coastal and international shipping relatively closed

No restriction for domestic entry; foreign entry only by joint venture

High

Rail transport (6) State monopoly Low

Forwarding (4) International: licensing system applies; foreign participation only via joint venture

Domestic: relatively open for domestic companies; not open to foreign companies

High

Storage and warehousing (3)

No restriction for domestic entry; foreign entry only by joint venture

High

Integrated services- 3PL Determined by the above 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 44


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

China’s 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 China’s 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 foreign-

owned 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 45


�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.

education services

In education services, China’s 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).

China’s 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 46


Professional and other services sectors

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 China’s

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-by-

project 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 47


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).

intellectual ProPerty rights

The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) is an important

aspect of China’s 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 48


the agreement on trade-related asPects of intellectual

ProPerty rights (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 country’s 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, China’s 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:

• China’s 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 Embassy–China �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 China’s intellectual property

laws and enforcement system in deterring intellectual property rights infringement.

P A G E 49


T a b l e � . 4

China leads the world in software piracy

Top10piratingcountries,piracyratesinpercentandpiracylossesinUS$million,2003

Piracyrates%

PiracylossesUS$million

� China 9� 38�3

� Vietnam 9� 4�

3 Ukraine 9� 9�

4 Indonesia 88 �57

5 Russia 87 ��04

6 Zimbabwe 87 6

7 Algeria 84 59

8 Nigeria 84 47

9 Pakistan 83 �6

�0 Paraguay 83 9

Note: 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 China’s 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).

above and beyond wto commitments: mainland hong Kong closer economic PartnershiP agreement (cePa)

Under the Mainland Hong Kong Closer Economic Partnership Agreement (CEPA), Hong Kong

companies can enjoy market access conditions above and beyond China’s WTO commitments. China,

so far has committed to open a total of �7 sectors to Hong Kong’s 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 China’s WTO commitments, the thresholds of entry to China’s 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 mainland’s services sector.

P A G E 50


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.

T a b l e � . 5

China grants market access above and beyond China’s WTO commitments to approved Hong Kong service suppliers

Applications for certificate of Hong Kong service supplier as of 31 July 2005

Services sector

No of applications

received

No of applications approved

� Legal 7 7

� Construction professional and construction and related engineering

46 4�

3 Medical and dental � �

4 Real estate �5 �3

5 Advertising 66 6�

6 Management consulting, convention and exhibition

39 30

7 Value-added telecommunications �7 ��

8 Audiovisual 9 9

9 Distribution �4� �35

�0 All insurance and insurance-related 3 3

�� Banking and other financial 5 5

�� Securities and futures � �

�3 Tourism and travel related � �

�4 Transport and logistics 399 388

�5 Information technology 4 3

�6 Job referral services and job intermediary 5 5

�7 Airport � �

�8 Trade mark agency � �

TOTAL 873 830

Source: Hong Kong Trade and Industry Department �005.

P A G E 5�


overriding imPortance of legal and regulatory reforms

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 Embassy–China �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 China’s 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. China’s basic compliance with notice-and-

comment commitment continues to be uneven – it established an internal review mechanism in �00�

to review non-uniform application of laws, but problems persist.

China’s 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�


china’s legal and arbitration systems

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 53


imPlications

China has made significant progress in fulfilling its WTO commitment to liberalise the country’s

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 China’s

domestic services offers substantial opportunities for foreign companies, including those from Australia,

to benefit from the Chinese people’s rising incomes and increasing demand for high quality services

and services-embedded goods.

P A G E 54


Sector By2001 After2001Accessionandupto2008

Professionalservices Legal services (excluding Chinese law practice)

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.

Continued restrictions on business scope.

Mode 3: Geographic and quantitative limitations were eliminated in �00�.

Accounting, auditing, and bookkeeping services

Fully liberalised except that partnerships and incorporated accounting firms are limited to CPAs licensed by Chinese authorities.

Taxation Mode �: None. Mode �: None. Mode 3: Only through CJVs, with majority foreign ownership permitted.

Fully liberalised Mode 3: None, wholly foreign-owned subsidiaries by �007.

Architectural, engineering, urban planning (except general urban planning) services

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.

Fully liberalised except for Mode � restrictions. Mode 3: Wholly-owned foreign-owned subsidiaries permitted by �006.

Medical and dental services Mode �: None. Mode �: None Mode 3: Foreign majority ownership 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.

Full foreign ownership not allowed and needs-based quotas.

aPPendix 2.1 – china’s wto accession commitments on trade in services

(See notes at end for explanations of acronyms and special terms)

P A G E 55


ComputerandrelatedservicesConsultancy 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.

Software implementation services

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.

Data processing services 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.

OtherbusinessservicesServices incidental to agriculture, forestry, hunting and fishing

Mode �: None. Mode �: None. Mode 3: JV with foreign majority ownership permitted.

Related scientific technical consulting services (offshore oil-field, geological, geophysical and other scientific prospecting services, sub-surface surveying services)

Mode �: None. Mode �: None. Mode 3: Only in the form of petroleum exploitation in cooperation with Chinese partners.

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 56


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.

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.

�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.

Basic telecommunications: fixed line services

Mode �: See mode 3. Mode �: None. Mode 3: Unbound.

�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.

Constructionandrelatedengineeringservices

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.

Distributionservices 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.

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.

P A G E 57


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.

Franchising Mode �: None. Mode �: None. Mode 3: Unbound.

Fully liberalised by �004. Mode 3: By 2004 none.

Educationalandenvironmentalservices 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.

Environmental services Mode �: Unbound except for consultations services. Mode �: None. Mode 3: Through JVs with foreign majority ownership permitted.

P A G E 58


Financialservices 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.

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 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

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 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.

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 59


Tourismandtravel-relatedservices 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.

Fully liberalised by �005.

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 �007.

Transportservices 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.

Auxiliary services - Maritime cargo-handling services - Customs clearance services for maritime transport - Container station and depot services

Mode �: Unbound. Mode �: None. Mode 3: Through JVs only with foreign majority ownership permitted.

Internal waterways transport Freight transport

Mode �: Only international shipping in ports open to foreign vessels permitted. Mode �: None. Mode 3: Unbound.

Air transport services Aircraft repair and maintenance

Mode �: Unbound. Mode �: None. Mode 3: Through Chinese controlled JVs and subject to an economic needs test.

P A G E 60


Computer reservation system

Mode 1: By connection with Chinese computer reservation system, etc. Mode �: None. Mode 3: Unbound.

Rail transport services Mode �: None. Mode �: None. Mode 3: Through JVs with a foreign ownership limit of 49 per cent.

Fully liberalised by �007. Mode 3: Foreign majority ownership by �004.

Road transport services Freight transport by rail and by road in trucks or cars

Mode �: None. Mode �: None. Mode 3: Through JVs with a foreign ownership limit of 49 per cent.

Fully liberalised by �004. Mode 3: Foreign majority ownership by �00�.

Auxiliary services Storage and warehousing

Mode �: Unbound. Mode �: None. Mode 3: Through JVs with foreign ownership limit of 49 per cent.


Freight forwarding agency services

Mode �: None. Mode �: None. Mode 3: Through JVs with a foreign ownership limit of 50 per cent and subject to minimum capital requirements.


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 country’s 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 6�

C h a p t e r 3

accessing china’s services marKet: australian business exPerience

Key Points

• By 2020, China’s financial services market will be larger than that

ofGermanyandwillgrowmorethantwiceasfastastherestof

theworld.

– Australianbanksarepositioningthemselvesinanticipationof

fullliberalisationbytheendof2006.

• Chinaistheworld’slargestconsumerofinternationaleducation.

– Australia has made significant gains in increasing its share of

thismarket.

– In 2004, China was the top source country for international

enrolmentsinAustralianeducationinstitutions.

• In2002,Chinaovertook theUnitedStates tobecome theworld’s

largesttelecommunicationsmarket.

– Telstra’s 100percent owned CSL is the first Hong Kong

registeredcompanytoqualifyundertheMainlandHongKong

CloserEconomicPartnershipAgreement,whichprovidesmarket

access above and beyond China’s World Trade Organization

commitments.

• By2020,Chinawillbecometheworld’slargesttourismdestination

andthefourthlargestsourceoftourists.

– Australiancompaniesare trying tomake inroads intoChina’s

travel industry but are facing stiff competition, high capital

requirementsandbusinessscoperestrictions.

P A G E 6�


• China’sdemandfortransportandlogisticsserviceswillcontinuetogrow

rapidly.

– Australiancompanies’hightechnologyandsupplychainmanagement

know-how can play a key role in developing China’s industry

capacity.

• The growing sophistication, transparency and market orientation of

China’s economy is driving strong demand for quality professional

services.

– Australian legal and other professional firms are strengthening their

presenceinChinatoservicetheneedsoftheirclients.

• Chinaisundergoingamassiveconstructionboom.

– Australian property companies are involved in infrastructure and

propertydevelopment.

• Despite improving market access foreign firms are facing entrenched

domesticcompetitors,highcapitalrequirementsandarapidlychanging

regulatoryenvironment.

P A G E 63

A u s t r a l i a n B u s i n e s s E x p e r i e n c e

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 China’s services sector.

financial services

Financial sector revenues in Asia Pacific will grow from US$390 billion in 2004 to US$1.8 trillion by

�0�0, 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, China’s 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 China’s

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 China’s 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,

China’s 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 China’s 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.

F i g u r e 3 . �

Earnings from retail banking forecast to rise

EarningsbysourceforChina’sbankingsector,2003–2013

Note: 2005, 2008 and 2013 figures are forecasts.

Source: McKinsey Quarterly �004a.

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

2003 2005 2008 2013

Loans to large andmidsize companies

Corporate deposits

Fee based business

Personal savings

Personal finance

Loans to small andmidsize enterprises

100 192 198 252 Index: earnings in 2003=100

Compound annualgrowth rate,2003–13, %

1

-1

25

7

35

..

P A G E 64


By 2010, China’s 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 �0�0,

�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 People’s 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 People’s 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 (People’s Daily 4 February �005).� The

People’s 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).�

F i g u r e 3 . �

China’s credit card market – 4th largest in Asia by �0�0

Forecastcreditcardrevenuesby2010inUS$millionand2001rankings

Source: McKinsey Quarterly �003.

� In May 2005, the People’s 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 People’s 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, Xi’an, Nanning, Mianyang and Huzhou (PB0C 2005b).

0 2000 4000 6000 8000 10 000 12 000

IndonesiaPhilippines

MalaysiaIndia

SingaporeThailand

Hong KongChina

TaiwanJapanKorea

US$ million

2001 ranking9900 2

8900 16400 3

3400 11

2200

1300

960

760590

330

240

4

5

6

10

78

9

P A G E 65


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 China’s 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 China’s 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).

F i g u r e 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

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.


0

10

20

30

40

50

60

70

80

90

State-ownedcommercial banks

Joint-stockcommercial banks

Rural creditcooperatives

Foreign-fundedbanks

Other financialinstitutions

19952000

2004

Per c

ent o

f tot

al fi

nanc

ial s

ecto

r loa

ns

P A G E 66


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 China’s 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.

F i g u r e 3 . 4

Insurance market in China is growing strongly

Insurancepremiumincome,RMBbillion,1999–2004

Note: Life insurance also includes injury and health insurance.

Source: CIRC �005.

RM

B bi

llion

0

100

200

300

400

500

1999 2000 2001 2002 2003 2004

Property insurance Life insurance

P A G E 67


F i g u r e 3 . 5

China’s life insurance market is expected to grow

TotallifeinsurancepremiumsinUS$billioninChinaandselectedcountries

a)China b)Chinaandselectedcountries,2008

(forecast)

Source: McKinsey Quarterly �004b.

More than 80 per cent of China’s 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 mass-

affluent markets (McKinsey Quarterly 2004b).

0

30

60

90

120

150

2002 2005 (forecast) 2008 (forecast)

Individual policies

Group policies

US$

billi

on

US$

billi

on

0

200

400

600

800

US

Japa

n

UK

Chi

na

Fran

ce

Ger

man

y

P A G E 68


T a b l e 3 . �

Domestic life insurers dominate the market

China’slifeinsurancemarket,marketsharesasmeasuredbypremiumincomes,2004

Typeofplayer

Examples Marketshare(%of

premiumincomes)

Totalassets

(RMBbillion)

Competitiveadvantage

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

5.9 5.5 �.8

�4.4 �4.5 8.9

Up and coming domestic players may be more responsive to market demand

Subtotal 97.4 748.3

Foreign JVs

Australian JV

AIA CITIC Prudential Manulife-Sinochem Life Pacific ING Generali China China Life-CMG A dozen or so others

�.5 0.�

0.� 0.� 0.�

0.02

0.4

8.8 0.7

�.� �.� 0.5 0.�

4.9

Deep industry expertise More professional and service-oriented sales force Brand image

Subtotal 2.6 17.4

Sources: McKinsey Quarterly �004b and China-Life CMG �005a.

P A G E 69


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 People’s

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

F i g u r e 3 . 6

General (property and casualty) insurance dominated by three major domestic insurers

China’sgeneralinsurancemarket,marketsharesasmeasuredbypremiumincomes,

January–June2005

Source: CIRC �005.

3 The transaction is still subject to approval from the China Insurance Regulatory Commission.

PICC53.1%

China Pacific12.9%

Ping An9.4%

Other local companies23.4%

Foreign companies1.2%

P A G E 70


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).

ANZ’s 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 country’s 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).

4 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 7�


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 China’s 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 Bank’s Presence in China).

commonwealth banK’s Presence in china

Source: CBA 2005a.

5 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 Company’s �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 China’s 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 China’s 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 73


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).

Macquarie’s 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), Australia’s 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 IAG’s heritage as the insurance arm of Australia’s 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 China’s oldest and largest motoring association and road-side assistance provider. CAA’s 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 China’s 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. CAA’s 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 CAA’s 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 74


education and training services6

China is the world’s largest consumer of international education and rapid economic growth over the

past decade has intensified the country’s 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.

market competition and major players

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).

6 The contents of this section were drawn from EAU’s report, Education Without Borders: International Trade in Education released in September �005.

P A G E 75


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 76


tafe nsw global

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 world’s largest telecommunications market

(OECD �003a). At the end of �004, China’s 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).

China’s telecommunications market is now facing a transition from a period of explosive growth to

a period of mature growth. Between 1995 and 2004 China’s telecommunications market grew by

around 30 per cent per year (in business volume terms), almost triple the country’s 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 77


F i g u r e 3 . 7

China’s telecommunications market – the largest in the world

Fixedandmobilephonesubscribersandinternetusersinmillionsandpenetrationrateper100people,1995–2005

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 country’s relatively low broadband penetration rate, market potential

remains robust.

Value-added telecommunications have a very high potential for growth with rapid expansion of inter-

related industries such as internet telephone services. Promising areas include internet telephony

solutions, internet content, internet equipment and wireless internet business (OECD �003c).

market competition and major players

The telecommunications sector in China offers new opportunities and huge potential as the market

opens further in line with China’s WTO commitments. While China’s 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

100

150

200

250

300

350

400

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Fixed line (lhs)Mobile phone (lhs)

Internet services (lhs)Fixed line penetration rate (rhs)Mobile phone penetration rate (rhs)Internet penetration rate (rhs)

Subs

crib

ers/

user

s in

milli

ons

5

10

15

20

25

30

Per 1

00 p

eopl

e

50

0 0

P A G E 78


telecom services where foreign firms have an interest.

The industry is seen as moving towards fixed-mobile convergence. China’s 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 Kong’s 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, China’s

second-largest telecom equipment maker, to develop the world’s 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 Telstra’s positioning in China’s telecommunications industry.

Telstra is also involved in China’s telecommunications sector through its mobile company in Hong

Kong, CSL, and its international voice and data joint venture REACH.

7 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 79


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 China’s 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).

tourism and travel-related services

Increasing incomes and looser restrictions on domestic and international travel are driving a boom in

China’s 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 80


F i g u r e 3 . 8

Chinese domestic and foreign tourism booming

China’sdomesticandoutboundtourisminmillionpersons,1994–2004


The World Tourist Organisation forecast that by �0�0, China (not including Hong Kong) will have

��0 million inbound tourists and become the world’s biggest tourism destination and the fourth largest

source of tourists. By 2020, China’s tourism sector is projected to generate up to US$302 billion in

revenues, accounting for between 8 to �� per cent of the country’s GDP (World Tourist Organization

cited by Asia Times �3 April �005).

In �004, China overtook Italy as the world’s 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. China’s 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 �0�0 and �00 million by �0�5 (Economic Intelligence Unit cited by Asia Times �3 April �005).

While in the short-term Hong Kong is attracting most of China’s outbound tourists other countries,

including Australia, are expected to benefit.

8 As of May �005, outbound group travel by Chinese nationals was allowed in 66 approved destination countries and regions (World Tourist Organization �005).

Milli

on p

erso

ns

0

200

400

600

800

1000

1200

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 20040

5

10

15

20

25

30

35

Domestic tourists (lhs) Chinese outbound tourists (rhs)

Milli

on p

erso

ns

P A G E 8�


Market competition

China’s tourism market has been open earlier than scheduled but foreign operators still face significant

barriers (China–Australia Chamber of Commerce–Beijing 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

China’s 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 China’s 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 Centre’s Corporate Division has assumed day-to-day management,

systems and financial control of the joint venture, while China Comfort, China’s 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 Comfort’s 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 long-

term 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).

transPort and logistics

By 2020, China will become the world’s 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 world’s air freight in �0�9 compared to 4� per cent in �999.

The turnover volume of China’s 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�, China’s 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 world’s capacity (DFAT �005a).

In �004, the combined value of China’s 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 83


Market competition and major players

China’s 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 state-

owned logistics firms such as COSCO and Sinotrans.9 Sinotrans which has a monopoly on China’s

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, Europe’s 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 Australia’s 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 Mayne’s 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).

Linfox’s operations in China have received a further boost after signing a five-year contract with

China’s 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.

9 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 China’s IT businesses (APL Logistics �00�). Lenovo is the largest personal computer manufacturer in China (Lenovo �005).

�0 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).

P A G E 84


legal and other Professional services

The growing sophistication, transparency and market orientation of China’s 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, China’s

main arbitral body, China International Economic and Trade Arbitration Commission, handled more

arbitrations than the rest of the world’s 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 2004–2005 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 2004–05 (AAR 2005).

Allens Arthur Robinson’s 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 multi-

currency 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 85


T a 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 �003 rank Value of deals US$ billion

Number of deals

� 7 Freehills 74.77 ��8

� � Allens Arthur Robinson

58.�3 84

3 � Mallesons Stephen Jacques

56.07 ��6

4 �3 Minter Ellison 36.97 84

5 9 Skadden, Arps, Slate, Meagher & Flom

3�.�� 3

6 3 Linklaters �3.03 59

7 �� Atanaskovic Hartnell �0.4� 6

8 8 Blake Dawson Waldron

�9.54 40

9 5 Freshfields Brauckhaus Deringer

�3.48 47

�0 �7 Clifford Chance �3.0� 33

�� 4 Clayton Utz ��.46 8�

�� 54 Ashurst �0.85 7

�3 �� Baker & McKenzie LLP �0.76 88

�4 �4 Shearman & Sterling 9.4� �5

�5 �6 Bell Gully 8.0� 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, Xi’an 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 86


• 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).

construction and related engineering services

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). Australia’s property industry is well placed to benefit from China’s 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 China’s 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 public–private 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 87


Leighton Group

Leighton, with a market capitalisation of around A$3 billion is Australia’s 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

• China’s accession to the WTO

• mining opportunities prompted by China’s appetite for natural resources, particularly coal

• Leighton’s 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.

China’s 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 88

P A G E 89

C h a p t e r 4

australia and china: services trade and investmentt

Key Points

• China isnowAustralia’ssixth largestservicesexportmarketand

eighthlargestsourceofservicesimports.

– Rising incomesandservicessector liberalisation inChinaare

boosting significantly services trade and investment

• China isAustralia’s number one source of overseas students

–around70000ChinesestudentsareenrolledinAustralianeducation

institutions.

• China is Australia’s fifth largest source of tourists and sixth most

populartouristdestination.Over250000ChinesevisitedAustralia

andover180000AustraliansvisitedChinain2004.

• There has been a dramatic turnaround inAustralian investors’

sentimentoverthepasttwoyears.

– Australian investors signed over 700 agreements in 2004,

committingoverUS$2billionworthofforeigndirectinvestment

inChina.

• China’s investment in Australia is growing, with significant investment

in resources reflecting China’s desire to secure resources for its

ongoingrapidindustrialisation.

• ThefreetradeagreementcurrentlybeingnegotiatedbetweenChina

andAustraliawillenhancebilateralservicestradeandinvestment.

– Itprovidesanopportunitytofurtherreducebarriers,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 90


Resources and rural exports are the core of Australia’s 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.

australia’s services exPorts to china

China was Australia’s 6th largest services export market in �004, up from �3th largest in �995

(Figure 4.�). Over the past ten years, Australia’s 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 Australia’s total

services exports. Taken as a whole, the value of Australia’s services exports to China has now

overtaken Australia’s second largest export to China, namely wool (DFAT 2005b and ABS 2005b).

F i g u r e 4 . �

China – Australia’s sixth largest services export market

Australia’stopservicesexportmarkets,A$million,1995,2000and2004

Source: ABS 2005b.

Education and tourism dominate Australia’s services exports to China, accounting for 74.5 per cent

of services exports in �003–04 (Figure 4.�).� As noted in Chapter 3, China is now Australia’s 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.

0 1000 2000 3000 4000 5000 6000

Korea

Malaysia

Indonesia

Hong Kong

China

Singapore

New Zealand

Japan

United Kingdom

United States

1995 2000 2004

2

3

1

45

13

7

8

9

6

A$ million

P A G E 9�

B i l a t e r a l S e r v i c e s T r a d e a n d I n v e s t m e n t

F i g u r e 4 . �

Education and tourism top Australian services exports to China

CompositionofAustralianservicesexportstoChina,2003–04

Source: ABS 2005c.

F i g u r e 4 . 3

China – Australia’s number one source of overseas students

OverseasstudentsinAustralianeducationinstitutionsinthousands,

1995,2000and2004

Source: AEI �005a.

Education-relatedtravel36.6%

Other personal travel31.8%

Business travel6.1%

Business and othermisc services

12.5%

Transport services13%

0 10 20 30 40 50 60 70 80

Singapore

United States

Thailand

Indonesia

Japan

Malaysia

India

Hong Kong

Korea

China

Number of overseas students in thousands

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 Australia’s 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).

F i g u r e 4 . 4

Chinese tourists in Australia growing dramatically

Australia’stopsourcesoftourists,short-termarrivalsinthousands,

1995,2000and2004

Source: ABS 2005d.

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 �994–95 to A$�49 million in �003–04 (Figure 4.5). Sectors where Australian suppliers are present

include financial, legal, telecommunications, transport and logistics, construction and engineering-

related services.

china’s services exPorts to australia

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 Australia’s total services imports. Manufactured

exports dominate China’s exports to Australia but services exports, taken as a whole, have now

overtaken China’s third largest exports to Australia of toys, games and sporting goods. In �004, China

was Australia’s eighth largest services import market (Figure 4.6).

0 200 400 600 800 1000 1200

Hong Kong

Germany

Malaysia

Korea

Singapore

China

United States

United Kingdom

Japan

New Zealand

Number of tourists in thousands

1995 2000 2004

P A G E 93


F i g u r e 4 . 5

Other services exports also emerging

ValueofmajorAustralianservicesexportstoChina,A$million1994–95to2003–04

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.

F i g u r e 4 . 6

China – Australia’s eighth largest services import market

Australia’stopservicesimportmarkets,A$million,1995,2000and2004

Source: ABS 2005b.

0 1000 2000 3000 4000 5000 6000 7000

Thailand

Switzerland

China

Germany

Hong Kong

New Zealand

Japan

Singapore

United Kingdom

United StatesRank in 1995

1

2

4

3

6

5

8

12

10

14

1995 2000 2004

A$ million

P A G E 94


Transportation and travel services accounted for 9� per cent of China’s services exports to Australia in

2003–04 (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 Australia’s sixth most

popular tourist destination (Figure 4.8).

F i g u r e 4 . 7

Transport and travel dominate China’s services exports to Australia

ValueofChina’smajorservicesexportstoAustralia,A$million,1994–95to2003–04

Source: ABS 2005c.

F i g u r e 4 . 8

China – Australia’s sixth most popular tourist destination

Australiantouristdestinations,residentshort-termdeparturesinthousands,

1995,2000and2004

Source: ABS 2005d.

0 100 200 300 400 500 600 700 800 900

Malaysia

Hong Kong

Singapore

Fiji

China

Thailand

Indonesia

United Kingdom

United States

New Zealand

Number of tourists in thousands

1995 2000 2004

P A G E 95


australia’s investment in china

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 Australia–China 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

Australia’s ��nd largest investment destination accounting for 0.� per cent of Australia’s 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$9�0 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 Australia–China business relationship.

F i g u r e 4 . 9

Chinese statistics show a dramatic turnaround in Australian investors’ sentiment towards China

AustralianFDIinChina,contractedandutilisedvalueinUS$millionandnumberof

signedagreements,1995–2004


� Foreign investment includes foreign direct investment, portfolio and other investment.3 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.

4 The ratio of contracted FDI to utilised FDI is used to measure foreign investor sentiment towards China (AME Info �004).

P A G E 96


China’s 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 China’s services sector

is expected to expand as planned reforms are pursued and the sector increasingly drives China’s

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.

china’s investment in australia

China’s 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 1991–92, China’s FDI outflows have grown

to almost $US5 billion in �00�–0� (UNCTAD data cited by Department of Treasury �003). Australia

has been benefiting from China’s outward investment (Department of Treasury 2003).

China’s 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

Australia’s �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.

China’s largest and high profile Australian investments are in the resources sector, reflecting China’s

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 97


F i g u r e 4 . � 0

China’s investment in Australia appears to have fallen

AnnualstockofChina’sinvestmentinAustralia,A$billion,June1997–December2004

Notes: In its most recent publication of foreign investment statistics, the ABS has changed its estimates of Australia’s investment position from financial years to calendar years.

Source: ABS 2005e.

F i g u r e 4 . � �

Chinese investment in Australia mostly in mineral resources and real estate

ApprovedChineseinvestmentproposalsbyindustrysectorinA$millionasreported

in selected fiscal years, 1998–99, 2000–01 and 2003–04

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 Government’s 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 98


china invests to secure uPstream resources

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, China’s

growing interest in these sectors in recent years reflects a desire to secure resources for

rapid industrialisation.

China’s 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 China’s 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 venture’s �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 China’s 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 99


summary and ProsPects

China’s 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. Australia’s 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-china free trade agreement negotiations commenced

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 China’s 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 country’s commitments in the WTO to maximise economic integration between

the two countries.

An Australia–China 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 Australia’s economy by US$�8 billion and China’s 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

�0�5, 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

China’s direct investment in Australia by US$3�8 million.

DFAT’s website, www.dfat.gov.au/geo/china provides details and updates on the progress of

the Australia–China FTA negotiations, latest changes to market access arrangements and

data on bilateral trade and investment.

Source: DFAT �005a.

P A G E �00

P A G E �0�

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EducationWithoutBorders:InternationalTradeinEducation

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www.dfat.gov.au/eau UNLOCKING CHINA’S SERVICES SECTOR

UNLO

CKING CH

INA’S SERVICES SECTO

RDFAT

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 China’s 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 efficiency.

This report analyses China’s commitments to open the services market and finds 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.

unlocking china’s services...

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