Foreign Trade Growth and Economic Development in China: Retrospective and Future Prospects 9789814298230, 9789814298223

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China Economic vol3_USA.pdf 1 12年9月17日 下午12:23

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Enrich Series on China's Economic Issues This series emphasizes the employment of modern economics methods to explore and research hot-spot issues and difficulties in the reform, openingup and economic development facing China today. It covers a wide variety of economic issues ranging from monetary policy, fiscal policy, regional economy to industrial and banking development.

Vol. 1

China's Opening-up: The Impact on Monetary Policy Choice

Vol. 2

Growth of the Service Sector in the Yangtze River Delta

Vol. 3 Foreign Trade Growth and Economic Development In China: Retrospective and Future Prospects Vol. 4

A Study of the Macroeconomic Effects of China's Financial Deficits

Vol. 5

Competition, Concerntration and Efficiency of Commercial Banks in Korean, Mainland China and Taiwan

Published by Enrich Professional Publishing (S) Private Limited 16L, Enterprise Road, Singapore 627660 Website: www.enrichprofessional.com A Member of Enrich Culture Group Limited Hong Kong Head Office: 1/F., Lemmi Center, 50 Hoi Yuen Road, Kwun Tong, Kowloon, Hong Kong, China Beijing Office: Rm 1108A, Culture Plaza, No. 59 Zhongguancun St., Haidian District, Beijing, China English edition © 2011 by Enrich Professional Publishing (S) Private Limited Chinese original edition © 2008 China Renmin University Press Translated by Li Ling and Tang Zhou All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without prior written permission from the Publisher. ISBN (Hardback) ISBN (ebook)

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This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Enrich Professional Publishing is an independent globally minded publisher focusing on the economic and financial developments that have revolutionized new China. We aim to serve the needs of advanced degree students, researchers, and business professionals who are looking for authoritative, accurate and engaging information on China.

Contents Preface to the Series ............................................................................................... vii Preamble ................................................................................................................... ix

Chapter 1 The Growth of China’s Export and Import and the Changes in ........................... 1 Its Structure

Chapter 2 The Development of Foreign Direct Investment in China .................................. 31

Chapter 3 The Characteristics of the Development of the Services ..................................... 57 Trade in China and Its Future

Chapter 4 The Reform of China’s Foreign Trade System and Its Effects ............................. 93

Chapter 5 A Retrospective on and Prospects for the Reform of the Foreign ..................... 119 Exchange Control System in China

Chapter 6 The Development and Change of Foreign Trade Financing in China .............. 155

Chapter 7 The WTO and Foreign Trade in China ................................................................ 195

Chapter 8 The Trend of Regional Integration and China’s Choices ................................... 233

Notes ...................................................................................................................... 269 References............................................................................................................ 271 Index...................................................................................................................... 279

vi

Preface to the Series The development and change of economic theory is closely associated with economic practice. With the transition of China to a socialist market economic system, practice requires the development and prosperity of economics; at the same time, practice is creating the conditions for the development of economics. Market-oriented reform in China is unprecedented and no ready-made economic theory can be used for guidance. This is a major challenge for Chinese scholars. “By other’s faults, wise men correct their own.” With the translation and introduction of a large quantity of Western economic theories to China and the growth of many skills in modern economics attainment, brand-new tools and perspectives are available for the understanding and solving of the economic problems of China. Theory and practice are interactive. While using modern economic theory as reference, China, as an unparalleled “test field,” will certainly inject new vitality into the development of economic theory and become an important driving force for its development. Only in this way may economics based on researches on Chinese economic problems be established. It is against this backdrop that Chinese economic issues are endowed with special significance. The fundamental purpose of planning for and publishing the Series on Economic Issues in China is to encourage economists’ spirit of innovation and exploration, further promoting the development and prosperity of economics research in China, and to establish a platform that is suitable for the growth of new ideas among economics works in China, providing a theoretical economic circle on China and explorers in real sectors a space for presentation of highlevel research findings, thus enabling this series to be indispensable reading for readers at home and abroad to learn about the development of economics and the economy in China. The distinctness and urgency of economic issues in China will provide Chinese scholars with a broad space for development. Using economic issues in China as the breakthrough point, this series emphasizes the employment of modern economics methods to explore and research hot-spot issues and difficulties in the reform and opening-up and economic development of China. For the purpose of development of the Chinese economy and economics, on an academic basis, this series has employed a “double-blind review system” integrated with solicited manuscripts from experts so as to cultivate a number

Preface

of Chinese academic pioneers with the spirit of rationality and exploration in the field of economics. China is an ideal country for economic research, where the diligent may make plentiful and substantial achievements.

viii

Preamble Since 1978, China has been walking on the glorious path of reform and

opening-up for thirty years. Reform and opening-up has accelerated China’s participation in economic globalization, which has in turn awarded the development of the nation’s foreign trade both opportunities and challenges. Since 1978, China has made a variety of effective reforms in its economic

management structure, especially in structural reforms of the foreign trade and foreign capital system, which have brought tremendous changes to China’s

national economy and created the miracle of the country’s surging economy and foreign trade.

As is known to all, during the years between the founding of the People’s

Republic of China (PRC) and reform and opening-up, China had been continuously implementing a planned economy and an “import substitution

trade strategy” that gave priority to developing heavy industry. Against such a backdrop, China has long been practicing a highly centralized and monopolistic

trade system governed by the state. This was when China set up a foreign trade

system wholly supervised and administered by the Ministry of Foreign Trade (now the MOFCOM) of the central government. The Ministry was responsible for the unified administration and operation of China’s foreign trade companies

of all industries, making mandatory plans for the system, and accounting for the profits and losses of the system as a whole.

It should be noted that a highly centralized foreign trade system under

a unified administration was in line with the planned economy in the early

years of the PRC, and it did indeed play a part in reinforcing a strategy favoring heavy industry. But as national economic development continued, the one-sided strategic emphasis on heavy industry, the corresponding planned

economy and the centralized foreign trade system gradually showed their weakness and seriously impeded the development of the national economy and foreign trade.

The reform of China’s foreign trade system can be roughly divided into five

phases by their respective primary goals and natures:

(1) The phase from 1979–1987 is seen as a transitional period for the central government to delegate power in foreign trade and streamline

Preamble

its related administrative bodies. By delegating administrative power over foreign trade, the central government created incentives for local governments of various levels, different industries, foreign trade companies and manufacturers, so as to invigorate foreign trade. The

reform in this phase underscored its consistency with the overall economic reform, and a change from an economic system based on

mandatory plans to one that combined directives and mandatory plans with market regulation.

(2) The three years from 1988–1990 was a period of overall progress. In

this phase, the primary goal for the structural reform of foreign trade was to promote the contract responsibility system throughout industry.

The most prominent feature of this reform was an attempt to improve

the performance of foreign trade entities by separating ownership and managerial power, while still retaining the state’s monopoly over the foreign trade industry.

(3) The phase between 1991 and 1993 was a transitional period for the operation mechanism of foreign trade enterprises. Reform in this

period centered on measures to implement a system in which foreign

trade enterprises assumed sole responsibility for their own losses or profits. The guiding principle here was to gradually build a market

system governed by unified policies and ideas such as fair competition, autonomous operation, being financially responsible for profits or losses

and combining industry and trade. A foreign trade agency system or import and export agency system was also introduced in this phase.

(4) From 1994–2001 the foreign trade structural reform was in its deepening period. The most prominent goal was to establish a foreign trade system

that was in line with both the socialist market economy and international foreign trade norms. The Foreign Trade Law of the People’s Republic

of China together with a new round of foreign trade structural reform that centered on the unification of foreign exchange rates were both put into force in this period. Both were aimed at establishing a foreign trade system in conformity with international norms and governed by unified policies and notions of fair competition, the assumption of responsibility for losses and profits, and combination of industry and trade. The implementation of the import and export agency system continued.

x

Preamble

(5) After China’s participation in the WTO, China began an all-round reform of its foreign trade system based on WTO rules. With nearly 3,000

foreign trade-related laws modified or promulgated, the government built a new foreign trade legal system, adjusted its regulating system

and policy instruments for foreign trade, and enhanced the transparency of its trade policies.

Naturally, accompanying the abovementioned reforms of the foreign trade

system were structural reforms concerning China’s foreign capital and foreign exchange system. In the 30 years of reform and opening-up, the country has been implementing mutually coordinated reforms of its systems of foreign

trade, foreign capital and foreign exchange. These efforts, together with the bold implementation of reform and opening-up, greatly invigorated foreign

trade enterprises and other related entities and prompted waves of foreign investment inflows. China has thus provided itself with an effective incentive mechanism and an institutional guarantee for its quickening participation in economic globalization and its burgeoning foreign trade.

Since 1978, the beginning of reform and opening-up, both China’s imports

and exports have seen a marvelous increase. As shown in Fig. 1, the volume of foreign trade has been rapidly increasing since 1978. In 1978 China had an

export and import volume of USD 20.64 billion, while by 2007 the figure had

jumped to USD 2.17383 trillion, 105 fold greater than that of 1978, making China the third biggest nation in terms of foreign trade volume, inferior only to the U.S. and Germany.

From an export growth rate perspective, in 1978 China’s export volume was

only USD 9.75 billion, while in 2007 the figure surged to USD 1.21802 trillion, 125 fold greater. In 1994 China’s export volume exceeded USD 100 billion for the

first time; in 2007 the figure exceeded USD 1 trillion for the first time. And in terms of the growth rate of import volume, in 1978 China’s import volume was

only USD 10.89 billion while in 2007 the figure surged to USD 955.82 billion, 88

fold greater. In 1993 China’s import volume exceeded USD 1,000 billion for the first time; in 2007 the figure approximated USD 1 trillion.

At the beginning of reform and opening-up, China’s foreign trade posted

deficits from 1978–1981. After the surpluses in 1982 and 1983, foreign trade

continued suffering from six consecutive years of deficits from 1984–1989. Since 1990, China’s foreign trade has basically enjoyed an 18-year-long surplus except for 1993, with the surplus increasing year by year. In 1990 the surplus

xi

Preamble

was USD 8.74 billion; in 2005 the surplus exceeded USD 100 billion for the first time; in 2007 the surplus hit USD 262.20 billion, 30 times that of 1978. The growth of the surplus was especially fast in the years after 2004, allowing the surge of China’s foreign reserve (see Fig. 2). The huge surpluses and foreign reserves have

attracted attention from China’s major trade partners and the rest of the world. As estimated by the State Administration of Foreign Exchange, in 2007 China’s foreign reserve had reached USD 1.528249 trillion, which was the world’s largest. Fig. 1.

The growth of China’s foreign trade volume since 1978

100 million USD 21,000 18,000 15,000 12,000 9,000 6,000 3,000

Total volume of exports and imports

Volume of exports

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

0

Volume of imports

Source: Based on the annual data from the websites of the National Bureau of Statistics and Customs statistics.

As the world economy quickens its pace of globalization and China

becomes more involved, the country’s foreign trade, while being given a historic opportunity, has also been confronted with unprecedented challenges. The challenges China is facing in its foreign trade are mainly: the increasing

uncertainty of the foreign trade environment and imbalance of trade, trade barriers and the increasingly frequent anti-dumping cases and anti-subsidies

cases due to severe trade frictions, the negative influence of the rapid appreciation of the RMB etc.

In a changeable new international environment, how to use the favorable

opportunities to develop China in a better and faster way, and what measures

we should take to tackle the difficult challenges ahead of us are two questions

xii

Preamble

of great significance. Meanwhile it is also very necessary that we draw constructive conclusions based on the great success and achievements in

foreign trade, analyze the causes of existing problems and the gaps between the developed nations and China, and work out the approaches to solutions and improvement. Fig. 2.

The growth of China’s foreign exchange reserve since 1990

100 million USD 16,000 14,000 12,000 10,000 8,000 6,000 4,000

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

0

1990

2,000

Source: The website of the State Administration of Foreign Exchange.

This book is comprised of the following parts: the first chapter, based on

a review of the growth of volume of China’s foreign trade in goods, analyzes

the correlation between GDP and the growth of foreign trade volume using quantitative analysis. It also conducts an empirical study of the changes in

foreign trade structure by analyzing the flow of trade, classification of goods and the patterns of trade, based on which it puts forward suggestions for the

future development of China’s foreign trade. Chapter 2 makes a thorough study of the evolution of China’s foreign investment system, foreign investment policy and the status of foreign direct investment in China. Chapter 3 mainly

analyzes the development and characteristics of China’s trade in services. It conducts a comparison between services trade in the world and that in China,

based on which it probes the competitiveness of China’s trade in services. It further analyzes the characteristics of services trade in China and its prospects,

xiii

Preamble

and makes suggestions on how to facilitate this trade. Chapter 4, based on the historical process of the structural reform of the foreign trade system, analyzes the contents of the reforms at different stages and their respective effects. Chapters 5 and 6 respectively review and analyze the status of the structural reform of China’s foreign exchange administrative system and the financing of foreign trade. The seventh chapter mainly analyzes the impact of China’s participation in the WTO on foreign trade and the problems concerning trade frictions. The eighth chapter makes an analysis of China’s foreign trade relations and its progress in participating in regional integration. It then discusses the formation of a global production network and China’s strategies in response. The subjects for research, the overall plan and the framework of this book were proposed by Prof. Jin Zhesong. And through study and group discussions by all contributors to the book, the outline of the book was formed. The book was separately written by: Prof. Jin Zhesong (Preface), Dr. Shen Qi (Chapter 1), Prof. Zhang Xiaotao and Yang Yanjiao (Chapter 2), Prof. Li Jun (Chapter 3), Dr. Li Ruiqin (Chapter 4), Prof. Xiao Fengjuan (Chapter 5), Prof. He Pei (Chapter 6) Dr. Sun Zhixian (Chapter 7) and Dr. Liu Chunsheng (Chapter 8). The book was revised by Prof. Jin Zhesong. This book is the result of the collective wisdom and diligent work of the abovementioned nine members of the Department of International Economy and Trade in the School of Finance of the Central University of Finance and Economics. In our study and writing, we were greatly supported by the dean of the School of Finance, Prof. Zhang Liqing, and other leaders in the school. We referred to the public information and materials on the websites of the National Bureau of Statistics, Ministry of Commerce, State Administration of Foreign Trade and China Customs. We also referred to the related research results of researchers at home and abroad. We hereby extend our heartfelt gratitude towards these people. And we also want to thank the editor of the book, Mrs. Wang Kefang, from the China Renmin University Press. Due to the limits of our academic ability and time, defects are hard to avoid. We look forward to the criticisms and corrections of fellow researchers and readers. March 31, 2008

xiv

1

Chapter

The Growth of China’s Export and Import and the Changes in Its Structure

1

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

The 30 years of reform and opening-up has been a period of rapid development

of China’s foreign trade. The volume of China’s imports and exports jumped

from USD 20.64 billion in 1978 to USD 2.17383 trillion in 2007, and the USD 1.14 billion deficit in 1978 had turned into a USD 262.2 billion surplus in 2007. China’s foreign trade annual growth rate is higher than that of its GDP, and the degree of dependence on foreign trade had increased from 23% in 1985 to 67%

in 2007. Empirical study shows that the development of China’s foreign trade has had a significant boosting effect on its economic growth. Now, as China has

become deeply intertwined with economic globalization, its foreign trade is characterized by not only a division of labor based on its resource endowment

but also a division of labor within industries that is based on economies of scale. T h e r a p i d d e v e l o p m e n t o f p ro c e s s i n g t r a d e i s a n o t h e r i m p o r t a n t

characteristic of the development of foreign trade in reform and opening-up.

Processing trade, which had an annual volume of only USD 1.666 billion, and took up merely 4.4% of the total annual volume of China’s import and export

trade in 1978, had surged to USD 986.05 billion in 2007, accounting for 45.4% of the annual total import and export volume. In addition, non state-owned enterprises have become an important participant in China’s foreign trade.

In an era when economic globalization exerts a profound influence on

the world, China’s foreign trade China is both embracing opportunities and confronted with challenges. What China should do in response is: encourage

innovation and build more self-owned brands; be rational and effective when

confronted with trade frictions, and try to create a harmonious environment for foreign trade; actively participate in the international division of labor based on

the changes in China’s own comparative advantage, so as to further invigorate its foreign trade and the economy as a whole.

The Growth of China’s Import and Export and the Growth of the GDP Since the start of China’s reform and opening-up, its foreign trade has seen tremendous growth with its trade surplus significantly increased. Over the past

thirty years, the growth rate of the volume of China’s import and export has been

higher than its GDP growth rate, and its degree of dependence on foreign trade

has been continuously rising. China has turned from an onlooker of international trade to an active participant and a giant of trade in economic globalization.

2

The Growth of China’s Export and Import and the Changes in Its Structure

The basic situation of China’s import and export development Ever since the start of reform and opening-up, China’s foreign trade has enjoyed a rapid development. As is shown in Table 1.1, the volume of China’s

import and export was only USD 20.64 billion in 1978, but the figure soared to

as high as USD 2.17383 trillion in 2007, 105 fold greater than the 1978 figure. In 1988 the import and export volume exceeded USD 100 billion; in 2004 the

figure exceeded USD 1 trillion. In 1978 the export volume was only USD 9.75 billion, while in 2007 the figure surged to USD 1.21802 trillion, 125 fold greater.

1994 was the first year that China’s export volume exceeded USD 100 billion. In 2007 China’s export volume exceeded USD 1 trillion for the first time. In terms of China’s import growth, in 1978 the import volume was USD 10.89

billion and in 2007 USD 955.82 billion, an 88 fold increase. In 1993 the import

volume exceeded USD 100 billion for the first time, while in 2007 the figure was approximating USD 1 trillion. Table 1.1.

Changes over China’s import and export volume (100 million USD)

Year 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Import and export volume Import & Export 206.4 293.3 378.2 440.2 416.1 436.2 535.5 696.0 738.5 826.5 1,027.8 1,116.8 1,154.4 1,356.3 1,655.3 1,957.0 2,366.2 2,808.6 2,899.1 3,250.1 3,239.3

Export

97.5 136.6 182.7 220.1 223.2 222.3 261.4 273.5 309.4 394.4 475.2 525.4 620.9 718.4 849.4 917.4 1,210.1 1,487.8 1,510.7 1,827.0 1,837.6

Import

108.9 156.8 195.5 220.2 192.9 213.9 274.1 422.5 429.0 432.2 552.7 591.4 533.5 637.9 805.9 1,039.6 1,156.1 1,320.8 1,388.4 1,423.6 1,401.7

Balance of Trade –11.4 –20.2 –12.8 –0.1 30.3 8.4 –12.7 –149 –119.6 –37.8 –77.5 –66.0 87.4 80.5 43.5 –122.2 54.0 167.0 122.3 403.4 435.9

3

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

1999 2000 2001 2002 2003 2004 2005 2006 2007

3,606.3 4,743.2 5,097.7 6,207.9 8,512.1 11,547.9 14,221.2 17,606.9 21,738.3

1,949.3 2,492.0 2,661.5 3,255.7 4,383.7 5,933.7 7,620.0 9,690.8 12,180.2

(Con’d)

1,657.0 2,250.9 2,436.1 2,952.2 4,128.4 5,614.2 6,601.2 7,916.1 9,558.2

292.3 241.1 225.4 303.5 255.3 319.5 1,018.8 1,774.7 2,622.0

Source: MOFCOM official website.

At the beginning of reform and opening-up, more specifically, from 1978

to 1981 China experienced trade deficits which were followed by two years of surplus in 1982 and 1983. From 1984–1989 China suffered another long-term deficit. Since 1990, China has basically enjoyed surpluses for 18 consecutive

years (except for 1993), with the surplus increasing year after year. In 1990 the

surplus was USD 8.74 billion; in 2005 it exceeded USD 100 billion for the first time; and in 2007 the figure expanded to USD 262.20 billion, which was 30 fold

greater than 1978. After 2004, China’s surplus grew continuously and rapidly (see Fig. 1.1). Currently, China’s huge surplus has drawn the attention of its major trade partners and the rest of the world. Fig. 1.1.

China’s balance of trade since 1978

100 million USD 3,000 2,500 2,000 1,500 1,000 500 0

4

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

1978

– 500

The Growth of China’s Export and Import and the Changes in Its Structure

We can also analyze China’s foreign trade over the years of reform and

opening-up in terms of growth rate. Table 1.2 and Fig. 1.2 show a relatively

large fluctuation in the growth rate of China’s import and export volume.

Moreover fluctuations in foreign trade volume, export volume and import volume appeared, to some degree, in a synchronized manner.

In the four years from 1979–1982, the export and import volume, export

volume and import volume all showed a downward trend; among them, the export and import volume and import volume of 1982 both decreased. From

1982–1985, the growth rate of export and import volume continued to rise, with

a 30% high growth rate in 1985. After slowing down in 1986 and 1987 to around 10%, the export and import volume growth rate hit a 24% high in 1988 again. However, in 1990, while the export and import volume kept a 3% growth rate,

the import volume was down compared to the previous year. Throughout the 1990s, the growth rate of the export and import volume saw a string of slight

fluctuations, and fell to a low in 1998 when the export and import volume, export volume and import volume all approximated zero. After the low point in

1998, the growth rate of the export and import volume increased gradually year on year. Except for the less than 10% growth rate in 2001, the growth rates of

export and import volume, export volume and import volume have all stayed

above 20% so far in the 21st century. With an already large base of the export

and import volume, export volume and import volume in the new century,

China’s 20% growth rate in seven consecutive years was especially striking, which has attracted much attention from its trade partners and the participants in the global economy. Table 1.2. Year 1979 1980 1981 1982 1983 1984 1985 1986 1987

China’s Annual Growth Rate of Export and Import Volume since 1978 Annual growth rate (%) Import and export 42 29 16 –5 5 23 30 6 12

Export 40 34 20 1 0 18 5 13 27

Import 44 25 13 –12 11 28 54 2 1

Balance of trade 77 –37 –99 –30,400 –72 –251 1,073 –20 –68

5

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

24 9 3 17 22 18 21 19 3 12 0 11 32 7 22 37 36 23 24 23

20 11 18 16 18 8 32 23 2 21 1 6 28 7 22 35 35 28 27 26

Annual growth rate =

(Con’d)

28 7 –10 20 26 29 11 14 5 3 –2 18 36 8 21 40 36 18 20 21

105 –15 –232 –8 –46 –381 –144 209 –27 230 8 –33 –18 –7 35 –16 25 219 74 48

x 100%

Source: Obtained by calculating the data of Table 1.1.

Fig. 1.2.

China’s annual growth rate of export and import volume since 1978

(%) 60 50 40 30 20 10 0 –10

Annual growth rate of import and export

6

Annual growth rate of export

Annual growth rate of import

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

1979

–20

The Growth of China’s Export and Import and the Changes in Its Structure

We can see from Fig. 1.3 and Table 1.3 that since the start of reform and

opening-up, China has seen a dramatic rise in its degree of dependence on

foreign trade. In the 1980s, China kept the degree of dependence on foreign

trade under 30%. In 2002 and 2003 the figure had grown to respectively 43% and 52%. In recent years the figure has continued to rise and has stayed above 60%, with a 67% high in 2006. Fig. 1.3.

Changes over the degree of dependence on foreign trade of China

(%) 80 70 60 50 40 30 20

Table 1.3.

Year 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

0

1985

10

The Degree of China’s Dependence on Foreign Trade on a Yearly Basis

Annual average of Degree of Trade volume GDP (100 exchange rate (mean price) dependence on (100 million USD) million RMB) (RMB/100 USD) foreign trade (%) 206.40 N/A 3,645.22 N/A 293.30 N/A 4,062.58 N/A 378.20 N/A 4,545.62 N/A 440.20 N/A 4,891.56 N/A 416.10 N/A 5,323.35 N/A 436.20 N/A 5,962.65 N/A 535.50 N/A 7,208.05 N/A 696.00 293.66 9,016.04 23 738.50 345.28 10,275.18 25 826.50 372.21 12,058.62 26 1,027.80 372.21 15,042.82 25 1,116.80 376.51 16,992.32 25

7

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

1,154.40 1,356.30 1,655.30 1,957.00 2,366.20 2,808.60 2,899.10 3,250.10 3,239.30 3,606.30 4,743.20 5,097.70 6,207.90 8,512.10 11,547.90 14,221.20 17,606.90 21,738.30

478.32 532.33 551.46 576.20 861.87 835.10 831.42 828.98 827.91 827.83 827.84 827.70 827.70 827.70 827.68 819.17 797.35 760.71

18,667.82 21,781.50 26,923.48 35,333.92 48,197.86 60,793.73 71,176.59 78,973.03 84,402.28 89,677.05 99,214.55 109,655.17 120,332.69 135,822.76 159,878.34 183,084.80 210,871.00 246,619.00

(Con’d)

30 33 34 32 42 39 34 34 32 33 40 38 43 52 60 64 67 67

Source: Data on import and export are from the MOFCOM official website; the GDP for 1998–2005 are from the China Statistical Yearbook (2006) ; the GDP of 2006 is from the Circular on the Preliminarily Examined Data of the GDP of 2006 of the National Bureau of Statistics of China ; the GDP of 2007 is from the new conference held by the State Council Information Office of the People’s Republic of China on January 24, 2008; the exchange rates for 1985–2005 are from the China Statistical Yearbook (2006) ; the exchange rates for 2006 and 2007 are from the Exchange Rate Report on the official website of the People’s Bank of China (the annual data are the arithmetic mean of the monthly data).

By calculating the correlation coefficient (for the linear correlation coefficient

formula please refer to Appendix 1.1) between the export and import volumes and the GDP from 1978–2007 we obtained a 0.96 correlation coefficient, which means that the export and import volume and the GDP of China are closely correlated.

When adopting a regression analysis, in which the GDP from 1978–2007 are seen

as the dependent variables and the export and import volume as the independent variables, a unary linear regression equation can be formed as follow:

(1.1) In which GDP is the series of the GDP from 1978–2007; Trade is the series of

the export and import volumes from 1978–2007; are regression parameters, is the exogenous disturbance term. The Ordinary Least Squares (OLS) method is used in the regression analysis and the results are showed in Table 1.4.

8

The Growth of China’s Export and Import and the Changes in Its Structure

Table 1.4.

The results of parameters estimation

Variables Intercept (b 0)

China’s foreign trade (b 1)

df

Regression Result

1

14,676

1

12.06

t

Prob > t

3.39

0.002 1

18.66

t

1

–825.9

–2.18

0.038 2

1

0.08

18.66

χ 2

1

15.72

1

χ 2 χ 2 0.028 4 0.164 3

Table 1.20. Granger causality test (df =3) Test 1 2 Test 1: Test 2:

df χ2 10.39 3 2.30 3 Group 1 variable: GDP Group 2 variable: foreign trade volume Group 1 variable: foreign trade volume Group 2 variable: GDP

Prob > χ 2 0.015 5 0.511 6

The results of the Granger causality test showed there is no statistical difference when the df is 1, 2 or 3 (under the 5% significant level). Therefore these results are to some degree robust.

29

30

2

Chapter

The Development of Foreign Direct Investment in China

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FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

Changes in Policies on Utilizing Foreign Direct Investment The Third Plenary Session of the 11th Central Committee of CPC held in

December 1978 established the developmental course for China—reform and opening-up. After that, China began attracting and introducing foreign

investment. As policies on utilizing foreign investment constantly changed and matured, foreign direct investment (hereinafter referred to as FDI) in China

also rapidly grew. Meanwhile China’s foreign investment policies have gone through a shift of focus from “where does investment go” to “which industry does investment go to”, and from quantity to quality.

Introductory phase (1979–1985) 1979 was a turning point for China’s utilization of FDI, as its policies towards foreign capital U-turned from rejecting FDI to utilizing it.

The shift was mainly seen through the changes in China’s policies and

regulating bodies concerning FDI. In July 1979, The Law of the People's Republic of China on Joint Ventures Using Chinese and Foreign Investment , was promulgated as China’s first law concerning foreign investment; in August 1979, the State Council founded the Administrative Commission for Foreign Investment, a commission designated to administer the utilization of foreign capital nationwide; in the following year, the Regulations on Special Economic Zones in Guangdong Province was promulgated and was followed by the founding of Shenzhen, Zhuhai, Shantou and Xiamen special economic zones. In March 1982, an array of foreign economic affairs-related administrative bodies were integrated into the Ministry of Foreign Economic Relations and Trade of the People’s Republic of China; in May 1983, the State Council convened the first national conference on foreign capital utilization, at which the government made it clear that utilizing foreign capital and developing joint ventures with foreign investment was a long-term strategy against the backdrop of reform and opening-up; in May 1984, the central government designated 14 coastal cities as “open cities”, and in May 1985, the Yangtze River Delta, the Pearl River Delta and the Southern Fujian Delta were designated coastal economic open zones, where flexible and specially tailored preferential foreign capital policies were later implemented; the central government also delegated the power to approve FDI to local governments and related departments, and took further steps to

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The Development of Foreign Direct Investment in China

perfect its legal system concerning FDI, so as to create a better environment for investment and to speed up FDI development.

The change in policies concerning FDI in this period was characterized

by an experimental nature, reflected by the somewhat unrefined design of a regulatory framework and relatively more restrictions on capital inflows.

Developmental phase (1986–1993) During this phase the overall economy of China experienced a string of

adjustments. A set of macro-economic control measures, including structural

reforms in various industries and restraints on overall social demand, more or less dampened the increase and scope of foreign investment. However, with

the Chinese government reiterating the importance of foreign investment to economic development and promising consistency in its guiding principles for

long-termed economic strategy, which was utilizing foreign capital, foreign investment policies were further developed and a legal system for foreign

capital utilization took preliminary shape. As the economic structural reform was gradually pushed forward, the change from the planned economy to a

planned commodity economy and then to a socialist market economy brought

an increasingly distinct focus to the reform. A consensus on the active use of foreign capital had been reached; restrictions on the inflow of foreign money were lifted; the allowed scope and investment areas for foreign investment

continued expanding; and more encouragements and favorable policies were given.

In October 1986, the State Council promulgated the Provisions of the State Council for the Encouragement of Foreign Investment , granting encouraging policies for export and high-tech companies. Furthermore the Law of the People’s Republic of China on Foreign-funded Enterprises, Provisional Regulations on Direction Guide to Foreign Investment, Law of the People’s Republic of China on Chinese-Foreign Contractual Joint Ventures, Income Tax Law of the People’s Republic of China for Enterprises with Foreign Investment and Foreign Enterprises were later promulgated. The famous “speech on the southern tour” made by Deng Xiaoping in February 1992 further affirmed China’s market economy oriented reform, boosting foreign investors’ confidence in China’s economic development. The immense market in China, its good environment for investment and its preferential policies attracted an increasing foreign capital inflow. FDI

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FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

gradually prevailed among the varied ways of utilizing foreign capital. While

opening up its economy, the Chinese government quickened the formation and integration of its domestic market. Based on the existing special economic zones

and coastal economic open zones, the government continued its attempt to develop a pointedly region-specific export-oriented economy, such as setting up

Hainan Province and designating it as a special economic zone, and developing the Shanghai Pudong New Area. These measures led to China becoming the

country receiving the second largest amount of foreign investment country in the world and the largest among the developing countries.

Policy adjustment phase (1994–2001) In response to both the benefits and problems brought by foreign investment,

during 1994–2001 China formulated a number of policies to regulate and guide

the flow of foreign investment in directions favorable to China’s economic development. Measures taken during this period mainly included the following: The Interim Provisions on Guiding Foreign Investment Direction

promulgated in June 1995 and the following Catalogue for the Guidance of Foreign Investment Industries categorized foreign investment projects into encouraged, restricted and prohibited ones. Being specific in classification, welltargeted and feasible, the provisions substantially increased the transparency of foreign investment policies; in 1996, the inclusion of foreign funded enterprises in the system of foreign exchange settlement and sale allowed exchange under current account; starting from April 1, the government slashed tariffs while simultaneously withdrew foreign tax exemption, including the tax exemption on equipment included in the total foreign investment amount in enterprises; in December 1997, the government further modified the Catalogue for the Guidance of Foreign Investment Industries , expanding the area of investment encouraged by the state. By doing so, the government highlighted its focus among industries and demonstrated its encouragement for investment aimed at western China; in August 1999, the Ministry of Foreign Trade and Economic Cooperation (hereinafter referred to as MOFTEC) together with several other relevant departments adjusted policies on tariff exemption, import linkage taxation and other relevant regulations, in order to encourage R&D and technological innovation by enterprises with foreign investment. Respectively in October 2000 and March 2001, the Standing Committee of the National People’s Congress amended three basic laws concerning foreign capital, and canceled

34

The Development of Foreign Direct Investment in China

items such as “balance of foreign exchange” and “local content” in requirements on export performance and records of production plans.

Despite a still prominent role of preferential policies to foreign investment,

we can also see a reduced trend in the sole reliance on preferential policies in

attracting foreign investment. The trend of policy making has shown a shift of

efforts from increasing the quantity of foreign investment projects to improving

the quality of such projects. Moreover the legalization and regularization of the administration of foreign investment was improved further.

The adjustment and changes of China’s policies concerning foreign investment in the new era After China’s recruitment into the WTO, as required, China rescinded laws

and regulations which were contradictory to WTO primary principles; meanwhile, China followed its commitment made before joining the WTO and expanded the area of business allowed for foreign investment; it also canceled

requirements on enterprises that were not in conformity with the principle of national treatment and nullified its previous nationalization requirement. To

fulfill its commitment to abide by the General Agreement on Trade in Services ,

China promulgated the Regulations of the People’s Republic of China on Administration of Foreign-funded Insurance Companies, Administration of Foreign-funded Telecommunications Enterprises Provisions, Regulations on the Administration of Tourism Agencies, Regulations of the People’s Republic of China Governing Financial Institutions with Foreign Capital, Regulations on Publication Administration, Administration of Representative Offices of Foreign Law Firms in China Regulations and the like, signaling an open services market. The changes in policies concerning foreign capital were as follows: (1) On December 24, 2001, the National Planning Commission issued the Tenth Five-year Plan on Utilizing Foreign Investment and Overseas Investment, in which the Commission introduced an internationalization strategy combining “bringing in” foreign investment and letting Chinese investment “go global”, the later being the ultimate goal. (2) In 2001, the MOFTEC issued the Circular of The General Office of the Ministry of Foreign Trade and Economic Cooperation on Relevant Issues of Joint Stock Companies with Foreign Investment , and on July 1 it implemented the Establishment of Securities Companies with Foreign Equity Participation Rules , following which the Issues Relevant to the Transfer of State-owned Shares and

35

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

Legal Person Shares in Listed Companies to Foreign Investors Circular and Provisional Measures on Administration of Domestic Securities Investments of Qualified Foreign Institutional Investors (QFII) promulgated by the government bodies concerned opened the door to the Chinese capital market for foreign investors. (3) On April 1, 2002, the state promulgated the Provisions on Guiding the Orientation of Foreign Investment and Catalogue for the Encouragement of Foreign Investment Industries , which noticeably increased the degree of openness to foreign investment and underscored the guidance to foreign investment and the focused implementation of foreign trade preferential policies for selected industries. (4) The state issued regulations concerning the following: the listing of foreign-funded venture investment enterprises and enterprises with foreign investment on the domestic A-share and B-share stock exchange, the purchase of non-circulation shares of domestic listed companies by enterprises with foreign investment, the absorption of foreign capital for participation in the restructuring and disposal of assets by financial asset management companies, the merger of enterprises with foreign investment and domestic enterprises, and the expansion of import and export operation rights of enterprises with foreign investment. The state further promulgated the Interim Provisions on the Establishment of Foreign-Funded Business-starting Investment Enterprises, Some Opinions Relevant to Foreign Investment in Listed Companies, Interim Provisions on Drawing Foreign Capital into the Asset Restructuring and Disposal by Financial Asset Management Companies, Second Supplementary Provisions on the Interim Provisions Concerning the Establishment of Investment Companies by Foreign Investment , and the Interim Measures on the Administration of Examination and Approval of Lease Companies with Foreign Investment . The state also issued the Circular on Problems Concerning Expanding the Import and Export Operation Rights of Enterprises with Foreign Investment , modified the Provisions on the Merger and Division of Enterprises with Foreign Investment , and started practicing the Provisions on The Merger And Division of Enterprises with Foreign Investment on March 3, 2003. (5) China also further intensified its protection of intellectual property rights. Based on the WTO requirements in the Agreement on Trade-Related Aspects of Intellectual Property Rights , China modified related domestic laws such as the Copyright Law of the People’s Republic of China , the Trademark Law of the People’s Republic of China and the Patent Law of the People’s Republic of China .

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The Development of Foreign Direct Investment in China

(6) On September 8, 2003, the first Foreign Investment Report of China—

An Introduction to China Foreign Investment Report 2003 —was issued at the Seventh China International Fair for Investment and Trade. The issuing of the report was a landmark for a new stage in China’s foreign investment attraction. (7) China modified the Provisions Concerning the Establishment of Investment Companies by Foreign Investment in November 2004, further lowering the threshold for application for the setting up of investment companies by foreign investors. (8) On December 11, 2006, the modified Regulations on the Administration of Foreign-funded Banks of the People’s Republic of Chin a became effective. In conformity with China’s WTO accession agreement, it lifted all non-prudential market access constraints for foreign-funded banks, implemented national treatment to foreign-funded banks, and opened its RMB retail market; except for life insurance businesses where foreign investment was restrained within not more than 50% share holding, the rest of the insurance market was fully open to foreign-funded banks; geographical restrictions on foreign banks, restrictions over the number of services they might offer, and restrictions over the proportion of shares held by them were all lifted, and the power of authorizing services of foreign-funded banks was further decentralized. (9) On October 31, 2007, the National Development and Reform Commission and the Ministry of Commerce jointly issued the Catalogue for the Encouragement of Foreign Investment Industries (modified in 2007), which came into effect on December 1, 2007. It further encouraged foreign investment in the manufacturing sector, such as hi-tech industries, equipment manufacturing, new material manufacturing etc.; in terms of service sector, the Catalogue did more than just fulfill China’s obligations in its WTO commitment. It made a stable yet bold expansion of the opening-up, adding more encouraged ventures such as “receiving services outsourcing” and “modern logistics” while removing prohibitions and restrictions over a number of items; it encouraged foreign investors to develop circular. To sum up, during the reform and opening-up period that will soon see its 30th anniversary, the adjustment and improvement of China’s foreign investment policies has never ceased. Currently, in the new age of market economic development, China is reviewing its foreign investment. Rather than letting its policies be simply an attraction for FDI and a boost for GDP growth, China has taken into consideration the quality of FDI and has made an allround optimization of it to become more investment-friendly.

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FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

The changes in the foreign investment policies of China show a shift of

focus in a number of aspects. Used to accept whatever it could get, or stuck

literally to the notion of merely “bringing in investment”, China now has the

room for selection among various investment projects, adding an another process to “bringing in investment” which is “picking out the best”. Instead of being obsessed with the quantity and scale of investment projects, it now shows an increasing interest in quality and an optimized industrial structure,

pragmatically moving the emphasis of attracting foreign investment from absorbing money or foreign currencies due to the lack of these to bridging the

gap between developed nations and itself in terms of advanced technologies,

managerial experience and skills. It now pays more attention to ecology, environmental protection, resources and the comprehensive utilization of

these. Its mechanism for attracting foreign investment, which used to be deeply intertwined with political factors, has now become a market driven one. In

many places government officials do not have to rely on hitting the quantity

targets for foreign investment projects introduced in their tenure to get high marks in their job assessment. Instead they are told to follow market principles

and to attract investment in a more marketized manner. Moreover western China has seen an inflow of foreign investment drained from the densely invested eastern coastal line, marking a change over the geographic structure of foreign investment.

The Developmental Patterns of FDI in China At the beginning of reform and opening-up, being skeptical about China’s

investment environment, foreign investors were reluctant to invest on a large

scale and clung to more exploratory investment. However their confidence was later boosted by an improving investment environment as the reform and opening-up deepened. The patterns of their investment changed rapidly,

as demonstrated by both an increased ratio of enterprises wholly funded by FDI and the many enterprises which used to be partly funded by FDI but later turned into wholly funded ones.

In the 30 years of reform and opening-up, the patterns of FDI in China can

be roughly classified by how they entered Chinese market and the differences of their business value chains.

38

The Development of Foreign Direct Investment in China

Classification by how FDI entered the Chinese market The patterns of foreign investment entering China have their own course of evolvement, which can basically be divided into the following phases.

The first period, 1979–1983, was an exploratory phase when the patterns of

FDI were dominated by Chinese-foreign contractual joint ventures, cooperative development and compensatory trade. In view of the inexperience in utilizing

foreign investment and the absence of a sound legal system on the Chinese side, foreign investors carefully felt out the investment environment in China,

which was alien to them at that time. Foreign investors therefore had more appetite for patterns that were less risky, such as contractual joint ventures

and compensatory trade. During the five years the total amount of FDI was USD 6.87390 billion, of which the contractual amount of Chinese-foreign contractual joint ventures reached USD 3.2287 billion, or 47% of the total, and

the contractual amount of compensatory trade reached USD 826.99 million,

or 12% of the total. The two together made up 60% of the total FDI, while the

contractual amounts of Chinese-foreign equity joint ventures and whollyforeign-funded enterprises accounted for only 4.8% and 5.9% respectively.

The second period lasted from 1984–1985. The FDI pattern was still

dominated by Chinese-foreign contractual joint ventures, but with a burgeoning array of Chinese-foreign equity joint ventures. The Law of the People’s Republic

of China on Chinese-foreign Equity Joint Ventures generated a rapid increase in the number of such firms. The year 1984 alone witnessed the birth of 741 equity joint ventures, 3.9 times the total number of such firms in the previous five years which was 190, with its proportion in the FDI contractual amount surging to 37.1% from 9.83% in 1983. In 1985 the number such firms doubled that of 1984, reaching 1,412, with the contractual amount up to USD 2.03 billion, a 90.3% increase over the previous year. The third period spanned 1986–1988. In this period, FDI entered a phase of steady development, with Chinese-foreign equity joint enterprises gradually prevailing. With an increasingly thorough implementation of the reform and opening-up China, learning from past experience, attached more importance to the guidance of macro-economic policies and speeded up its construction of a corresponding legal system to its economic status, leading its initiatives to absorb FDI onto a steady and healthy track of development. The State Council built a team to guide the government work and the direction of foreign investment. In 1986, the contractual amount of Chinese-foreign equity joint ventures, which accounted

39

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

for 48.52% of the total FDI, for the first time outweighed that of Chinese-foreign contractual joint ventures, which accounted for 41.83% of the total FDI.

The fourth phase lasted from 1989–1996 and was dominated by contractual

equity ventures, with a gradually maturing environment for wholly foreignfunded enterprises. The domination of foreign-Chinese equity joint ventures coexisted with a burgeoning of wholly foreign-funded enterprises, which laid

a foundation for the rapid development of the later. In 1989, the contractual amount of wholly foreign-funded enterprises increased by 244.09%, and the

amount of actual utilized foreign investment increased by 821.22%. Meanwhile the contractual amount of Chinese-foreign equity joint ventures decreased by

15.15%, while the amount of actual utilized foreign investment slightly increased by 3.13%. Contractual amount of Chinese-foreign contractual joint ventures

went down by 33.3%, with the amount of actual utilized foreign investment down 3.61%. Henceforth the proportion of wholly foreign-funded enterprises

expanded year by year and that of both Chinese-foreign equity and contractual ventures shrunk. In April 1995, the MOFTEC promulgated the Provisional

Regulations of the Ministry of Foreign Trade and Economic Cooperation on the Establishment of Investment Companies by Foreign Investors , and later ratified a large number of investment companies, which led to a series of mergers and acquisitions by investment companies. Foreign investors merged and acquired state-owned enterprises as a whole, or acquired the state-owned shares of joint ventures, turning them into wholly foreign-funded ones. This provided a solid foundation for the future prospering of wholly foreign-funded enterprises. The fifth phase spans from 1997 until today, which is characterized by a trend towards equity buyout. Prior to 1996, equity joint ventures were the most prominent of all enterprises with foreign investment (including Chinese-foreign equity joint ventures, Chinese-foreign contractual joint ventures, and wholly foreign-funded enterprises, in which investment from Taiwan, Hong Kong and Macau is categorized as foreign investment). In 1997, among all enterprises set up with foreign investment, the number of Chinese-foreign equity joint ventures was 9,046, and that of wholly foreign-funded ones 9,604, so the latter surpassed the earlier in number for the first time. Henceforth, wholly foreign-funded enterprises became increasingly important in the Chinese economy. The equity proportion upper limits for foreign investors was gradually relaxed, and the areas of business were allowed to expand, opening a door once shut for foreign investors. In previous years they were allowed to found companies only in the form of Chinese-foreign equity joint ventures or with

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The Development of Foreign Direct Investment in China

a certain proportion of shares of these companies held by Chinese. In more

and more industries, foreign investors were allowed to hold more than 51% of

shares and to found wholly foreign-funded firms. In response, international companies adjusted their investment strategies in China, as was demonstrated by the quickened pace of equity buyout by international corporate giants

like Henkel, Panasonic, P&G, UPS, Avon, Siemens, Nokia and IBM. Such international big corporations, showed an increasing preference for wholly foreign-funded enterprises and a bigger control over their previous equity joint

ventures i.e. they accelerated their buyout or purchase of Chinese equity in joint ventures to gain control or become the sole owner of them. In addition,

many international corporations engaged in a comprehensive integration

of their Chinese investment, establishing new sets of market strategies and corresponding systems. During 1997–2004, Chinese-foreign equity joint

ventures took up only 47% of the total foreign investment actually utilized in

China, while wholly foreign-funded enterprises took up over 50%. In 2005,

foreign wholly funded firms claimed absolute dominance by weighing in at as much as over 70%.

Classification by differences in business value chains As a gigantic emerging market, China has been offering an enormous market

opportunity. The potential and developmental prospects of its market, together with its abundant and cheap labor, preferential policies towards foreign

investment, a stable macro-economic environment and other factors made it an

almost irresistible attraction for foreign investment. Enterprises with foreign

investment thus experienced a change in position in the industrial value chains

they operated in, which can be roughly divided into the following phases of adjustments and change.

(1) The first phase was a time of processing and assembling factories. At the

initial stage of investment in China, foreign investors were inclined to

view China as a center for processing and assembling, mainly for cutting production costs by using its cheap labor. In this phase, the foreign investment economy was in the lower part of the value chain. To some degree, for foreign companies, China was just their processing workshop alongside their global business value chains.

(2) The second phase saw a transition of China’s role from processing and assembly to an all-round manufacturing base. As time went on, China as

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FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

an environment for investment underwent radical changes. For one thing, more international corporations entered China; for another, a great number

of state-owned and privately-owned domestic enterprises were maturing. Against such a backdrop enterprises with foreign investment, while paying

much attention to differentiation in competitiveness, still attached much

importance to cost competitiveness. A scan of the developmental strategies of such companies in this phase would reveal the following trends: to

consolidate their position in the Chinese market and to increase their

production capacities within China, so as to construct cost competitiveness in the international market with “made in China” goods.

In this third phase enterprises with foreign investment felt an

increasingly urgent need to develop the market and become more effective, resulting in their grafting, extension and expansion of their networks of

value chains in China, or to be specific, the localization of their production, sale, procurement and other links of their businesses. Among them, changes

in production, as a link in their value chains, were the improvement in production capacities and technologies. Taking the car industry as an

example, world renowned automakers such as GM, Volkswagen, Ford,

Toyota, and Daimler Chrysler all extended their production networks to China, founding a number of joint branches.

(3) The third phase was marked by the establishment or relocation of R&D institutes in China. As the production and sale of international

corporations became more localized in China, and with the smoother flow

of production factors such as capital and technologies on a global scale and

constantly optimization of the human resource structure in China, some big international corporations started an all-round localization rather than

simply keeping their production or processing localized. They founded

R&D institutes, with some preliminarily relocating their R&D center to China. The extension of their R&D networks into China has become a vital part of their Chinese strategies. For example, corporate giants such as

Motorola, Intel, IBM, Lucent, Siemens, Dupont, P&G, Unilever, GE, GM, Volkswagen, Panasonic, Nortel, and Alcatel have all set up R&D centers in

China which span software, semiconductors, telecommunications, cars and commodities.

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The Development of Foreign Direct Investment in China

Analysis on the Development of FDI in China The track of changes in FDI The Third Plenary Session of the Eleventh Central Committee in December 1978 established the developmental direction for China—reform and opening-up. The Regulations for the Implementation of the Law of the People’s Republic of

China on Joint Ventures Using Chinese and Foreign Investment promulgated on July 1, 1979 legalized factories funded by foreign investment, and became a landmark legal document in China’s utilization of foreign investment. After that, FDI took root and prospered in China. In the thirty years of reform and opening-up, despite a few fluctuations, FDI inflow has maintained an upward trend. So far China has achieved tremendous success in utilizing FDI. For detailed data, up till the end of 2007, the sum of authorized FDI projects over previous years had reached 594,427, with a total contractual amount of USD 1.485848 trillion and an actual utilized amount of USD 691.897 billion (see Table 2.1). As can be seen in Table 2.1, China’s utilization of foreign investment can be roughly divided into four stages. The first stage is from 1979–1991, which was the preliminary stage. During this period, the utilization of foreign investment maintained a slow upward trend, with no annual actual utilized amount surpassing USD 5 billion and the sum for the 13 years being USD 25.058 billion, amounting to an annual average of only USD 1.928 billion. This situation was in conformity with the condition of China at the time, when the market economy had just debuted and economic development had just started recovering. The second stage was from 1992–1998. We can see a surge in utilization of foreign investment, which peaked after Deng Xiaoping’s famous “speech on the southern tour”. The contractual amount of foreign investment reached USD 58.124 billion in 1992, 3.85 times that of the previous year. And the actual utilized amount also broke a USD 10 billion record high. The 1993 trend of foreign investment showed an even more robust trend, as the contractual amount surpassed USD 100 billion, making China a foreign investment receiver second only to the U.S. In the seven years of this stage, the accumulated sum of utilized foreign investment amounted to USD 242.23 billion, about tenfold more than in the previous stage. And the average utilized amount of foreign investment in this stage was USD 34.604 billion, eighteen-fold that of the first stage, with FDI becoming the most prominent method of China’s utilization of foreign investment.

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FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

Table 2.1.

The total of FDI in China prior to 2007 (Unit: 100 million USD)

Year 1979–1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Number of projects 920 638 2,166 3,073 1,498 2,233 5,945 5,779 7,273 12,978 48,764 83,437 47,549 37,011 24,556 21,001 19,799 16,918 22,347 26,139 34,171 41,081 43,664 44,001 41,485 37,888

Contractual amount of foreign Actual utilized amount investment 49.58 17.69 19.17 9.16 28.75 14.19 63.33 19.56 33.30 22.44 37.09 23.14 52.97 31.94 56.00 33.93 65.96 34.87 119.77 43.66 581.24 110.08 1,114.36 275.15 826.80 337.67 912.82 375.21 732.76 417.26 510.03 452.57 521.02 454.36 412.23 403.19 623.80 407.15 691.91 468.46 827.68 527.43 1,150.69 535.05 1,534.79 606.30 1,890.65 603.25 2,001.74 694.68 – 826.58

Source: The China Statistical Yearbook (2007) . The data for 2007 is from the website of MOFCOM.

In the third stage spanning 1999–2000, the country experienced a decline

in its utilization of foreign investment. In 1999, FDI downturned for the first

time since the start of reform and opening-up by USD 40.319 billion, down 11%

compared to 1998. In 2000 the decline moderated, and the actual utilized amount

was USD 40.715 billion, still not regaining the level before the decline. Meanwhile the contractual amount saw a big fluctuation, with that of 1999 down 21% from

1998 and that of 2000 52% up from 1999. The situation in this period was closely related to an external environment that was greatly dampened by the financial crisis in Southeast Asia and the domestic economic adjustment.

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The Development of Foreign Direct Investment in China

The fourth stage is from 2001 up until now, in which China’s foreign

investment utilization steered a healthy and benign course as China’s related legal system continued to improve and adapt itself to new circumstances. Starting from 2001, China’s utilization of foreign investment was restored to

another prime, with the actual utilized amount in 2001 upped to USD 46.846

billion, outstripping the USD 45.436 billion in 1998 before the decline. And in the

following years, the actual utilized amount basically went on increasing. In 2002,

2003, 2004, 2005 and 2006, the annual increase rate was respectively 12.59%, 1.44%, 13.32%, –0.50%, 15.16%. The actual utilized amount of USD 69.468 billion in 2006 was 3.7 times that of the first stage as a whole. In 2007, the actual utilized amount

set a record high, reaching USD 82.658 billion, 18.99% up from the previous year.

Accompanied by this was the steady increase of the annual contractual amount, which made a record high of USD 200 billion in 2006.

In conformity with the different developmental phases of FDI in China, the

number of enterprises with foreign investment showed a corresponding trend of change (see Fig. 2.2).

Fig. 2.1.

The status of China’s utilization of foreign investment till 2007

100 million USD 2,500

2,000

1,500

1,000

500

Contractual amount

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1979–1982

0

Actual amount

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FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

Fig. 2.2.

The changes over number of enterprises with foreign investment from 1980–2006

300,000

250,000

200,000

150,000

100,000

50,000

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

1980

0

Countries contributing FDI in China Since the reform and opening-up started in 1978, through continued optimization of its legal system and its macro-economic environment, China has been receiving an increasing amount of FDI and has been thrust into the

limelight as a global investment hotspot. But both the number of projects, and the contractual and actual utilized amount of foreign investment, if considered in terms of their origins and their quantities, will reveal that the FDI in China

comes largely from only a few nations and regions. Asia contributes the most FDI to China, followed by North America and Europe.

Table 2.2, the statistical analysis of countries (regions) contributing FDI in China up until 2006, indicates that Asia has been the biggest source of FDI for China, contributing 460,205 investment projects and taking up 77.42% of the total. Actual utilized Asian investment amount is USD 464.52 billion, which accounts for more than 60% of the total. Following Asia are America and the EU, which respectively contribute an actual utilized amount of USD 53.955 billion and USD 53.397 billion, both accounting for about 8% of total. The last big contributor is free ports, which also take up a significant share.

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The Development of Foreign Direct Investment in China

Table 2.2. Statistical analysis of countries (regions) contributing FDI in China up to 2006

(Unit: 100 million USD) Country/Region Asia Hong Kong Indonesia Japan Macau Malaysia The Philippines Singapore Korea Thailand Taiwan Major Countries in the EU Belgium Denmark Britain Germany France Ireland Italy Luxembourg Holland Greece Portugal Spain Austria Finland Switzerland North America Canada America Some of the Free Ports Mauritius Cayman Islands British Virgin Islands Samoa

Number of projects share (%) 460,205 269,555 1,444 37,714 10,697 3,947 2,523 15,556 43,130 3,792 71,847 25,837 650 433 5,359 5,338 3,271 115 3,385 192 1,949 69 136 1,249 801 286 813 61,999 9,788 52,211 24,460 1,643 1,843 16,616 4,358

77.42 45.30 0.24 6.34 1.80 0.66 0.42 2.62 7.26 0.64 12.09 4.35 0.11 0.07 0.90 0.90 0.55 0.02 0.57 0.03 0.33 0.01 0.02 0.21 0.13 0.05 0.14 10.43 1.65 8.78 4.11 0.28 0.31 2.80 0.73

Actual utilized Share (%) amount (billion USD) 4,645.20 65.99 2,797.55 39.74 15.61 0.22 579.73 8.24 69.40 0.99 42.26 0.6 22.01 0.31 300.04 4.26 349.99 4.97 29.68 0.42 438.93 6.24 533.97 7.59 8.87 0.13 8.79 0.12 139.22 1.98 134.18 1.91 78.02 1.11 0.83 0.01 34.98 0.5 5.48 0.08 77.59 1.1 0.61 0.01 1.20 0.02 10.29 0.15 7.66 0.11 4.90 0.07 13.67 0.19 593.69 8.43 54.14 0.77 539.55 7.66 798.69 11.35 44.37 0.63 107.55 1.53 571.64 8.12 75.13 1.07

Source: China Commerce Yearbook (2007).

From the table of countries and regions contributing FDI to China, we can

clearly see that most of FDI is from Asia, especially from Hong Kong, Macau

47

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

and Taiwan. Up till the end of 2006, the top five contributors of actual utilized FDI were Hong Kong, Japan, America, Taiwan and Korea in descending order. Together the five took up more than 70% of the total foreign investment. Since the advent of reform and opening-up, FDI from Hong Kong has always been the dominating source of China’s FDI. More recently, accompanied by a deepened and extended cooperation between Hong Kong and mainland China, FDI from Hong Kong stayed steadily above 50%. Before the southeastern Asian financial crisis, investment from Hong Kong and Macau maintained a steady rise. However, due to the effect of the crisis, in 1998 and 1999 their actual investment amount to mainland China continued to fall and hit the bottom in 2000, then started to rebound until falling again in 2005 to USD 18.54925 billion, down 5.09% compared to the previous year. It then rose again in 2006 (see Fig. 2.3). Fig. 2.3.

Investment from Hong Kong and Macau from 1986–2006

100 million USD 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000

Contractual amount

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

0

Actual amount

Investment from Korea to China started from in the middle of the 1980s. However due to the absence of formal diplomatic relation between the two countries, deeper economic exchanges were difficult, thus restricting Korean investment in China. This situation lasted until August 1992 when the two countries established diplomatic ties, and Korean investment in China has since seen a transition from informal to formal, from indirect to direct, and from small-scale to large-scale. In 1992 the actual utilized amount of investment from Korea was USD 119.48 million, which in the following year grew explosively by 212.86% to USD 373.81 million. In the period between 1992 and the southeastern Asian financial

48

The Development of Foreign Direct Investment in China

crisis, investment from Korea actually utilized in China kept an 87.7% growth rate and Korea became one of China’s most important sources of FDI. Nevertheless, Korean investment was scaled back under the effect of southeastern Asian financial crisis. Korean investment actual utilized amount went down in two consecutive years compared to the 1997 figure of USD 2.14238 billion, reaching only USD 1.8032 billion and USD 1.27473 billion in 1998 and 1999, respectively down 15.83% and 29.31% in a year-on-year comparison. After hitting the ground, Korean enterprises rekindled their investment to China after 2000, which kept growing steadily and showed an unprecedented big-scaled growth in 2003, 64.98% up from its previous year. Despite a slowdown on its growth rate in 2004, the actual utilized amount hit a historical high of USD 6.24786 billion the same year. After 2005 Korean investment started falling, al though it still ranks among the top in the list of contributors of actual utilized investment in China (see Fig. 2.4). Fig. 2.4.

Korean FDI in China from 1992–2006

100 million USD 2,500,000 2,000,000 1,500,000 1,000,000 500,000

Contractual amount

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

0

Actual amount

In the early 1990s, EU investment in China was very limited. From 1986–

1989, the sum of EU actual FDI in China was USD 576.72 million, accounting for only 5.17% of the total foreign investment in the same period; from 1990–1994

the figure rose to USD 2.84487 billion, but accounted for a reduced 3.81% of

the total FDI. It was after July 1994 when Towards a New Asia Strategy was

released that EU investment to China began to prosper. In the three consecutive years from 1995 to 1997, China received EU investment that amounted to,

respectively, USD 2.13131 billion, USD 2.73706 billion and USD 41.71115

49

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

billion, accounting for 5.68%, 6.56% and 9.22% of the total investment of the same years. The Southeast Asian economic crisis left EU investment in China basically intact. In 1999 and 2000, EU investment maintained a historic high

of around 11% of the total. However, in the following years, due to the impact of the slower growth of the U.S. in the global economy, the EU suffered from a slowdown in growth as well resulting in a fall in China-bound FDI, which was

downsized to USD 3.70982 billion in 2002, down by 11.31% from the previous year. In 2005 EU investment increased by 22.52% from the previous year to USD

5.19378 billion in terms of actual utilized amount, and kept a steady growth ever since with its proportion in the total utilized foreign investment in China perching somewhere near 7% (see Fig 2.5). Fig. 2.5.

EU FDI in China from 1986–2006

100 million USD 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000

Contractual amount

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

0

Actual amount

In the 1980s, Japanese investment had been significant in China and their

FDI had continuously occupied a relatively high proportion of the total investment. In 1986 China received USD 263.35 million of investment from Japan, 11.74% of China’s total foreign investment of the year. And in 1988, actual

utilized investment contributed by Japan rose to USD 514.53 billion, taking up

as much as 16.11% of China’s total foreign investment, up by 134.20% from the

previous year. Japanese investment remained significant in China’s total foreign investment at around 10% until 1992, when it started to show a noticeable

50

The Development of Foreign Direct Investment in China

downturn trend. In 1993 Japanese China-bound investment hit a historical low,

representing only 4.81% of China’s total foreign investment. This was due to the bursting of Japan’s domestic bubble burst which crippled its economy. The

subsequent southeastern Asian financial crisis further dampened Japan’s ability to invest. As a result, from 1998, Japanese China-bound investment dropped for three consecutive years until in 2001, when it rebounded by 49.13% comparing

to the previous year. It then dipped again in 2002, but picked up and kept an upward momentum, reaching a historic high of USD 6.52977 billion in 2005.

In 2006, similar to China-bound FDI from the rest of the world, Japanese FDI showed a downturn trend again (see Fig. 2.6). Fig. 2.6.

Japanese FDI to China from 1986–2006

10,000 USD 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000

Contractual amount

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

0

Actual amount

As demonstrated above, from a global perspective, FDI in China is on the

rise, but with a less than perfect structure (see Fig. 2.7). A major proportion

of China’s FDI is from Asia, especially Hong Kong, Macau and Taiwan. Such an overly concentrated source of FDI poses risks for China’s attraction for investment. Moreover, although some countries in the EU have greatly scaled

up their investment to China, the share taken up by the EU as a whole is

decreasing. As China’s attempt to attract FDI continues and matures it is hoped

that the country can diversify its sources of investment and get rid of the situation whereby FDI relies too heavily on too few nations.

51

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

Fig. 2.7.

FDI from major contributors from 1986–2006

10 thousand USD 2,500,000 2,000,000 1,500,000 1,000,000 500,000

Macau and Hong Kong

Korea

EU

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

0

Japan

The geographic structure of FDI distribution Since 1978, the strategy of China’s reform and opening-up has been to give priority to the development of its eastern coastal area, from which opening

up is designed to then later sweep gradually across China to the inland. Such

a sequential strategy of opening up, together with the differences in terms of geographical characteristics, regional policy concerning investment and the varied investment environments of different areas meant that the coastal area

was much more open and thus attracted almost all the foreign investment in

China. The gaps in economic development between different regions yawned even wider in the 1980s, and such margins were enlarged at an even quicker

pace in the 1990s. As China’s economy developed, the problem became more and more prominent. The state tried to tackle the problem with preferential policies,

but received little positive response. According to related data, by the end of 2006, the eastern, central and western regions of China had respectively taken up 86.86%, 8.79 % and 4.37% of the sum of FDI China had received for the years.

Table 2.3 illustrates the changes in the utilization of FDI by eastern, middle

and western China. It is shown that eastern China has enjoyed a proportion of FDI (around 85%) far greater in amount than that enjoyed by central and eastern China. However by adopting an all-round opening up policy, starting an initiative to develop western China, and implementing various preferential

policies, the coverage of foreign invested projects started to expand to the

52

The Development of Foreign Direct Investment in China

inland and a step-by-step increase of investment in central and western China manifested itself, although with some ups and downs. The proportion of FDI

taken up by the central region climbed gradually to 11% in 2004, which was a fairly high level, but fell back to 8% in 2005. Fluctuations accompanied FDI

utilization in western China, which accounted for a historical high of 5.56% of

China’s total FDI in 1998 but subsequently fell. It was reduced to only 2.88% in 2004, although it generally remained somewhere nearer 3%. Fig. 2.8 shows the actual utilized FDI respectively in eastern, central and western China in 2006. Table 2.3.

The utilization of FDI in different regions from 1998–2005 (%)

Regions

1998

1999

2000

2001

2002

2003

2004

2005

Eastern China

84.92

85.36

86.62

86.06

86.70

84.83

85.93

88.78

Central China

9.52

9.13

8.83

8.54

9.50

10.90

11.02

8.00

Western China

5.56

5.51

4.55

5.40

3.80

3.22

2.88

3.22

Data: MOFCOM statistics on foreign investment.

In 2006, the actual utilized investment of eastern China and western China

increased respectively by a medium degree and a larger degree in a year-on-year

comparison, while that of central China fell. Among this, 35,538 new enterprises with FDI in eastern China accounted for 85.69% of China’s total number of

newly founded non-financial-industry enterprises and marked a 7.55% decrease

in growth rate, and the actual utilized foreign investment amounted to USD

56.922 billion, meaning a 6.28% increase from the previous year and accounting for 90.32% of the total non-financial-industry FDI; 4,084 new enterprises with

FDI in western China accounted for 9.85% of China’s total number of newly founded non-financial-industry enterprises and marked a 8.85% increase in

growth rate, and the actual utilized foreign investment amounted to USD 3.922

billion, meaning a 18.73% decrease from the previous year and accounting for 6.22% of the total non-financial-industry FDI; 1,851 new enterprises with FDI in

western China accounted for 4.46% of China’s total number of newly founded non-financial-industry enterprises and marked a 2.27% increase in growth

rate, and the actual utilized foreign investment amounted to USD 2.177 billion,

meaning a 12.17% increase from the previous year and accounting for 3.45% of the total non-financial-industry FDI.

53

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

Fig. 2.8.

FDI utilization on a region basis by 2006 Western China 4.37%

Middle China 8.79%

Eastern China 86.86%

To conclude, the overconcentration of foreign investment in the eastern littoral

firstly further unbalances China’s already seriously uneven regional structure of development, and secondly, impedes the formation of a sound industrial

structure, thus worsening the existing shortage of raw materials, energy, and labor

in the eastern region, while leaving the abundant energy and human resources of

the western region untapped. Therefore it is of great significance to further adjust and optimize the regional structure of foreign investment utilization.

Industry-specific structure of FDI Generally speaking, from the industry-specific structure of FDI we can see

a network of widely distributed foreign investment which covers primary, secondary and tertiary industry. Foreign investment has long been involved

in various areas of the national economy, including plants building,

transportation, logistics, metallurgy, mechanics, electronics, textiles, real estate, travel services etc. In recent years, as the state promulgated the Catalogue of

Foreign Investment Industries and carries on its adjustments, China’s attraction for foreign investment has continuously improved and the areas where foreign investment is allowed have expanded. Some industries and businesses where foreign investment was not allowed before are now becoming more and more open. This is especially true for businesses in the tertiary industry, such as banks, retailing, insurance etc. Now foreign investment can be found in the course of development in the majority of industries in China. As we can see from both Table 2.4 and Fig. 2.9, by 2006 the agriculture sector had only received a very slim proportion of the total foreign investment. Crop raising, forestry, livestock husbandry and the fishing industry had together only absorbed 16,472 foreign investment projects, which translated to a contractual

54

The Development of Foreign Direct Investment in China

amount of USD 460.212 billion, accounting for 2.77% of the total project number

and 1.89% of the total contractual amount. The service sector had absorbed FDI

of USD 460.212 billion, accounting for 30.72% of the total FDI, a much lower amount than that of the industrial sector, which was USD 1,009.373 billion. The

service sector had maintained an annual absorption of around 30% of the total FDI over the years, while the industrial sector received 67.38% of the total by

2006, representing a large margin between itself and the agriculture and service sector. In the service sector FDI had shown an uneven distribution, with the

biggest part of it concentrating on real estate, leasing and commercial services, and wholesale and retailing, respectively accounting for 16.24%, 3.66% and 2.82%

of the total, while leaving less than 1% of the total respectively for other areas such as education, public hygiene and social welfare. Fig. 2.9.

The industry-specific FDI distribution by 2006 Agriculture sector 2%

Service sector 31%

Industry sector 67%

The status quo can largely be attributed to the policies designed to stimulate

industrial development that have prevailed in China since the advent of reform and opening-up. China’s preferential policies for foreign investors have been

basically focused on its manufacturing sector, thus draining a tremendous flow

of FDI into that sector which has boosted and maintained its rapid development while largely ignoring the primary sector and the tertiary sector. This has shaped the uneven structure of today.

However in recent years can we see some adjustments of China’s industrial

policies that have resulted in the decrease of the proportion of FDI taken up by

the secondary sector. The new industrial policies have also led to an increase of

the proportion of FDI received by the tertiary sector, which is especially obvious in the booming outsourcing business. This has afforded China a good basis on which it can further optimize its industrial structure.

55

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

Table 2.4.

Statistics of industry-specific FDI distribution in China by 2006

Industry Crop raising, forestry, livestock husbandry, and fishing Mining Manufacture Electricity, gas and water production and supply Construction Transportation, storage, postal services Transmission, computer services, software Wholesale and retailing Accommodation and food industry Finance Real estate Leasing and commercial services Scientific, technical and geological research Water conservancy, environment and public facility management Residential services and other services Education Hygiene, social welfare Culture, sports and entertainment Public management and social organization Data: China Statistical Yearbook (2007).

56

Number of Contractual Weight Weight (%) projects FDI (%) 16,472

2.77

283.43

1.89

1,263 423,056

0.21 71.17

57.91 9,563.79

0.39 63.85

1,874

0.32

164.71

1.10

11,260 7,272 4,493 32,531 3,441 213 47,226 23,965 6,118

1.89 1.22 0.76 5.47 0.58 0.04 7.94 4.03 1.03

307.31 365.84 95.83 422.11 77.99 212.80 2,432.54 548.80 95.23

2.05 2.44 0.64 2.82 0.52 1.42 16.24 3.66 0.64

435

0.07

26.72

0.18

11,149 1,619 1,267 785 6

1.88 0.27 0.21 0.13 0.00

204.25 30.26 58.55 30.86 0.35

1.36 0.20 0.39 0.21 0.00

3

Chapter

The Characteristics of the Development of the Services Trade in China and Its Future

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

The Trend of the World’s Services Trade and Its Characteristics After the World War II, especially after the 1980s, accompanied by an

increasingly globalized world economy and a global industrial structure under adjustment, the world’s trade in services has seen a rapid development.

The continuous and rapid growth of the world’s services trade The continuous adjustment of the world’s economic structure and the quickening pace of economic globalization have greatly boosted the

development of the world’s service sector, which has become increasingly

important in a large number of economies around the world. By 1990, the

proportion occupied by the service sector exceeded 60% in the world’s overall GDP, marking the formation of a world economic landscape based largely on

services. By 2004 the proportion occupied by the service sector had risen further to 68%. In developed nations, the proportion rose from 65–72%. Among them, the figure in America reached a high of 77%. In middle income nations, the figure also stayed above 60%, and in low income nations the figure saw a rise

from 45–52%. The figure in China reached 40.3% in 2005. As was reported by the International Labor Organization, the service sector contributed 70% to the overall employment in wealthy nations in the northern hemisphere, and more than 40% in the developed nations in the southern hemisphere.

As the service sector continues to develop, international exchanges of

services are also expanding, making trade in services the fastest developing

field in the contemporary world. In 1970 the world’s export volume in services was only USD 71 billion; in 1980 the figure jumped to USD 365 billion; in 1992 it exceeded one trillion USD for the first time; in 2000 it reached USD 1.44 trillion; in 2004 it exceeded two trillion USD and reached USD 2.13 trillion,

which was 30-fold greater than that of 1970. In 2005, the volume of trade in services rose to USD 2.4 trillion, marking an 11% increase and accounting for

19.3% of the world’s total trade volume. From 1980–2005, export volume of trade in services expanded from USD 365 billion to 2.4147 trillion, the later being 5.7 times the former. Its proportion in the world’s total exports increased from 1/7 to 1/5 (see Fig 3.1).

58

The Characteristics of the Development of the Services Trade in China and Its Future

Fig. 3.1.

The volume of trade in services from 1980–2005

100 million USD 3,000 2,500 2,000 1,500 1,000

Export

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

0

1980

500

Import

The structural adjustment of services trade accelerated with emerging services booming Before WWII, international trade in services comprised mainly the interflow of labor among countries. After WWII, as technology rapidly advanced,

trade in services, especially travel, transport, banking, construction and the

contract market were gradually introduced to the international market. After the 1980s, the structure of the world’s trade in services underwent a dramatic

transition. Trade in services gradually expanded to include new areas such as

telecommunications, finance, information industry and intellectual property rights, while its more traditional areas, such as travel and transport maintained

a steady growth but with their proportion in the volume of services trade gradually shrinking. From 1990–2005, transport services accounted for a reduced proportion in the total volume of the world’s service trade, falling

from 28.6–23.3%, while the proportion represented by travel was reduced from

33.9–28.9%. In contrast, new areas such as telecommunications, computers,

information services, finance, insurance, and the utilizing and concessionary royalties for expertise have taken up an increased proportion from 37.5–47.8%.

However in recent years, driven by the rapid rise in transport of goods and the surge of its cost, transport and travel services still maintained a steady growth.

The world’s transport services exports increased by 23% in 2004 and 12% in

59

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

2005. The world’s travel services exports also raised on a relatively large scale, namely 18% in 2004 and 10% in 2005.

With the advent of the era of the knowledge economy, in the past decade

or so many emerging services businesses have detached themselves from manufacturing and become independent service-related businesses. Among them, technology, information, and knowledge-intensive service industries

have enjoyed the most vigorous growth, while others such as finance, transport, trade and management consulting have also experienced a rapid expansion due to the advanced technologies applied in them. The advancement of information technology not only changed many of the ways that services are rendered, it

also attached great importance to the collection, selection, processing, storage and transmission of information, which further boosted trade in services directly based on information technology. The world’s trade in services is

undergoing a transition from the traditional services based on natural resources or labor intensive industries (such as travel and the food industry), to modern

services based on knowledge-intensive industries (such as telecommunications

and specialized services) or capital and technology-intensive industries (such as finance, insurance and real estate). The future competition in the international

services sector will center on emerging service industries. A series of emerging services based on information technology and high-tech will become the major growth point of all economies (see Fig. 3.2). Fig. 3.2.

Changes in the composition of the world’s exports of services from 1980–2005

100%

80%

60%

40%

20%

0% 1980

1990

1985 Others

60

1995 Travel

2000 Transport

2005

The Characteristics of the Development of the Services Trade in China and Its Future

An uneven landscape in the development of services trade, where developed nations dominate, and developing nations are catching up Due to a severely uneven landscape of economic status and service sectors

of countries in the world, there is a yawning gap between different nations in terms of their levels and competitiveness in the world market of trade in

services. Either from a perspective differentiating nations by their level of

development, or from one that differentiates them according to the composition of their respective services trade, the development of service sectors and trade

in services around the world demonstrates a clear imbalance. Compared to the international trade in goods, the unbalanced development of trade in services between regions is even more noticeable.

From the perspective of level of development, developed nations still take

dominance in the international services trade while developing nations are at a disadvantage and largely lag behind. Developing nations take up 80% of the

market share. The U.S., UK and Germany make up nearly 30% of the world’s total volume of trade in services. Despite an improvement in the status of the

services trade of developing nations and regions in recent years, there is still a yawning gap between the developed and developing nations in the overall

scale of trade. Moreover, developing nations mostly suffer from a service trade deficit. Since 1980, the U.S., Britain, Germany, France and Japan have steadily

occupied the top five positions in the list of volume of trade in services. In 2005

the five nations together made up for 37.2% of the world’s total service trade volume. Among the top ten of the list, the only two developing nations are China and India. In 2005, the five nations which enjoyed trade surpluses were

the U.S., UK, Hong Kong, Spain and Switzerland, all of which are developed

nations or regions. Their surpluses were respectively, USD 646 hundred million, USD 332 hundred million, USD 287 hundred million, USD 259 hundred million and USD 199 hundred million.

From a geographic perspective, the world’s trade in services is mainly

concentrated in the EU, North America and south Asia, which account for near 90% of the world’s total trade volume, with the EU taking up close to 50%, as is shown in Fig. 3.3. The status quo can be largely attributed to the large presence

of technology, knowledge and capital intensive industries in developed nations, which are largely based on technology and are high value-added, leading to an

increasing proportion of the total service trade volume taken up by industries

such as finance, banking, insurance, law, leasing, advertising, information

61

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

consulting and data exchange, and a shrinking proportion of the traditional service industries. Therefore the export in trade in services from developed

nations comprises mainly intellectual exports, namely, exporting various operational services and intellectual property rights. Fig. 3.3.

The proportions taken up by regions of the global volume of trade in services

(%) 60 50 40 30 20 10 0 North America

Middle and South America

Europe

Commonwealth Independent of Africa States Export

Middle East

Asia

Import

Overall, the services trade is underdeveloped in developing nations and

regions. The services trade of these regions and nations relies heavily on tourism

resources that attract foreign tourists and on the export of their cheap labor. In

the 1990s, the volume of trade in services of developing nations and regions surged noticeably. Statistics show that in the 1990s, developing nations and

regions posted an annual average growth rate of 12%, more than twice that of developed nations; in the first five years of the 21st century, developing nations and regions reached an annual average growth rate of 15% in trade in services, which proves that their status in the global landscape of trade in services is

on the rise. Among developing nations and regions there is also an uneven

landscape in trade in services, with Asia (mainly south Asia) demonstrating the most dynamic growth, mainly in Singapore, Korea, Hong Kong, Taiwan, Mainland China, Thailand, Malaysia, Indonesia and other emerging industrial

nations. These nations and regions take up about 70% of the total volume of services trade of developing nations (see Tables 3.1 and 3.2).

62

The Characteristics of the Development of the Services Trade in China and Its Future

Table 3.1.

The growth rate of global trade in services by region Export

Import

Amount (billion USD)

Annual growth rate (%)

Amount (billion USD)

Annual growth rate (%)

Year

2005

2001 2002 2003 2004 2005

2005

2001 2002 2003 2004 2005

World

2,415

North American Mid and South American Europe

The Commonwealth of Independent Nations

422

0

–4

7

14

20

10

2,345

68

–2

-3

10

16

1,245

3

9

19

42

13

20

57

0

–1

Africa

Middle East Asia

55

525

–4

366

1

–1

5

14

19

10

19

70

0

–12

4

15

21

19

8

1,120

3

8

18

17

8

16

29

20

62

24

16

17

28

19

6

26

20

12

69

2

5

16

19

21

8

10

26

14

573

–2

4

9

24

12

3

6

4

27

13

14

10

13

85

–2

3

1

8

19

15

20

9

18

Source: www.wto.org.

Table 3.2. The proportion taken up by developing nations of the total volume of trade in services (Unit: billion USD) The world’s service export

The world’s service import

Service export from developing nations

2000

2001

2002

2003

2004

1,435

1,460

1,570

1,780

2,193

358

360.4

370.7

406.8

479

1,435

Service import to developed nations

401.7

Proportion in import

27.99

Proportion in export

24.9

1,445 395.2 24.6 27.3

1,545 412.4 23.6 26.7

1,795 444.9 22.8 24.7

2,165 552

22.7 25.5

Source: UNCTED/ditc/tab, Developing Countries in International Trade 2005 .

In addition, global trade in services demonstrates a very distinct intra-

regional characteristic, i.e. there is much intra-regional trade. As shown in Fig. 3.4, 70% of the EU’s services exports are inside Europe and only 30% is exported outside Europe. Similarly, 40% of American and more than 50% of

Asian and Australian services exports is intra-regional. The trade in services

63

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

between Africa and Europe is close to 60% of Africa’s total, because of their closer ties with the EU due to colonial history. Fig. 3.4.

Global services exports on a regional basis (2003)

(%) 100 80 60 40 20 0

Global

Europe Africa

Africa America

America Asia and Oceania

Asia and Oceania Europe

According to WTO statistics, in 2005 developed nations accounted for 75%

of the global services export volume and 73% of the import volume. In 2005 the top ten in the list of global services trade export volume, namely the U.S.,

Britain, Germany, France, Japan, Italy, Spain, the Netherlands, China and India together accounted for 54.2% of the global total. Except for China and India,

they are all developed nations. In 2005 the top ten in the list of global services trade import volume, the U.S., Germany, the UK, Japan, France, Italy, China,

the Netherlands, Ireland and India together accounted for 53.3% of the global total. Except for China and India, again all the rest are developed nations (see

Table 3.3). One point worth mentioning is that India has seen a boom in its

trade in services. Its rapidly increasing scale of outsourcing business has greatly improved the nation’s status in the global landscape of trade in services.

Commercial presence has become the main pattern for services trade By WTO definition, there are four patterns of trade in services, namely cross

border trade, consumption abroad, commercial presence and presence of a natural person. Generally speaking, the trade volume of cross border trade,

consumption abroad and the presence of a natural person is reflected through

the BOP (balance of payments), while that of commercial presence can be

obtained through FATS (foreign affiliates trade in services). At present, only

64

The Characteristics of the Development of the Services Trade in China and Its Future

very few nations (the U.S. and other OECD nations) are capable of realizing the FATS statistics calculation.

Starting from the 1980s, the scale of international trade realized through

commercial presence based on foreign direct investment has gone through a rapid expansion. It has surpassed the trade volume realized through cross

border trade in some developed nations. For example, in 2003 the sales volume of the foreign affiliates of American firms reached USD 477 billion, while the

amount recorded in the BOP was only USD 292 billion. Therefore the American trade volume based on commercial presence was already 1.6 times that of the

volume of BOP in 2003. In terms of exports, the trade volume of American

foreign affiliates surpassed that of cross border trade in 1996; in terms of

imports, the trade volume of American foreign affiliates surpassed that of cross border trade in 1990. Table 3.3.

The top ten in the global services trade volume in 2005 (Unit: 100 million USD)

Ranking

Ranking Country or Export in 2004 region volume

Proportion Proportion Ranking Country or Export in total Ranking in total in 2004 region volume volume volume

1

1

U.S.

3,533

14.6

1

1

U.S.

2,887

12.2

2

2

UK

1,834

7.6

2

2

Germany

1,986

8.4

3

3

Germany

1,429

5.9

3

3

UK

1,501

6.4

4

4

France

1,137

4.7

4

4

Japan

1,359

5.8

5

5

Japan

1,066

4.4

5

5

France

1,029

4.4

6

7

Italy

934

3.9

6

6

Italy

923

3.9

7

6

Spain

912

3.8

7

8

China

3.6

8

9

China

812

3.4

8

7

692

2.9

9

8

750

3.1

9

9

Ireland

675

2.9

10

22

The Netherlands

The Netherlands

853

India

676

2.8

10

15

India

674

2.9

Total

13,083

54.2

Total

12,579

53.3

Global total

24,150

100

Global total

23,600

100

Source: WTO statistics on international trade and the bulletin published in April 2006.

Because a service is intangible and cannot be stored, a commercial presence

in the service consuming nations facilitates quantity production by the service

65

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

provider, which in turn helps the provider achieve economy of scale and lowers its cost and price. According to the World Investment Report published by the United Nations Conference on Trade and Development (UNCTD), the focus of FDI has turned to the service industry. The reserve of FDI in the world’s service

sector increased from 25% in the 1980s to 62.8% in 2004, which was estimated to

be USD 9.4 trillion. In the same period, the FDI reserve in the world’s primary sector fell from 9.3–4.7%, and that in manufacturing fell on a larger scale from

41.5–32.5%. The increased speed of the inflow of FDI to the service sector helped the expansion in the scale of trade in services based on commercial

presence. As estimated by the WTO, currently the volume of services trade in

the form of commercial presence is 1.5 times that of cross border trade. Table 3.4 shows the composition of the patterns of supply of services trade. Meanwhile,

an increasing amount of offshore outsourcing has also driven international investment in the service sector. The mode of relocation of service business has changed from one that follows manufacturing to one that is based on self-driven expansion. Many international companies have started to build their service supply network internationally. Among the Fortune 500 in 2006,

international companies that are primarily based on services business accounted for nearly half of the list and took up half of the total annual profits of these 500 companies. Table 3.4.

The composition of global trade in services patterns

Patterns Cross border trade

Percentage 35

Consumption abroad

10–15

Commercial presence

50

Presence of natural person

1–2

Source: WTO, International Trade Statistics (2005).

At present, the pattern of selling products through commercial presence

funded by FDI has dominated the international trade in services. This pattern

has not only outnumbered the other three, its promising prospects are also very

appealing to international companies. It therefore has a very good prospect as is demonstrated by its developmental trend.

66

The Characteristics of the Development of the Services Trade in China and Its Future

As a new mode for services trade, service outsourcing has a promising future Since the 1980s, starting from IT outsourcing, international companies originating in the developed nations have shown an increasing preference

for offshore outsourcing. In recent years, service outsourcing has increased at a faster rate than that of trade in goods. The size of the global services

outsourcing market is estimated to be around USD 300–500 billion. UNCTD predicted that by 2007, this will reach USD 1.2 trillion.

The U.S., the EU and Japan are currently the major receiving ends of

outsourcing, while emerging nations are mainly the contractors or service

providers of outsourcing, among which Asian nations account for 45% of the total. In the global total expenditure on outsourcing, America takes up 2/3 of the total, and Japan and the EU 1/3, leaving very little for the rest. On the provider side of the business, India is the outsourcing center of Asia, Mexico of North

America, Eastern Europe and Ireland of Europe, while China, the Philippines, Brazil and other countries are becoming the center of their respective regions.

In the 21st century, international outsourcing services have developed at an

increased speed. International companies from the U.S., the EU and Japan follow each other in outsourcing some parts of their businesses to nations and regions

where labor is both cheap and qualified. Currently the most rapidly expanding

international services outsourcing areas are IT, HR management, public relations management, customer services and marketing. Software and information

services and finance are the busiest and most concentrated areas for service outsourcing. An estimated 80% of international companies are using outsourcing in the IT area to cut costs. Nevertheless, international services outsourcing is still at the fledging stage. Among the world’s 1,000 biggest companies, there are still 70% that have not outsourced any of their business to nations with cheaper

labor, and the businesses outsourced among them so far accounts for just 1–2% of their total business. As the business philosophy of these international companies

gradually evolves, outsourcing non-core businesses will become a trend, giving a bright prospect for international service outsourcing.

Free trade and trade barriers coexist in the international services trade The upgrading of the industrial structure in different nations will constantly serve as a boost for global trade in services. The globalization and liberalization of services trade is an unstoppable trend. The General Agreement on Trade

67

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

in Services (GATS) signed at the Doha round-table conference offered an institutional arrangement and guarantee for the free trade in services for the first time. To keep pace with the trend of economic globalization, the WTO

has been striving to quicken the process of trade liberalization for more than a decade since its founding.

As a new round of adjustment and liberalization of trade continues to push

forward, many nations have formulated their own developmental strategies

to boost their trade in services. Due to the immense potential for development

and profits of services trade, nations and regions that have a monopolistic competitiveness or relative strength in the service sector are keen to liberalize

and globalize trade in services through negotiations in the WTO or other regional trade organizations. Relying on their advantageous service trade, developed

nations such as the EU and America require other nations to open their service markets in bilateral and multilateral talks, so as to enlarge their own surpluses

in the services trade. At present, a liberalizing trend can be seen in areas ranging from traditional service industries such as commerce, travel, transport, contract and export of labor, to emerging service industries such as information, finance,

insurance, law, consulting, accounting and telecommunications. These are all the subjects of talks and efforts to lower the market threshold.

Services trade has become the main issue in the new round of WTO talks and

in other regional talks on economic cooperation. The landscape concerning the interests of all sides will be reshaped in such multilateral diplomatic wrestling.

In response to this new trend, many nations continuously adjust their domestic economic policies. Due to the different economic status and the different positions in the international division of labor of these nations, the interests

they obtain from the liberalization and globalization of trade in services are very different. Nations with a weaker international competitiveness, in order

to protect their fledging domestic service industries, tend to adopt non-tariff barriers such as restrictive policies over entry, technical standards, foreign exchange control etc. Many nations have also imposed restrictions on some sensitive areas such as finance, insurance, telecommunications, computers,

information and the airline industry, which often concern the sovereignty and national security of the importing nation. Therefore in this sense the trade barriers against trade in services are actually increasing. It is estimated that

the developed nations and developing nations will have continue to have contrasting stances on opening the market for service trade, and that trade barriers in disguised forms will continue to exist.

68

The Characteristics of the Development of the Services Trade in China and Its Future

In the near future, the world’s trade in services will continue its rapid growth. Its main drivers include: the steady growth of the world economy; the global industrial structural upgrading which will continue to boost the rapid growth of trade in services, and the global industrial transfer which will intensify in speed and scale, with its center moving from manufacturing to services, in which service industries such as finance, insurance, travel, and consulting, and technology intensive industries such as the electronics industry will become the focus; the continuous growth of trade in goods will directly boost service industries that are closely linked to it, such as transport and insurance; and international investment and international mergers and acquisitions both show a increasing tendency to focus on the services industry, which also provides a strong engine for the rapid growth of services trade. In addition the development of technology, the emergence of new trading modes such as service outsourcing, and the fact that global and regional service trade barriers are gradually disappearing, will together contribute to the development of trade in services.

Analysis of the Competitiveness of China’s Services Export In the 30 years of reform and opening-up, as China’s national economy and its society continued developing and as reform and opening-up was thoroughly implemented, China took the opportunity of international manufacturing transfer, and became a giant in international trade in goods. Meanwhile China’s trade in services has also been rapidly developing. Especially in recent years, when the scale of the services trade continues to grow at a tremendous rate with a growth rate higher than that of China’s sizzling overall economy, lifting the nation’s status in the landscape of international trade in services. According to WTO statistics, the export of China’s services trade rose from 28th in 1982 to 8th in 2005, and import from 40th in 1982 to 7th in 2005. However, the scale of China’s service export is dwarfed by the nation’s overall economy. Compared to other economies, China has a relatively lower proportion of export volume taken up by services export; compared to its trade in goods, its trade in services is unevenly lagging behind. The structure of China’s service trade relies heavily on low end services. Most of its advantages focuses on traditional areas such as travel and architecture, while knowledge and technology-intensive service industry take up only an insignificant share. The explicit relative comparative advantage (RCA) index of China’s

69

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

services trade is too small, showing that China’s trade in services is still underdeveloped and has a relatively low competitiveness internationally. The trade competitiveness (TC) index of services trade is negative, indicating the overall disadvantageous status of China’s trade in services. Specifically, China’s trade in services shows the following characteristics.

The acceleration of the growth rate of China’s services trade is high, but the overall level is low China’s industrial structure experienced a landmark change in the mid 1980s, when the service sector surpassed the agricultural sector in its proportion of the GDP. The growth of the national economy changed from one that was driven by agriculture and industry to one that was driven by industry and the service sector. In the 9.3% increase of the GDP at constant prices from 1990 to 2004, 5.8% was contributed by industry, 2.5% by the service sector, and 1.0% by the agricultural sector. Meanwhile China’s trade in services had seen rapid growth, with the volume of cross border trade increased from USD 4.34 billion in 1982 to USD 191.75 billion in 2006 (see Fig. 3.5), a 44-fold increase over 24 years; over the same period, the proportion of China’s services trade in the global service trade volume rose from 0.6–3.6%. At the end of the period, China’s services export volume was USD 73.92 billion, 29 fold greater than at the start of the period, with an annual growth rate of 16%, two times that of the world average over the same period. From 1980–1990, China’s imports and exports respectively enjoyed an annual average growth rate of 10.8% and 20.9%, far higher than the world average, indicating the rising status of China’s trade in services globally (see Figs. 3.6 and 3.7). Fig. 3.5.

The volume of China’s trade in services from 1982–2006

100 million USD 2,000

1,500

1,000

500

0

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Source: Official website of the Department of Trade in Services of MOFCOM.

70

2004

2006

The Characteristics of the Development of the Services Trade in China and Its Future

Fig. 3.6.

The average growth rate of volume of trade in services from 1982–2005

(%) 18

15.9

16 14 12

10.2

10

8.8

8.6

8.4

8

7.7

7.5 5.3

6 4

Hong Kong, China

Japan

France

Germany

Global Average

The UK

China

0

The U.S.

2

Source: Official website of the Department of Trade in Services of MOFCOM.

Fig. 3.7.

China’s service trade volume and its proportion in the global total volume from 1982–2006 (%) 4

1,200

3.5

1,000

3 800

2.5 2

600

1.5

400

1 200

0.5 0

Export volume of China

Proportion of China’s exports in global exports

Import volume of China

Proportion of China’s imports in global imports

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

0

However, the overall level of China’s trade in services has remained low. Its

trade volume accounted for only 3% of the world’s total, which is not in line with China’s population, and its strength of foreign trade and the economy as a whole.

71

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

From 1982–2005, the export service volume stayed at under 10% of the total export

volume, which was 9.4% in 1982 and 8.8% in 2005. In 2005 the global service export volume, in contrast, accounted for 18.9% of the total export volume, with the

American figure being 28.1%, Britain 32.7%, and India 42.9%, while the Chinese figure was 8.9%, less than half of the global average (see Table 3.5).

Table 3.5. The proportion taken up by the export volume of services trade of four nations in the global total export volume in 2005 Global

18.9%

The UK

32.7%

The U.S.

28.1%

China

8.9%

India

42.9%

Source: Department of Trade in Services of MOFCOM.

China’s services trade is lagging behind its trade in goods In the global trading system, China’s services trade lags behind its trade in

goods. However, a new trend in international trade is to “base a nation’s trade

primarily on trade in services, and supplement it with trade in goods”. The

situation in China does not go in line with this trend, as its trade in goods and services are largely unbalanced with the latter taking up a very low proportion

in its overall trade volume, a proportion much lower than the world average. For example, in 2005 the proportion of services export of China in the overall foreign trade volume was only 8.9%, much lower than the proportion of trade in goods and than the world average of 18.9%.

From a historic perspective, before 1989, the growth rate of China’s services

trade was generally lower than that of its trade in goods; from 1989–1994, the

growth rate of China’s services trade was higher than that of its trade in goods; after 1995, although the growth of China’s trade in services was maintained

at a high level, that of its trade in goods maintained an even higher level. In

particular after China joined the WTO, the growth rate of its trade in goods was

noticeably higher than that of its trade in services. Of course, such a situation was related to the slower process of opening up in China’s services sector (see Fig. 3.8).

72

The Characteristics of the Development of the Services Trade in China and Its Future

Fig. 3.8.

The growth rates of trade in goods and services from 1983–2006

(%) 60 50 40 30 20 10 0

Trade in goods

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

–10

Trade in services

China’s trade in services is dominated by traditional service trade, with some emerging services burgeoning Since the 1980s the global structure of trade in services has been constantly optimized, with a lowered proportion of traditional transport services, a

steady proportion of tourism services, and a continuously rising proportion of other commercial services. In contrast to the global trend of restructuring,

China has experienced a rise in the proportion of its transport services in the

overall volume of services trade due to the rapid development of its trade

in goods, while the proportion of its tourism exports fell slightly. In 2006, in China’s services exports, transport services took up an increased 22.8%, 10.2% higher than the previous year; its tourism service, took up 36.9% of the total service trade volume, 12.4% lower than the 1997 figure of 49.3%; other services

remained at 38.1% of the total service trade volume, a level similar to the 1997 figure of 38.1% (see Fig. 3.9). The structure of China’s trade in services is still dominated by traditional service trade but its emerging areas of trade in

services have shown a quickening pace of development. From 1997–2005, while

the total service trade exports posted an annual growth rate of 14.8%, computer

and IT services presented a 47.1% export growth rate, consulting 40.7%, and movie and video services 38.3%. These areas are several of the businesses that have enjoyed the fastest growth (see Table 3.6).

73

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

Fig. 3.9.

Changes in the structure of China’s services exports from 1997– 2006

(%) 100

80

60

40

20

Others

Travel

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

0

Transport

Source: State Administration of Foreign Exchange: Balance of Payments from 1997–2006.

In 2006, while the export of traditional services kept growing, China’s

services export of some emerging businesses also showed a significant growth, indicating a slightly optimized service trade structure. Transport and tourism

trade volumes maintained their growth and their high proportions in the overall volume of trade in services, but with their combined proportion fell

to some degree. Transport and tourism respectively accounted for 28.9% and

30.4%, and together accounted for 59.3% of China’s total services trade volume, down 1.1% compared to the total volume of the two in 2005. Meanwhile among

emerging services, computer and IT services, telecommunications services and consulting services saw rapid growth in export, scoring respectively

60.8%, 52.2% and 47.2% compared to 2005; and the proportions they took up

in China’s total export volume respectively increased by 1%, 0.1% and 1.4%.

Rapid increase was also observed in financial services and consulting services, which respectively posted a 0.7% and 1% increase over 2005, making up 0.7%

and 1% of the total services trade volume. In 2006, tourism, transport, other

commercial services, consulting and computer and IT services were the top

five in the list of service export volume; in terms of import, the top five were transport, tourism, other commercial services, insurance and consulting (see Figs. 3.10 and 3.11).

74

0.84 0.55

7. Computer and IT services

7.33% 245.04

Proportion

Total

238.8

11.58%

27.65

26.01%

62.12

0.15

2.11

5.18

0.27

3.84

261.65

10.46%

27.38

26.41%

69.09

0.07

2.21

2.8

0.75

2.65

1.11

2.04

9.85

5.9

53.88%

140.98

9.25%

24.2

1999

301.45

10.48%

31.59

23.50%

70.84

0.11

2.23

3.56

0.8

3.56

0.78

1.08

6.02

13.45

53.84%

162.31

12.18%

36.71

2000

329.01

9.70%

31.92

22.13%

72.82

0.28

2.77

8.89

1.1

4.61

0.99

2.27

8.3

2.71

54.08%

177.92

14.09%

46.35

2001 57.2

2002

393.81

11.46%

45.15

22.25%

87.61

0.3

3.73

12.85

1.33

6.38

0.51

2.09

12.46

5.5

51.76%

203.85

14.52%

Source: The statistical data on the official website of the Department of Trade in Services of MOFCOM.

17.96

31.34%

13. Government services not mentioned elsewhere

Proportion

76.79

0.1

11. Movie and video

12. Other commercial services

2.38

10. Advertising and publicity

9. Consulting

3.46

0.63

0.27

6. Financial services

8. The utilizing and concessionary royalties for expertise

1.34

1.74

5. Insurance services

5.94

5.9

8.19

52.77%

4. Construction services

49.27%

Proportion

126.02

2.72

120.74

2. Tourism

9.64%

23.01

1998

3. Telecommunication Services

12.60%

29.5

1997

China’s classified services exports from 1997–2005

Proportion

1. Transport

Table 3.6.

463.74

12.95%

60.06

32.47%

150.56

0.33

4.86

18.85

1.07

11.02

1.52

3.13

12.9

6.38

37.53%

174.06

17.05%

79.06

2003

620.55

13.37%

82.98

25.70%

159.51

0.41

8.49

31.53

2.36

16.37

0.94

3.81

14.67

4.4

41.48%

257.39

19.45%

120.67

2004

739.09

16.64%

123.01

22.85%

168.85

1.34

10.76

53.22

1.57

18.4

1.45

5.49

25.93

4.85

39.64%

292.96

20.87%

154.27

2005

(Unit: 100 million USD)

The Characteristics of the Development of the Services Trade in China and Its Future

75

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

Fig. 3.10.

The 2006 China service export by industries

Other commercial services 21.4%

Government services not mentioned elsewhere 0.6% Transport 22.8%

Movie and video 0.1% Advertising and publicity 1.6% Consulting 8.5% The utilizing and concessionary royalties for expertise 0.2% Computer and IT services 3.2% Tourism 36.9% Financial services 0.2% Insurance services 0.6%

Telecommunication Services 0.8% Construction services 3.0%

Source: State Administration of Foreign Exchange: Balance of Payments of 2006.

Fig. 3.11.

The 2006 China service import by industries Movie and video 0.1%

Advertising and publicity 0.9%

Other commercial services 11.2% Government services not mentioned elsewhere 0.5%

Consulting 8.3% Transport 34.1%

The utilizing and concessionary royalties for expertise 6.6% Computer and IT services 1.7% Financial services 0.9% Insurance services 8.8% Construction services 2.0%

Tourism 24.1% Telecommunication Services 0.8%

Source: State Administration of Foreign Exchange: Balance of Payments of 2006.

As is shown in the diagrams, China’s services trade mainly concentrated

on transport and tourism, the two traditional services that jointly accounted

for close to 60% of the total service trade volume in 2006. Following them were other commercial services, which accounted for 16.7% of the total; finance, telecommunications, computer and information services accounted for relatively small proportions, 0.2%, 0.7% and 2.2% respectively. Finance,

insurance, consulting, computer and information services, the main pillars of

76

The Characteristics of the Development of the Services Trade in China and Its Future

trade in services in the world which is now based largely on such technology and knowledge intensive industries, still remained in a preliminary stage

of development in China and demonstrated very little international competitiveness.

China’s services trade shows a long-term trend of deficit From 1982–1991, China’s services imports and exports were basically in balance, with a small amount of surplus. Since the first services trade deficit in 1992, except for 1994, China continued suffering from deficits and was one of the

three nations in the list of the top ten exporters of trade in services that posted deficits. In recent years, the deficits in services trade have tapered off to some

degree. The deficit in 2005 was USD 9.26 billion, down by 3% from the 2004 figure of USD 9.55 billion. This was the first downturn in deficit since 1999. The

deficits mainly came from transport, insurance services, and the utilizing and

concessionary royalties for expertise. In 2005, deficits in these businesses were respectively USD 13.02 billion, USD 6.65 billion and USD 5.16 billion. Among

them, transport suffered from the largest deficit, which was far more than the sum of services trade deficit of China (see Fig. 3.12). Fig. 3.12.

The surpluses and deficits of trade in services of China from 1982–2006

100 million USD 50

0

–50

–100

–150

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

–200

Source: Calculated through the BOP of China published by the State Administration of Foreign Exchange.

77

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

The 2006 deficit in services trade was USD 8.91 billion, down by 3.9% from

2005, which continued the downturn trend started in 2005. The decline in

deficit could be attributed to the increase of surpluses in tourism, computer and

information services, and other commercial services. In that year, the surplus in tourism was USD 9.63 billion, making a year-on-year increase of 27.7%; the

surplus in computer and information services, where added value is high, surged up to USD 1.22 billion, marking a 4.6 fold increase. Other commercial services enjoyed a surplus of USD 8.43 billion, marking a 12.5% increase. The

deficits in China’s services trade remained concentrated in transport, insurance, the utilizing and concessionary royalties for expertise etc. The 2006 transport

deficit was USD 13.35 billion, slightly larger than the previous year. Due to

the rapid increase in imports, insurance also posted an increasing deficit. In 2006, the deficit in insurance was USD 8.28 billion, up by 24.6%. Utilizing and concessionary royalties for expertise posted a deficit of USD 6.43 billion, up by 24.5%. Although finance presented a relatively small deficit of only USD 750

million, it increased rapidly by 456.9% compared to the previous year and was six times the export volume (see Fig. 3.13). Fig. 3.13.

The surpluses and deficits of services trade in China by industries in 2006

20

–100

Telecommunication Services

Movie and video

Government services not mentioned elsewhere

Advertising and publicity

–80

Construction services

–60

Computer and IT services

–40

Other commercial services

–20

Tourism

0

–120 –140

Source: State Administration of Foreign Exchange: Balance of Payments of 2006.

78

Transport

Consulting

40

Insurance services

60

Financial services

80

The utilizing and concessionary royalties for expertise

100

The Characteristics of the Development of the Services Trade in China and Its Future

An uneven regional landscape of services trade as import and export markets concentrate on developed nations and regions Since reform and opening-up, the different regions in China have been

developing in an unbalanced manner with a big gap between the inland regions

and the coastal area, or the west and the east. In line with this there is also an uneven landscape in terms of services trade. With the superior geographical

conditions and a relatively developed modern service industry in place, the coastal area has enjoyed advantages in transport, insurance, computer and

information services, consulting services, advertising etc. and has become the place where most of China’s services exports originate. Beijing, Shanghai, Guangdong, Zhejiang and Tianjin are the forerunners in services export. In 2005,

Shanghai alone took up more than 20% of the nation’s total services export.

In 2006, trade in services in Beijing made up 19% of the nation’s total, with its services exports accounting for 24% of that of the whole nation.

China’s import and export markets of trade in services are mainly advanced

nations and regions. In terms of the volume of trade, Hong Kong, the U.S., the EU and Japan are China’s four biggest service trade partners which collectively post a USD 20 billion trade volume, more than half of China’s total. Among them

Hong Kong is the most prominent as it makes up more than 20% of China’s total services trade volume, and the U.S., the EU and Japan all account for around 10%. In imports the EU has become the biggest origin of imports. The top four

import origins are, in descending order, the EU, Hong Kong, the U.S. and Japan, which together account for more than half of China’s total import.

In 2006 China achieved surpluses against Hong Kong, Russia, Taiwan, and

Singapore, while still posting deficits against most of the other trade partners.

China’s biggest surplus came from Hong Kong at close to USD 100 million, while its biggest deficit came from the EU (see Fig. 3.7).

Table 3.7. China’s major markets for export and origins for import of services in 2006 Ranking

Export markets

2

U.S.

4

Japan

1 3

HK EU

Origins of import EU

HK

U.S.

Japan

Source: MOFCOM official website.

79

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

An analysis of the industrial competitiveness of China’s services exports The structure of China’s service trade was imbalanced. With its more advantageous services businesses concentrated in traditional areas such as sea transport and tourism, China’s tourism and transport together made up

more than half of the service export volume while knowledge and technology intensive industries such as finance, insurance, computer and information

services, technology consulting, the utilizing and concessionary royalties for expertise, advertising and publicity, movie and video etc. are slow in developing and represent a low proportion of the total export volume.

Surpluses in China’s trade in services mainly came from tourism and labor

export, which were the two most prominent export items in volume. These two

aspects, where China has a labor intensive advantages, are however low in added value. The most prominent problem for China’s export of labor is the low quality of labor, which gets low pay abroad mainly by doing basic manual work. An analysis

of the structure of demand in the current international labor market shows that the demand for hi-tech talents and labor for dirty and dangerous work are both increasing, while that for general labor is in decline. Due to the development of

hi-tech industries, some developed nations in Europe and North America and some emerging industrialized nations and regions have an increasing demand

for technical labor. That is to say, China’s advantage in labor export is tapering off gradually. At present, services export is contributed to increasingly by hi-tech industries in nations with developed service sectors. Currently China is not in a favorable position in the high-tech and high value added service industries.

In many knowledge and capital intensive service industries, China has

negative trade competitiveness indexes (TCI). Table 3.8 shows the service trade

TCI based on calculation of China’s BOP. Service trade TCI is a powerful tool in the analysis of international competitiveness of a specific industrial structure. It can reflect the subject’s status in relative advantage and the international

competitiveness and the market position of a nation’s particular industry or product. TCI = (export – import) / (export + import), which varies between –1 and 1. The greater it is in value, the greater the competitiveness (see Table 3.9).

As is shown in Table 3.8, in the six year period the overall TCI of China’s

services trade were all less than 0, fluctuating between –0.08 and –0.06, which was relatively stable. It indicates that China’s overall trade in services is in a relatively unfavorable position. Although China has a certain degree of competitiveness in

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The Characteristics of the Development of the Services Trade in China and Its Future

some industries such as tourism, construction services, other commercial services, advertising and publicity etc., most of them are traditional labor or resources intensive industries. Currently these industries are becoming increasingly technology and capital intensive globally, with their productivity rising rapidly. It therefore remains a big question whether China will be able to maintain its traditional advantages. In technology and knowledge intensive industries where added value is high, such as the utilizing and concessionary royalties for expertise, insurance, finance, consulting etc. China has a clear disadvantage and a very low international competitiveness, which indicates that China’s trade in services lacks elements of technology and knowledge and is facing great challenges once its services market completely opens up (see Fig. 3.14). Table 3.8.

The TCI of China’s overall service trade and sub-industries

Total 1. Transport 2. Tourism 3. Telecommunication Services 4. Construction services 5. Insurance services 6. Financial services 7. Computer and IT services 8. The utilizing and concessionary royalties for expertise 9. Consulting 10. Advertising and publicity 11. Movie and video 12. Other commercial services 13. Government services not mentioned elsewhere

2001 –0.08 –0.42 0.12 –0.1 –0.01 –0.84 0.11 0.15

2002 –0.08 –0.41 0.14 0.08 0.13 –0.88 –0.28 –0.28

2003 –0.08 –0.4 0.07 0.2 0.04 –0.87 –0.2 0.03

2004 –0.07 –0.34 0.15 –0.04 0.05 –0.88 –0.19 0.13

2005 –0.06 –0.30 0.15 –0.11 0.23 –0.86 –0.05 0.06

2006 –0.07 –0.26 0.12 0.05 0.15 –0.87 –0.25 0.17

–0.89

–0.92

–0.94

–0.9

–0.94

–0.94

–0.26 0.06 –0.25 0.12

–0.34 –0.03 –0.52 0.28

–0.29 0.03 –0.35 0.04

–0.2 0.1 –0.62 0.31

–0.07 0.20 –0.07 0.29

–0.02 0.19 0.04 0.28

0.28

–0.11

–0.12

–0.19

–0.11

0.07

Source: Based on calculating the China’s balance sheet, various years.

Table 3.9. Country or region The UK Germany France Spain The U.S.

Comparison of service trade competitiveness 1990 0.087 58 –0.211 21 0.135 52 0.290 62 0.151 25

TCI

2004 0.116 06 –0.180 9 0.063 41 0.222 91 0.100 81

Country or region

Japan Korea India China Hong Kong

Source: WTO, International Trade Statistics (2006).

1990 –0.31 36 –0.046 6 –0.012 642 0.165 8 0.243 94

TCI

2004 –0.170 7 –0.106 98 –0.162 8 -0.071 42 0.284 91

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FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

Fig. 3.14.

The TCI of some of China’s services from 2001–2005

0.4 0.3 0.2 0.1 0 – 0.1 – 0.2 – 0.3 – 0.4

2001

2002

2003

2004

2005

Total

2. Tourism

4. Construction service

7. Computer and IT services

10. Advertising and publicity

12. Other commercial services

Source: Based on calculating the China’s balance sheet, various years.

The Prospects for China’s Services Trade The overall objectives of China’s development of services trade Trade in services is the sign of how developed a nation’s service sector is.

Enlarging the scale of trade in services is not only helpful to the improvement of the balance of payments of services trade, or the optimization of China’s

overall foreign trade structure, it will also help improve China’s position in the international division of labor and will facilitate its industrial structural

adjustment. And all these will guarantee China’s sustainable development and are thus of great historic and practical significance. In the New 11th Five-Year

Guidelines the Chinese government made it clear that “by 2010, the volume of trade in services should reach USD 400 billion, and maintain a 20% increase”. To meet this objective, we should implement the scientific concept of development, change the way trade volume grows at the moment, enlarge China’s services exports, continue to expand the share of trade in services in the overall foreign trade volume, and last but not the least, keep the balance between import and export of trade in services. While boosting the export of capital and technology intensive service industries such as computer and information services, financial services and

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The Characteristics of the Development of the Services Trade in China and Its Future

insurance services, we should also keep expanding the export volume of traditional labor intensive service industries such as transportation and travel,

so as to improve the export structure of trade in services and enable China’s services trade develop in a healthy way.

We should combine our two objectives of safely opening up our domestic

services market and actively expand our market share abroad. Thus on the one

hand we should open up the domestic market to allow more competition, so as to let local enterprises grow and enhance their international competitiveness in

a competitive environment; on the other hand we should implement the “goingout” policy to the fullest, so as to encourage the affiliates of Chinese enterprises

to provide services abroad and enable them to utilize both the markets and resources at home and abroad.

Moreover we should pay attention to both the overall development

of trade in services as a whole and to the focused development of some

particularly competitive areas and enterprises. To do so we need to construct a demonstrative area for trade in services, and bases or industrial clusters for services outsourcing, giving our prioritized support to enterprises that are highly competitive and have a good potential for growth.

China has immense potential to develop trade in services China’s service sector and trade in services will be further invigorated by the

structural adjustment of the national economy and a new round of opening-up.

During the New 11th Five-Year Guideline period, China’s trade in services has a new historic opportunity. From a global perspective, the upgrade of the global

industrial structure, the continuous growth of trade in goods, and the preference of international investment for the services sector are all factors that stimulate the growth of global trade in services. From a domestic perspective, the New

11th Five-Year Guidelines have stated the government’s clear intention to boost trade in services, which means that we need to practice the scientific concept of development and make an unremitting and focused effort to accelerate the growth of the services sector.

The great potential for the services sector The service sector is the root of trade in services. For a long time, China’s

domestic services sector has lagged behind and this in turn has had a negative

effect on its trade in services. Statistics show that in 2007 China’s services sector accounted for 39.1% of the GDP, which is far lower than the developed nations’

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FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

figure of 72%, and is lower than the 52% average for developing nations. With an increase in government attention on the services sector, the sector is

undergoing rapid development with an increased proportion in the GDP and an annual growth rate of 15.4%, far higher than the average growth rate of the

GDP. In addition the rich human capital, cheap labor, vast land, various places

of interests, and the deep-rooted traditional culture all serve as advantages in opening up China’s services market and remain China’s greatest potential on which the development of its services trade can rely.

Foreign investment still has plenty space to grow in trade in services In the WTO agreement signed by China the nation has made a commitment to open up more than 30 industries, including basically all service industries,

except for a very few that involve ideology, national security and economic sovereignty. An opening-up on such a big scale and wide range offers a good

opportunity for China’s trade in services. In 2005 there were 7,445 foreignfunded service trade-related enterprises. In 2006 the number was 7,141, which accounted for 17.2% of the total number of foreign-funded firms, diversifying the players in the services trade industry. In 2005 trade in services as a whole

(including banking, insurance and securities) received an actual utilized FDI amount of USD 11.68 billion, accounting for only 19.4% of the total utilized FDI of the year. In 2006 trade in services as a whole (including banking, insurance

and securities) received an actual utilized FDI amount of USD 21.139 billion,

which accounted for 30.4% of the total, marking a rapid increase from 2005.

This reflected the achievement China has so far made in channeling FDI to trade in services, but more importantly it gives us reason to believe that there is still plenty of room for further growth of FDI in trade in services.

In view of the rise in China’s economic clout and according to international

experience, some of China’s trade in services has embarked on a transitional

stage. Not only does China top the list in volume of services trade among developing nations, it also has some advantageous service industries that are well-established. Its travel, construction services, other business services,

transportation etc. have seen a rise in the global ranking based on market share.

Now that China has the world’s third largest trade in goods, the continuously rapid increase in this will greatly energize related service trade industries such as transportation and insurance services which will in turn fuel the continuing growth in the total volume of trade in services. As the “going-out” policy is

thoroughly implemented, Chinese company affiliates abroad will increase in

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The Characteristics of the Development of the Services Trade in China and Its Future

number as will the services they will provide. Meanwhile, with the reform and opening-up being constantly pushed forward, domestic demand for financial

services, insurance services, accounting services, law services, education

services, consulting services etc. will keep expanding, making it more common to obtain services via the international market and the affiliates of foreign firms.

The scale of trade in services will maintain rapid growth In view of the surge of China’s economic clout and according to international experience, some of China’s trade in services has embarked on a transitional stage. Not only does China top the list of volume of service trade among

developing nations, it also has some advantageous service industries that are well-established. Its travel, construction services, other business services,

transportation, etc. have seen a rise in the global ranking based on market share.

Now that China has the world’s third largest trade in goods, the continuously rapid increase of it will greatly energize related service trade industries like

transportation and insurance services, and in turn fuel the continuing growth in the total volume of trade in services. As the “going-out” policy be thoroughly implemented, Chinese company affiliates abroad will become greater in number,

so are the services they will render. Meanwhile, with the reform and opening-up constantly pushing forward, domestic demand for financial services, insurance services, accounting services, law services, education services, consulting

services, etc. will keep expanding, making it more common to obtain services via international market and the affiliates of foreign firms.

The cross border transfer of service sector provides China’s trade in

services with great opportunities. Since the 1980s, started from IT outsourcing,

international companies originated from developed nations have shown an increasing preference to offshore outsourcing. In recent years, service outsourcing increases in a faster rate than that of trade in goods. International companies from the U.S., EU and Japan follow each other in outsourcing

some parts of their businesses to nations and regions where labor is cheap

and qualified. The U.S., EU and Japan are currently the major receiving ends of outsourcing, while emerging nations are mainly the contractors, or service

providers of outsourcing, among which, nations from Asia account for 45% of the total. In the global total expenditure on outsourcing, America takes up 2/3 of the total, and Japan and EU 1/3, leaving very little for the rest. On the

provider side of the business, India is the outsourcing center of Asia, Mexico

of North America, Eastern Europe and Ireland of the Europe, while China,

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the Philippines, Brazil and other countries are becoming the center of their respective regions.

In the 21st century, international outsourcing service develops in an increased

speed. Nevertheless, international service outsourcing is still fledging. Among the world’s 1,000 biggest companies, there are still 70% that have not outsourced any

of their businesses to nations with cheaper labor, and the businesses outsourced among them so far account for just 1–2% of their total businesses. As the business

philosophy of these international companies gradually evolves, outsourcing noncore businesses will become a trend, giving a bright prospect for international service outsourcing. A new round of international industrial transfer featuring

service outsourcing is offering China’s trade in services a precious opportunity

for growth. With advantages in industries, investment, human capital, etc. that no developing nations can match, it is predictable that China, in receiving the transferred industries, will become the center of the world’s attention again

just like when it received the transferred manufacturing industry. China should seize the opportunity of the current international industrial transfer of service

industry to accelerate the growth of China’s trade in services. This will greatly optimize China’s structure and the growth pattern of foreign trade, and therefore

enhance the overall competitiveness of its service sector and transform its current underdeveloped service trade into a sound and developed one.

The scale of trade in services will keep a rapid growth Compared to consumer services, China’s producer services still have a huge

market potential left untapped. As the services designed to go along with

manufacturing, producer services include financial services, insurance services,

information services, international trade, modern logistics, agent, exhibition, etc. The industrial structure in the U.S. demonstrates a more than 70%

proportion of producer services in its overall service sector volume. In recent years, the industrialization of China is noticeably accelerating, leaving sufficient room for the development of producer services. And as the specialized division

of labor intensifies, manufacturing enterprises will separate various servicetype businesses such as accounting, R&D, design, logistics, training, and advertisement from their main business, and outsource them to a wide range

of specialized companies, casting an encouraging market prospect for producer services. Moreover, the socialization of production will link the enterprises to

externality, which will then lead to the formation of an interwoven network of production that allows enterprises to rely on each other in a wide spectrum of

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The Characteristics of the Development of the Services Trade in China and Its Future

businesses ranging among R&D, market research, and coordinated production, sale of product, after-sale services, and product feedback. With such an inter-

reliance gradually deepening, a rise in demand for services like advertisement, consulting, financial, insurance, telecommunication, equipment repairing, etc. is foreseeable. Therefore, modern production will also provide the trade in services of China a generous market potential.

Policies and Measures to Boost China’s Services Trade To achieve a rapid development of China’s trade in services, we need to design

a better administrative system for the industry. Better communication and coordination are also necessary, that is to say, industry chambers should play a

part in connecting different sides of the industry. Together these will constitute an effective and better administration of the industry. We also need to establish

a sound statistical system for trade in services and constantly perfect it. Based

such a system we can conduct in-depth statistical analyses and build a public

information website on services trade, thus facilitating the formation of a rounded and multi-layered services trade. We need to further the opening-up of trade in services, seize the opportunity provided by the new round of international industrial transfer, be innovative in utilizing foreign investment and optimize

the industrial structure of foreign-funded firms, and utilize foreign investment in boosting innovation, industrial upgrading, coordinated regional development etc.

Improve the overall planning and coordination of trade in services, build and constantly perfect an administrative system for the industry Service trade involves finance, insurance, telecommunications, transport, travel, computer information and many other services. The Ministry of Commerce of

the People’s Republic of China (MOFCOM) should be in charge of the following:

the overall administration, strategic planning and policy making, statistics,

facilitating services trade, multilateral talks, foreign affairs, foreign investment utilization in the service sector etc. But in practice, the specifics of trade in services

are managed by scores of related bodies and the policies concerning the industry may vary between central and local governments. Moreover, statistics are lagging behind the actual demand of trade in services. All of these are obstacles to the development and opening-up of China’s services sector, and to negotiations with

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foreign parties and the opening-up of trade in services. In this sense we must have

a better coordinated administration to develop trade in services. The MOFCOM is in charge of establishing a well-coordinated administrative system for trade

in services, in which different government departments, the central government and local governments, and governments and enterprises will be closely linked. By improving macro-planning, research and statistics, market promotion, policy

coordination, negotiation with foreign parties etc. we shall create a more practical and effective administration of trade in services.

Establishing China’s statistical framework for trade in services, build a statistical system and constantly improve it Based on the statistical standards jointly drawn up by the UN and five other international organizations, and the status quo in China, China should establish a statistical system for its trade in services following mainly two lines, namely cross-border trade and foreign affiliates. The China International Trade in

Services Statistical System promulgated by MOFCOM and the NBS (National Bureau of Statistics of China), has specified the statistical standards, statistical system, statistical approach and method of publicity for China’s trade in services. Through closer contact with international organizations we can follow the changes in international statistical regulations, constantly modify our statistics, adjust the coverage of statistics, further classify statistical items, and improve the validity of our statistics and their comparability with international ones.

Boost the development of focused areas in services trade and form a competitive industrial system Selecting particular service industries and boosting their export performance is

in line with the objective of adjusting China’s industrial and trade structure. It is also a necessary step to take in order to adapt China to the global economic and trade landscape and seize the opportunity afforded by global industrial transfer. It is thus of great significance to the improvement of the overall competitiveness

of China as a whole. Trade in services is comprised of many sub-sectors or

sub-industries which are of various statuses, making a complicated picture. In order to choose the right industries we need to take into consideration the

trends in the global services trade, the prospective demands of the global market, and the potential for development of China’s services industries. Along with these we should also follow the principles of “boost focus industries”,

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The Characteristics of the Development of the Services Trade in China and Its Future

“make in-depth exploration of potential” and “pay special attention to some”

so as to better decide on which industries we should place our focus and

boost their development. We should promote export from industries such as culture, software and construction so as to form a competitive industrial

structure. The areas where we need to do further work are as follows: firstly,

areas where we need to boost exports, such as cultural trade, international tourism, transportation principally based on sea transport, construction,

finance, insurance, certified accountant services, and Chinese medicine services; secondly, areas where we need to exploit the advantage of China’s rich human capital, such as receiving the outsourcing packages of information management,

data processing, finance and accounting, R&D, and industrial design; thirdly, areas concerning technology, to improve which we should promote the export of

software and related information services, intensify our support for technology

introduction and innovation, and focus support on R&D center projects that help China’s utilization of international advanced technology, management expertise and specialized talents etc.

Formulate policies encouraging trade in services and improve the overall policy system of trade in services Based on research on the characteristics of trade in services, we should begin drafting Some Opinions on Boosting China’s Trade in Services (Opinions) in

which the overall requirements, guiding thoughts and basic principles shall be specified, and the objective of steering China’s foreign trade from one based on

trade in goods to one based on the coordinated development of both trade in goods and services shall be clarified. The Opinions shall propose feasible and

practical policies and measures in aspects relating to public finance, taxation, finance, insurance, foreign exchange etc. so as to give trade in services support equal to that given to trade in goods. We should also perfect legislation for the services trade under which the opening-up of the industry can be conducted. In contrast to the wide coverage of services sector which includes more than

one hundred industries, China currently has no universal law for the sector and there are still many areas without regulating laws. Most of the regulations in place are merely regulations of the various functional bodies, which makes it very necessary to further regulate the legal system of the services sector.

China should quickly establish and perfect its legal system concerning its

services sector and trade in services in conformity with international norms.

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It should also establish a standardized system of trade in services in line with international ones.

Open up the domestic services trade market step by step while keeping some protective trade policies Opening up the domestic services trade market has many advantages: absorbing a large amount of foreign investment, introducing advanced technologies

and management; incubating new service industries, improving the level of

domestic services, changing the status quo in which China’s service sector generally lags behind; expanding China’s exports, and maintaining a steady

and rapid growth of its economy. However the liberalization of trade in services is a progressive process. Therefore we should take into consideration both the trend of global trade in services and the status quo of China’s, and implement a prudent, focused, step-by-step opening-up of the domestic market. We should

decide on the degree of openness and protectionism based both on international norms and on China’s actual situation. We should classify the opening-up into

three categories, namely, forbidden opening-up, opening-up under certain

restrictions and encouraged opening-up. Firstly, industries or projects that involve national sovereignty or national security should be forbidden to use

foreign investment through related policies; secondly, industries or projects that

relate to the lifelines of the national economy or the stability of the population

and its livelihood should be allowed to open up and absorb foreign investment, but should also be protected from being solely funded by foreign investment

or being controlled by foreign investors, which requires an upper limit on shares held by foreign investors; thirdly, industries and projects other than the

abovementioned two categories should be fully opened up and liberal policies

should be implemented. While strictly following the principles of national treatment, stringent regulated laws and regulations should be in place to restrict and delay the inflow of foreign investment.

Spare no effort to develop China’s services outsourcing and receive international industrial transfer in an orderly way The 11th Five-year Plan for the National Economy and Social Development made a clear pledge to “construct several services outsourcing bases so as to receive international services industrial transfer”, which shows that the Chinese government has officially adopted the strategy to receive service outsourcing.

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The Characteristics of the Development of the Services Trade in China and Its Future

In 2006 the MOFCOM began an initiative called “The Thousand, Hundred and Ten project”, which means to build ten service outsourcing bases, channel the service outsourcing packages of 100 international companies to China, and foster 1,000 enterprises capable of receiving packages with an annual government investment no less than 100 million in the next three to five years. Since the 1970s, the specialized division of labor led by international corporations has brought economic globalization to its prime. In the 21st century, due to the rapid development and wide application of information technology, the tradability of services has been greatly improved. Similarly, the further specialized division of labor of service links led by international corporations again fueled economic globalization. Against such a backdrop, there appeared an increasing trend that these companies transfer some of their internal services to China. In order to better serve their manufacturing investment and expand their Chinese market, many international corporations started to establish service centers in China. For example, in 2002 the HSBC relocated its headquarters from Hong Kong to Shanghai, its technical support center to Shenzhen, and its call centers to Guangzhou and Shanghai; from 2000– 2002, HP saw its service outsourcing orders and procurement orders in China reach USD 10 billion; Cisco contributed three billion USD worth of outsourcing packages to Chinese enterprises. At present, there are close to 700 R&D centers set up by foreign companies. The industries with the most rapidly expanding outsourcing in China are software and IT services outsourcing. In 2005 the software outsourcing market reached USD 889 million, a 40.5% increase from 2004 and five times the USD 180 million in 2001. It is estimated that from 2005–2009, the market will grow at a rate of 48.8% and reach USD 4.56 billion. Attracted by the cheap yet well educated labor, international corporations will quicken their pace of transferring services outsourcing to China. Moreover as services outsourcing has the virtues of being clean, knowledge-based, and will employ a large number of people, developing this is not only in line with China’s status quo and relative strength of having an abundant human capital reserve, it is also of great significance to China’s current initiative to optimize its foreign trade structure and its economic growth pattern, and the attempt to thoroughly implement its foreign economic and trade strategies. In addition, the practical experience China has acquired in receiving the manufacturing industrial transfer over the past 20 years or so will also serve as an advantage for the nation to receive international service outsourcing.

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4

Chapter

The Reform of China’s Foreign Trade System and Its Effects

FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

The 30 years of reform and opening-up have made tremendous changes

to China’s economy, and the growth in its foreign trade has also greatly invigorated the nation’s overall economy. The rapid development of China’s foreign trade is closely linked to the reform of its foreign trade system.

The foreign trade system refers to the organizational pattern, institutional

structure, extent of administrative authority, division of labor in operation, distribution of interests etc. It is an important component in China’s market economic system and is the basic framework and principle under which the nation’s foreign trade is operated. It includes the various activities of foreign trade enterprises and the nation’s foreign trade administrative system. It also involves China’s public finance, finance, investment, economic plans and foreign exchange administrative system.

The objective of China’s reform of the foreign trade system is to adapt the

system to international norms in trade. It is a progressive reform that can

be divided into the following stages according to their respective degree of

marketization and progress in major aspects. The first stage was from 1978–

1987, when the primary objective was to decentralize the operational rights to foreign trade. It was an experimental and trial stage. The second stage was from 1988–1990, which was focused on promoting the contract responsibility system so as to thoroughly implement reform in industry. The third stage was from

1991–1993, when the primary goal was to promote a system whereby foreign trade enterprises assumed sole responsibility for their own losses or profits. The fourth stage was from 1994–2001, in which a coordinated reform was

implemented in order to build a foreign trade system in line with international norms. The fifth stage is from 2002 to present, in which the foreign trade system is under gradual improvement after China joined the WTO.

Reform of the Foreign Trade System in the Preliminary Stage of Reform and Opening-up and Its Characteristics (1979–1987) Analysis of the background before reform of the foreign trade system Prior to the founding of the PRC, industry in China was extremely underdeveloped. It was impossible to change this situation immediately after the founding of the PRC. In addition, the international environment at that time was not favorable

to the formation of large-scale foreign trade, thus making it impossible for China

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The Reform of China’s Foreign Trade System and Its Effects

to adopt an export-oriented economic strategy. Against this backdrop, only an

economic scheme that prioritized heavy industry and boosted rapid growth could

lead the country to fast industrialization. This was largely due to the particular historical circumstances. The adoption of the strategy to prioritize heavy industry

made it possible to put the limited capital and resources into the technical equipment needed to introduce and develop heavy industry in China. Due to this decision many achievements were made, and a relatively sound and complete industrial structure and national economic system took shape.

During the years between the founding of the PRC and reform and opening-

up, China had been continuously implementing an “import substitution

trade strategy” that gave priority to developing heavy industry, and a planned economy. Against such a backdrop, China had long been practicing

a highly centralized and monopolistic trade system governed by the state. That was when China set up a foreign trade system wholly supervised and

administered by the Foreign Trade Department (now the Department of Commerce) of the central government. The Department was responsible for

the unified administration and operation of China’s foreign trade companies in all industries, formulating directive plans for the system, and accounting for the profits and losses of the system as a whole. Such a foreign trade system

had the following characteristics: firstly, foreign trade was under the unified

administration of the state; secondly, all foreign trade companies were state-

owned; thirdly, the state nominated all institutions and organizations that had the right to conduct foreign trade related activities; fourthly, the state decided

on the directive plans for foreign trade, which all foreign trade activities had to follow. Basically, from 1949–1978, the characteristics of China’s foreign trade were high centralization and uniformity. And its guiding thoughts were “depend on ourselves and adjust oversupply and insufficiency through foreign trade”.

Before reform and opening-up, the highly centralized foreign trade system

was in line with the international and domestic environment China was in and with its overall economic strategy and planned economy. The system

helped China avoid deficits in its balance of payments, protected China’s

domestic market from the uncertainties in the international market (controlled by capitalist nations), and was thus helpful in controlling the level and the

composition of imports and exports, protecting the country’s fledging national industry and meeting the objective of import substitution. It played a definite role in the development of China’s economy.

However as the domestic and international situation evolved and changed,

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the shortcomings of the system started to emerge. The planned economic

system often disrupted the interest relationships of producers, imbalanced the proportion of different products, and disconnected supply from demand.

Under such a system, price is more of a subjectively decided signal by the government than a reflection of the real value of a certain resource. Due to the

incapability of the system to effectively utilize and allocate resources, it is also

inefficient in obtaining interests. Under this foreign trade system based on the planned economy, the market economy was denied, the domestic market was

unable to reflect relative scarcity, the comparison between international price and domestic price could only be reflected in a distorted form, and people were unable to conduct foreign trade based on relative strength and were ignorant

of the advantages of actively participating in the international division of labor. In this system, foreign trade enterprises were all state-owned. Such enterprises

were deprived of the pursuit of economic interests because they acted upon decisions made by the government, and could do nothing but follow plans that had been made a long time ago while facing a changed international

and domestic market demand. The information they had lagged behind the actual situation, which explained the frequently occurring conflicts between production, supply and sale, and between demand and supply. For these

reasons, domestic foreign trade enterprises were divorced from the international market. They were barely influenced by the pressure of competition in the

international market, and thus lacked innovative spirit and the motivation to develop them. The technology they applied was no match for that at the world’s

leading level, and they could only rely on the government to keep their place in the international market.

The highly centralized and uniformly controlled foreign trade system was

established based on the planned economy in the preliminary period after the

founding of the PRC. It played, to some degree, a positive role in prioritizing

heavy industry. But as the national economy developed, the disadvantages of the one-sided focus on heavy industry, a planned economy in line with this, and

a centralized foreign trade system gradually emerged, severely restricting the development of the national economy and foreign trade.

People became gradually aware of the main problems in the foreign trade

system, which were as follows: the over-centralized administration by the central government; the operation of enterprises which were over-controlled

by the government; the disconnection between supply and sale; the lack of initiative and motivation of local governments, authorities in different

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The Reform of China’s Foreign Trade System and Its Effects

industries and enterprises; a fiscal system that accounted for the losses and profits of all enterprises; and the unsound distribution of foreign exchange.

Reform and opening-up was an inevitable trend of history and was the only

right thing to do. In December 1978, on the eve of the Third Plenary Session of the Eleventh Central Committee of the Communist Party, Deng Xiaoping said, “right now China’s administrative system of its economy is over-centralized. We

need to have the courage to delegate our power. Otherwise we cannot benefit

from the initiative of the central government, local government, enterprises and individuals, or modernize our operation and management of enterprises and improve our productivity.” This was exactly the guiding thought that dominated

the Third Plenary Session of the Eleventh Central Committee of the Communist

Party, which decided to carry out reform of China’s economic structure, system

and organization. The foreign trade system, in order to keep pace with reform

and opening-up and facilitate China’s participation in international multilateral trade, started its own reform in 1979.

The basic contents of the reform of China’s foreign trade system at the beginning of reform and opening-up and its characteristics The phase from 1979–1987 is seen as a transitional period for the central

government to delegate power in foreign trade and to streamline its related

administrative bodies. By delegating the power to manage foreign trade, the central government created incentives for local governments at various levels, industrial sectors, foreign trade companies and manufacturers, so as to invigorate foreign trade. The reform in this phase underscored its consistency

with the overall economic reform and a change from a directive economic

system to one that combined directive and mandatory plans with market regulation. The main contents of reform were as follows:

(1) Reform of foreign trade administrative bodies. On July 30, 1979, the

Tenth Meeting of the Fifth NPC Standing Committee decided to set up the

Administrative Commission for Foreign Investment and the State Import

and Export Regulatory Commission, which would be in charge of the organization of all foreign trade related activities. It later turned out that

too many administrative bodies easily led to bureaucracy and slowed down work efficiency. In March 1982 the state reorganized the administrative bodies of foreign trade. The Ministry of Foreign Trade (MFT, now called the

Ministry of Commerce of the People’s Republic of China), formed by several

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incorporations, 1 was then authorized to be in charge of the administration

and management of China’s foreign trade and foreign economic cooperation. Meanwhile, the state set up Foreign Trade General Corporations in several

provinces. 2 After these adjustments, China established its dual-level foreign trade administrative system. Based on the level-based administrative principle, the central government was only in charge of managing a small number of

goods that were important and fiercely competed for in the international market, leaving most of the licensed goods under the control of local

administrations. The former foreign trade system where administration was highly centralized by the central government no longer existed.

(2) The decentralization of the right to conduct foreign trade changed the

monopolistic situation and increased the variety of approaches to foreign

trade. After having their limited right to conduct foreign trade expanded, some provinces started to make autonomic arrangements for import and export on their own. These provinces established their own foreign trade enterprises

affiliated to the provincial governments which, in their operation, became more flexible as they took into consideration production and sale, manufacturing and trade, and domestic trade and foreign trade. Furthermore the state gave

permission to conduct foreign trade to some manufacturing enterprises and

some industries, which changed the former situation when specialized foreign trade companies monopolized all affairs related to foreign trade. The state also increased the forms of foreign trade. While previously there had only been

general export, now there was processing with provided material, processing with imported material, compensatory trade, counter trade, border trade etc.

(3) The state carried out pilot programs in integrating industry and trade

in an attempt to eliminate the “gap” between manufacturing enterprises and market forces. The so-called “gap” was a result of the operational regulations

on foreign trade enterprises and the limited right to conduct foreign trade. By integrating manufacturing industry and trade, products became more salable and competitive in international market.

(4) The state conducted reform of its former wholly planned system of

foreign trade, turning it into one that followed both directive plans and market adjustment. The system changed from one based on comprehensive

mandatory plans to one based on both mandatory and directive plans and market adjustment, with the coverage of mandatory plans declining and that of directive plans increasing.

(5) The state also made a change to its fiscal system for foreign trade, but

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still maintained the basic system whereby the central government accounted

for the losses and profits of most of the entities. Due to some limitations, the adjustment was confined in some parts of the system. While the profits

and losses of the Specialized Foreign Trade General Corporation and its branches were still taken care of by the central government as had been the

case previously, foreign trade companies affiliated to specific industries, and industrial and foreign trade companies were disconnected from central public

finance and the profits and losses of local foreign trade companies were the responsibility of local governments.

(6) The state reformed its distribution system of foreign exchange, allowing

enterprises to keep a certain proportion of foreign exchange. In August 1979 the State Council decided that enterprises which made profits in foreign

currencies, and their local government or its administrative bodies, could keep a certain proportion 3 of the foreign currencies within their own control. This

preliminarily resolved the long-lasting problem of the disconnected earning and spending of foreign exchange and the ensuing low efficiency of utilizing it.

(7) China started to introduce a foreign trade agency system and set up

foreign affiliates. Since 1980 the China Specialized General Foreign Trade

Corporation started to implement a new function—that of being an agency. It acted on behalf of manufacturing enterprises rather than buying goods from

these enterprises as before. The agency system included not only the China

Specialized General Foreign Trade Corporation but also its local branches and

other companies which had been given the right to engage in foreign trade, which had the right to operate any kind of goods except for certain goods

nominated by the state which could only be operated by the China Specialized General Foreign Trade Corporation. In order to improve export and to get

a better knowledge of the international market, specialized foreign trade

corporations actively explored foreign markets and set up permanent trade agencies in China’s major export markets.

(8) The state preliminarily established the macro-economic adjustment

system and put forward a series of measures to encourage exports. As the

structural reform of the nation’s economy went increasingly in the direction of a market economy, it became urgent to change our foreign trade macro-

control from one based on a direct administrative system to one based on economic leverage. On January 1, 1980, China resumed tariffs on imported

goods operated by state-owned specialized foreign trade corporations. In

the Fifth Meeting of the Fifth NPC it was proposed that tariffs should be

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properly adjusted to encourage or discourage the import of certain goods. The meeting also made noticeable adjustments to the tax regulations and codes. The adjustments were based on the principle that tariffs on advanced

equipment that China could not produce, crude materials that were scarce in China, and components of machinery and equipment should be lowered, and that tariffs on durable consumer goods and machinery and equipment that China could already produce should be lifted. Meanwhile, China made

an all-round modification of its tariff law and formulated a set of new

import and export tariff regulations based on the Customs Co-operation Council nomenclature. Following this, in 1984 the State Council approved the

Customs Import and Export Tariffs of the People’s Republic of China and the Provisional Regulations for the Implementation of the Customs Import and Export Tariffs of the People’s Republic of China proposed by the Customs Tariff Commission. Under these guiding principles, the average tariff was reduced from 52.9 to 38% in 1984. The average tariff on agricultural products was 43.6%, and that on industrial products was 36.9%. Moreover China set up an export fund and offered export rebates (starting from 1985) 4. It also imposed differentiating tariffs on import and export goods. By doing this it better met the requirements of the reform and opening-up, and facilitated the development of its foreign trade.

Analysis of the effects of the structural reform on China’s foreign trade system at the beginning of reform and opening-up The reform was carried out on a well-established state-monopolized foreign

trade system under a planned economy. It was a tremendous attempt to bring forward changes over a wide spectrum, touching every aspect of the old system.

Before the reform there were only 12 national specialized trade companies.

But as the reform released the right to operate foreign trade business to provinces and cities, as well as to some related bodies in the central

government, the situation gradually changed. Meanwhile some manufacturing enterprises that had better facilities and experience in import and export and

had been more self-sufficient in their operation were authorized to export their products and import the input materials for their production. Moreover, the

coverage of mandatory planning by the state was shrinking gradually, allowing all but a small number of goods to be removed from state mandatory plans and to be traded flexibly by foreign trade companies according to market changes at

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home and abroad. In such a way, after eight years of reform, foreign trade and foreign investment were both significantly developed.

From the perspective of the overall trade volume, China’s export volume

jumped from USD 9.75 billion in 1978 to USD 39.437 billion in 1987, and imports from USD 20.64 billion to USD 82.653 billion,5 indicating a huge boost to China’s foreign trade by the decentralization. However due to the unbalanced trade

structure of imports and exports, the growth of exports was slower than that of imports. Moreover, from the perspective of overall trade volume, China’s was

still much smaller compared to the top ten in the list of foreign trade, although

the margin was made much smaller thanks to the preliminary stage of its reform on foreign trade system. For instance, in 1978, the No. 1 in the list, the U.S., had a trade volume 16 times that of China’s, while in 1987 the former was only eight times the latter.6 These changes all demonstrate the growing importance of China in the international trade community, which should entirely be attributed to the reform of the foreign trade system.

In the experimental stage, problems were unavoidable in the reform. As

the core of the reform of this stage was to decentralize foreign trade rights, the

state loosened its macro control over foreign trade leading to a chaos at the micro level. Quite a number of industries and enterprises grabbed the supplies they needed for their own interests and sold them abroad at very low prices to

complete or outperform their quotas. Furthermore some have estimated that in

1986, 60% of exports and 40% of imports were still under mandatory plans, and 20% exports and 30% imports were under directive plans,7 indicating that a low proportion of imports was actually regulated by the market.

Although the reform did provide incentives for enterprises and local

governments to develop foreign trade, the pattern of the reform was limited to a circle of decentralization and centralization. It did not touch other problems

such as the failure to separate enterprises from government, the fact that

enterprises had not become independent economic entities, and an unfavorable

trade pattern in which China traded its primary products for the thing it lacked in developing its economy, foreign exchange, due to its low industrial level and hence its uncompetitive finished product manufacturing.

The reform at this stage had mainly the following problems: firstly, export

merchandise was still primary products as China’s comparative advantage of

its rich labor resources was left untapped, and enterprises’ lack of effective measures and self-discipline led to a chaotic foreign trade, which in turn dampened the enterprises’ capacities for earning foreign exchange and hence

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produced slim if any profits if there was any at all; secondly, a faster increase

in imports than in exports due to a one-sided structure of imports and exports aggravated the trade deficit to some extent.

The Period of Contractual Responsibility (1988–1990) In 1988, in view of factors such as the trend in developed nations to transfer

labor intensive industries, the need to transfer labor from China’s rural areas

and the insufficient funds for developing heavy industries, the state put forward a strategy to develop its coastal areas aimed at getting China more involved in the international exchange and division of labor, and building an exportoriented economy. The advent of the developmental strategy for coastal areas

marked a strategic shift from developing an inward-oriented capital intensive industry to an export-oriented labor intensive one.

Under the guidance of a set of reform ideas “to implement a system where

economic actors account for their own losses and profits, and to liberalize

operation and enhance management, and to unify actions by domestic economic actors, so as to further boost foreign trade”, 8 from 1988–1990 invigorating enterprises became the focus of the reform of the foreign trade system, which

was carried out through improving the operation mechanism of enterprises. With the basic principle being to separate the ownership and the operation

of enterprises, reform was implemented in the form of fitting enterprises into

different versions of the contract responsibility system which features letting enterprises be responsible for their own losses and profits.

The main policies in the period of the operational accountability system in China’s foreign trade The reform concerning the operational accountability system in foreign trade was comprised of the following:

(1) To fully implement an operational accountability system in foreign trade.

The changes in the system were that the state now contracted with nation-

level general foreign trade companies or industry and trade companies to earn foreign exchange, the later being obliged to submit a due proportion of the earnings to the central government and assuming sole responsibility for

operating profits or losses, and being given the same contractual base lasting

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for three years. Meanwhile light industry, the art ware industry and the clothing industry became the pilot industries where bolder reforms took place, namely,

the three industries were allowed to retain the majority share of their foreign exchange earnings for their own expenditure in maneuvering for accounting of their own profits and losses.

(2) Reform of the operational system of imports and exports. This reform

was constituted by the following: firstly, a very few goods that concerned the overall state of the economy and the livelihood of the people were controlled by mandatory plans and were under the unified management of general foreign

trade corporations and their branches nominated by the state; a minority of vital goods that had a limited international market, were controlled by the quota

system and involved fierce competition, were controlled by directive plans and managed by a few foreign trade companies authorized to conduct trade in them;

the unmentioned majority of goods were under market regulation and open to all kinds for foreign trade companies. In this way, the coverage of directive planning and market regulation expanded.

(3) Reform of the foreign trade administrative system. This reform was

comprised of the following: canceling the former foreign exchange controls,

allowing local governments, industries and enterprises to retain their share

of foreign exchange according to the regulations and dispose of it freely;

and opening the foreign exchange trading market, which exerted a positive influence on the development of foreign trade. The reform also included setting up an array of foreign trade trading centers, where foreign trade companies and

export companies were allowed to purchase and sell foreign exchange under a system of a managed float.

(4) Reform of the foreign trade public finance system. This reform included

that public finance only accounted for the profits and losses arising from

planned foreign trade, leaving the profits and losses from foreign trade transactions beyond the plan to be digested by local public finance, which

varied fundamentally from the old system where all losses and profits were taken care of by state public finance. The reform also involved building a sound economic regulating mechanism, and implementing export refunds in all areas.9

(5) Reform of the foreign trade regime. This reform mainly involved

implementing a unified and level-specific administrative system for foreign trade. The administrative and operational functions of foreign trade

management entities at various levels were separated. The foreign trade regime

shifted from relying on direct control to indirect control, and from micro

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regulation to macro regulation. It also combined legal, economic and, if the need arose, administrative approaches to regulate market relationships and enterprises’ conduct.

Analysis of the effect of implementing the contracting system in foreign trade The implementation of a reform pivoting on the contract system in foreign trade was an experimental exploration based on the economic and foreign trade status at the time. Through the reform, foreign trade enterprises were to

some degree encouraged to improve operations, which included limiting stock,

controlling the cost of exports, saving expenditure, rational adjustment of the export structure etc. This guaranteed that enterprises met the three contracted targets and hence significantly enhanced the profits of foreign trade.

From the perspective of trade volume, since the second stage of reform of

the foreign trade system started, the growth in trade volume had been rising rapidly. The 1988 total foreign trade volume reached USD 102.791 billion, marking a 24% rise from the 1987 figure of USD 82.653 billion. In the following two years, due to the political turbulence in 1989, the growth rate slowed down

to 8.6% and 3.4%. At the same time, the rise of finished industrial products’ share in exports brought down the deficit, and achieved a surplus of USD 8.746

billion10 in 1990. This should be ascribed to the contracting system in foreign trade which invigorated enterprises, leading to the rapid growth of exports.

Furthermore, as the system that allowed unified losses and profits was

gradually phased out, stress on state public finance was easing and foreign exchange earning was making progress, which paved the way for further reform of the foreign trade system and the overall economic system.

Despite all these positive points the reform at this stage was also

characterized by some transitional and experimental elements, which

manifested themselves in the following: firstly, the separation of accountability for profits and losses based on regions generated problems such as regional

confinement and separation of the market, which were inevitably transferred to foreign trade; secondly, the contracting system was not thorough enough as it

only stayed at the province, municipality and autonomous region level instead of going directly down to enterprises, which therefore did not actually account for their own profits and losses. It would be fair to say that no substantial reform had been carried out to fundamentally resolve the problem of political

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administration interfering in enterprises, and there was no fundamental change either in the affiliating role of enterprises; thirdly, the different levels of export

subsidies and retention of foreign exchange earnings on a regional basis led to unfair competition among enterprises.

Furthermore, in order to guarantee the scope and speed of national

economic development, sacrifice was sometimes inevitable. For instance, China had to exchange a higher domestic price for a lower international price in exports, which was a costly foreign exchange earning pattern; in imports, imported merchandise was sold at planned prices domestically, which was

in effect subsidy by the state. Such dual subsidies made it impossible for the

foreign trade mechanism to make the profits it have done, and were overall

discouraging to export, which put a very heavy burden on the state. Meanwhile there were still problems in the structure of foreign trade, which was not conducive to the improvement of the competitiveness of China’s exports.

The Transitional Stage of the Mechanism of Foreign Trade Enterprises (1991–1993) After more than a decade of reform, and especially after the implementation of the contract system, the administrative system of foreign trade was significantly altered. However foreign trade enterprises were still not accounting for their own profits and losses and the state was thus still under fiscal pressure from this

aspect. Moreover, with such a system, China remained liable to criticism from the

international trade community. Domestically, the varying contracting bases of different regions and industries, and the varying proportion of retained foreign

exchange earnings, resulted in unfair competition among enterprises. In view of these legacies of the reform in the previous three years, from 1991 the state implemented another round of reform and perfecting of the foreign trade system. The reform was aimed at achieving fair competition, autonomous operation, a

combined market for industry and trade, enterprises accounting for their own

losses and profits, and the implementation of an agency system, through creating a mechanism for enterprises to account for their own losses and profits.

The main policies in the transitional stage of the mechanism of foreign trade enterprises The reform in this stage was to let enterprises manage themselves and account

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for own losses and profits, and was centered on reforms on the micro level, namely, the management of enterprises.

(1) Reform of the foreign trade public finance system. The state canceled its

subsidies to exports and followed international standards in restraining the state’s role to only conducting overall administration over foreign trade,

and letting enterprises operate autonomously and account for their own losses and profits.

(2) Further reform of the allocation of foreign exchange. The state changed its previous system of different retention proportions by region to a retention proportion system based on industries.

(3) Reform of the export regime. The state narrowed the coverage of goods under state control, and canceled the original categorized operations of

exports, allowing all but a few important goods that remained under state

control to be operated by various foreign trade enterprises based on the fact that they accounted for their own losses and profits.

(4) Reform of the import regime. On January 1, 1992, China adopted the

Harmonized Commodity Description and Coding System and lowered the tariffs on 225 import items; on December 31, 1992, the state adjusted the tariff again by lowering it by a overall 7.4 % to an average tariff rate of 39.9%, which was further lowered in December 1993 by 8.8%;11 on April 1, 1992, all import regulating tariffs were canceled; in the same year, the license administration of 16 goods was canceled, making foreign trade administration more transparent. (5) Deepening the reform of foreign trade enterprises’ mechanism. Based on the Detailed Regulations on Implementing the Transfer of Foreign Trade Enterprises Operational Mechanism promulgated by the Ministry of Foreign Economic Relations and Trade (now the Ministry of Commerce), the state put forward ten targets of the reform and adopted related policies and measures to facilitate the shift of the operational mechanism of foreign trade enterprises.

Analysis of the effect of the change in the mechanism of foreign trade enterprises The new round of reform that focused on the cancellation of export subsidies

and the unification of the proportion of foreign exchange which could be

retained had a significant positive impact on the development of foreign trade, which could be seen in the following aspects:

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(1) The reform stimulated the motivation of local governments, industries and foreign trade enterprises to enhance export performance, abolishing the long-

lasting foreign trade system where the state accounted for the losses and profits of enterprises. The new system saved state public finance from the

burden incurred under the former system and linked enterprises more directly

with their interests. It therefore stimulated attempts by the local governments, industries and enterprises to increase their foreign trade earnings.

(2) The reform enhanced the awareness of profits of the foreign trade enterprises

and facilitated the transfer of their operational mechanism. Foreign trade enterprises became, for the first time, the real actors in foreign trade and

independent entities in competition. This allowed these enterprises to base

their efforts of self-development and self-discipline on autonomous operation and accounting for their own losses and profits, and improve their operation and management so as to become better competitors in the international

market. Based on this, enterprises would be able to participate in the

international division of labor more thoroughly and market order would develop healthily. At the same time, it gave more control to enterprises over foreign currency which was conducive to import growth at a proper rate,

and therefore paved the way for further developing trade relations with other nations. Moreover, to protect the state’s absorbance of foreign exchange

earnings from exchange evasion and cheating, administrative bodies and banks in charge of foreign exchange settlement closely followed the process of settlement and hence had a better grip on foreign exchange.

(3) The reform encouraged fair competition, cancelled export subsidies

and unified the foreign exchange retention proportion, so giving a fair

environment for the various foreign trade enterprises. This to some degree

contained the conduct of some enterprises which had levered up domestic prices while competing in the international market with much lower prices, and therefore contributed to improving the order of foreign trade.

(4) During this stage, mandatory plans for import and export were basically canceled. In the first quarter of 1992 only 15% of exports and 18.5% of

imports were under mandatory plans.12 While mandatory plans were being

phased out other regulating instruments, especially tariffs and licenses became increasingly important. This change was a big step in China’s move towards international standards and a market mechanism.

(5) The results of the abovementioned reforms and the lowered tariffs marked a

more liberalized foreign trade for China, which greatly boosted the growth

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of its foreign trade. From 1991–1993, export growth basically stayed above

16% and import growth above 20%, leading to an over 20% trade volume growth rate. By 1993 China’s overall trade volume ranked 15 in the world. Under the influence of the downward adjustment of tariffs in 1992, China’s import growth was significantly faster than export growth, resulting in a

decline of the trade surplus for three consecutive years. In 1993 there was a

large deficit of USD 12.215 billion.13 These were all believed to be necessary stages to go through. However, during the process, how to improve the competitiveness of Chinese products was a vital question.

In addition, problems in this stage were as follows. Firstly, due to the

requirement of meeting mandatory plans over the amount of foreign exchange earnings, enterprises often had to do this at the expense of profits, namely by

seizing a market share through very low pricing. This put enterprises in an awkward situation between making a profit and meeting the requirements

of plans. Secondly, in a practical sense, enterprises were still affiliated to

government, therefore allowing local governments to give immense export tasks

to enterprises which restricted their operations. Thirdly, the coexistence of an official exchange rate and a regulating exchange rate to some degree distorted the exchange rate of the RMB, greatly depriving the currency of its leverage function.

The occurrence of such problems was closely linked to the following. Too

much administrative interference by macro regulations made it difficult for foreign trade to operate according to objective economic laws; the transfer of the operational mechanism of foreign trade enterprises lagged behind the development of the overall situation, and was slow in reacting to market

changes; and the import regime lagged behind the export regime, dampening the coordinated development of foreign trade as a whole etc.

The Deepening Stage of Reform of the Foreign Trade System (1994–2001) The 14th NPC decided to set the target of economic structural reform so as to build a socialist market economic system. To be in line with this new target,

reform of the foreign trade system was therefore designed to build a new system in conformity with the socialist market economy and international trade standards. In 1994, China embarked on a new round of reform centered

on abolishing the dual-track exchange rate system. Its targets were to unify

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policies, encourage enterprises to account for their own losses and profits, and promote fair competition, the combination of industry and trade, and the

agency system, so as to build a foreign trade system in line with international trade standards.

The main policies in the stage of deepening stage of reform of the foreign trade system The reform in this stage was to apply different approaches to conduct a coordinated reform and build a foreign trade system in line with international standards. It mainly comprised the following.

(1) Reform of the foreign exchange regime, allowing the foreign exchange rate to

exert its regulating function on foreign trade. The State Council decided that on January 1, 1994 China should: abolish the dual-track exchange rate system and build a unified and administered floating exchange rate system based on

market demand and supply; build an inter-bank foreign exchange market, improve the formation mechanism of the exchange rate, and keep a sound and

stable RMB exchange rate; abolish the current retention system and replace it with a RMB settlement system; let banks start taking charge of the settlement of foreign exchange; and abolish the approval procedures for acquiring and

using foreign exchange for current account transactions. On December 1, 1996

China announced that it accepted its obligations under the eighth item of the IMF and allowed foreign exchange settlement under current account.

(2) Use of economic and legal approaches to improve the macro administration of foreign trade. The state no longer issued mandatory plans to provinces, cities, autonomous regions, municipalities under the direct administration

of the state, foreign trade enterprises and cities under the planning system, but instead issued directive plans as a form of administration. That is to say,

the state made directive plans for the total volume of foreign trade, foreign trade earnings and use of foreign exchange for import, and controlled a number of vital goods involving the national economy and the livelihood of

the people by issuing quotas for their respective overall volumes. The state also improved the tax refund system 14 by making sure that refunds were

complete in amount and punctual, that the procedures were simple, and that no cheating existed. The state also pledged to follow the principle that

it would regulate foreign trade through economic instruments such as the exchange rate, tariffs, taxes, the interest rate etc.

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(3) Speeding up the transfer of the operational mechanism of foreign trade

enterprises. From 1994–1995, on the principle of “clarify ownership, clarify rights and responsibilities, separate government and enterprises, operate

in scientific way”, China started its restructuring of state-owned companies and trial-implemented their transformation into stock companies. As the reform deepened, state-owned foreign trade companies were increasingly

threatened by foreign-Chinese equity joint ventures, foreign-Chinese contract joint ventures and foreign enterprises. From 1996–1997, foreign

trade enterprises continued to become incorporated and more were jointly held, marking the start of an all-round reform of the operating mechanism of foreign trade companies.

(4) Reform of the foreign trade regime. On April 1, 1997 the state lowered the tariffs on 4,900 items, with the overall tariff down to 23%. Again in 1997 it

slashed the tariffs on 4,874 items, lowering the average tariff to 17%.15 In 2001, before China joined the WTO, the unweighted average tariff rate was

as low as 15%, reaching the average level of developed nations. Meanwhile

it adjusted the tentative tariff rate, canceled preferential policies on tariff exemption for imports, canceled the quota licenses and controlling measures for over 170 items, and imposed regular management over imports. By 2000, exports under restriction of license fell from 60 to 30%. In terms of the

export regime, China tried to boost exports by taking into consideration both tax rebates and taxation based on domestic economic status. In 1994 China

established the Export-Import Bank of China, together with which an export credit system was built. In 1995 it trial-implemented the deposit settlement

system in foreign trade pilot banks, which was fully launched on July 1, 1996, giving a guarantee for the healthy development of processing exports.

(5) Renewed promotion of the agency system. Restricted by the foreign trade

system, the agency system was not well received. Based on in-depth research, the Ministry of Foreign Trade and Economic Cooperation (now

the Ministry of Commerce) promoted the agency system again. It proposed, firstly, that it was a vital part of transferring the operational mechanism to

use the agency system in the purchase system; secondly, that foreign trade administrative bodies and other related bodies jointly study and decide on the legislation for the agency system; and thirdly, to accelerate the process

to give manufacturing enterprises foreign trade rights and simultaneously

expand the domestic trade rights of foreign trade companies, so as to build the agency system upon two unified trade systems at home and abroad.

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(6) In July 2001 the Ministry of Foreign Trade and Economic Cooperation (now the Ministry of Commerce) promulgated the Circular on Regulations on

the Administration of the Qualifications for Foreign Trade , changing the granting of foreign trade rights from an approval system to a register-ratify system. This would diversify the participants in China’s foreign trade, and help it realize liberalized operation and fair trade, and ultimately build a foreign trade system in line with WTO standards and the socialist market economy that would bring China’s foreign trade to a new stage.

Analysis on the effects of the reform of the foreign trade system in the deepening stage The reforms since 1994 had gradually created a prosperous situation whereby

foreign trade companies existed in different industries and varied in their

positioning in the market. Foreign trade administration, pushed by market economic demand, changed to a macro regulating system primarily based on

economic leverages such as tariffs, exchange rate and credit supplemented by legal approaches, which gradually replaced the system regulated by plans and

administrative approaches under the planned economy. The level of tariffs fell dramatically; progress had been made in adopting international standardized

administration in foreign trade; and as the macro regulating system for foreign

trade was gradually formed, the administration was in this respect was on the legalization track.

In terms of the performance of imports and exports in this stage, in 1994

and 1995 there were big increases in trade volume, with the export growth nearing 30%. Afterwards, due to the relatively flagging domestic economy and the impact of the Southeast Asian economic crisis, the growth of foreign trade volume was limited to about 10%. In 2000, a larger increase was observed in

foreign trade. However, dampened by the global slowdown in growth, the growth of foreign trade slowed again to 7% in 2001.16

In terms of the balance of trade, after entering the stage of deepening reform

of foreign trade, a surplus started to prevail.

Moreover by 2001, China’s trade volume ranked the sixth in the world,

indicating the tremendous power released by the reform of foreign trade, and

this would continue to give an enormous boost to the further development of foreign trade.

Despite the great successes, there were still gaps in building a foreign

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trade system in line with both the socialist market economy and international standards in trade, which were as follows:

(1) Not meeting the requirements of the socialist market economy. The desired foreign trade system should be an open trade system. Despite progress

in the current foreign trade system, due to restrictions from other aspects

of economic structural reform (such as public finance and the financial system), it was still hard to build an open foreign trade system in line with the socialist market economy.

(2) The tariffs for imports were still too high, imposing a limit on import volume. China’s import tariff rate remained higher than the average level

of 13% in developed nations, and there were too many items on which such high tariffs were imposed. The coverage of quota licenses for imports was

still too broad, and there still existed state-run trade by companies under mandatory plans.

(3) Foreign trade rights were still restrictively approved, foreign traders were

still unable to sign foreign trade contracts directly with Chinese clients but had to rely on agents such as foreign trade companies, and the scope of

foreign trade in which foreign-funded enterprises were allowed to conduct business was still limited. However, changes were expected after the register-ratify system replaced the approval system.

(4) Transparency of import administration and the uniformity of import policies still needed enhancement.

Therefore on December 11, 2001, when China entered WTO as its 143rd

member, China was still in need of faster development of its foreign trade while continuing to perfect its foreign trade system.

New Progress in Reform of the Foreign Trade System in the Era of WTO Although China has formulated a foreign trade system preliminarily adapted

to its socialist market economy, problems which need to be tackled immediately are still noticeably numerous, for example its trade participants, operational

mechanism, legal and regulation system, as well as macro regulation. In

building a foreign trade system in line with WTO rules and the socialist market economy, China needs to deepen its reform of the operational mechanism of

its enterprises as well as the foreign trade industry as a whole. It also needs to

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perfect its legal and regulation system and build a flexible and effective macro

regulating system for foreign trade. If the previous reforms were implemented

according to China’s own will, the reform after 2001 should be based more on its WTO commitments so as to better integrate itself with WTO rules and international standards.

China fulfilled its WTO accession commitments and made new progress in reform of the foreign trade system After entering the WTO, China fulfilled its promises and made new progress in the reform of the foreign trade system, which included:

(1) Huge progress has been made in meeting WTO standards on the governmental level. Before and after China’s entry to the WTO, it

implemented a large-scale modification of its legal system which comprised modifying a great number of laws including its foreign investment law and foreign trade law, and promulgating, modifying, or abolishing more than

2,000 items in law and administrative regulations. It also abandoned more

than 190,000 items in regional laws, local governmental regulations and policies. The Administrative License Law of The People’s Republic of China

promulgated in 2003 posts stricter and more specific requirements on the

transparency of government behavior. The launching of official websites of the central and local governments marked a closer link between the

state and its people, and its progress towards a more transparent, effective,

practical and honest government, which leads to more scientific and democratic decision making.

(2) China’s sense of the rule of law was strengthened. China accepted basic international rules, and made sure that its economic laws and regulations are in line with those of the WTO and international norms; it also enhanced the transparency of its laws and regulations and took measures to guarantee the uniformity of trade policies nationwide.

(3) China made all-round adjustments to the trade system and policies, greatly improved the degree of openness of its market for trade in goods, and

made four slashes in its tariffs. The overall tariff level has gone down from

15.3% before China’s entry to the WTO to 12.7% in 2002, 11% in 2003, 10.4% in 2004 and 9.9% in 2005 (reaching a level lower than 10% in advance of

that required). The tariff rate of agricultural products fell from 23.2% before

WTO to 15.3% in 200517. In addition, China made several other adjustments

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to the tax rebate policy.18 Trade in services was gradually opened to other

WTO members as promised. Taking the banking industry as an example, by

the end of October 2005, 173 banks from more than 40 nations had opened 238 representative offices in China, 24 more than before China joined the

WTO, and 71 banks from 20 nations had set up 238 operational entities, 43 more than before WTO. In addition, the protection of intellectual property rights has been greatly increased.

(4) There has been a boom in the economic actors of various ownerships. Three years after China entered the WTO, all enterprises of different ownerships should be allowed to participate in foreign trade and all policies would

be equally imposed on companies of all sorts. This will greatly motivate non state-owned companies to take part in foreign trade activities, which

will in turn stimulate state-owned foreign trade companies to accelerate the transformation of their operation mechanism and become more

competitive; moreover, most of China’s services sector will be opened to the world and allow the participation of foreign funded enterprises.

(5) New progress in the foreign exchange regime. In July 2005, China started

to adopt a managed floating exchange rate based on market demand and

regulated with reference to a basket of currencies. That is to say, instead of pegging the RMB artificially only to the USD, the RMB exchange regime is now more flexible.

Analysis of the effects of reform of the foreign trade system after China entered the WTO After entering the WTO China kept its commitments to the WTO and accelerated reform of the foreign trade system and trade liberalization, which

has led to a high growth rate in both imports and exports. In 2002, China’s imports reached USD 295.2 billion, 21.2% up from 2001; its exports reached USD

325.6 billion, up 22%. By 2006 its imports had reached USD 791.5 billion and exports USD 968.9 billion, posting a surge in the surplus. Meanwhile China has

risen to become the third biggest trader in the world. After China entered the WTO the average contribution rate of China’s economic growth to the world’s growth reached 13%, which should be largely ascribed to our deepening and improving reform of the foreign trade system.

However, we still need to be sober-minded about the problems we face.

Firstly, protection of intellectual property rights should be improved. The

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current weak protection has seriously impeded both the quality and quantity of foreign investment in China and its foreign trade.

Secondly, there are many Chinese foreign trade laws and regulations that are

not in line with the socialist market economy and international basic standards. First, some of China’s foreign trade laws and regulations are not in conformity with basic WTO rules, and sometimes are even contradictory to them. As a

WTO member, China should remove or modify such laws. Second, some of the laws and regulations stressed by the WTO are still absent in China, such as anti-dumping and anti-subsidies laws. Third, inside China there are still huge differences in the legal systems of different regions. The foreign trade legislation

in the special economic zones, coastal areas and cities and inner China vary

greatly in terms of market access, investment, tax etc. Such ill-coordinated legislation creates unfair competition and undermines the central government’s ability to impose foreign trade policies that abide by the WTO agreements and

its requirements on the legislation of members. Fourth, laws and regulations are still not transparent enough, while transparency is one of the basic principles of the WTO. For a long time the state has realized its administrative function in foreign trade by issuing internal documents, making it hard for the other parties

involved to act properly in response. Such arbitrary administration has given

China a bad reputation as an investment environment and is contradictory to the transparency required by the WTO.

Thirdly, the governmental administrative system should also be reformed,

as laws, regulations and government decisions are supposed to be more

transparent. With the advent of the “post-transitional stage”, some of the foreign trade administrative approaches used by the government during the

transitional stage are to be abolished or restricted, which might pose new challenges to the original administrative system. In the “post-transitional

stage”, China is confronted with tasks such as perfecting the socialist market economy, comprehensively raising the level of openness, resolving conflicts and problems underneath the surface of socio-economic life etc. To accomplish these tasks we need to push forward reform of the administrative system.

Finally, with the tariff level having been dramatically dropped, non-tariff

measures restricted, and regulatory approval further relaxed after China entered

the WTO, the protection for national industry by the state is confined within the WTO multilateral trade framework leaving Chinese enterprises exposed

to unprecedentedly fierce competition in both the domestic and international market. Chinese enterprises now not only have to live with the pressure from

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foreign competitors, they will also be confronted with tremendous competition and formidable challenges.

An Overall Comment on the Reform of the Foreign Trade System in the 30 Years of Reform and Opening-up As economic reforms have to keep pace with the changes in economic strategies, so reform of the foreign trade system should also be in line with the changes in foreign trade strategies as an organic component of the overall economic

structural reform. After 30 years of reform, China’s foreign trade and national

economy have seen unprecedented development and the comprehensive strength of the nation is on a constant rise. This has proven that the reform and establishment of the foreign trade system have been successful. The traditional

foreign trade system under the state’s control was replaced by a new system that has been preliminarily formed to be in line with the opening-up and

socialist market economy. In retrospect, what we have achieved in the past thirty years is as follows.

The reform has been carried out based on a shift of the main participant

in foreign trade, namely from the state to local governments and then to enterprises. Before 1978, the state was the main participant in foreign trade.

Then in the 1980s the local governments, and finally in the 1990s enterprises,

became the main actors whose dominant position in participating in the

international division of labor and international competition was gradually recognized. Since the start of reform and opening-up, the socialist market economy has been preliminarily established. And as the reform of the foreign trade system was carried out, with a number of domestically well-established and internationally competitive Chinese enterprises gradually coming into being, the high international competitiveness of Chinese enterprises has also

manifested itself which will serve as a boost for the rapid development of China’s foreign trade.

As an important component of the foreign trade system, the operational

mechanism of foreign trade has always been a difficult subject in reform. After

many years of constantly deepening reform of the foreign trade system, the original landscape where state-owned foreign trade enterprises monopolized

foreign trade operations has been consigned to history. At present, a foreign trade landscape basically in line with the requirements for developing the

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socialist market economy is dotted with state-owned foreign trade companies, collectively owned manufacturers, foreign-China equity joint ventures, foreign-

China contractual joint ventures, foreign enterprises and private enterprises, which are of various ownerships and are capable of conducting foreign trade

through many channels and on many levels. The reform of the foreign trade operational mechanism has expanded the scale of China’s foreign trade operations and boosted the development of foreign trade.

Before reform and opening-up, the state’s regulation of foreign trade was

mostly direct. The government directly managed and administered enterprises. After the advent of reform and opening-up, the role of government has been

changed from one serving the planned economy to one serving the market economy, and the market has started to play some fundamental roles in

allocating resources. What to produce and how much to produce is decided by producers according to market demand, which marks their autonomy in

their operations in the market. Government has stepped back from the position

of direct administrator of a large number of enterprises and become a macro administrator of the economy and society.

After reform and opening-up, as the reform of the foreign trade system

became more thorough, the scale and structure of China’s foreign trade also went through dramatic changes. With the foreign trade dependence ratio surging up, foreign trade became an important engine for economic growth. Meanwhile the growth in foreign trade allowed the application of advanced

technology in the production of many goods and therefore improved product quality and the international competitiveness of these goods. The development of foreign trade is also conducive to easing unemployment. In many areas,

especially in the Pearl River Delta and the Yangtze River Delta, the boom of processing trade not only improves employment locally but also attracts labor

from adjacent provinces. While easing unemployment, it also brings a rise of

wage standards in these areas. Moreover due to the inflow of a large amount of foreign investment, China has the opportunity to utilize a wide range of foreign

advanced technology and to import a large amount of equipment and other sorts of input, thanks to which China has now developed an array of advanced

industries such as consumer products, cars, telecommunications equipment, office automation equipment etc.

From the perspective of changes in foreign trade policies, under a planned

economy the targets and instruments of China’s foreign trade policy was in line with the nation’s economic development, namely they followed the plans

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of the state. After reform and opening-up, China gradually strengthened the regulatory effect of foreign trade policy on the import and export of goods, with its targets drawn up according to the basic objectives of a developing nation. The policies and measures of China were relatively complete, as they kept some legacies from the planned economy while trying to go in line with international standards and regularize them. And in terms of the content of policies and measures, as the features of the planned economy gradually faded away and the intrinsic non-tariff trade barriers were replaced by policy instruments under the market economy, the tariff’s significance in adjusting foreign trade volume and structure is rising. As China’s economy makes its way into the international community, its foreign trade policies and measures still need further adjustment. Moreover we need to combine the effects of a sound tariff structure and nontariff trade barrier. Since the start of reform and opening-up, China has built from basically nothing a set of foreign trade laws and regulations, including the Foreign Trade Law , the Contract Law , foreign trade administrative regulations, local laws and regulations, and industrial laws and regulations that relate to different aspects of foreign trade. Together with other international treaties and agreements that China has pledged to abide by, they form a preliminary foreign trade legal system characterized by a Chinese flavor. Meanwhile we need to be aware of our shortcomings so that we can seize the opportunity offered by the WTO to continue to improve the competitiveness of our enterprises in the international market, build a sound and complete legal and regulatory system, and quicken our pace of making and perfecting important laws and regulations required by the WTO as well as enhancing the transparency and openness of our foreign trade system and the policies concerned. We need to change the role of government, accelerate the building of a sound market structure, improve the market mechanism etc. While continuing to implement foreign trade system reform we should be aware of the principle that the foreign trade system of a nation should be in conformity with its degree of development and its basic status. As a developing nation, China is still in the primary stage of socialism. In addition, as it is constructing a socialist market economy, it would not be feasible to try to impose a foreign trade system as adopted by Western developed nations. Therefore, amid China’s attempts to make align its foreign trade system with international standards, we should also take into consideration the status quo and do this in a Chinese way.

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5

Chapter

A Retrospective on and Prospects for the Reform of the Foreign Exchange Control System in China

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The Basic Concepts in the Foreign Exchange Control System in China According to the Regulations on the Foreign Exchange System of the People's

Republic of China which was promulgated in 2003, foreign exchange (forex) refers to the payment instruments and assets that take the form of foreign currencies and that can be used in international settlements. Foreign exchange includes foreign currencies (both banknotes and coins), payment vouchers in foreign currencies (bills, bank deposit certificates and postal savings certificates), foreign currency negotiable securities (government bonds, corporate bonds and stocks), Special Drawing Rights (SDRs), European currency units and other foreign exchange assets. Foreign exchange controls are control policies and measures imposed by the departments of currency management and other government institutions, which are authorized by the state through laws and codes, on the revenue and expenditure, purchase and sale, exchange, debit and credit, and transfer of foreign exchange as well as international payments and settlements, exchange rate and the foreign exchange market. Generally there are three kinds of controls implemented by the Chinese government on revenue and expenditure, purchase and sale, exchange and international settlements: control of the foreign exchange settlements, control of foreign exchange sale and control of foreign exchange payment. Foreign exchange settlement refers to a transaction in which a person sells his foreign exchange earnings to a bank authorized to deal in foreign exchange and the bank pays the seller with the equivalent amount of domestic currency at a certain exchange rate. Foreign exchange settlement can be carried out in various forms, including compulsory foreign exchange settlement, voluntary foreign exchange settlement, foreign exchange settlement with a limitation on the amount, and forward foreign exchange settlement. In compulsory foreign exchange settlement a person must sell all his foreign exchange earnings to an authorized bank without reserving any himself. In voluntary foreign exchange settlement a person can decide on his own whether to sell his foreign exchange to an authorized bank or to open a forex account to reserve the earnings. In foreign exchange settlement with a limitation on the amount, a person can reserve a certain amount of foreign exchange that is approved by the government and any foreign exchange in excess of the approved amount must be sold to an authorized bank. In forward foreign

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exchange settlement, an agreement is made between the client and the bank on the forward forex settlement, in which agreement on the currency, amount, date and exchange rate of the future forex settlement are settled on by both parties

and the forex settlement transaction must be strictly conducted in accordance with the agreement. Foreign exchange sale refers to the transaction in which a bank authorized to deal in foreign exchange sells the foreign exchange to the

unit or individual which requires foreign exchange and receives the equivalent amount in domestic currency at a certain exchange rate. Foreign exchange

payment refers to the transaction in which financial institutions that engage in all kinds of foreign exchange operations pay for the financial actions abroad of units and individuals who require forex with the forex reserved in the accounts

of or purchased by the units and individuals, which payment is conducted according to the contracts or agreements that they have made with those units and individuals on the means, date and amount of the settlement.

From the perspective of balance of payments (BOP), the concrete practice

of forex controls in China can be divided into three parts: control of current

accounts, control of capital accounts, and control of forex reserves. Current accounts refer to the items of transactions taking place frequently in international payments, including visible trade balance, services trade balance and unitary transfers. Capital accounts refer to the increasing and decreasing items in the assets and liabilities resulting from the export and import of capital in

international payments, including direct investment, all sorts of loans, and investment in securities. Forex reserves refer to the convertible foreign currencies possessed by the monetary authority of a country that are available for foreign

payments. Only the currencies which play an important role in the international monetary system and are convertible into currencies in other reserve assets can

serve as international reserve assets. The forex reserves that are frequently used

by China and other countries in foreign trade and international settlements include the USD, the Euro, the Japanese yen, and the UK pound.

Moreover the controls of the forex market, the exchange rate system and

the forex transaction business are also significant parts of forex control. For the purpose of encouraging exports while restricting imports and balancing the

international payments equilibrium, the dual exchange rate system employs

different exchange rates to influence and control the trade and non-trade moves as well as the movements of capital, which fosters the development of

the national economy and foreign relations. Also, the goal of controlling forex can be achieved by administering both the operations of the forex market and

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the operational mechanisms of the exchange business, such as restricting the entities engaged in the exchange business.

Forex control and capital control sometimes overlap each other, but the two

are not identical. The cross-border capital movement consists of two parts: trade and exchange. Forex control includes both control of the exchange for current accounts and control of the conversion between the domestic currency and

foreign currencies under capital accounts as well as control of the cross-border

financial resources transfer. Capital control includes not only control of the participants and their actions in exchange transactions, but also control of the

conversion of domestic currency and foreign currencies as well as cross-border

capital transfer under capital accounts. In the forex control system in China, there is a strong relationship between forex control and capital control. The long-term

objective of the forex control system in China is to realize the convertibility of money in capital accounts and further realize the complete convertibility of the

RMB. Quite a few measures taken in the reform of the forex control system in

China, such as the forex retaining system that allows corporations to retain some

of the foreign exchange they earn from overseas trade, the implementation of forex settlements and sales at banks, the policy that permits units to swap their forex reserves, and the adjustment of the RMB exchange rate system, are closely related to the system for control of foreign trade. Meanwhile the reforms of both the forex control system and the foreign trade control system in China serve the needs of the overall reform of the economic structure.

This Chapter centers on the scope of foreign exchange controls. The second

section of the Chapter will introduce the three stages of the reform of the forex

control system in China. The third section will generalize the current framework

of the forex control system in China. The fourth section will recapitulate the

characteristics of the Chinese forex control system in the last thirty years by analyzing the influence of reform measures at different stages on the national

economy, and especially on China’s foreign trade. The last section will discuss the major problems existing in the forex control system in China and also propose a direction for our future reform of the system.

The Reform Course of the Foreign Exchange Control System in China Over the last 30 years the reform of the foreign exchange control system in

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China has undergone two consecutive transformations: the first transformation was from a planned management mechanism that was highly centralized and

that emphasized a unified state control over income and expenditure to a management mechanism established on the basis of the forex retaining system as well as the turning-in system and the integration of planned management and market control; the second transformation, which is based on the first

one, was from the integrated mechanism to a management mechanism that is grounded on the implementation of forex settlements and sales at banks and that lays its emphasis on regulation through the market.

The first stage: 1949–1978 During the period between 1949, when the new PRC was founded, and 1978

when the policy of opening-up and reform was proposed, due to the scarcity of

forex resources and the low level of economic development a high centralized forex distribution control system was implemented in China. This system was

designed to accommodate the country to both the highly centralized economy with mandatory plans and to the import-substitution trade strategy. Within the system, all the limited forex resources were gathered under unified management and were

distributed by mandatory administration to the areas of the country most in need of economic construction. At that time, foreign exchange settlement was compulsory, which meant that all domestic institutions and residents were obliged to sell their

entire forex earnings to the Bank of China — the specialized bank dealing with

forex business, and none of them were allowed to reserve any forex. The singlelevel distribution system, in which the country’s revenue and expenditure were all controlled by the central government and the expenditure was determined by the

revenue, did not only assure the stabilization of the exchange rate but also satisfied the needs of economic construction in the early years of the country. However,

with the development of the economic situation, the flaws and disadvantages of this highly centralized control system gradually showed in that the excessive

centralization and corporations’ lack of flexibility when meeting an emergency worked against the launch of economic and trade activities.

The second stage: 1978–1993 After the CCP’s Third Plenary Session of the Eleventh Central Committee,

in order to integrate with the reform of the economy as a whole, the policy of opening up to the outside world and also with the decentralization of

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rights of trade management in the reform of the foreign trade system, and for

the purpose of carrying out the contract management responsibility system

and implementing a mode of business operation that encouraged units and individuals to conduct autonomous management and assume sole responsibility

for their profits and losses, the reform of the forex control system in China took

“reducing administrative intervention and increasing regulation through the

market” as its main thrust. The reform found its way into four aspects: the first one was to continuously relax or even revoke the limits upon the exchange

and remittance of current accounts; the second one was to foster and develop

the forex market step by step; the third one was to gradually generate the marketization of the RMB exchange rate; and the fourth one was to continually

improve and relax the forex control of capital accounts (Guan, 2003). The reform in China was generally embodied in the following aspects:

(1) The practice of the forex retaining system. In 1978, in accordance with

the Chinese government’s policy of economic reform and opening, a reform was carried out of the forex control system in China, the goal of which was mainly to reduce both administrative intervention and mandatory plans while

increasing regulation through the market and strengthening the flexibility of corporations in using forex. The major measures taken in the reform were to

practice the forex retaining system in which export enterprises sold their export

exchange earnings to the authorities, which then distributed the forex retaining quotas to export enterprises and regions according to a certain rate. When it had

a demand for forex, a unit used RMB to purchase spot exchange at the exchange rate quoted by the State Administration of Foreign Exchange (SAFE) and then paid for its financial behavior through the purchased spot exchange.

One thing to mention is that the forex retaining system could only be

applicable to enterprises financed entirely by Chinese capital, and was not

practicable for foreign-owned enterprises. In fact between 1978 and 1993 the Chinese government carried out different forex settlement control systems for differently controlled objects and different kinds of forex funds: a

voluntary forex settlement system was applied to foreign-owned enterprises; a

compulsory forex settlement system was applied to Chinese enterprises on their

forex earnings from both trade and non-trade activities, which application was complemented by the forex retaining system; no forex settlement was permitted on overseas loans of Chinese enterprises. Also, the voluntary forex settlement

system was applied to the foreign exchange owned by both Chinese residents and foreign representative offices and foreigners in China.

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(2) The construction and development of the forex swap market. Although

the implementation of the forex retaining system greatly aroused corporations

and regions initiative to increase imports and exports, it also revealed some problems such as the disconnection between the forex quotas and the demands of entities. Some units had adequate reserved forex but they did not need this,

or their reserves could fully satisfy their needs, while other units’ requirements for forex could not be met because of insufficient reserved forex and a lack of

help from the state plans. In order to resolve this discrepancy and to channel the surplus forex of some enterprises to other needy ones, since 1980 enterprises

have been allowed to swap their forex reserves. By the end of 1993, about 80% of forex resources in China were under the allocation of the forex swap market (Liu, Sun, Guan, 1997).

(3) The reform of the RMB exchange rate system. In August 1979, the State

Department decided to reform the exchange rate system in China, whereby the quoted exchange rates were preserved but the internal settlement rate was

changed. In 1981, internal settlement exchange rates of trade forex earnings were set in China to settle the export-import trade forex. In 1978, USD 1 could

be converted into RMB 2.8, which conversion was accounted for by adding 10% of the profits to the average cost of the country’s export commodities in earning forex. From 1981–1984, there was no fluctuation in the internal settlement

exchange rates of trade forex earnings. Meanwhile, the Chinese government continued to announce quoted exchange rates, which rates were mainly applied to the conversions and settlements of non-trade forex earnings. The rates were determined according to the conventional computational method that calculated

the weighted average value of a basket of currencies. During this period, USD 1 could be converted into RMB 1.5.

On January 1, 1985, the internal settlement prices of trade forex earnings were

cancelled by Chinese government and export-import trade forex earnings were

settled by the official rate in which USD 1 equaled RMB 2.8. From 1985–1990, based on the fluctuations in commodity prices, the Chinese government adjusted the exchange rate on a large scale many times, and the USD/RMB exchange

rate rose from 1:2.8 on January 1, 1985 to 1:5.22 on November 17, 1990. 1 From November 17, 1990 to the end of 1993, the official rate was adjusted to 1:5.72. Due to the existence of the forex retaining system and the forex adjustment market,

from 1985–1993 a dual exchange rate was implemented in China in which the official rate coexisted with the adjustment rate (Wu, 2002). At the end of 1993, the USD/RMB exchange rate in the forex swap market was 1:8.72.

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(4) The approval of multiple kinds of financial institutions’ operations of

forex. Before 1978, exchange business in China was operated uniformly by the

Bank of China. In order to meet the requirements of reform and opening up the Chinese government brought a competitive mechanism into the forex business, allowing the overlap of business operations by different national specialized

banks in China, ratifying the establishment of many commercial banks as well as forex operations by a set of nonbanking financial institutions, and allowing

foreign-owned financial institutions to set up facilities to operate forex business. Other measures taken in forex control reform included the establishment of a

forex control system that supervised capital accounts, the relaxation of controls on residents’ forex and the issue of foreign exchange certificates (FEC).

The third stage: 1994–2001 In the November of 1993, the Decision of the CPC Central Committee on Several

Issues Concerning the Establishment of a Socialist Market Economic Structure pointed out that, “(the Chinese government should) reform the forex control system and establish a forex market that is based on the supply and demand in the market and that enjoys a managed floating exchange rate system as well as unified standards, in order to turn the RMB into a convertible currency step by step”. In the latter half of 1993, the Chinese government designed a new round of forex control system reforms that suited the establishment of the socialist market economy system by using the experience of other countries for reference. The government set both long-term and periodical objectives for the reform of the forex control system: the former one was to realize the complete convertibility of the RMB and the latter one was to realize the convertibility of current accounts of RMB. (1) The government cancelled the forex retaining and turning-in system and the mandatory plans for forex revenue and expenditure while putting into practice a system of forex settlements and sales at banks and realized the convertibility of current accounts of RMB. For more than 40 years before 1994, the corporations in China had to turn in a proportion of their export forex earnings and at the same time were allowed to reserve some of the earnings on a certain scale. The forex retaining system had been implemented in China for 15 years from 1979–1994, which involved the right to use forex by quotas that converted the RMB to spot exchange when used. Every time the corporations had a demand for retained forex, their demand had to be examined and

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approved by many administrative departments, and when they needed to

import raw materials they had to go through a large number of formalities

in the many departments in charge and the banks. The system of forex settlement at banks meant that the corporations could sell their forex earnings

to authorized banks at current rates and be paid with the equivalent amount in RMB. The Chinese government cancelled the mandatory plans for forex revenue and expenditure and implemented macro-control of the balance of payments

by taking economic and legal actions. Prior to the cancellation, the government

had used and allocated forex resources mainly by administrative means that distributed the forex in accordance to the mandatory plans, and the prices of forex were calculated using the official exchange rates.

It should be noted that from 1994 to the July of 1996 there were differences

between the bank forex settlements and sales systems applied to Chinese enterprises and foreign ones: the Chinese enterprises’ forex earnings under

current accounts were compelled to be settled and sold to the banks except those which were approved to be reserved in forex accounts, while the foreign

enterprises could decide for themselves whether their forex earnings should be settled. However the forex settlements of foreign enterprises were not allowed

to be dealt with at authorized banks as all the forex sales and purchases of

foreign enterprises had to be transacted at the foreign exchange swap centers. Therefore only some RMB current accounts were convertible.

After July 1, 1996, based on the forex control system reform implemented in

1994, the Chinese government launched two new systems in succession to allow enterprises invested in by foreigners to settle their forex at banks but set a limit on the amount of forex settled or sold. The foreign enterprises could settle and sell their forex so long as they submitted the settlements or sales to the relevant

authority and then marked off their forex accounts, and at the same time they

could also continue to purchase and sell forex via the forex swap centers. The limit was set by the State Administration of Foreign Exchange (SAFE) according to the foreign enterprises’ actual investment and their demands for forex in

fund turnover under current accounts: the earnings under current accounts

within the limit could either be reserved or sold to the authorized banks; the

earnings beyond the limit must be sold to the banks or through the swap centers. Meanwhile, by both increasing the amounts and broadening the range

of residents’ individual forex conversion, and by lifting the restrictions upon frequent international payments or transfers, the forex system in China had

met the requirements of the eighth clause in the Agreement of the International

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Monetary Fund. After December 1, 1996 the Chinese government removed all

the restrictions on frequent international payments and transfers (including those of all invisible trades) and realized the full convertibility of RMB current accounts.

In terms of forex sales, before 1994 the forex sales at authorized banks were

actually a conversion from forex quotas to spot exchanges. If a unit wanted to purchase forex, it must gain a forex quota from the government first and then use the equivalent amount of RMB to purchase the approved amount of forex according to the official market quotations. After 1994, units could purchase forex

at the banks for their incidental charges for articles and trades that conformed to the national import regulations and non-trade foreign payments using

contracts, agreements, invoices and foreign institutions’ notices of payments.

The forex used to pay for imported articles that were administered by quota and for the specific products under import control and items that were auto-

registered should be purchased at authorized banks with licenses, certificates of import licenses or import registration forms, relevant import contracts and valid commercial bills that were associated with the forms of payments.

In terms of forex payments, before 1994 all forex payments were transacted

with ratification files issued by the SAFE. From 1994 to July 1996, both

enterprises’ trade and non-trade forex payments could be fulfilled from their forex accounts or be honored at authorized banks with the required valid vouchers and business papers. After October 1996, forex payments under

current accounts could be fulfilled from forex accounts or be honored at authorized banks with the required valid vouchers and business papers.

While the system of bank forex settlements and sales were carried out, the

systems of cancellation of export-import forex payments and forex receipts after verification was implemented. On January 1, 1991 a system of cancellation of

forex receipts after verification started to be practiced in China. Cancellation of export forex receipts after verification meant that after the articles were

exported, the SAFE would cancel the forex receipts after verifying them.

Cancellation of import forex payments after verification refers cancellation after

payment for imported articles. The Administration would cancel the received

articles after verifying them. On January 1, 1999, the export-import entry bill inspection network that linked all the Customs, authorized banks and the

Administration was launched. The network system facilitated the examination and verification of the authenticity of the enterprises’ forex settlements and

payments for their export and import items. After May 1, 1999 the assessment

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of export forex receipts was implemented which took export forex receipt rates

as indicators for performance appraisal to rank and assess the situation of enterprises’ forex receipts.

(2) The official rate of exchange for the RMB was made uniform with the

market rate. Before the uniform rate was implemented on January 1, 1994 there was a huge disparity between the official rate and the forex swap market rate.

For example, on December 31, 1993, the official USD/RMB rate was 1:5.8 while

the market rate was 1:8.7, but after the official rate was made uniform, the rates were both 1:8.7.

(3) A nationwide unified inter-bank forex market was set up to generate the

RMB exchange rate and a simplex and managed floating exchange rate system on the basis of market supply and demands was implemented. After 1997, a simplex and managed floating system that was pegged to the USD had been

practiced for the RMB exchange rate. In particular, in terms of the entities on the forex markets, Chinese banks and their authorized branch banks, foreign financial institutions and a few authorized non-bank financial institutions could

participate in trades in the forex markets. As to the method of trading, a system

of respective quotation and matching trade was adopted, in which system a computer system matched up bids and offers in accordance with the principle of price and time preference.

To set the exchange rate, the central bank published the reference rates of

the RMB against the USD, the Hong Kong dollar and the Japanese yen based on the weighted average prices of forex transactions on the inter-bank forex

market during the previous day’s trading. The purchasing and selling rates of the RMB against the USD on the inter-bank forex market could fluctuate within

0.3% of the reference rate; and for the Hong Kong dollar and Japanese yen the permitted range was 1%. The bank listing exchange rate of the RMB against the USD was required to be within 0.15% of the reference rate, whereas for the Hong Kong dollar and Japanese yen the permitted range was 1%. For foreign

currencies other than the three currencies mentioned above, the exchange rates

could fluctuate within 0.5% of the medial rate which was calculated with the

reference rate of the USD and the international market exchange quotations. In trades in which the transaction amount exceeded USD 1 million, the banks

and clients could conclude their transactions at negotiated prices within the approved ranges (Guan, 2003).

In order to act in concert with the development of the forex markets, forward

forex settlements and sales had been permitted in China since April 1997. The

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approved foreign currencies for forward forex settlements and sales included the USD, the Hong Kong dollar, the Euro, Japanese yen, Great Britain pound

(GBP), Swiss Franc (SF), Australian dollar (AUD) and Canadian dollar; and

there were 14 kinds of time limits: seven days, twenty days, one month, two

months, three to twelve months and so on; the transactions could be either fixed date transactions or option date transactions.

After October 15, 1997 Chinese enterprises that were of good financial

standing and whose total annual volume of foreign trade and registered capital

had reached a certain size were allowed to open forex accounts and settle their forex at banks, but there was a limit on the amount of their forex settled or sold. The ceiling on a Chinese enterprise’s forex settlement account was 15% of its

total volume of foreign trade in the previous year. The export forex receipts

within that limit could either be reserved or sold to the authorized banks and those beyond the limit should be sold to the banks.

While the Chinese government realized the convertibility of current

accounts, it exercised strict control over trades and exchanges under capital accounts. The relevant laws and regulations included the Regulations for

Exchange Control of the People's Republic of China (1980, 1996), the Regulations for Control of Foreign Exchange Settlements, Sales and Payments (1994, 1996) and the Announcement of the People’s Bank of China on Further Reform of Foreign Exchange Control that was promulgated on December 28, 1993. At the end of 1994 the Chinese government started to restrict the settlements of forex loans. After 1996, all settlements under capital accounts had to be examined and approved by the exchange control departments. China also practiced control of external debts that took advantage of the foreign capital plans and short-term external debt balances.

The fourth stage: 2002 to present At the end of 2001 China officially became a member of the WTO, which marked

that the reform and opening up of China had reached a new stage and which also generated new challenges to the forex control system in China. On the one hand, in tune with the improvement of the socialist market economy system reform

and in order to fulfill the undertaking made to the WTO, China has continually

extended its opening up to the outside world, increased the entities, sizes and

forms of foreign economic contacts, and also strengthened the economic links at home and abroad, which consequently increased both the difficulty and the cost

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of forex control, which in turn challenged the Chinese forex control model that was based on control of amount and administrative examination. On the other

hand, China’s entering the WTO changed the scarcity of forex resources in China

completely and thus there was a need to adjust the old control idea that focused on encouragement of inflow and restriction of outflow.

During this period, the reform of the forex control system in China was

adjusted in the following ways: firstly, the long existing concept of “the more forex inflow, the better” was changed and monitoring and control of

the forex inflow was strengthened; secondly, the concept of “the less forex

outflow, the better” was changed and a normal, reasonable and controllable outflow mechanism was gradually established; thirdly, the concepts of market

mechanism were built up and methods adopted ways that accorded with the running rules of a market-directed economy to realize the goal of forex control.

Generally speaking, in response to the unified arrangements made by the Party Central Committee and the State Council, the forex control departments in China made efforts to meet the overall requirements of the socioeconomic

development by dealing with the challenges posed by the WTO and economic globalization, deepening the reform of the forex system, reducing examination, simplifying procedures, standardizing management, relaxing restrictions and

actively promoting trade facilitation. The measures taken by the forex control departments in China were mainly as follows:

Further improvement of the forex control under current accounts (1) The forex accounts control was reformed. In September 2002, the SAFE

relaxed the account-opening standard for Chinese enterprises, unifying the terms for Chinese enterprises’ opening of forex current accounts with those for

foreign enterprises and exercising the same limitation management on Chinese and foreign enterprises. The ceiling for an enterprise was set in at 20% of the

enterprise’s forex earnings under current accounts in the previous year, and the

ceiling for a new enterprise that had never opened a forex account before should be less than USD 100,000. In September 2003, the forex control department relaxed the limitation of forex under current accounts of international contracted

projects, international marine and international bidding. The ceiling for forex current accounts of these projects or activities was changed from 20–100%.

In March 2004 the SAFE further lifted the ceiling of forex under current

accounts: for those enterprises whose forex expenditure under current accounts

occupied over 80% of their earnings in the previous year, the ceiling was set

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at 50% of their forex earnings under current accounts in the previous year; and for those enterprises whose forex expenditure occupied less than 80% of

their earnings, the ceiling was set at 30% of their forex earnings under current accounts in the previous year. At the same time the aggregate limitation upon the current accounts within a region was cancelled and equal limits were applied to all regions in China.

In February 2005, the SAFE further relaxed the restrictions on forex accounts

under current accounts: it extended the time limit of a domestic institution’s

forex settlements of above-ceiling forex from 10–90 days; it allowed domestic institutions to reserve their forex capital within 90 days after their forex under

current accounts went above the ceiling; it increased the number of enterprises where the limit on their forex under current accounts could be set at 100% of their actual forex earnings; and it also granted the “100%” privilege to those

import and export or manufacturing enterprises which really needed to reserve all their forex earnings.

In August 2005, the SAFE raised the ceiling on forex reserved under current

accounts again. It stipulated that for enterprises whose forex expenditure occupied less than 80% of their forex earnings under current accounts in the previous year,

the ceiling was changed from 30% of their forex earnings under current accounts in the previous year to 50%; for those enterprises whose forex expenditure occupied

more than 80% of their earnings, the ceiling was changed from 50% of their forex

earnings under current accounts in the previous year to 80%; for enterprises which had a real requirement the proportion could be 100%; and for newly-opened accounts where there were no forex earnings under current accounts in the previous year, the forex reserved should be no more than USD 200,000.

In April 2006, the measures taken in the control of forex accounts included

firstly, abolishing the examination before the opening of forex accounts under

current accounts. When enterprises needed to open, alter or close forex accounts under current accounts, they could transact this directly with the banks on

the basis of forex control requirements and commercial usages, and put the

transactions on record with the SAFE. There was no need for the transactions

to be examined and approved first except that when an enterprise opened its first account, it needed to register its basic information. Secondly, the approach to ratifying and increasing the account limit was adjusted. In previous years

the ratification of the account limit was decided only on the forex earnings under current accounts of domestic institutions. However, in the new approach, both the earning and expenditure structure were taken into consideration. The

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standard was adjusted generally from the previous 50% or 80% of earnings to

the sum of 80% of the forex earnings and 50% of the forex expenditure under current accounts. For those domestic institutions which did not have any forex earning or expenditure under current accounts in the previous year and needed

to open forex accounts under current accounts, their initial ceiling was adjusted

from no more than USD 200,000 to 500,000. Thirdly, those enterprises which had requirements for import payments were allowed to purchase forex and deposit the forex into their forex accounts in advance.

In August 2007, the SAFE canceled the restrictions on forex accounts under

current accounts, which enabled domestic institutions to reserve their forex

earnings under current accounts in reference to their own operational purposes.

This cancellation could be seen as a meaningful symbol which marked that the system of compulsory forex settlements that had been practiced for 13 years

since 1994 had stepped down from the stage of history and had been replaced by a voluntary forex settlement system.

(2) The control of forex capital inflow and settlement was strengthened, the

authenticity of forex earnings under current accounts was examined, and the forex revenue and expenditure of trade in goods of enterprises which had a large amount

of forex earnings was strictly monitored. In May 2005, the forex control department

improved the forex control of export prepayments and entrepot trade forex receipts,

and at the same time strengthened the control of four kinds of foreign remittances and forex settlements.2 In November 2006, the SAFE promulgated the Circular of

the State Administration of Foreign Exchange of the People's Republic of China, on Issues Concerning Further Improving Administration of Trade Foreign Exchange Receipts and Settlements (Circular) . The Circular was in accordance with the principle that laid emphasis on the categorized administration and supervision of entities in trade forex remittances and settlements, and provided sufficient convenience to legally-operated enterprises while strictly supervising the forex sales and settlements of those enterprises that had problems and needed special attention. The Circular also started to try out internal forex settlements and sales in some selected finance institutions. (3) The forex control departments simplified the verification administration, designed and developed the “verification and cancellation system for exchange earnings through export”, and built up three verification and cancellation models: verification and cancellation order by order, verification and cancellation of a batch size, and aggregate verification and cancellation. The simplified system practiced automatic verification and cancellation both

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to the excellent enterprises’ export forex receipts and to the import payments of “remittance on arrival of goods (AOG)”. The automatic procedure raised the forex purchase and payment quota beyond which payments in advance of

imports against guarantee letters could not receive direct bank verification. The simplified administration also authorized banks to verify the authenticity of forex sales and payments of trades in services and standardized the

administration of import extended forex payments and forward forex payments. (4) The improved forex control system supported the forex sales and payments

in service trades of transnational companies to make the paying activities of companies’ trade more convenient. Considering the operational features of the foreign-invested transnational companies, the improved system helped the

transnational companies to solve problems in payments for trades in services caused by foreign advanced payments and allocation. The vouchers and procedures were simplified to facilitate the enterprises’ forex usage for trades in services.

Further improvement of forex control under capital accounts (1) In the improved system, investment in securities was opened up in a selective and step by step way. The channels of capital outflow and inflow were

broadened. In 2002 the SAFE, in cooperation with the CSRC, put forward the

QFII system in which qualified foreign investment institutions were allowed to

invest in the RMB-marked financial instruments (including stocks, bonds and funds) on the domestic stock market. In June 2007, the QDII system was put forward to further broaden the channels for capital outflow.

(2) The policies on foreign direct investment (FDI) forex control were

regulated. The improved forex controls allowed some of the transnational

companies to practice the overseas operation of some idle funds. Qualified

authorized banks were allowed not only to examine the capital settlements under the investment accounts of foreign investors, but also to transact the registration as well as accounts of domestic loans and manage the repayment

of the principal and payment of interest on domestic loans. The sub-bureaus of the SAFE in Shanghai, Tianjin and Shenzhen were authorized to experiment

with simplification of the administration of interest on forex loans and expense audits at domestic foreign-invested banks.

(3) Short-term capital flow, namely “hot money” speculative investments,

was restrained. The flow of “hot money” was operated through fraudulent channels such as falsified reporting of export-import prices, advances on sales

and deferred forex payments under trade items, and false investments, overly-

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large loans and speculation in the real estate market under direct investment items. In 2006 the Chinese government reinforced the control of foreign-

invested real estate enterprises’ external debts and settlements so that foreigners could purchase real estate only when they really needed houses to live in. The government also reduced the short-term external debt quotas for financial

institutions step by step, and reinforced the controls on the forex registration and external debts of foreign-invested real estate enterprises.

(4) The improved control system improved control of the forex funds inflow-

outflow balance and loosened the forex restrictions on foreign investments

to encourage domestic enterprises to develop their foreign investments. The

examination of the capital sources of foreign investment items was simplified, the quotas for enterprises’ purchase of forex to invest abroad were relaxed, both

the forex risk examination and the requirement for paying and repatriating profit margins were cancelled, and there was trial reform of forex control for

foreign investments. In 2006, the regional quota restriction on forex purchase for foreign investment was abolished and enterprises were allowed to remit relevant preliminary costs in advance.

Further improvement of the forex markets Since 2004, the reform of the forex markets in China has quickened its step in

embodying market-oriented reform and expanding market scale. In 2005, the reform made an important step forward in establishing the RMB exchange

rate formation mechanism when on July 21, 2005 the People’s Bank of China announced a reform of the RMB exchange rate formation mechanism, which

resulted in an administrated floating exchange rate system in which the RMB is no longer pegged to USD. The floating rate system was based on the supply

and demand of the markets and adjusted the rate in reference to a basket of

currencies. The RMB/USD exchange rate was adjusted from 8.2765:1–8.11:1 with an increase of 2.01%. The inter-bank exchange rate of a basket of currencies against the RMB was determined as the medial rate of the purchases and sales of the next day with a fluctuation within 0.3%.

In terms of entities in the forex markets, the membership of the inter-bank

forex market began to include non-banking financial institutions and large non-

financial enterprises. The transaction model was changed from a single price bidding model to a combination of price bidding model and price inquiry

model. In terms of the exchange rate formation, the SAFE relaxed the scale of the price gap between the inter-bank exchange rate and USD cash and spot

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exchange in banks, and abolished the restriction on prices in the purchase and

sale of non-USD currencies. There was no control on the prices of forward and extended transactions.3 The Central Bank did not intervene in the forex market, and all banks gradually determined the exchange rate in forward and extended

forex transactions with the interest rate parity. The banks raised the ceilings on

aggregate positions of forex settlements and sales, and relaxed the restriction on

amount in conversion between the domestic currency and foreign currencies. Also the control of market access in spot forex settlements and sales was improved.

Since 1994 when the implementation of the bank forex settlement and sale

system was started, the Chinese government had practiced an exchange quota

control on the turnover positions of bank settlements and sales, which meant

that forex funds used by banks in their turnovers of forex settlements and sales could not go beyond a ratified range. Otherwise the funds should be put into the inter-bank forex market to cover the position on the market. With the

economic development and the deepening of financial reform in China as well as the development of the RMB-foreign currencies derivative products market and the enhancement of forex market functions, the banks’ requirements for

flexible and independent control of forex funds had kept growing. There had

been increasing demands from Chinese and foreign banks for a unified control

of positions, and the banks had advanced a request for a reform of turnover positions of forex settlements and sales.

On September 23, 2005 the SAFE promulgated the Circular of the SAFE

Concerning the Adjustment of Procedures for Bank Foreign Exchange Settlement and Sale Positions Control which extended the coverage of past turnover positions for forex settlements and sales to forex positions that were possessed by authorized banks and that were generated in the trade of RMB and foreign currencies, and with the Circular integrated control was carried through positions of forex settlements and sales. In order to adapt China to the needs of market development and to enable the authorized banks to improve their exchange rate risk avoidance mechanism, on June 2, 2006 the SAFE promulgated the Circular of the SAFE Concerning the Integrated Control of Bank Foreign Exchange Settlement and Sale Positions which changed the cash basis of integrative positions of bank forex settlements and sales to an accrual basis. In addition the transaction commission could be reduced; the market-making system could be introduced; and the standard delivery time could be changed. Also, by integrating with the world market, the transaction period could be prolonged; and by making the forward transaction and swap transaction the

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main agreement, the standard of admittance for forex settlements and sales

at both domestic and foreign banks could be unified, so could the ratifying standards for the restriction of the forex settlements and sales. The forward price of forex settlements and sales could be converted from a unified price to multiple prices. Through the possible reforms stated as the above, the efficiency of the Chinese foreign exchange market can be further promoted.

Strengthening the administration of forex reserves In China, the monetary mechanics of forex reserves and asset distribution are

determined by integrated consideration of the reality of Chinese economic development, foreign trade payment, structure of foreign loans and the

situation in the capital market. Specifically, there are several criteria for the

administration of forex reserves. The first criterion is that the administration should be safety-guaranteed, appreciable and with a high degree of liquidity.

The second one is that the structural distribution of the forex reserves should

be determined based on a long-term and strategic criterion for structure rather

than short-term gain through exchange rate fluctuation. The third criterion is the necessity of a full consideration of the demand for foreign payments.

The Current Framework of the Forex Control System in China The convertibility of current accounts In forex earnings and payments, the convertibility of current accounts is incorporated in the settlements of forex earnings at banks, the unrestricted forex payments, and the cancellation of export-import receipts and payments after

verification. The forex earnings of domestic institutions under their current accounts should all be recalled back to China on time and sold to the authorized

banks according to the market exchange rates, except that the reserved forex which has been approved by the authorities could be retained in forex accounts

opened in authorized banks. The domestic institutions (including those invested in by foreigners) whose rights to operate businesses abroad or with

forex earnings under current accounts that have been verified and recorded by the authorized administrative departments can open forex accounts under

current accounts after gaining the permission of the State Administration of Exchange Control and its branch bureaus in the regions where the institutions

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FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

are incorporated. The institutions can then reserve their forex earnings under current accounts within the limited amounts.

When domestic institutions have demand for forex under their current

accounts, they can purchase forex from authorized banks based on the market

exchange rate with appropriate vouchers, or pay for their business abroad with forex in other forex accounts they hold. Commissions that exceed a certain proportion or amount can be honored at banks so long as the validity of the

commissions has been examined and approved by the Foreign Exchange

Department. Individuals’ personal requirements for forex within the limit can be met by purchasing forex from banks with valid vouchers. Purchase beyond the limit should be validated first by the Foreign Exchange Department.

The three-system arrangement for the convertibility of RMB current accounts

assures the work of the forex control departments in China, which includes the

verification of the authenticity of bank forex settlements and sales under current

accounts, the supervision of export-import forex capital flows, and the prevention of forex capital loss and capital flows that violate the regulations. In more specific terms, the framework of the control of trade forex settlements and sales as well as verification of forex receipts and payments is shown in Table 5.1.

Table 5.1. The framework of control of trade forex settlements and sales as

well as verification of forex receipts and payments under current accounts

The framework of the control of forex settlements and verification Common General trade trade

Special trade

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Compensatory trade

Trade of consignment Petty trade in the sales and sales on a border areas commission basis Charging processing trade Advances on sales Carrying trade among third countries Providing power, gas Providing goods and water to non(including fuels, residents provisions and reserves) to nonresidents’ vehicles at ports

Trade of processing Food processing and assembling trade supplied materials Trade of foreign Leasing trade contracted projects and export cargos Sales of deep-sea fishing

Sales of deep-sea oil

Providing goods Reshipping of goods to non-residents for their repair of vehicles including airplanes and ships

The Reform of the Foreign Exchange Control System in China

(Con’d) Tourism Commissions and service charges in financial services etc Official contacts Patent use and among governments franchise fees

Trade in Receipts from Insurance service services related to transportation Telecommunications Constructions, and posts installations and contracted labor services Others trades4 The framework of the control of forex payments and verification Common General trade Non-reimbursable Materials presented trade assistance free of charge by and materials overseas Chinese, presented free of compatriots in charge by foreign Hong Kong, Macau governments and Taiwan, and and international Chinese of foreign organizations nationalities Trade of processing Trade of food Trade of and assembling processing and consignment sales supplied materials assembling and sales on a commission basis Trade of food Leasing trade Tax-free forex goods processing and assembling imported equipments Barter trade of Other trades imported materials to be processed and sold in domestic markets by foreign-invested companies Special Cash in advance Goods (including Payments for trade fuels, water, repair of vehicles provisions and (including airplanes reserves) consumed and ships) abroad by vehicles at foreign ports Other trades Trade in Payments for Insurance Official business service services related to trips transportation Telecommunications Constructions, Official contacts and posts installations among governments (contracted labor services) Other trades5

Compensatory trade

Petty trade in the border areas Charging processing trade

Reshipping of goods

Commissions and service charges in financial services etc Patent use and franchise fees

Source: The table is edited according to information in The Forex System in China and RMB Free Conversion written by Liu Guangcan et al.

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FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

The control of forex under capital accounts According to the general arrangements and long-term goals of the forex

system reform, the basic principles of the control of forex revenue and

expenditure under capital accounts are: while abolishing the limitations on exchanges under current accounts, the government should improve the forex

control under capital accounts and gradually create a favorable environment for the facilitation of the convertibility of the RMB under capital accounts. .

Under this influence of the principle, the Chinese government practices

strict control of forex under capital accounts and exercises three general

principles: the first principle is that all forex earnings under capital accounts

should be recalled to China except those which are regulated specifically by the State Council; the second principle is that all domestic institutions (including foreign-invested ones) should be reserved in their accounts opened

exclusively for forex at banks, and that foreign-invested enterprises, when they want to settle their forex capitals, can transact with the relevant files

directly at banks authorized by the SAFE while other forex earnings under their capital accounts cannot be sold to authorized banks without the approval

of the SAFE; the third principle is that apart from some accounts in authorized banks, forex purchases and foreign payments under capital accounts should

be verified by the forex control departments, and the verified forex sales and

payments can then be transacted at authorized banks. There are three forms of

international revenue and expenditure under capital accounts: foreign debts and loans, direct investments from foreign investors, and direct investment overseas.

The control of foreign debts and external guarantees The Chinese government has implemented planned management of foreign

debts. The medium and long-term (over one year) foreign debts of Chineseinvested financial institutions and enterprises should be within the framework of the state plan for the use of foreign funds. Short-term foreign debts of less than one year should be supervised by the SAFE. The SAFE authorizes

the balance control quotas for the related provincial and municipal financial institutions. The institutions that have quotas of short-term loans can borrow

short-term international commercial loans of less than one year and use the loans within their balance. Foreign-invested enterprises do not have to obtain approval before borrowing international commercial loans.

All domestic institutions (including foreign-invested enterprises), after they

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borrow foreign loans, should register their foreign debts on time with the forex control departments either order by order or at regular intervals. The repayments of the principal and payments of interest on foreign loans registered order by

order (except the loans borrowed by banks) should all be approved by forex control departments. Domestic institutions’ issue of medium and long-term bonds

abroad (except when the Ministry of Finance represents the State in issuing bonds

abroad) should be examined and approved by the National Development and

Reform Commission (NDRC) and countersigned by the SAFE, and then examined by the State Council. Issue of short-term bonds abroad should be examined and

approved by the SAFE, among which rollover bonds should be examined by both the SAFE and the NDRC. Local governments do not have the right to borrow

foreign loans. Domestic institutions’ issue of commercial bills should be examined by the SAFE and accord with the appropriate SAFE’s quotas for short-term loans. Listed foreign-invested companies’ issue of convertible bonds should follow the same examination procedures as those for domestic institutions.

External guarantees, which attribute to possible debts, can only be issued by

financial institutions which have been ratified to manage external guarantees (excluding foreign-invested financial institutions) and non-financial enterprises that are competent enough to meet the engagements. State organs and public

institutions, except those that have been approved by the State Council to onlend loans borrowed from foreign governments and international financial

organizations, are not allowed to issue external guarantees. The Ministry of Finance can issue guarantees and authorized banks can issue external guarantees under non-financing items without being examined and approved by the SAFE, while

other domestic institutions’ issue of external guarantees need to be examined and approved one by one. The external guarantees must be registered with the SAFE and the performances of external guarantees should be approved by the SAFE.

The administration of direct foreign investments In order to encourage foreign investors to invest directly, the Chinese government mainly administrates the foreign-invested enterprises’ forex revenue and

expenditure activities under capital accounts in the following ways: (1) Foreigninvested enterprises can reserve their foreign-invested capitals as forex, and

foreign-invested non-incorporated joint ventures are allowed to open investment special accounts to reserve forex and can take back their forex capital under investment accounts by transacting it with the relevant files at authorized banks,

and also take back their forex earnings under other capital accounts after obtaining

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FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

the approval of the SAFE; (2) Foreign-invested enterprises can borrow money

from both domestic and foreign banks by themselves and repay the money by themselves without being examined or obtaining approval first, but they need to register the debts and loans afterwards. However, a foreign-invested enterprise’s

medium and long-term foreign loans cannot exceed the balance between the total investment of the enterprise and the registered capital; (3) In a disinvestment of

the foreign part in a Chinese-foreign cooperative enterprise, the foreign investors can remit their investment from their forex accounts or purchase forex and then

remit, and similarly the foreign investors can also obtain their forex in this way in a foreign-invested enterprise’s closedown and liquidation in accordance with the laws, capital reduction and transfer of stock ownership; (4) Foreign-invested

enterprises are allowed to reinvest their monetary funds earned from RMB profits, liquidations, transfers of stock ownership, disinvestment and capital reduction,

and can also enjoy the privileges endowed to investors who invest with forex; (5) A system of forex registration and an annual check is practiced on foreign-invested enterprises to improve supervision and administration.

The administration of overseas investments The National Development and Reform Commission (NDRC), the Ministry of

Commerce (MOC) and departments authorized by the NDRC and MOC are in

charge of the examination and approval of investment projects abroad while the SAFE takes charge of the forex control of overseas investment. The major

contents of the administration of overseas investments include: (1) domestic institutions’ forex purchase and remittance for their overseas investments should first be reported to the branch departments of the SAFE in the regions

where the institutions are located, and the departments will examine the sources of investment forex funds; projects in which the investments are

fully contributed by physical assets, foreign aid programs and strategic investment projects approved by the State Council need not to be examined;

(2) after their overseas investment projects having been approved by the administrative departments, the domestic investors should register their overseas investment forex registration and handle the formalities for their

investment forex purchase and remittance at the forex control departments; (3) domestic institutions should report the relevant conditions of their overseas investment (including the financial reports of their overseas enterprises) to the SAFE and have the conditions recorded; (4) any significant capital alterations by domestic enterprises (including capital increase, reinvestment, the transfer

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of shares from Chinese investors to foreign ones and Chinese investors’

purchase of shares from foreign partners) should be examined and approved;

(5) a joint annual review and evaluation system is implemented upon overseas investments, and the domestic investors should join the annual review and evaluation on time.

According to the information on the framework and situation of capital

control in China in the IMF’s Annual Report on Exchange Arrangements and

Exchange Restrictions (2007), the current control of forex under capital accounts in China is illustrated in Table 5.2: Table 5.2.

The current control of forex under capital accounts in China6

Trades in capital market Trades of joint venture investment securities Business credit Guarantees, guaranties and financial supports Direct investment liquidation Trades of individually owned capital Special clauses for institutional investors

Controlled Trades in the money market Controlled Trades of derivatives and other tools Controlled Credit financing Controlled Direct investment

Controlled Controlled Controlled Controlled

Controlled Trades of real property Controlled Controlled Special clauses for commercial Controlled banks and other credit institutions Controlled

Source: The table is edited according to information from the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (2007).

The current framework of the forex control system in China controls not

only forex conversion and trades of both current accounts and capital accounts,

but also the RMB exchange rate formation mechanism, the macro-management

system of the BOP, the supervision of forex operations in financial institutions and the system of forex control laws and regulations.

The Reform of the Foreign Exchange Control System and Foreign Trade in China Generally speaking, in the past thirty years since the policy of reform and opening up was put forward, the reform of forex control system has been

continuously deepened and has made a series of breakthroughs, including the

realization of the RMB’s convertibility step by step and the ever-increasing

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convertibility of capital accounts. In these circumstances the RMB exchange

rate formation has become more and more market-oriented, and the forex

markets have been established gradually and have also made great progress. The functions of forex statistics and monitoring systems have been amplified,

and the system for forex reserves and management has been improved. It can be said that the reform of the forex control system has greatly facilitated the reform of the trade system in China and the development of foreign trade.

The forex retaining system of Chinese enterprises from 1978–1993 increased

both the flexibility of enterprises’ forex use and their enthusiasm for exporting. The establishment of the forex swap market provided convenience to enterprises in their management of surplus forex. The coexistence of the trade

rate and non-trade rate motivated enterprises to import, which gave impetus to the development of foreign trade. The RMB was depreciated many times in

favor of the trade policy at the time, which aimed at expanding exports. The

coexistence of the RMB official rate and the forex swap market rate provided a “soft landing” to the solution of problems including overestimation of the

RMB rate and the realization of the official rate’s conformity with the market rate. However with the further marketization of the economy in China, many problems were revealed both in the forex retaining system and in the forex

swap market. The forex retaining system was not adaptable to the rapid development of foreign trade and became an obstacle in the realization of

the RMB convertibility in trade items. In addition, the forex retaining system restricted enterprises’ motivation for exporting. Lastly, the coexistence of the

official rate and market rate went against the marketization of the exchange rate formation mechanism. The RMB official rate had been overestimated until 1994

when the reform was started. The trade deficit in China was USD 6.6 billion in 1989, and this increased to USD 12.2 billion in 1993, which showed that at that

time the forex condition in China was rather intense and ex-pit transactions were serious.

A series of reform measures taken in the forex control system from 1994–2001

made trades more convenient and at the same time met the requirements of further marketization of China’s economy. The implementation of the bank

forex settlements and sales system simplified the procedures for enterprises and made fund turnovers faster. The cancellation of mandatory plans for forex revenue and expenditure helped to relieve the crisis in which enterprises were assigned by the authorities to gain a certain amount of forex earnings, and thus

had to bring down their prices to scramble for market share and clients in order

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to fulfill the assignment. In addition, the cancellation increased the efficiency

of allocating forex resources. The system of export-import forex payments and

receipts verification assured the ordered flow of trade capital, facilitating the foreign trade activities of enterprises. The system of export forex payments

examination encouraged qualified enterprises while restricting the inferior ones, and at the same time supported export by awarding and punishing enterprises

at different levels according to their performances. The official rate was made uniform with the forex swap market rate, which brought the regulations of export and import into play. Meanwhile the uniform rate helped resolve the

problem of overestimation of the RMB, promoting exports, and at the same time

assisted the advancement of China’s further opening up and full convertibility of the RMB. The fixed exchange rate system in which the RMB rate was pegged

to the USD helped enterprises avoid exchange rate risks and fostered exports. The allowance of forward forex settlements and sales helped enterprises lock

their period costs to hedge and avoid risks. Hard facts showed that since the forward forex settlements and sales were allowed to be transacted, enterprises in China had been greatly helped in avoiding risks despite many severe fluctuations in the international forex market.

However, with the economy’s further opening up and the deepening

of marketization, the reform of the forex control system revealed some

disadvantages. Firstly the compulsive forex settlements, although eased the forex shortage in China and becoming a key in boosting China’s forex reserves, led to a large extent to the increasing pressure of inflation in China in recent

years.7 From this respect, the reform of forex control system in China had some flaws such as the lag in some functions.

A series of reforms of the forex control system since 2002 has been seasoned

with China’s entrance into the WTO and has met the requirements of further

opening up and the deepening reform of the economic trade system. For example, the lasting reform of forex accounts under current accounts and the everincreasing quotas were gradually replaced by the cancellation of restrictions on

forex accounts and the ending of compulsive forex settlements, which has played an important role not only in facilitating enterprises’ operations, reducing costs,

satisfying the enterprises’ demands for forex and increasing the competitiveness

of enterprises in international markets, but also in easing the pressure on the central bank from remittances, inflation and the appreciation of RMB. However,

we are still unable to reach a final conclusion on the effects of the policy because

we have not been able to estimate the share of hedging forex in the total amount

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of issued currencies under the original system in China. But we can say that if the appreciation of the RMB against the USD is not going to change, even though the voluntary forex settlement system is implemented, the pressure from remittances will go through a process of gradual slowdown. Moreover the examination of

the authenticity of forex revenue and expenditure under current accounts is helpful to prevent the funds under capital accounts from being interfused with

current accounts to engage in foreign trade financing in disguise or in aleatory operations. The simplified verification of import and export has made the foreign trade activities of enterprises more convenient, and the simplified vouchers and

procedures for forex sales and payments of transnational companies’ trades in services has provided the companies with more convenience.

The RMB exchange rate formation mechanism has been essential in China’s

efforts to balance foreign trade, expand domestic demand, enhance the

international competitiveness of enterprises, and open wider to the outside world. By July 21, 2007, the RMB/USD rate had increased by 8.4%. The rate was 1:7.0970 on March 13 this year, an increase of 14.25%.

Up until now, the reform of the exchange rate mechanism has had some

influence on China’s trade. In 2005, speaking from the national perspective

compared to the first half of the year the volumes of trade, exports and imports

in the second half of the year increased by 20% and the trade surplus increased by 57.4%. The year-on-year growth rate of these volumes also showed similar

numbers in the financial years 2005–2006 and 2006–2007. What is worth mentioning is that, compared to 2005, the trade surplus in 2006 increased by an

amazing 74%. The trade surplus in 2007, although reduced a little compared to

that in 2005 and 2006, still maintained impetus which is illustrated in Table 5.3. Therefore, nationally speaking, the reform of the RMB exchange rate mechanism had no negative influence on the volumes of trades, exports and imports in

China but withheld the growth of the trade surplus while maintaining a general

trade surplus, which proved that the reform policy had been effective. After the

reform of the RMB exchange rate mechanism, the reason why RMB appreciation did not have enormous negative influence upon the overall trade situation in

China lay in the upsurging economy in China, the J-curve effect, the upgrading of the industrial structure, the improved structure of foreign trade goods, the

expanding entities of foreign trade, the support from policies that fostered tax

reimbursement for export, the expansion of trade subjects, and the application of rate risk-avoiding tools etc.

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Table 5.3.

The increase in trade volume, export volume, import volume and trade surplus (%)

Year

The growth rate The growth rate The growth rate The growth rate in trade volume in export trade in import trade in trade surplus

Second half against first half in 2005

20.5

2007 against 2006

23.5

2006 against 2005

24

22.6 27

25.7

18.1 20

20.8

57.4 74

47.7

Sources: The table is edited according to data published in the China Statistical Yearbook and by the General Administration of Customs of the People’s Republic of China.

Reviewing the foreign trade situations of different provinces we can find that

the RMB exchange rate system has had some different effects. For example, in

Henan Province, the trade surplus in 2005 increased by 42.1% compared to the

previous year, and the figure was 18.3% in 2006. In Gansu Province, the trade

surplus in the first half of 2005 was replaced by a trade deficit in the second half

of the year, and the deficit continued in 2006. A trade deficit prevailed in Hainan Province in both 2005 and 2006. Observed from the micro perspective, which is the enterprise perspective, the rise in the exchange rate after the reform of the

RMB exchange rate mechanism had impacted on enterprises, especially laborintensive enterprises with low added value, in a negative way. For instance many export enterprises in regions along the southeast coast of China, such

as Zhejiang Province and Jiangsu Province, had suffered tremendous losses resulting from the appreciation of the RMB.

The Prospects for the Reform of the Foreign Exchange Control System in China Although generally the reform of the forex control system in China has adapted the system into one that can meet the requirements of China’s entrance into the

WTO, China’s further opening up and deepening of economic structural reform is still revealing some problems:

(1) The examination system for the authenticity of trade under current

accounts still needs to be improved. For instance, there are deficiencies in the examination system to verify the authenticity of services trade and non-trade

forex funds inflows. There is also a lack of supervision over forex accounts opened abroad for projects operation which means that enterprises can, based

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on the verification needs, declare any kind of capital as trade forex earnings

or earnings in non-trade contracted projects (Wan, Wang, and Chu, 2006). The flaws in the authentication system make it possible for enterprises to interfuse

forex capital of unapproved kinds into forex under current accounts to be settled, which does not only go against the evaluation and prediction of the

situations and trends of forex revenue and expenditure but also brings down the efficiency of the control of forex under current accounts. This has lead to

changes in the structure and channels of foreign capital inflow in recent years:

while there has been little variation in the scale of direct foreign investment, private equity investments have entered China on a large scale; in other investment items, the proportion of equities merger and acquisition has been

increasing greatly; and there has been a diversion of the capital inflow channels and abnormal capital inflows have been seen in the foreign trade surplus.

(2) There is still a large surplus in the BOP, which enhances the complexity

and difficulty of macro-control and increases both the pressure on the RMB to appreciate and the trade frictions, making it harder to transform the economic growth model and facilitate structural adjustment.

(3) The forex market still needs to be improved. Currently, the forex market

in China is an inter-bank one which was established in 1994 and has existed for

nearly 15 years. There are still many restrictions on the participants in the inter-

bank forex market. In addition, the exchange rate formation mechanism has not been fully marketized yet, and the free convertibility of capital accounts has not

been realized. Therefore supply and demand for forex come mainly from trade forex settlements and sales in enterprises operations, the interest rate of capital flow is not very elastic, and the “interest rate–capital flow–exchange rate”

formation mechanism has not been established in the forex market in China. The central bank intervenes in the forex market to stabilize the exchange rate.

(4) The huge forex reserves have had some negative influence on China’s

economic development. Since the policy of reform and opening up was

implemented, the forex reserves in China have maintained a steady increase generally, and in recent years forex reserves have increased at a high speed. The total amount of forex reserves in “the first ten years” from 1979–1988) increased

by 113.3% compared to that in the twenty-nine years (1949–1977). And the amount in “the second ten years” (1989–1998) increased by 258.3% compared to that in “the

first ten years”. The total amount of forex reserves in the nine years (1999–2007),

compared to that in “the second ten years”, increased at an even more amazing speed — by 877%. The forex reserves in 2003 were USD 100 billion more than

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the previous year. In 2004, 2005 and 2006, the increase of forex reserves each year was more than USD 200 billion, and the forex reserves of 2007 increased by USD 461.905 billion compared to that of 2006. The data are listed in Table 5.4. Table 5.4.

The growth of forex reserves in China8 (billion USD)

Year

1950–1978 1979–1988 1989–1998 1999–2007

1999

2000

2001 46.591

Amount

2.497

5.277

141.587

1,383.29

9.716

10.899

Year

2002

2003

2004

2005

2006

2007

74.242

116.844

206.681

208.940

247.472

461.905

Amount

Source: The table is edited according to statistics compiled by the SAFE (the version of January 26, 2008).

The growth situation of China’s forex reserves is connected with the increase

in foreign trade imports, the compulsory forex settlement and the PBC’s intervention in the forex market. In terms of the best international reserves scale,

the international mainstream thinking emphasizes that the best international

reserves scale should alleviate the difficulties in international payments and it also attaches great importance to the possession of opportunity cost in

international reserves. However, there is a sharp contrast between this thinking

and the practices in developing countries. The hidden problem of monetary

crisis caused by a high flow of capital leads to great changes in the function of international reserves in developing countries. International reserves play an

important role in making the exchange stable in developing countries. In China, apart from maintaining the stability of the exchange rate, forex reserves play a

vital role in solving the problems caused by insufficient demand in economic development and the fragile bank system (Yu, 2006). Some people hold the

opinion that due to the fact that most of the forex reserves in China are in USD, with the depreciation of the USD and the prediction of its further depreciation we should pay great attention to the shrinking of forex reserve assets in China.

(5) The statistical work on the forex control system in China falls behind

that of the U.S., Britain, Japan and other developing countries. The International Investment Position (IIP) is an indispensable part of a complete international

accounting system, and it is never less important than the Balance of

International Payments (BIP). The functions of the IIP are: it strengthens the international accounting system and improves the four macro-statistical systems

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— the national account, government finance, statistics on currency finances and balance of payments statistics; it reflects the economic operational situation in a country, especially the development situation of thee external economy; and

it increases the transparency of the international finance statistics of a country,

which makes it easier for the international community to evaluate the solidity of the financial system, the sustainability of foreign payment ability and the situation of international capital flows in a country. The IIP statistics of the U.S.

started in 1976, and Britain and Japan started their IIP statistics in 1966 and 1986 respectively. China published its IIP statistics for the first time in May 2006, which shows that China started the IIP fairly late. Also, there are some problems in the accuracy of the statistics and the data sources are uncoordinated.

Therefore reform of the forex control system in China should insist on reform

and development to solve emerging problems. We should reinforce the mechanisms and innovation of the system, improve the system to better bring the fundamental

function of the market-allocated forex resources into play, consistently perfect

the market mechanism and management mechanism of the BOP regulation, and

continue to promote the convertibility of the RMB under capital accounts in a steady and orderly way, avoiding international economic risks.

Firstly, we should have an innovation of the trade forex control. The reform

of the export-import verification system should be promoted vigorously and the

reform of the services trade forex control implemented step by step. Also, we

should formulate unified laws and regulations for services trade forex control. The examination administration of the authenticity of non-trade forex revenue

and expenditure should be improved. Moreover we should draw up proper

management methods soon to make management policies more systematic, more reasonable and more operable; we should establish a meeting system to strengthen

our contacts with the tax departments, exploring the role tax plays in adjusting the forex revenue and expenditure activities in the services trade, especially the inflow

sector, and increasing the violation costs of speculative capital inflows; we should reinforce our pre-warning supervision over non-trade revenue and expenditure,

design and establish a monitoring platform to supervise non-trade forex revenue

and expenditure, and bring the management of both residents’ and nonresidents’ individual forex revenue and expenditure as well as all kinds of services trade

into the supervision system, computing and monitoring the forex revenue and expenditure activities as well as capital flows in a timely way.

Secondly, we should vigorously develop the forex market. The infrastructure

of the forex market needs to be strengthened and currency conversion services

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need to be further improved. We should reform the forex control system in

China and further reform and improve the Chinese forex market to make it

efficient in coordinating the interest rate and exchange rate, thus bringing the chain effect mechanism of “interest rate–capital flow–exchange rate” into play

under the relaxed management of capital accounts, providing conditions for the central bank’s free intervention, and helping the central bank to stabilize

the exchange rate. In our reform and development of the forex market in China

there is a need to adjust the current forex revenue and expenditure management: (1) We should improve the voluntary forex settlement and sales system, and

give the active role of enterprises full play in the forex retail markets; (2) On the basis of standardizing the forex market as well as the behavior of the entities in

the market, we should raise or cancel the limits on the forex working balance at authorized banks, giving the active role of authorized banks full play in the

inter-bank forex market; (3) We should allow the first-grade market maker to

have more freedom in fixing prices, activating the trade in RMB derivative products; (4) We should gradually relax the “real needs” principle in forex

transactions, and abolish the controls over the exchange fluctuations in retail markets and the transaction quotas to promote the development of the retail

markets, creating favorable micro-conditions to realize both a symmetrical management of capital flow and the general convertibility of capital accounts.

Thirdly, we should continue to promote the orderly development of

convertibility of capital accounts. Foreign direct investments (namely, foreign

industrial investment) of domestic enterprises and individuals should be

supported, and the implementation of a qualified domestic investor system should

be advanced steadily to better satisfy the citizens’ needs for forex because of the increase in their property income and their diversified investments. As the policies that manage forex under capital accounts have gradually stabilized we should start

to draft the Foreign Exchange Law to satisfy the needs of forex control practice.

We should intensify the symmetrical management of capital inflows and outflows. While opening the capital accounts step by step, we should also further change the principle of “encouraging capital inflow and restraining capital outflow”. We

should insist on balance control and reinforce the supervision of capital inflows

on the premise of keeping normal trade and investment undisturbed, and at the same time broaden the channels of capital outflow on the condition that the risk is controllable. Lastly, we should strengthen the checking and warning system

to accomplish integrated management, establishing a supervision coordination mechanism and enhancing the efficiency of management.

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We should also reinforce the supervision of short-term capital flows and

encourage foreign investment to flow into the bond market while at the same

time restraining its entrance into the stock market. We should make use of the reform of tax policy to contain short-term capital flow. At present, the income tax

system, value-added tax system and tax reimbursement system have been built

in China, and we could also actively learn from the experience of other countries and take the things we have learned into consideration of whether we should

design new taxes. For example, we may consider adding Tobin Tax to our tax

system while establishing an effective bank supervision system, which could restrain the short-term capital inflow and keep it unaffected, and in this way

we may succeed in fostering the strengths while circumventing the weaknesses. We should also improve the current management modes for forex under capital

accounts, relaxing the demands for examination in advance while strengthening registration and record management. The authorities could authorize banks

to operate some regular examination, accomplishing the transition to indirect

management. Procedures could also be simplified to increase the efficiency of management of capital accounts. Meanwhile, we should promote research and, in

concert with the opening up of capital accounts in China, we should also do some studies and draft a series of laws and regulations on forex control, establishing

a sound monitoring and warning system to control the transnational capital flow. In this way could we vigorously and steadily facilitate the realization of

convertibility of the RMB under capital accounts, and effectively avoid some risks brought about by the expansion of international capital.

Fourthly, we should reinforce the supervision of financial institutions’ forex

businesses. We should promote the banks’ implementation of forex policies and establish in sound banks self-supervision and management systems to

supervise their forex revenue and expenditure. We should gradually transform the supervision system where the domestic currency and foreign currencies are

supervised separately into a unified supervision system in which the domestic currency and foreign currencies are supervised together (Chen, 2006).

Fifthly, we should intensify the forex receipts and settlements control of

forex capital. We should reinforce the dynamic supervision and the after-fact verification of forex revenue and expenditure of both trade in goods and trade

in services. The individual forex revenue and expenditure controls should be further standardized. Also, we should strengthen the management of the banks’ short-term foreign debts quotas and improve the management models for foreign debts of foreign-invested enterprises.

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Sixthly, we should reinforce the forex inspection of transnational capital flows. We should organize a series of specific examinations centered on forex capital inflows and the flow of RMB after the forex settlements. Also, specific examinations should be carried out to examine the regularity in banks’ implementation of forex policies. We should work together with other relevant departments to crack down on crimes such as illegal private banks and illegal purchases and sales of forex. Seventhly, we should further improve the management and operation of forex reserves. Considering the opportunity costs in the possession of forex reserves, the key to improvement is to reinforce the management of the forex reserves and to preserve and increase the value. To be specific, the use of forex reserve funds can be divided into three parts: the first one is to launch investments of high negotiability to cope with the fluctuation of the BOP; the second one is to launch investments of medium negotiability to cope with matured foreign debts and the pullout of FDI; the third one is to invest in longterm assets of low negotiability that could cope with international risks (Li, 2006). In September 2007, the China Investment Corporation (CIC) was founded officially as a state-owned sovereign wealth fund to take charge of and manage the forex reserves in China. After its founding, the CIC purchased 10% of the shares of the Blackstone Group. When the Group came onto the market, its stock price fluctuated so intensely that the CIC lost USD 5 billion in the market (Ronny Bechmann and Stefan Jansen, 2007). In this sense, to practice a careful and prudent management of forex reserves in China is not only an urgent matter for the Chinese government, it is also a direction which we have been working towards for a long time. Eighthly, we should promote the construction of forex management laws and regulations as well as administrative ability. The administration-oriented supervision should be further transformed into a market-oriented supervision, the marketization mechanism should be further introduced, and suitable market-based instruments should be adopted to increase the efficiency of forex control. The adjustment function of prices (interest rates, tax rates) should be put into play and the excessive dependence on administrative means should be reduced. Furthermore, we should enhance the state’s ability in macro-control to maintain the stability of macroeconomics. Lastly, we should perfect statistical work on the forex control system in China as soon as possible so that it can meet the international requirements.

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154

6

Chapter

The Development and Change of Foreign Trade Financing in China

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FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

Foreign trade financing refers to the demand and supply activities associated with funds, credit and relevant services and convenience generated in

international trade. With the development of world trade, foreign trade financing has become a basic functional business of banks and an integrated financial activity that involves multiple financial service elements. Since the

reform and opening up, foreign trade financing in China, which has gone through tremendous changes based on the reform of the economic structure and financial system, has played a vital role in the development of China’s foreign economy and trade.

A Brief Review of the Development of Foreign Trade Financing in China Foreign trade financing during the period of the planned economy Remittance settlement is the outcome of the development of the commodity economy, monetary system, credit and credit institutions to a certain stage.

According to textual researches by financial historians, the first remittance

settlement in China can be dated back to 806–821 AD when Emperor Xianzong in the Tang Dynasty governed the country. In the more than a thousand years

after the first remittance settlement occurred, with the growth of the national bank industry and the slow progress of foreign trade, the payment and

settlement system as well as settlement finance services developed gradually,

which generally reflected and conformed to the real situation of the economy, finance and society of China at the time.

During the years from 1949 when the PRC was founded to 1978 when the policy

of reform and opening up was introduced, China had experienced a planned

economy for 30 years. In these thirty years the finance system and its operational

mechanism fully reflected and adapted itself to the product manufacture and the special requirements of finance in the planned economic system. The thirty

years was a period when China’s foreign trade stumbled along a zigzag course in the ups and downs of the world trade environment. In 1953, the total volume of foreign trade in China was USD 2.4 billion and the volume increased to USD

20.6 billion in 1978. The features of export trade during this period was that the manufactured goods’ share of export trade was comparatively small but kept

increasing while the share of primary products was large but decreasing, and the primary product share of export was larger than manufactured goods, as is

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shown by the fact that in 1957, the primary product share was 79.4% while that of

manufactured goods was 20.6%, but in 1980 when the reform and opening up had been implemented for less than one year, the share of primary products was 50.3% while that of manufactured goods was 49.75%.

During this period, China’s foreign trade advanced within a limited range

and the finance was operated in a restrictive environment. Observed from the perspective of foreign trade financing, the relationship between foreign trade and finance was mainly as follows:

Firstly, in accordance with the planned economy and the unified financial

management system, after 1953 all mercantile credits had been abrogated and

credits all centered in the national banks. Accordingly, the financial institutions started to become more and more centralized. Having undergone several

institutional integrations, by 1957 the unified bank system had been formed. There was only one national bank in China, which was the People’s Bank of

China (PBC). The PBC was not only the state institution which administered finance but also an economic organization through which financing all over the country was managed. Therefore the unified financial operational mechanism,

in which the national bank was the center of all credits, settlements and cash registers in the country, had been established completely and had carried

through the national economic construction and financial operation. Meanwhile a highly centralized trade system was also implemented in China, in which

state-owned trade enterprises represented the country in foreign trade, the foreign trade were operated according to state plans, and all capital needed for trade was provided by the planned credits and loans of the national bank.

Secondly, after the new China was founded, all matters which had been

neglected before the founding were yet to be dealt with, among which the

most important were that economic construction needed to be developed on a

large scale, and the country had an urgent need for forex to import industrial equipment and sparse means of manufacture and livelihood. However, at that

time, the Western countries placed blockades and embargoes on the sale of

materials to China. In order to fight against these China energetically developed foreign trade with socialist countries with the Soviet Union and East European countries as the representatives. Foreign trade with socialist countries was the first regional trade cooperation for China in its struggle against the obstacles

set by forces hostile to the development of China. Developing with the help of

the bilateral and multilateral mechanisms established within the framework of governmental agreements, foreign trade with socialist countries adopted a

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model of trade by agreement in which barter was practiced and pricing and settlement by clearing currencies were exercised.

Thirdly, with the implementation of the planned economy system, foreign

trade was under the charge of state-owned trade companies and exchange business was fully managed by the PBC, which gradually formed a highly-

centralized forex control system that was controlled by state plans. The

state exercised centralized control on trade and exchange while practicing decentralized control on forex use. Forex revenue and expenditure were

controlled by mandatory plans and all forex earnings had to be sold to the

state government. Any unit’s or individual’s requirement for forex should

be allocated and approved by state plans. The policy carried through the international payments equilibrium was “expenditure determined by revenue and export determined by import”, and the balance of the forex budget was maintained by mandatory plans and administrative means.1

It can be said that during the period of the planned economy, finance’s

support for foreign trade was actually a sort of project financing under the system of planned capital supply and demand, and the project financing was essentially different from foreign trade financing in the market-directed economy.

Foreign Trade Financing after the Reform and Opening up After the reform and opening up, the foreign economy and trade in China continued to develop at a high speed and the requirements for financial support

gradually transformed from plan-based ones to market-based ones. With the deepening of financial reform and the improvement of financial services, foreign trade financing has gone through several stages.

(1) The first stage: 1978 to mid 1980s. The years between 1978 (when “reform

and opening up” was put implemented) and the mid 1980s was a startup period

for the rapid development of foreign trade in China, during which foreign trade in China started to show a progressive increase: the volume of foreign trade in China increased from USD 20.6 billion to USD 69.6 billion, and the total volume of foreign trade in the eight years amounted to USD 340.5 billion, 2.37 times

more than the total volume in the previous eight years (1953–1977). In the years between 1978 and 1985, the structure and proportion of China’s export products

changed greatly with the share of manufactured goods gradually exceeding that of primary products. Due to a severe shortage of forex, “export products to earn forex” was the primary task of foreign trade in those years in China.

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On March 13, 1979, the State Council gave formal sanction for the Bank of

China’s (BOC) separation from the People’s Bank of China, and then the two banks co-exerted the power of the SAFE and were both under the leadership

of the State Council. The original general administration division of the BOC

within the system of the PBC was transformed into the head office of the BOC to

take charge of the administration and management of foreign exchange business all over the country. In September 1983, the State Council authorized the PBC to function as the central bank. Later, the BOC and the SAFE were established

separately, each having its own functions, with the BOC maintaining its function to manage forex in China as a whole. Thus the BOC became a specialized bank that was supervised by the PBC and that managed the forex and foreign trade

in China and took charge of international operations including international

settlements. 2 During this period, the extremely unified bank administration system started to be split apart, especially with the implementation of the

system in which forex and foreign trade were managed by specialized banks, which embodied the orientation of policies put forward by the Chinese

government to vigorously develop foreign economics and trade. The BOC offered the service of export-import trade settlement to specialized foreign trade

companies by using documentary letters of credit and other methods of settling accounts. It carried through the principle of “settle after receiving the credit note” in settling transactions so as to avoid risks, and rarely exercised the trade

financing mode which was widely used in other countries. Moreover, due to

the fact that the BOC was the only bank in China to deal with forex and foreign trade, it actually monopolized international financing in China.

(2) The second stage: the mid 1980s to 1993. The second stage covered two

important periods in national economic construction — the periods of the “7th five-year plan” and the “8th five-year plan”. In the years between the mid 1980s and 1993, foreign trade in China developed rapidly with an increase

in the volume of imports and exports from USD 73.8 billion in 1986 to USD

195.7 billion in 1993. Another remarkable change in China’s foreign trade was that during these years the share of manufactured goods in export products increased rapidly while the share of primary products decreased rapidly. In

1990, the manufactured goods share was 74.4% while that of primary products was 25.6%.

At the same time, increasing maturity had been seen in the Chinese

government’s policies to transform specialized banks into commercial banks,

and the environment of market competition was gradually forming. In the

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later years of the 1980s, with the rapid development of the foreign economy

and trade in China, it was necessary and urgent to expand international financial business. Consequently other domestic banks were approved to operate international business, and more and more specialized banks started to be engaged in international business including foreign financing, forex trade, international settlement and finance lease. The monopoly of the BOC

in the operation of foreign trade and forex business came to an end, and the market share of international settlement business was split between different

banks, which resulted in the emergence of business competition among banks. However hardly any innovation was shown in the bank business and foreign trade financing was not qualitatively changed.

With the progress of opening up, China attracted more and more foreign

investment and an increasing number of foreign enterprises and financial institutions came to invest and start business in China. In the eight years between 1986 and 1993, China utilized USD 118.16 billion in foreign investment. By 1993 there were 98 foreign-invested financial institutions in China, of which

82 were banks, these foreign-invested financial institutions did not only bring foreign capital into China but also acted as a go-between to help China’s

overseas financing, and also offered financial services of an international caliber

to foreign-invested enterprises in China. According to the authorized limits of foreign-invested banks’ business operations in China, international settlement

and trade financing were the earliest businesses approved by governmental

departments to be operated by foreign-invested banks. These foreign banks provided services of international settlement and trade financing to foreign

enterprises in China with their strength as well as experienced and skilful international business operation. Although the operation of foreign-invested

banks in China was not competitive enough to impact on the domestic banks, the advanced operation ideas and high-level operative competence of the

foreign banks set an example to domestic banks, helping domestic banks to realize the international trends of international settlement and trade financing.

In the early days of this economic transformation, the reform of the forex

control system was initiated. In order to reform the foreign exchange allocation system in which the country’s revenue and expenditure were all controlled by the central government, and for the purpose of motivating units to make a profit

on the currency market, increasing forex earnings and improving the allocation

of forex resources, the forex retaining system started to be implemented in 1979 In this system although forex was generally managed, balanced and allocated

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The Development and Change of Foreign Trade Financing in China

to certain areas by the state, regions and enterprises which were making profits

on the exchange market were allowed to keep a proportion of forex to import

materials to help them develop manufacture and broaden business. The central government determined who could retain their forex earnings and what the

proportion was; and the use of retained forex had to conform to the prescripts

of the government. The more the enterprises which could retain forex and the

proportion of this was, the less the forex allocated by mandatory plans was. In

the implementation of the forex retaining system, the need for swapping forex was becoming more and more urgent. Therefore the BOC started to deal with forex swap in October 1980, allowing units that were approved to reserve forex

to transfer their surplus forex quotas to those units that were short of forex. Later, more and more units were allowed to swap their forex reserves. At the very beginning of the opening of the forex swap market, the exchange rate

was set by the authorities to be a little higher than the official rate. But later, in

March 1988, the government relaxed control of the swap market rate and let the

vendor and purchaser in a forex swap determine their exchange rate. The POC would exercise market intervention within limits, fostering the development and strengthening of regulation through the market.3

(3) The third stage: 1994–2001. With the implementation of the programmatic

Decision of the CPC Central Committee on Several Issues Concerning the Establishment of a Socialist Market Economic Structure adopted by the Third Plenary Session of the 14th CPC Central Committee on November 14, 1993, the Chinese economy and finance went through a series of momentous reforms and events, which had enormous influence upon the reform of foreign trade financing.

The reform of the foreign exchange control system In 1994, the reform of the forex control system in the socialist market economy

was started, in which reform the focuses included: the implementation of a bank forex settlements and sales system, the abolition of forex turningin and retaining and of mandatory plans for and examination of forex use; the realization of the official rate’s uniformity with the market rate and the implementation of a uniform and controlled floating exchange rate system which is based on market supply and demand; the establishment of a unified,

regulated and efficient forex market; the maintenance of forex control policies

on foreign-invested enterprises; and the prohibition on using foreign currencies for pricing, settlement and circulation in the PRC. By completing all of the above

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FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

reforms, the conditional convertibility of the RMB under current accounts were

realized in 1994. The significant reform of the forex control system substantially

promoted and facilitated the development of the foreign economy and trade, pushing forward the rapid development of international business in Chinese

banks. After the realization of the uniformity of the dual exchange rates, all banks were able to compete with the BOC on an equal basis and vigorously expanded their forex businesses, mainly focused on international settlements and trade financing. Therefore conventional foreign trade financing including

letters of credit and export-import documentary credits had the opportunity to develop rapidly.

The export-import policy finance system taking shape At the beginning of 1994, in accordance with the state arrangement of finance system reform, the state-owned banks started to transform from specialized

banks to commercial banks, which was supported by the foundation of three

policy banks in 1994 — the China Development Bank (CDB), the ExportImport Bank of China and the Agricultural Development Bank of China

(ADBC). In particularly, the founding of the Export-Import Bank of China

marked the formation of an export-import policy finance system and operation

mechanism in China. Internationally, the policy financial institutions, no matter

whether in developed countries or in developing countries, are always used by governments as tools to adjust and intervene in economy. Policy financial institutions help to allocate resources in the best way and promote economic

growth and social development with their special functions and means as well

as with their particular financing principles and service scope. For instance, it was an internationally accepted model for a government to foster the

foreign trade of its country and enhance its international competitiveness via the operation of policy financial institutions, thus promoting the integrated

development of its national economy. Almost every developed country and most of the developing countries have adopted strong measures to encourage

export-import policy financial institutions to offer favorable financing conditions and supporting financial services to enterprises in their countries.

During the years between 1978 and the mid 1990s some formerly

conspicuous conflicts, such as the problem that supply did not meet demand, the bottleneck in infrastructure constructions and the severe shortage of forex

were all alleviated to a certain degree. However, some conflicts that had not been so obvious in the previous years, such as the constructive imbalance

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The Development and Change of Foreign Trade Financing in China

between supply and demand, the excessive capacity of the processing industry, the increase in unemployed labor, the limits on resources, environmental

issues and financial risks, became more and more serious. It therefore became

the economic priority to carry out reform of the economic structure reform and implement industrial restrictions in order to transform the extensive

economic growth mode which relied on concrete inputs to an intensive one that depended on technological innovation and increase in utilization efficiency.

The importance of foreign trade made it widely recognized that the increase in

foreign trade should keep ahead of the national economy, and especially that foreign trade should maintain a high speed of growth. Advanced strategies of

export were formulated to transform the forex earning-centered model into a model in which forex earnings were balanced with benefits. Strategies were also focused on the transformation of an extensive increase model, in which

quantity expanded, into an intensive increase model in which quality and benefit increased. Moreover the strategies laid emphasis on the fact that China’s exports should optimize their structure, improve their economic performance

and make use of their comparative superiority to develop themselves. The key measures adopted in realizing the above strategic transformations were

to adjust the export industrial structure and expand the export of machinery and electrical equipment. On July 1, 1994, the Export-Import Bank of China,

which was directly under the leadership of the State Council, was founded at this crucial point in the development of foreign trade in China. The bank was

responsible for carrying out the national industrial policies and foreign trade

policies, providing policy financial support for China’s expansion of machinery,

electrical equipment and plant export, facilitating the upgrading of the lineup of export commodities, enhancing the competitiveness in international markets and promoting the integrated development of the national economy in China.

The founding of the Export-Import Bank of China marked the official

formation of an export-import policy finance system. The bank embodied the government’s policy intention, which was to encourage the development of foreign economy and trade, especially the export trade, using policy financial

means including export finance, export credit insurance (which was later operated by China Export and Credit Insurance Corporation) and securities. The main measures taken included: firstly, with governmental capital and

guarantees as its backup force, it helped export the preeminent products to drive the comprehensive increase of export trade and assure the import of

required products; it converted the advantages and optimized the allocation of

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FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

resources to improve the situation of the BOP and realize a balance between the domestic economy and the foreign economy. Secondly, it fostered and adjusted

the foreign trade industrial structure by offering financial support, encouraging the export of the products with international competitiveness, high-tech

and high added value to gradually transform the quantity increase model of the extensively manufactured and managed foreign trade enterprises into a quality and benefit increase model. Thirdly, in accordance with the objective

requirements of the sustainable growth of the national economy, it helped adjust the domestic industrial structure by offering financial support, encouraging the

development of industries that had advantages in both trade and social benefit while restricting or eliminating the industries that did harm to the environment and had low social benefit, in order to help realize the sustainable and healthy

development of national economy. Fourthly, by offering financial support, it

helped domestic enterprises to link the domestic and international markets together and to find international channels for their products, technologies

and services, laying a foundation for the sound development of enterprises, enlarging the scale of employment and maintaining social stability. Fifthly, by

establishing a healthy financial security system, it offered favorable financing conditions and supporting financial services to enterprises, making up for the

defects and deficiencies of commercial finance and taking the high risks that usually the commercial banks were not inclined to or not competent enough to take, and thus it stimulated, supported and promoted the increase of China’s foreign trade more efficiently.

How to manage cooperation with and complement the commercial financial

institutions after the founding of the bank was a problem the Export-Import

Bank of China had to deal with the aftermath of its founding (in other words, the effects of the establishment of the export-import policy finance system in

China). The general situation in the global trade financial support showed that

the financing support and related financial service of commercial financial institutions made irreplaceable contributions. Especially in China, before

the Export-Import Bank of China was founded in 1994, financial support to

foreign trade enterprises came from the BOC. Statistics shows that during the years between 1978 and 1998, the total number of loans granted by the

BOC was RMB 4 trillion. Even in a short period just after the founding of the Export-Import Bank of China, due to the bank’s lack of a settlement system, few branch organizations and strict restrictions upon supported products and

enterprises, the exports supported by the bank represented only a tiny fraction

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The Development and Change of Foreign Trade Financing in China

of the nationwide export volume and the exports of a larger scale were closely

related to the financial support offered by commercial banks. Therefore, while

intensifying the policy foreign trade financial support, further exploiting the potential of commercial banks to offer financial support and strengthening the cooperation and complement between the two types of financial institutions became a kind of policy orientation and practice to improve the trade financial system during that period.

China’s entrance into the International Chamber of Commerce (ICC) In ICC, which was founded in 1919, has always been engaged in developing and

constructing relevant international practices and has drawn up and published a series of international practices on international trade and international settlement, such as the International Rules for the Interpretation of Trade Terms,

Uniform Customs and Practice for Documentary Credits, Uniform Rules for Collections and Uniform Rules for Demand Guarantees etc. These international usages are widely implemented in international economic activities and are highly authoritative. In June 1998, approved by the State Council, the China Council for the Promotion of International Trade (CCPIT) started to operate in the name of the China Chamber of International Commerce (CCOIC) and applied to join the ICC. On November 8, 1994, in its 168th council meeting held in Paris, the ICC passed a resolution to allow China to join the ICC and founded the ICC CHINA. On January 1, 1995 the ICC CHINA, established under the leadership of the CCPIT, was officially founded. Before China joined the ICC, although foreign trade enterprises and banks had followed the international usages promulgated by ICC in their external contacts, the binding capability of these international usages was limited. After China’s entrance into the ICC international communication and cooperation in foreign economics and trade as well as finance have been strengthened. In particular through taking part in the ICC’s research, drafting and promotion of international usages, China has driven its enterprises, banks and government departments to understand the international business rules correctly and to follow those rules strictly, among which there are a series of international practices about international settlement and trade financing. It can be said that although in the mid 1990s the marketization and internationalization of financial services in China was not very developed, China’s entrance into the ICC, as a groundbreaking progress, marked that China became a real part of the international business rules system, which facilitated the foreign trade and

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FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

financial rules construction in China meeting the international requirements. China’s entrance into the ICC is of great significance to the internationalization and standardization of trade financing in China.

China’s strategies to withstand the Asian financial crisis: making every effort to expand exports In the second half of 1997, the financial crisis broke out in Southeast Asia and spread to all Asian regions in a short time. It then affected Russia and some Latin

American countries, tremendously influencing the world economy. China’s foreign

trade was inevitably impacted by the Asian financial crisis. After the beginning of 1998 China’s foreign trade worsened rapidly and the export trade showed a comparatively high negative growth for four successive months from May to August in 1998. The Chinese government was unprepared to confront the drastic

decline in foreign trade, and with the great efforts made by the government the volume of exports in 1998 amounted to USD 183.7 billion, increasing by only 0.5% compared to 1997. The foreign trade situation remained serious in 1999 as the export trade in the first half of 1999 continued falling as it had in 1998.

The impact of the Asian financial crisis prompted people in all walks of life

to think about the orientation China’s foreign trade development. Our shortterm goal was to rally exports and maintain the growth in exports; our long-

term goal was to continue adopting measures to guide the change in the model

of foreign trade exports so as to facilitate the sustainable development of trade. The common sense at the time was: in the development of national economy,

there was a need for us to make every effort to expand exports, and based on this several policies and measures were put forward, one of which emphasized

strengthening the complementation of export-import policy finance and commercial finance and reinforcing the financial support. On the one hand, in

the framework of the export-import credit system, the Export-Import Bank of

China made use of some policy financial instruments such as export finance,

export credit insurance and guarantees to give more and more support to the export of machinery and electrical equipment, complete sets of equipment,

ships etc. By May 1999, the total amount of export seller’s credit approved by

the Export-Import Bank of China had added up to RMB 76.29 billion and USD 140 million, the total amount of the approved export buyer ’s credit added up to USD 100 million, and the foreign guarantees offered amounted to USD

1.44 billion. The export credit insurance insured by the Export-Import Bank

of China amounted to USD 1.64 billion, supporting the export of machinery

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The Development and Change of Foreign Trade Financing in China

and electrical equipment with a total contract value reaching USD 29 billion. On the other hand, with the diversification of the banking system (including

state-owned banks, joint-equity banks, city commercial banks and foreign-

invested banks) and the development of the financial market, the competition

in international settlement and trade financing was increasingly fierce and the business scale, although expanding rapidly, was still centered on conventional

businesses including import L/Cs, packing loan under export L/Cs and export-

import documentary bills. New businesses such as forfeiting and international factoring were still not well developed.

A follow-up problem was that, influenced by the Asian financial crisis and

disturbed by the disorder in some export areas, some domestic foreign trade enterprises met challenges in their fund turnover—they were unable to pay

the matured L/C or financing funds. At the same time, the banks did not have a thorough understanding of the risk in trade financing and they were not well-prepared to solve the problem, which led to an abrupt increase in the

business risk. Therefore, during this period, the standardized operation and risk

management of international settlement and trade financing attracted much

attention—the regulatory authorities reinforced supervision and all banks did not only design relevant management systems and operational procedures, they

also brought foreign trade financing into the system of credit management and

enterprise credit extension management. With the rapid expansion of the scale of foreign trade financing services, risk management had become an essential part of the risk avoidance of banks, which was a remarkable advance.

(4) The fourth stage: 2001 (China’s entrance into the WTO) to present.

China’s entrance into the WTO on December 11, 2001 was a historic sign

which indicated that China had entered into the world economic system more

deeply in every aspect. The rapid development of the foreign economy and trade as well as the all-round opening-up of the financial industry promoted a qualitative change in foreign trade financing.

The rapid development of export-import trade has generated enormous needs for foreign trade financing After China’s entrance into the WTO, the export-import trade in China developed at a high speed. As shown in Table 6.1, during the years from 2002–

2007 the total volume of export-import trade increased every year with a growth rate of more than 20%. In 2004 the total volume of export-import trade in China

added up to more than USD 1,000 billion for the first time, ranking third in the

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FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

world behind the U.S. and Germany; in 2007, the total volume of export-import

trade in China added up to a record USD 2.1738 trillion—more than USD 2,000 billion for the first time. The rapid development of export-import trade in

China and the increasing trade in staple commodities and large machinery and

electrical equipment generated a huge demand for integrated financial support,

and foreign trade financing in China moved quickly into a developmental stage of reform and innovation.

The reform of the RMB exchange rate system has facilitated the new development of foreign trade financing in China. Since July 21, 2005 a series of reforms have been implemented in the RMB

exchange rate system. These reforms established a managed floating exchange

rate system, allowed banks to decide the posted rates by themselves and put

on multiple prices in a day, relaxed the forward forex settlements and sales, started foreign currencies/RMB swap transactions and implemented out the

forex market maker system. The reforms also eased some policies on the control of forex under current accounts and capital accounts, creating a more relaxed

environment for the development of the foreign trade financing market and the innovation of products. Table 6.1.

The statistics of export-import trade in China from 2002–2007 (100 million USD)

Year

Export-Import Trade

Export Trade

Import Trade

Amount Growth Rate (%) Amount Growth Rate (%) Amount Growth Rate (%) 2002 2003 2004

6,207.7

21.8

3,256.0

22.3

2,951.7

21.2

11,545.5

35.7

5,933.2

35.4

5,612.3

36.0

8,509.9

2005

14,219.0

2007

21,738.3

2006

17,606.9

37.1 23.2 23.8 23.4

4,382.3 7,619.5 9,690.8

12,180.1

34.6 28.4 27.2 25.7

4,127.6 6,599.5 7,916.1

9,558.18

39.9 17.6 20.0 20.8

Source: The data is from China Customs Statistics.

Restricted by conventional operating ideas some enterprises, especially

the state-owned enterprises, were insensitive to international financial market trends and movements, and the long-term relative stability of the RMB exchange rate had enabled enterprises to operate in an environment where there was no pressure from exchange rate risk. Therefore the enterprises had little

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The Development and Change of Foreign Trade Financing in China

sense of risk avoidance and did not have a sufficient knowledge of financial derivative tools. Objectively, the limited demand restricted the development and application of risk avoidance products. Fig. 6.1.

The growth situation of export and import in China from 2002–2007

100 million USD

(%)

25,000

100

23,000

21,738

90

21,000 19,000

80

17,606

70

17,000 14,219

15,000 13,000 11,000

50

8,509

9,000 7,000

60

11,545

6,207

5,000

40 30

37.1

35.7

21.8

3,000

23.8

23.2

23.4

10

-

1,000

20

0

– 1,000 2002

2003

2004

Total volume of export and import

2005

2006

2007

Growth compared to the previous year

With the increasing elasticity of the RMB exchange rate, the enterprises

had to face increasingly heavy pressure from exchange rate risk, which resulted in an obvious increase in their initiative to establish exchange rate risk avoidance mechanisms and apply all kinds of risk avoidance methods, and in

this way the enterprises’ capabilities to deal with exchange rate fluctuations have been gradually increasing. Looking at the practices of different kinds of

enterprises, including Chinese-invested enterprises and foreign-invested ones,

manufacturing enterprises and specialized foreign trade enterprises, we can conclude that the commonly used exchange rate risk avoidance methods include trade financing, applying financial derivative products, altering methods of

settling trade accounts, raising the prices of exported products, settling in non-

USD currencies, raising the proportion of domestic sales, and employing forex financing products. Among the methods listed above, trade financing is the

most commonly used. With the swift growth of China’s foreign trade exports,

the competition in exports has become more and more fierce which contributes

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FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

to an obvious increase in credit sales and an extension of the accounts receivable

collection periods, and thus the enterprises need to solve properly the problems in cash flows during the period between consignments and forex receipts.

Some trade financing methods such as outward documentary bills, packing

credit and anticipatory L/Cs can effectively help export enterprises arrange

their cash flows before and after shipping rationally. Meanwhile enterprises can lock the amount of their forex receipts in advance to avoid exchange rate risk. While the conventional trade financing methods are widely used, there

has been an increase in the application of financing products such as forfeiting

and international factoring as well as some derivative financial instruments that

are closely related to trade financing, including forward forex settlement and sale, forex swap and non-deliverable forwards of RMB abroad. Furthermore, the cost of trade financing is always lower than the interest rate for a RMB loan

in the corresponding period, which further motivates enterprises to use trade financing to avoid risks.

The reform of the RMB exchange rate formation mechanism, together

with the enterprises’ universal need for risk avoidance, has facilitated the construction of the forex market in China and objectively promoted the rapid development of participants in the forex market, the transaction modes and

transaction types. Especially with the increasing popularity of the enterprise supply chain management, the development and promotion of risk avoidance

products have been brought into the bank supply chain financial services

system. For instance, the “Da”-series trade financial products (Import Hui Li Da 進口匯利達 , Export Quan Yi Da 出口全益達 , Rong Fu Da 融付達 , Rong Xin Da 融信達 , Rong Yi Da 融易達 , Tong Yi Da 通易達 , Rong Huo Da 融貨達 etc) created by the BOC provided enterprises with all-round financial services that

can satisfy all their needs in operation in an international environment where the exchange rates and interest rates keep changing.

The all-round opening up of the financial industry has promoted innovation in foreign trade financing. For a long time banks in China have mainly provided services of savings deposits and loans but have not attached enough importance to foreign trade

financing and intermediary businesses. This situation did not improve greatly until long after China’s entrance into the WTO.

In 2003, the “side-changing” by Nanjing Ericsson Company brought about

a re-exploration of the importance of foreign trade financing in the domestic

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The Development and Change of Foreign Trade Financing in China

banking system. Nanjing Ericsson was a joint venture company founded by Ericsson and Panda Corporation in 1991. With more than ten years’ of development, Nanjing Ericsson has become Ericsson’s biggest R&D center and

production base in Asia. The company is not only a top taxpayer in Jiangsu Province, but also an important client which many banks compete for. However

in March 2003, Nanjing Ericsson closed all its financial business in Chineseinvested banks including the Bank of Communications and then applied for

loans and other financial services in foreign-invested banks. It is said that there are two direct reasons for Nanjing Ericsson’s “side-changing”: the first

one is that the headquarters of Ericsson had reduced its loans both in Chineseinvested banks and in foreign-invested banks in China; the second reason is

that Nanjing Ericsson believed that Citi Bank could transact the transfer of the non-recourse accounts receivable — factoring, which could not be transacted in

Chinese-invested banks. Although the “side-changing” of Nanjing Ericsson was only an individual event, it reflected the fact that the Chinese banks had fallen behind in foreign trade financing and that clients, especially the transnational

enterprises, thought the Chinese banks were unsatisfactory. The foreign banks’

absolute advantages in international trade financing, along with transnational enterprises’ urgent need for convenient and efficient international settlement and trade financing of high quality, forced the Chinese banks, which had been

accustomed to the conventional operations, to confront great challenges and

heavy pressure. The positive effect of Nanjing Ericsson’s “side-changing” lay in that the event drove Chinese banks to become aware of the gap between their abilities and clients’ requirements, to realize the importance and urgency

of speeding up financial innovation, and to really look at the strategic value of foreign trade financing. It can be said that Nanjing Ericsson’s “side-changing”

became a symbolic motivational factor, contributing to the Chinese banks’ comprehensive recognition of the three-dimensional and all-round financial service concepts and thus facilitating product innovation and procedure redesign in the Chinese financial industry. In this way, foreign trade financing in China entered into a brand new developmental stage.

 On December 11, 2006, with the implementation of the Regulations of the

People’s Republic of China for the Administration of Foreign-Funded Banks , the Chinese government fulfilled its promise made to the WTO five years previously by canceling both the regional and client restrictions on foreigninvested banks’ operation of RMB business and abolishing the non-prudential restrictions upon foreign-invested banks in China, which marked that the

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FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

banking industry in China had carried out “opening up” thoroughly. According to the statistics provided by the China Banking Regulatory Commission (CBRC),

by October of 2007 there were 20 foreign-invested banks with 95 branch offices in China; 3 Sino-foreign joint venture banks with 5 branch offices and

1 subsidiary body; 3 foreign-funded financial companies; and 130 branch offices of 72 foreign-invested banks from 22 countries and regions. In addition, there

were 241 representative offices of 191 foreign-invested banks from 46 countries and regions in 25 cities in China. And 23 Chinese banks had been invested in by 35 foreign institutions with a total investment of USD 21 billion. According to

the newly-amended PRC Regulations for the Administration of Foreign-invested Banks , on the premise of allowing foreign-invested banks to freely choose their commercial forms, the foreign-invested banks which enjoy both a large number of banking outlets and a comparatively large scale of saving deposits and are likely to operate retail trades of RMB are encouraged to reorganize their branch offices into corporate banks registered in China. By the end of July in 2007, 21 foreign-invested banks had been approved to reorganize their branch offices in China into corporate banks. As foreign-invested banks had entered Chinese market on a full scale by the end of 2006, foreign trade financing had become the hottest business in which the Chinese and foreign-invested banks have been competing fiercely. Compared to other bank businesses, trade financing is a crossover and integrated financial service that is a synthesis of assets business, intermediary business, off-balance sheet business and international business, and it enjoys the advantages of high yield, high negotiability, low risk and low occupation of capital, which has strategic meaning for the banks’ optimization of operational structures, innovation of product services, enrichment of revenue sources and enhancement of competitiveness. A conspicuous change after China’s entrance into the WTO is that, motivated and influenced by foreign-invested banks, the Chinese-invested banks have been making every effort to make innovations in their systems, products, technologies and marketing, and at the same time redesign their procedures, in order to strategically establish a trade financing service platform which is based on the needs of supply chain control and thus satisfy the requirements of enterprises and supply chain in every aspect. Since the policy of reform and opening up was put forward, with the development of the foreign economy and trade as well as the growth of finance in China, foreign trade financing in China which has gone through transformations from planned to market-oriented, from unitary to diversified,

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The Development and Change of Foreign Trade Financing in China

and from closed to open, has gradually become an important financial service in the global supply chain system.

With the rapid development of China’s foreign trade, the foreign trade

financing business has become a new favorite in the Chinese and foreign financial institutions’ competition of expanding the market. It is worth

mentioning that the universal application of supply chain management and modern logistics in international production and circulation facilitates the comprehensive development and transformation of foreign trade financing — the integration of financial factors and foreign trade. Understanding the

background and meanings of the development and transformation of foreign trade financing is of far reaching importance in promoting innovation in

foreign trade financing, improving the efficiency of foreign trade financing, and facilitating the sustainable development of China’s foreign economy and trade.

Reform of the Foreign Trade Financing Model in China As a financial credit activity which is closely related to foreign trade, the key

value of conventional foreign trade financing lies in its dealing with capital

restriction on international purchase and sale of goods. Therefore conventional foreign trade financing has the typical features of a negotiable finance:

(1) Financing support is particularly centered on international circulating

sections, and capital always flows into circulation intermediaries and rarely into production processes. Trade financing in China had followed the negotiable

finance model for a long time and the finance capital was allocated to the

trading process in foreign trades via operational channels of international

settlements. For instance, packing credit and export documentary credit, as two typical conventional foreign trade financing means, are trade credits provided by banks in the operation of a documentary letter of credit to meet the requirements for capital of export enterprises before and after shipping.

(2) Foreign trade financing takes negotiable enterprises in international trade

as its financing objects and satisfies the enterprises’ needs for external capital in export operations, accomplishing the account settlements of international credits and debts under different payment arrangements. Therefore foreign

trade financing always needs to be combined with operation of payment

means. For many years, China implemented an administrative examination

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FOREIGN TRADE GROWTH AND ECONOMIC DEVELOPMENT

system on the main bodies engaged in foreign trade. Most of the enterprises that were approved to run foreign business were negotiable enterprises, and

these negotiable enterprises were exactly the main bodies of foreign trade financing. Since July 1, 2004, the amended Foreign Trade Law of the People’s

Republic of China has been brought into effect; according to the agreements made by China with the WTO, at the end of 2004, the admission and recording system was carried out upon the main bodies in foreign trade. Consequently, the business resources of the foreign trade companies that had had a monopoly were split among more enterprises and individuals that were approved to run trade business, and there was an opportunity to reshuffle foreign trade. Correspondingly, the entities that required foreign trade financing have gradually expanded from conventional specialized foreign trade companies to a variety of enterprises. (3) Foreign trade financing takes goods in real trade as the mortgages of the finance, and the finance loans are self-liquidating. The self-liquidation of foreign trade financing reflects the basic feature of conventional negotiable finance — the mortgages of the finance are always products in cross-border negotiation and with the accomplishment of international marketing, the finance capital is self-liquidated through the operation of international settlements. (4) Since the supply and demand of negotiable international trade financing are centered on foreign trade negotiable areas and specialized foreign trade enterprises, the finance decision-making and execution, the finance profit evaluation, the finance risk control and the finance rules are all closely related to circulation intermediaries in foreign trade and the export-import activities of enterprises. Based on this feature, in terms of the providers of finance — banks — their relevant credit extension administration, market expansion, product service and risk control in foreign trade financing are obviously concentrated on transactions in the foreign trade chain; and in terms of the demanders of finance — the export-import enterprises — the intervention of external finance is helpful in realizing the international purchase and sale of goods, thus maintaining the stable operation of the foreign trade chain. It is undeniable that in the global production and trade system, negotiable foreign trade financing realizes the periodical intervention of financial service factors, effectively making up for the funding gap in products’ (services’) entrance into the international circulation market. It is also of far reaching importance in promoting the linking up of markets, ensuring both the property rights and the cross-border transfer of currency ownership and enhancing the

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The Development and Change of Foreign Trade Financing in China

efficiency of international switching, More importantly, as a basic channel for foreign trade financing, negotiable finance is already mature and despite the

continual extension of international commerce and the evolution of both the intension and extension of foreign trade financing under the background of globalization, the support of negotiable foreign trade financing is still making a remarkable contribution.

With the universal application of supply chain management worldwide, new

changes have taken place in the allocation and organization of the elements of production and exchange. The supply chain, which consists of suppliers,

manufacturers, wholesalers, sellers and consumers, is a demand-supply transport network designed for the products’ manufacturing and circulation. In recent years, with the emergence of global manufacturing and the rapid development of information management technology, supply chain has become commonly

used in manufacturing management and has become a new management

model. Under supply chain management, what decides the profits of enterprises

is no longer limited to the enterprises themselves — the profits depend on the aggregate efficiency of a series of value activities that are undertaken by

different relevant enterprises in the supply chain, which include purchasing,

manufacturing, marketing and service provision. The foreign trade circulation model has also changed: it integrates enterprises and cooperating partners into a rigorous organism. Centered on a key enterprise, a strategic alliance that includes all the upstream and downstream enterprises is formed and an international trade supply chain is made up of suppliers, manufacturers and traders with all

members taking risks and sharing the profits together; and the supply chain

operates by making use of the information system optimization supply chain and

replaces inventory control with information management. A strategic alliance, instead of a single enterprise, competes in the market, facilitating the overall

value-adding of the supply chain and all enterprises involved with the interaction between supply and demand in the chain.

Around the end of the 1990s the supply chain and supply chain management

attracted more and more attention in China, and the research and practice of

supply chain management theories, supply chain design and reconstruction, supply chain information system construction and supply chain management

methods was developing swiftly. In addition, with China’s deepening participation in the international division of labor, the areas of elements of

production as well as the inevitable trend of global allocation would become increasingly obvious, promoting the transnational operation of enterprises.

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“Investing abroad and attracting investment from other countries at the same time” has become a prominent characteristic in the operation of the

national economy. And enterprises have kept innovating in their methods of competition in accordance with the changes of the competition environment and the strengthening of their rivals, and in the competition the supply chain’s

effectiveness in reducing costs and increasing efficiency has been demonstrated

thoroughly. The competition between enterprises has gradually transformed into competition between supply chains. An enterprise must either construct a

competitive supply chain or join a competitive supply chain. Solitary operation by a single enterprise can never be competitive enough in the market.

Under the supply chain management, the foreign trade operation system

in which single enterprises are the basic elements has gradually evolved into foreign trade supply chain systems, resulting in the reform of foreign trade

financing in many aspects. Different kinds of enterprises in the supply chain

have different demand periods and particularities that call for a thorough integration of financial factors and the supply chain, which consequently

promotes the development of foreign trade financing from the conventional negotiable financing to supply chain finance:

(1) The financial support runs throughout the international trade supply

chain and relevant enterprises. The integration of financial capital and

industrial economy generates a sustainable industrial ecology in which the banks, enterprises and the supply chain coexist on the basis of mutual benefits. Compared to conventional foreign trade financing, supply chain finance has

shown qualitative changes in both its intension and its extension; for banks, an active promotion of innovations in concepts, systems, products and technological support has become a key move in their construction of a strategic services

platform and enhancement of core competency. After China’s entrance into the WTO, the commercial banks in China have been engaged in the research and practice of supply chain finance. For example, in 2006, the Shanghai Pudong Development Bank (SPD Bank) put forward the “supply chain financing

solution”, offering all-round services to enterprises by integrating the industries,

products and objects; in 2007, the solution was further amended into the “supply

chain financing services scheme”, which is a synthesis of supply chain financing services, supply chain electronic services and offshore bank services.4

Because of its major accomplishments in its distinct trade financing,

China Merchants Bank (CMB) was honored by Asia Money — a famous and

authoritative financial magazine — as “the best trade bank in Mainland China”

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in 2004. CMB’s systematic integration of settlement and financing facilitates the overall development of foreign financial strategies.5 Based on the requirements of enterprises, the China Construction Bank also made innovations in composing new trade financial products and services by integrating trade

financing and credit and capital services for enterprises; and in 2006, the CCB

took the lead in founding a documents center among the four state-owned

banks in order to optimize the service procedures and provide enterprises with all-round financial solutions. 6 In 2005, China Merchants Bank founded the “Department of Trade Finance” and made clear the business concept that CMB

should “be engaged in specialized services and develop distinct trade finance”.

Following its managing guideline which emphasizes “profession, devotion and specialization”, CMB has launched many distinct services including

management of accounts receivable, logistics financing, credit and insurance

financing, international factoring, and value-added services. CMB has taken advantage of the extension of the trade chain to provide clients with integrated trade finance services of high efficiency, low cost and high added value.7

(2) Based on their sufficient evaluations of the core enterprises in the foreign

trade supply chain, the banks design complete sets of service schemes which

involve both the upstream and downstream enterprises in accordance with the features of the industries and the structure of the supply chain. By infusing

capital into the operation of enterprises, banks do a good job in coping with

the imbalance and fracture of the supply chain; by integrating credits into the purchases and sales of enterprises, banks build up the mercantile credits of enterprises thus enhancing the aggregate competitiveness of the supply chain

and ensuring its steady operation. In the conventional foreign trade financing model, the relationship between banks and enterprises is established in the

occurrence and operation of export-import trades, in which trades the banks provide settlement and financing services to their clients on the basis of the

clients’ needs and the services offered to different clients are independent and separate from each other. However, in the supply chain financial competition,

banks have to possess the ability to integrate their allocation of resources into the supply chain and into the enterprises along with the upstream and downstream clients of the enterprises. Banks must also be competent enough to provide all-round financial services on the basis of the supply chain as a whole instead of a single enterprise. For example, the international settlement service of the BOC breaks the conventional geographical separation of “international

and domestic” and covers all the international trade services and the settlement,

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financing and other related services under the domestic trade items, forming

a supply chain financing service system. In 2007, the volume of the BOC’s

international settlement reached a total of USD 1 trillion, amounting to USD 1.4 trillion, and the BOC became the first commercial bank in the world whose annual volume of international settlement exceeded USD 1 trillion, which made the scale of the BOC’s international settlement service top in the world.8

(3) In accordance with the circulation structures and paths of material flows,

cash flows, information flows and service flows, and in order to satisfy the need to improve both the cash flows and the overall financial strength of the supply

chain, the banks offer integrated financing conveniences to enterprises. The liquidity of foreign trade facilitates the transition of foreign trade financing from

negotiable financing to supply chain financing, and it also requires banks to develop new products, new marketing models and new strategies, to enrich the

contents of services and to expand the extension of services in accordance with

the operating rules of the supply chain. In recent years, innovative financing by commercial banks in China mainly includes the following aspects: (a) Indent financing

Banks offer production and purchase financing to suppliers on the basis

of commercial orders (sales contracts) signed by upstream suppliers and core

enterprises, taking the suppliers’ rights and interests under commercial orders

as securities and the future cash flows to be yielded in the commercial orders as source of repayment.

(b) Logistics financing

During the periods of the transportation and storage of goods, the banks

offer production and purchase financing to suppliers, taking the goods or property of goods (such as warehouse warrants) as securities and the future cash flows to be generated in the sales of goods as sources of repayment. For instance, the BOC cooperated with Sinotrans and other logistics and storage

enterprises to develop the financing service called “Rong Huo Da 融 貨 達 ”, in which banks provide their clients with services including import letters

of credit/bills of exchange, import collection on documentary bills, outward remittance financing and domestic integrated factoring financing. The service

promotes the combination of trade logistics and capital flows by “activating” goods for enterprises, and thus explores and develops new channels for credit

extension financing. The service does not only tackle the difficulties in financing for small and medium-sized enterprises, but also helps large-sized enterprises to enhance their competitiveness in the supply chain.9

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(c) Accounts receivable financing

With the formation of the buyer’s market, the focus of competition among

enterprises has shifted from price and quality to modes of sale. Accounts

receivable is an essential product of enterprises’ credit sales of merchandise. A strict control over accounts receivable used to be a significant principle

in management of clients’ credits. However with the advance of marketing concepts and the improvement of marketing techniques, people have come to

a new understanding of accounts receivable’s contribution to the promotion

of enterprises’ marketing. Therefore the risk avoidance model that emphasizes strict control over accounts receivable has been replaced by an efficient

utilization of the asset value of accounts receivable. Correspondingly, accounts receivable financing has come into vogue.

Accounts receivable financing refers to the financing offered by banks to

exporters of goods as well as other enterprises in the supply chain on the

basis of taking the premature accounts receivable that have been off-set as securities, and factoring is one model of accounts receivable financing. As a

financial product that has a history of one hundred years, factoring contains all kinds of solutions, including management of credit standing and reputation,

funds accommodation, risk control, management of accounts receivable and

collection of loans, which solutions satisfy enterprises’ requirements to lock risks with fixed costs, to reinforce negotiability, to improve cash flows and to enhance the management of enterprises with the help of external resources.

A more remarkable advantage of factoring is that it enables enterprises to transfer the accounts receivable generated by credit sales to factoring suppliers

conditionally, and in this way the banks are able to reclaim part of the debts to fill the gaps of cash flows and thus accelerate the circulation of capital, enhance the efficiency of capital operation, improve the financial conditions and advance

the realization and circulation rate of accounts receivable. At present, factoring has been applied worldwide.

The concept of factoring was introduced in China at the end of the 1980s,

but for a long time factoring was neither well recognized nor applied by banks and so factoring services barely developed. There are three main reasons for

this. Firstly, the credit system in China still needed to be improved as the

credit culture had not gained popularity, credit transactions were not widely

applied by enterprises and conventional settling methods such as L/Cs remained the primary choice of many enterprises. Secondly, the threshold of

factoring services is so high and the restrictions upon clients is so strict that a

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large number of small and medium-sized trade enterprises are not accepted by the service, which restrains the promotion of factoring. Thirdly, the risk

control of banks put too much emphasis on the importance of mortgages and lacked the ability to evaluate clients’ credit, to monitor the capital flows and to recognize the financial conditions, therefore the banks were not competent to

provide their clients with financing services without mortgages and favorable risk pricing, which meant that the banks were inferior to foreign-invested

banks in the competition for customers. Fourthly, all factoring services are provided by commercial banks whose marketing instruments and service scope were too limited to form a client-oriented operation mechanism. However, in recent years, with the promotion and competition of supply chain finance,

the factoring service in China has shown essential rapid development and the

commercial banks have developed and promoted factoring services as their key business.

(d) Confirmation financing

Banks offer financing services to purchasers on the pledge of suppliers’

desired warehouse warrants at the warehouses authorized by banks, on

condition that the drawn rights of purchasers are controlled by the banks. The

services help provide small and medium-sized enterprises at the nodes of the supply chain with financing conveniences — effectively tackle the shortage of

capital in purchasers’ full purchases, accomplish leveraged purchase supported

by external financing, and promote the mass sales of suppliers. The financing products of confirmation financing mainly include: advanced receipts financing (establishment of L/Cs on deduction of margin money, offshore pledges and

securities, discounting by procuration etc), inventory financing (pledge of

movables, standard pledge of warehouse warrants, inward documentary bills,

guarantees on goods pickup etc), receivable financing (international factoring,

packing credits, outward documentary bills, forfeiting, financing under export credit insurance items etc) and so on.

(4) The international trade services platform has been employed to enhance

the efficiency of supply chain financing. In April 2007, the Society for Worldwide

Interbank Financial Telecommunication — a famous international interbank

non-profit cooperation organization—officially launched a cooperative

central data matching public system — SWIFTNet TSU (Trade Service Utility), providing enterprises with a more extensive supply chain financing services platform based on TSU. With the increasing popularity of supply chain financing, enterprises and banks have both been paying much attention to the

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enhancement of their efficiency, the reduction of their costs and avoidance of

risks. SWIFTNet TSU, with its fast, highly efficient, safe and low cost “Data Matching” function carries out a centralized processing of orders, transport

documents, invoices and other foreign trade documents, offering an excellent

message–exchanging platform to enterprises and banks. By January 2008, 53 banks had joined the SWIFTNet TSU including four Chinese banks — the Bank

of China, the China Construction Bank, China Minsheng Banking Corporation and Huaxia Bank. With the help of data matching and the standardized process operated by SWIFTNet TSU, the four Chinese banks can extend their supply chain financing services and increase their service efficiency. For example, the

BOC makes use of SWIFTNet TSU to extend its supply chain finance. Based on

this extension, the BOC develops services such as cash flow management and documentation agency in accordance with the needs of clients and the market.

Reform of the Financing Products and Financing Operational Methods of Foreign Trade Financing Reform of the financing products — from simplex trade financing to structural trade financing Conventional foreign trade financing usually provides credit support to export-

import enterprises in the operational process of international settlements, and its

financing products are always simplex. For example, the foreign trade financing under L/C is limited within the framework of L/C products in spite of the various financing channels (including export L/C finance and import L/C finance).

According to the value chain theory, enterprises’ competitive edge is originated

from a series of activities that create value and that compose the value chain of

the enterprises. Combined with supply chain management and modern logistics

services, the value chain of the enterprise can be subdivided into many correlated value-creating processes, including internal logistics, production operations,

external logistics, marketing and services. Meanwhile, if there is a funding gap in any enterprise of any sector in the processes, the need for financing will

be triggered and the infusion of capital and relevant financial services would influence the cost inputs and value outputs of the enterprises, maximizing the

appreciation of the enterprise value chain. Therefore the demand for foreign trade

financing stems from the enterprise value chain, product innovation re-enters the enterprise value chain, and the profits and risk avoidance depend on the

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enterprise value chain. The close relationship between foreign trade financing and

the enterprise value chain promotes the extension of international trade financing from simplex product finance to structural trade financing.

Based on the production cycle, transaction mode, delivery date, payment

term, financial arrangement, credit standing and reputation of affiliated

enterprises and other features of international trade items, structural trade financing practices the best combination of conventional finance products,

export finance, export credit insurance, forfeiting, project finance and financing

lease, and designs personalized financing products that integrate material flow,

information flow and capital flow to provide an all-round financial service to the enterprise value chain and all kinds of enterprises. In practice, structural trade financing is particularly suitable for international staple commodity

trade and other international trade in ships, airplanes and complete sets of equipment. Value-added services including export finance in advance, import advance finance, structural L/C finance, management of accounts receivable,

fund management and risk management are offered by banks on the basis of

their global grasp of the structure of the staple commodity trade enterprise value chain and their dual control of the material flow and the capital flow. In

addition, the international trade in complete sets of equipment, airplanes and ships has the characteristics of capitalization and projectization, and even has

some policy features. Therefore the structural trade financing needed in these international trades always contain many transnational combined finance modes such as international project finance, investment allowance leveraged lease, financing lease and official export credit support.

Let us take trade in ships as an example. Since 2003 the international shipping

market has become increasingly developed with investment in ships rising

rapidly. Due to the high costs of ocean ship production, in the framework of

shipping finance for new shipbuilding, only a small part (20–30%) of the funding

is provided by the ship-owner and the rest is mainly provided by external

shipping finance. The entities of shipping finance consist of banks and other financial institutions, which cooperate to personalize the financing structures for shipping companies and shipyards on the basis of the companies’ and shipyards’

special needs, offering financing conveniences and services including ship

mortgage finance, financing lease, business leasing, advance payment guarantee and export credit. The rapidly expanding international shipping trade has

accelerated the development of the international shipping finance market and attracted more internationally recognized financial institutions to join the market.

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With the enhancement of the overall competency of industries in China, the

building and exporting of ships has been increasing. The shipping industry in China has gone through three important stages since 1978: the first stage

was when the Chinese shipping industry entered and adjusted itself to the international shipping market; the second stage was when the Chinese shipping

industry developed steadily in the international market; and the third stage was when the industry established its competitive edge in an all-round manner.

Through the three stages, the Chinese shipping industry has formed a virtuous circle of “manufacturing and developing this generation of products while

researching the next generation of products”, which circle promotes not only

research, development and manufacturing but also export in the shipping industry. In 1982 China’s shipbuilding output ranked seventeenth in the world and the ranking rose to third in 1994, which ranking has been maintained till now. 10 According to the Customs statistics, in 2007 China exported 1,063,881

ships, an increase of 484.7% compared to 2006, and the total amount added up

to USD 11.944 billion, an increase of 49.2% compared to 2006. Chinese ships of more than 500 kinds have been exported to more than 60 countries and regions,

including the nine leading shipping countries. The tonnage of exported ships rose from 10,000 tons to 300,000 tons, and the volume of shipbuilding in China commanded nearly 23% of the world market.

The effective execution of China’s strategy to build and export ships is

closely related to the support from trade financing, especially structural trade financing. In particularly the Export-Import Bank of China has contributed a

lot in the execution of the strategy. Since its founding in 1994, the businesses of the Export-Import Bank have continually emphasized support for the national

shipbuilding industry and shipping industry. The bank has fully supported the

shipping industry in China by developing financial products such as export seller’s credit, export buyer’s credit and letter of guarantee. As a main force in fostering financing for the domestic shipping industry, the Bank offered support

to the development of more than 90% of the large and medium-sized shipping enterprises. By the end of 2006, the volume of shipping financing provided

by the Bank had added up to RMB 140 billion and the volume of L/G issued

for the refund of ships’ advance payments had amounted to about RMB 110 billion, which loans had supported the export of nearly 1,500 ships of different

kinds. According to the long-term expansion program of the shipping industry in China, structural trade financing services will play an increasing notable strategic role in shipping financing.

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With the rapid development of the air transport industry in China, airplane

financing has become increasingly significant and has become the most popular business among both Chinese and foreign banks. As the building and trade of

airplanes rather specialized, airplane financing has shown the typical features of a structural financing; therefore airplane financing is a banking syndicate financing model that combines the gathering of materials and financing.

Reform of the financing operational approaches — from international settlement related financing to multiple entities integrated financing Typical foreign trade financing refers to the trade credit that the commercial banks grant to the importers and exporters through international settlement

when they are offering transnational payment, which belongs to extensive

assets operation based on intermediate business. Because the commercial banks are able to offer the basic service of settlement, they have an absolute advantage

in both function and market in the relevant financing competition over international settlement, which has the basic effect that the commercial banks

base themselves on the intermediate business and develop the relevant valueadded product and services to promote the innovative integration of services

and the comprehensive capacity of management. For a fairly long time in the

future, the banks are the absolute or the only supplying entity of Chinese trade

financing. They offer the enterprises trade financing convenience through the channel of international settlement.

Observed from the broad sense of foreign trade management of the

supply link, the staging, marketing timing and purposes have obviously been

more enriched. The management and financing plans of many enterprises

are irrelevant to the international settlement such as the advance payment financing for domestic purchases, financing on pledge of movables during manufacture, accounts receivable financing during selling etc. All of these

financing are crucial to the stable operation of the foreign trade management

of the supply link. The relative separation of financing and international settlement has extended the cooperation chain of foreign trade financing.

Financial institutes incapable of the basic function of payment and settlement

such as some companies, commercial credit companies, merchant employers, financial companies etc. offer distinct financing convenience and services to

the enterprises in each sector of the foreign trade management of supply link through specialized models and promote the subdivision of the foreign trade

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financing market and the research and development of products to different

target customers. In the middle of the 1990s, the export-import policy financial

system in China was officially established. The system, through government financial means, provides financing convenience for economic construction

and the internalization of enterprise management under open conditions, and therefore has injected new vitality based on the export-import credit system to the Chinese trade financing system. In the past decade, the export-import policy financial institutes have been brought into full play and embody the central

role of government guidance and regulation of foreign trade policy in the development of and innovation in China’s trade financing.

It must be noted that the execution of multinational enterprises’ global

strategies means a specific demand for supply chain financing, which as a result prompts a new financing cooperative system. Meanwhile, foreign trade

financing as service provider also develops into multiple entities from the financial entity. The involvement of third party logistics (TPL), known as the

third profit pool of enterprises, has thoroughly changed the traditional mode of “supply, production and sale” and changed the traditional relationship between supply and demand in financing. In the mid-1990s, the concept of third-party

logistics was introduced into China. In order to develop physical distribution, China launched a series of important measures: the eighth “Five-Year Plan”

was targeted at developing tertiary-industry, especially physical distribution; the ninth “Five-Year Plan” was intended to develop physical distribution

through standardization and internationalization; the tenth “Five-Year Plan” was intended to progressively improve the proportion of socialized and professionalized logistics distribution in the fields of production and production

and circulation; and according to the 11th “Five-Year Plan” we should establish a fast, efficient, safe, convenient and internationally competent modern

logistics services system, and improve the socialization, professionalization and modernization of physical distribution vastly by 2010. In 2007, the logistics

in China as a whole was up to RMB 74.8 trillion, an increasing of 25.5%, 1.5% higher than that in 2006. The total volume of cargo transportation amounted to 22.6 billion tons, an increase of 11.8%, higher than the growth of the GDP. Also in 2007, the added value of domestic logistics was predicted to reach RMB

1.68 trillion with a year-to-year increase of 18.8%. The proportion of the added value of logistics in the whole services trade rose from 17.1% in the previous year to 17.5%, and its proportion in the GDP rose from 6.7% in the previous

year to 6.8%. The rapid development of modern logistics has promoted the

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establishment of the network of components and parts producing and purchase by the transnational companies, which will enable more Chinese enterprises to

become involved in the global supply chain. Some excellent Chinese enterprises have made efforts to construct supply chains centered on them. This can form an enterprise strategic alliance to enhance the advantages in brand globally

and strengthen the core competitive force. Third party logistics has become an important support for Chinese enterprises’ integration into the global supply chain system.11

The key advantage of the third party logistics facilitator lies in its control

of entity goods, and the advantage makes it easier not only to operate goods

circulation and goods financing at the same time but also to control the property in the goods and to avoid financing risks. Currently, the third party logistics

enterprises in China are operated both in specialized and integrated ways

and the integrated supply chain model that combines inventory management, goods circulation, and distribution and logistics has been applied in more and more manufacturing enterprises as well as in commercial enterprises.

Apart from the launch of value-added commercial models such as “Warehouse Network+24/48”, the “Whole Management of Supply Chain + Combination of

Logistics and Commerce” and the “Cold Chain Logistics”, financing services

have become a new business that third party logistics enterprises compete to develop. In reality, there are two kinds of approaches for logistics facilitators to

start their financing business: (1) Independent financing mode. The third party logistics facilitators who operate independent financing are always equipped with their own professional financing companies, which companies provide

their clients with integrated services including financing and offer support to the financing inside the enterprises. For example, the famous transnational

enterprise UPS provides distribution financial services to its clients in order to help the clients reduce the costs of possession of inventory, speed up the

circulating fund turnover and improve their financial conditions. Under the current financial monitoring system in China, the independent financing

operations of logistics enterprises are restricted. However, as an irresistible trend, it will develop on a large scale. (2) Cooperation with banks. Some banks make use of their electronic trade and settlement platform to cooperate with transnational purchase groups as well as third party logistics facilitators

to launch outsourcing operation of supply chain management and to offer

integrated finance and logistics services, realizing the funds accommodation with the guarantee of logistics and the transfer of logistics with the support of

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The Development and Change of Foreign Trade Financing in China

capitals. Thus the banks advance their clients’ businesses, enhance the efficiency

of their clients’ capital operation and improve the overall performance of the

supply chain. The “Goods Financing Master”, which was launched through

the BOC’s cooperation with Sinotrans as well as other logistics enterprises, is financing of this second kind. In 2007, the financing loans on pledge of

warehouse warrants issued by the China National Materials Storage and Transportation Corporation amounted to RMB 30 billion with a year-to-year

increase of 100%, and the earnings in pledge supervision increased by 200% compared to that in the previous year.

In general, the evolution of financing from an international settlement

relevant one to a multiple-entity integrated one has accomplished, under the

financing framework of multiple members’ cooperation, not only the systematic

combination of financial capital, industrial capital as well as commercial capital and the supply chain management environment, but also the organic integration

of “multiple flows” (material flow, capital flow, services flow, information flow and value flow), enhancing the efficiency of allocation of factors. In addition, the evolution facilitates the active practice of financial integrated operation in

foreign trade areas, which requires financial institutions to possess different competitive edges, trans-industrial “cooperative-competitive” competencies and creative thinking as well as innovation abilities.

Reform of the Basis and Mortgage Mechanism of Foreign Trade Financing in China Reform of the financing basis — from a document-restricted financing to a non document-restricted financing Document and bill are not only the basic instruments of international trade settlement and finance, but also the basic means to demonstrate rights and

interests. Document is used to demonstrate the ownership of goods and relevant rights and interests while bill is used to demonstrate the ownership of

currencies and creditor’s rights, and the two together compose the key elements of international trade settlement and finance. L/C finance is a typical model

of document-restricted finance, and the “document” is the footstone of L/C

business. Within the international rules framework, the requests on documents

such as “properly filled-in document” and “payment against document” have absolute binding force in conventional foreign trade financing arrangements

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(such as export-import L/C financing) and have absolute influence on the interests of the persons involved.

Document-restricted financing, while providing conveniences including

property rights control and risk avoidance to commercial banks, gives rise to the following practical problems: firstly, the basic principles — “properly filledin document” and “payment against document”, although they ensure both

the independence of banks and the uniformity of payment documents, means complexity and inflexibility of the L/C operation procedures and the financing relies so heavily on documents that the settlement and financing business

are stuck in the inflexible restriction of documents, thus losing efficiency

and adaptability to a certain extent; secondly, the rigid document rules and processing procedures increase work loads, which results in higher transaction

costs; thirdly, the moral hazards associated with documents (such as falsification of documents, faulty documents and strict demands about documents) are likely to happen, causing damage to rights and interests; and fourthly, the

documents’ quality and circulation speeds, and controversies over and even the frauds on documents all have a direct influence upon the assignments of goods ownership in financing, affecting the realization of creditor ’s rights and the safety of financing.

Consequently, in the international trade arena where efficiency and economy

are pursued increasingly, financing products whose settlements are restricted

by documents such as the L/C are no longer popular. It can be said that the

creation and flourishing of the L/C satisfied the distant international trade’s urgent needs for bank credit guarantees in a comparatively closed environment, and the intrinsic flaws were concealed by the advantages of bank credit.

However, with the opening up of the world market, the diversification of

international financial services, the establishment of the international credit system and the improvement of international trade laws and regulations, there

has been a great change in the concepts and practices of international trade operation. The spatial distance between the trade participants has been greatly reduced, which makes the geographical factor less important, and the security

of settlement of debts is no longer the only thing or the primary thing in trade

participants’ considerations when they are about to choose payment terms.

Factors such as efficiency, cost and convenience have become more and more influential which have revealed the intrinsic flaws of the L/C, making necessary

and unavoidable the emergence of reform and innovation in international payments.

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The Development and Change of Foreign Trade Financing in China

For a long time there was hardly any change in the export-import trade

settlement structure, and the conventional modes of payment, including

the L/C payment, were still regarded as the most important. Some foreign economy and trade enterprises’ operation of BOP businesses were so

conservative and programmed that their lack of flexibility and innovation resulted in their constant loss of business opportunities and even damaged

their profits and assets. Therefore, using new concepts and new operation models in international commercial activities for reference will help enterprises broaden their outlook, strengthen their confidence, accumulate experience and enhance their competitiveness. Only by improving their understanding

of the international settlement theories, analyzing the influence of different

factors on the choices of international settlement models, and increasing their specialized techniques for international payments can the enterprises become

more and more mature. A remarkable change is that in recent years, the use of the documentary letter of credit which used to be predominant in China

has decreased, and in some enterprises the decrease rate has reached 40–50%.

Non-document restricted products such as O/A, remittance and factoring have become more and more popular because of their flexible, relaxed, simple

and economic style. The system standardization and operation mechanism of

the non-document restricted financing are different from those of document financing. Measures adopted by commercial banks to protect their profits, rights

and interests have evolved from document-oriented ones into a marketing model which can effectively identify and control the enterprises’ credit risks,

manage the enterprises’ accounting receivable and other credit assets, and can practice different operations for different enterprises. The marketing model

requires enterprises to have a better core business system as well as operating

management model which embody informationization and internationalization,

and enterprises are also required to acquire more diversified and skilled operational techniques.

Reform of the financing mortgage mechanism — from overall credit financing to specialized asset financing In both debt financing and equity financing, the overall credit standing of the credited objects is usually considered by the banks as the key factor in determining whether to grant credit or not. This kind of “overall credit financing” actually becomes a system restriction that leads to difficulties in

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financing for enterprises of small or medium size. The conventional foreign trade financing operation also follows the management system of overall

credit financing, which is difficult for a large amount of small and mediumsized enterprises. Based on this, the adjustment of the evaluation standard

for enterprises’ credit and the implementation of a more flexible “specialized

asset financing” will help to resolve the difficulty in small and medium-sized enterprises’ financing.

The so-called specialized asset financing refers to financing operated

for enterprises’ asset accounts receivable generated in credit marketing.

Enterprises’ accounts receivable are always generated in active sales activities and they increase with the expansion of the operation scale. The accounts

receivable enjoy a short term, high negotiability and high cashability, and

they are less likely to be restricted by factors such as enterprise size and asset liability so that they have comparatively higher live pledge values. In addition,

compared to other enterprise assets, the asset value of the specialized accounts

receivable that are generated in concrete transactions are easier to evaluate and more helpful in lessening asset reduction resulting from dissymmetry in

information, and thus they can reduce the financing costs. Practice has proved that specialized asset financing explores and exploits the asset value of the accounts receivable generated in daily sales and the enterprises’ credit resources

in a reasonable way, providing the financing mortgage mechanism with a more

economic and operable selection scheme that is more capable of satisfying the actual requirements of enterprises.

In the foreign trade area, specialized asset financing such as international

factoring, of which the key content is the off-take of accounts receivable, is particularly suitable to satisfy the requirements for capital and value-added service of small and medium-sized enterprises which are short of physical

assets and which have a large proportion of accounts receivable in their total

assets. Specialized asset financing will help small and medium-sized enterprises improve cash flow, reduce management costs and avoid risks. For instance, the China Construction Bank broke the restrictions of the conventional financing guarantee models and launched the international trade services — “Commodity Financing Master” — to extend credit to enterprises on holding their goods documents in pledge, which allows export-import enterprises to apply for

export-import trade credit supports on condition that the enterprises mortgage

the goods documents that are legally owned by the enterprises themselves or by third party logistics enterprises, and the goods and movable properties are

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supervised by third party logistics enterprises approved by the banks. The

credit supports the enterprises are allowed to apply for can be categorized into two kinds: (1) the first one is Credit Extension on Pledge by Spot Goods

such as Pledge by Warehouse Receipts and Pledge by Spot Goods Supervision, which can be used in all kinds of export-import trade financing products, including establishment of L/C, packing credit, export negotiation, export loan

collection and goods pickup by trust receipt; (2) the second one is Single Trade Credit Extension (including the commodity finance cabin model and bonded

warehouse model), which can be used in import establishment of L/C, payment guarantee and some other trade financing services. The “Commodity Financing Master” along with other specialized asset financing products replaces the conventional credit extension service model (which bases the evaluation on

enterprises’ overall credit) with specialized financing that allows enterprises to use their single or specialized property assets in export and import trade

as mortgages. Hence the new service enables enterprises, especially small and

medium-sized enterprises, to obtain trade financing through real bargaining transactions thus activating the inventory assets, lowering the thresholds for

financing, reducing financing costs, and providing enterprises with the financial support they need in business operation and development.12

With the progress made in marketization of export credit insurance

operation, offering financing convenience by virtue of governmental credit

guarantees has become a new development in foreign trade financing in recent years. After covering export credit insurance, enterprises can obtain their

bank financing with their guarantee slips. This insurance financing, as an integration of credit services of policy insurance institutions and credit business of commercial banks, embodies the national credit support for business credit.

As for the enterprises, insurance financing can not only effectively avoid export credit risk but can also help them obtain export financing support with the

credit mortgage offered by export credit insurance without any need to provide mortgage and pledge of assets, rights and interests.13

The Expansion of the Scope of Foreign Trade Financing in China Foreign trade financing in a narrow sense is only positioned in the area of trade

in goods, and it puts particular emphasis on satisfying the financial needs

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in enterprises’ operation. However in the opening up of and competition in the global economy, several kinds of needs have emerged. The first one is the

construction of multiple channels to transfer the factors of production and exchange values; the second one is to strategically adjust the international

market for enterprises at the optimum time; and the third one is to employ various means to cross the obstacles and barriers formed by institutions,

policies and technical operations. With all these needs to satisfy, a diversified international trade methods system has been formed.

Different international trade methods reflect distinct value chain and

supply chain management models in enterprises and dissimilar integration

frameworks and paths of production flows, capital flows, information flows and services flows. Therefore, the intervention of finance needs to be adjusted at

the optimum time, and the significance of foreign trade financing has also been

extended from the narrow sense focused on solving the enterprises’ needs for

capital under general trade conditions to an integrated financial convenience that fosters multiple kinds of trade methods. For example, since the 1980s,

counter trade has been in the ascendant and many FORTUNE 500 enterprises have made huge profits on counter trade. The core of counter trade lies in the

rational design of a finance framework and the effective application of financial instruments. Therefore financial input is the foundation of the operation of counter trade.

Observed from the broad sense, in addition to trade in goods, international

trade includes trade in services, trade in technology etc. Moreover trade in services and trade in technology are playing increasing important roles in

international trade and are becoming more and more influential in the global

economy. Therefore, based on a brief description of the international trade

implications, formats and the approaches to accomplish it, we can clarify and ascertain the basic position of foreign trade financing in international trade

and related activities. The position can be divided into two parts: international trade financing defined in the narrow sense, and international trade financing

defined in the broad sense. Conventional international trade mainly refers to

trade in goods, correspondingly foreign trade financing in the narrow sense generally refers to the entities’ demand and supply of capital, credit services

and risk management in the international goods trade. The meaning of foreign trade financing is enhanced if we observe it from the broad sense. Foreign

trade financing in the broad sense refers to international financial activities that

happen in different areas including trade in goods, trade in services and trade

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in technology, and thus it has different financing particularities and operating rules.

With the development of the national economy and the gradual enhancement

of the industrial capacity of the service industry, the services trade in China

has been developing rapidly. According to the statistics given in The Eleventh Five-Year Plan Outline for the Development of Services Trade in China that was promulgated by the MOC in December 2007, the services trade in China increased by 29-fold during the years from 1982–2005, and the average annual growth rate was 15.9%, double the global average growth rate. In 1982 China’s services trade export ranked 28th and its services trade import ranked 40th in the world, but the rankings rose to 8th and 7th respectively in 2005. However the services trade’s share of total goods trade export was never above 10% during the same years, which was only half of the global average, and there had been a chronic deficit in the services trade. In 2006 the export-import scale of China’s services trade (calculated according to the BOP calibration and excluding the governmental services) continued expanding and amounted to USD 191.75 billion, an increase of 22.1% compared to 2005. In accordance with the Several Opinions of the State Council on Accelerating the Development of the Service Industry , in the “11th Five Years” (2006–2010), the aim of the development of the services industry is: in 2010, the proportion of the services industry’s added value in the GDP increases by 3% compared to that in 2005; the proportion of service sector employees in the national total of employees increases by 4% compared to that in 2005; the volume of services trade amounts to USD 400 billion; a service economy-centered industrial structure is formed in large and medium-sized cities that enjoy sufficient resources; the growth rate of the service industry’s added value exceeds both the growth rate of the GDP and that of secondary industry. By 2020 we will have completed the transformation into a service industry-centered economic structure, and the service industry will account for more than half of the GDP; the structure of the service industry will have been optimized greatly, and there will have been a remarkable increase in the employment capacity of the service industry; the equalization level of public service will have been enhanced greatly, the market competitiveness of the service industry will have been strengthened notably, and the general development level will meet the requirements of the construction of a welloff society in an all-round way. Observed from the perspective of foreign trade financing in the broad sense, there is overlapping between the operations of some kinds of services trade and trade in goods. Especially in an economic

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environment where the supply chain management prevails, some services businesses including logistics, distribution, storage and insurance are closely related to goods trade, resulting in the creation of many financing products that enjoy features of the service industry. The products include logistics financing, warehouse receipt financing, insurance financing etc. These financing products are in wide demand and have extensive market space. Observed from a broader perspective, the transnational transfer of factors generated in some international businesses such as international direct investment, franchised operation, permitted operation and international contracted projects will inevitably be related to international trade in different ways, thus forming more complicated financing structures and capital supplydemand mechanisms. Therefore the intension and extension of foreign trade financing will change correspondingly and become a vital part of integrated international commercial finance. With the steady progress of Chinese enterprises’ transnational operations, external investment has expanded from a simple combination of general foreign trade, catering and simple processing to a compound that involves many elements such as marketing network, shipping and logistics, development of resources, production and manufacturing, and design and research. The investment areas will extend from developed countries and regions such as Europe, the U.S., Hong Kong and Macau to some developing countries and regions such as the Asia-Pacific region, Africa and Latin America — the number of investment areas amount to 160. By the end of 2007, the total volume of China’s foreign direct investments reached USD 92.05 billion. Some competitive domestic enterprises are becoming likely to launch their foreign investments by merger and acquisition. In 2007, a foreign direct investment of USD 6.1 billion was launched by merger and acquisition, accounting for 32.6% of the total foreign direct investment of the year. It is concluded that enterprises’ foreign direct investments are closely related to their international trade activities. Therefore trade financing is always an important part of enterprises’ transnational financial arrangements. Obviously, an integrated foreign finance solution is a basic requirement in the internationalization of an enterprise.

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7

Chapter

The WTO and Foreign Trade in China

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In the world today, as every country has countless ties with the international economy, joining the World Trade Organization (WTO) is the only way for China to incorporate into the globalization of the economy which has become an

inevitable development trend. Having gone through a long and hard struggle,

China was accepted as a formal member of the WTO in 2001. Since then China’s economy has fully integrated into the world economy and its foreign trade China has met unprecedented opportunities and challenges.

The Long-March-Like Negotiation Process Concerning China’s Entry into the WTO In November 2001, at the 4th WTO Ministerial Conference, China was approved to accede to the WTO, 15 years after China notified the General Agreement

on Tariffs and Trade (GATT) for the first time about its intention to resume its

status as a contracting party. During these 15 years China underwent a long process of negotiation and waiting as well as cycles of hope and despair.

The historical background to China’s entry into the WTO The GATT is the predecessor of the WTO, and China was one of the 23 original

signatories of the GATT. In October 1947, the government of the Republic of China

(ROC) represented China in signing the GATT as well as the final protocol with 123 bilateral tariff concession agreements. In January 1948, the GATT entered into force. In April the same year, China signed the Protocol of Provisional Application and became one of the original contracting parties of the GATT in May that year.

In October 1949, the Kuomintang Government of the ROC retreated to

Taiwan. The government of the People’s Republic of China (PRC) was founded on the mainland and became the only legitimate government of China. At

that time, most of the products that were approved by agreements on tariff concessions in GATT were produced on the mainland and few products from

Taiwan were exported. Considering that its interests would be harmed by

PRC government’s taking advantage of GATT, the Taiwan authorities in the

name of the “ROC” notified the Secretary-General of the United Nations that it had decided to withdraw from GATT. China then lost its status in GATT

until October 1971 when the PRC’s legitimate status in the United Nations was

restored. However, for both international and domestic reasons, China did not take the opportunity to restore its status in the GATT.

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With the implementation of reform and opening up in China it was necessary

and increasingly important for China to make every effort to incorporate

into the world economy and to reinforce its relationships with international organizations including the GATT. At the beginning of the 1980s, China started

to engage itself actively in contacts with GATT. In 1984 China was granted observer status and was approved to take part in GATT activities. In 1986,

the Uruguay Round of negotiations began. As a GATT observer, China sent a ministerial delegation to attend the meetings and requested “resumption” of

its contracting party status in the GATT for the first time. Thenceforth, China started its long-march-like unremitting efforts to resume its GATT membership and join the WTO.

The hardships of China’s resuming its GATT membership and joining the WTO After China notified the GATT about its intention to resume its status of contracting party in 1986, it went through four stages in its efforts to restore its status in the GATT and then to join the WTO. The four stages were as follows:

The first stage (from July 1986 to May 1989): The early negotiations concerning China’s resumption of its status in the GATT were fruitful On July 11, 1986, China made a formal request for the resumption of its contracting party status in the GATT. In February 1987, the Chinese government

presented to the GATT the Memorandum on China’s Foreign Trade Regime , which introduced in detail China’s economic structure, policy of reform and

opening up, foreign trade policies, foreign trade system and customs tariff system. Moreover, the Chinese government notified the GATT that China was ready to

carry out substantive negotiations with contracting parties of the GATT. In March

1987 a working party to examine China’s status was set up by the GATT, which

held its first meeting in October 1987. During the meeting, China had dozens of

bilateral negotiations with the major contracting parties in which China explained to the contracting parties some central issues concerning China’s resumption of

its GATT membership. In 1989, responses from all parties showed that China’s

resumption of its GATT membership could be expected soon and it had become

a common realization both inside and outside the GATT that the negotiations concerning China’s rejoining the GATT would be concluded.

During this period, the negotiations were comparatively fruitful for several

reasons. Firstly, China’s reform and opening up which was started in the 1970s

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was greatly welcomed by Western countries, and China maintained favorable bilateral political relationships with the major contracting parties of the GATT

such as the United States and the European Community (old term for the EU,

European Union). In addition, the bilateral economic and trade relations between China and the contracting parties were still in their early stage of development when trade disputes and conflicts were not yet evident. Secondly, when

considering China’s rejoining the GATT, the attention and requests of the U.S.

and the EC on China were mainly focused on five issues: transparency of trade policies, uniform implementation of trade policies, reduction of tariffs and non-

tariff measures (NTMs), timetable of price reform, and selective safeguard clauses,

most of which issues were concerned with trade administration system in China and few with China’s policies on the domestic economy and foreign exchange.

The second stage (from June 1989 to February 1992): The negotiations concerning China’s rejoining the GATT were suspended During this period, due to the frequent influence of some unexpected incidents, the negotiations concerning China’s resumption of its GATT membership was

politicized thus becoming increasingly complicated, which obstructed China’s progress in the resumption of its membership. After the political incident in

June 1989, the Western nations headed by the United States imposed economic sanctions on China and their impeding China’s rejoining of the GATT was a

major content in the economic sanctions. Furthermore the collapse of the Soviet Union, the drastic changes in Eastern Europe and the end of the Cold War

changed the international political situation dramatically, which resulted in the major contracting parties’ understanding that China was less important in the

world economy than before. Meanwhile the domestic economy in China was undergoing retrenchment and consolidation. From December 1989 to September

1990, the Chinese delegation introduced to the GATT in detail the achievements China had made in its retrenchment and consolidation of the national economy

as well as the progress made in reform of foreign trade system. In February 1992, the GATT basically concluded its examination of China’s foreign trade

system and entered into the stage of substantive negotiations on the contents of China’s protocol of rejoining the GATT.

The third stage (from March 1992 to December 1995): China made every effort to tackle the increasingly difficult negotiations concerning China’s resumption of its GATT membership At this stage, the negotiations were resumed and started to deal with the most

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difficult part—the substantive negotiations concerning rights and obligations. During this period Deng Xiaoping’ remarks on reform in 1992 during his

southern tour of China speeded up reform and “all-round” opening up, which invigorated the rapid development of China’s economy. However it was exactly because of the rapid economic development in China and the new international situation after the Cold War that some developed countries took advantage of

the negotiations concerning China’s restoring its status in GATT to constrain

and impede China’s development, thus turning the negotiations into economic negotiations with a strong political nature.

The U.S., the EU and other major contracting parties expanded the contents

of the negotiations and made more stringent demands on many issues in China, including intellectual property rights protection, the opening of the

services market, the trade in agricultural products and textiles, and some affairs that were purely concerned with China’s domestic macro-control measures

and judicial sovereignty, which went far beyond the obligations set forth by

the GATT. The major contracting parties deliberately made the negotiations

more and more difficult for China. As the negotiations continued, China was

stuck in a “loop” where the problems increased, the obligations of China were dispersed and the rights of China were made more and more vague. Hence, no matter how painstaking China was in deepening its reform and

improving its economic system, the major contracting parties’ demands on

China were never satisfied. In order to make some breakthrough, China made

the decision that “the substantive negotiations concerning China’s resumption of its GATT membership should be concluded by the end of 1994”, urging the major contracting parties to stop making unreasonable demands on China and enhance their sense of responsibility and urgency. In December 1994, at the 19th meeting of the GATT working party on China, China failed to reach agreements with the contracting parties on China’s rejoining the GATT and becoming one

of the founding nations of the WTO. On January 1, 1995, the WTO was officially founded but it was decided that the GATT would continue to exist for one

more year. In the same year, China carried on substantive negotiations with

contracting parties. Although China was accepted by the WTO as an observer,

there was barely any substantive breakthrough in accomplishing China’s resumption of its GATT membership.

The fourth stage (from January 1996 to November 2001) On December 31, 1995, the GATT was completely replaced by the WTO, so

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from January 1, 1996 the negotiations concerning China’s rejoining the GATT turned into negotiations concerning China’s accession to the WTO. Compared

to the resumption of its contracting party status in the GATT, China’s accession

to the WTO was more complicated in procedures as both the contents of the

negotiations and the parties involved increased greatly, all of which made it much more difficult for China to accede to the WTO.

In August 1997, New Zealand became the first nation with which China

reached a bilateral agreement on China’s accession to the WTO. In the same

year, China signed bilateral agreements with South Korea, Hungary, Czech and some other nations. In November 1999, the governments of the U.S. and China signed the bilateral agreement on China’s accession to the WTO

in Beijing, which marked that China had overcome the biggest barrier in its

march towards its accession to the WTO. In May 2000, China reached a bilateral agreement on its accession to WTO with the EU. Thereafter China’s progress in

bilateral agreements concerning its accession to the WTO was expedited and by September 2001, China had reached agreements with all nations it had to hold negotiations with. In November 2001, at the 4th WTO ministerial conference

held in Doha, the protocol on the accession of the People’s Republic of China

to the WTO was voted through. After 15 years of hardship, China eventually became a formal member of the WTO.

China’s compliance with WTO commitments China’s WTO commitments involve trade in goods and services, traderelated intellectual property rights and the formulation and implementation of

economic policies. Since its entry into the WTO in November 2001, China has been complying with its commitments to the WTO.

In the area of trade in goods, with the amendment of the Foreign Trade Law

of the People’s Republic of China and the promulgation of the Circular of the Ministry of Commerce of the People's Republic of China, on Inviting Public Comments on Measures for the Record and Registration of Foreign Trade Operators , the Chinese government relaxed controls over foreign trade rights and started to carry out the record and registration system for foreign trade operators on July 1, 2004, which indicated that China had abolished the examination system of foreign trade rights which had existed for 50 years and fulfilled China’s promise made to the WTO on the release of foreign trade rights half a year earlier than the promised deadline. The average tariff rate in China was reduced from

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The WTO and Foreign Trade in China

15.3% in 2001, when China had just entered the WTO, to 9.9% in 2006 with the

average tariff rate on agricultural products reduced from 23.2 to 15.2% and that on industrial products reduced from 14.8 to 9.0%. 1 By January 1, 2005 China

had fulfilled most of its undertakings made to the WTO on tariff concessions and had finished the abrogation of non-tariff measures on the import of 424 Tax

Identification Number Products. China also kept its undertaking to establish an integrated, open and transparent tariff-rate quota (TRQ) administration system

of the import of staple commodities concerning the national welfare and the people’s livelihood, including grain, cotton, oil, sugar, wool and fertilizer.

In the area of trade in services, China amended and formulated a series

of laws and regulations on further implementing reform and opening up in many areas concerning banking, insurance, securities, telecommunications,

architecture, distribution, law, tourism and transportation, which fulfilled China’s WTO commitments in the area of trade in services. Of the 160 sectors of trade in services that are categorized by WTO rules 104 have been opened in

China, which approximates the average level of developed country members in which 108 sectors of trade in services are open.

In the area of intellectual property rights (IPR), China has amended all its

laws, regulations and judicial interpretations relevant to intellectual property rights protection, including the Patent Law , Trademark Law , and Copyright

Law to make them consistent with the WTO rules. China started to regulate that all cases concerning intellectual property rights could go to court, and China abrogated the final decision of administrative organs. Meanwhile China improved its objectives in intellectual property rights protection by issuing the Regulations on Protection of Integrated Circuit Layout Design and amending the Regulations on Administration of Veterinary Drugs, Regulations for the Implementation of the Drug Administration Law and the Regulations on Administration of Fodder and Fodder Additives, offering protection to undisclosed information. In terms of intellectual property enforcement, China founded a national intellectual property rights working group to take charge of the overall coordination of national intellectual property rights protection, which launched many special actions to protect intellectual property rights. In 2006, 50 IPR complaint centers were set up in China and the “12312” complaint hotline as well as the complaints window on the website of “Intellectual Property Rights in China” was opened. In April 2006, the WTO carried out the first comprehensive examination of China’s trade policies. The Ministry of Commerce of the People’s Republic of

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China provided the WTO Secretariat with a large amount of information and statistics which objectively reflected China’s trade system and policies. During

the examination, the MOC offered answers to more than 500 of the 1,100 written questions asked by 26 WTO members, producing favorable comments from all WTO members.

An Overview of the Influence of China’s Entry into the WTO on Its Foreign Trade In the multilateral and bilateral negotiations concerning its entry into the WTO,

China insisted on the principle of maintaining the balance between rights and obligations, which destined the dual influence of China’s entry into the WTO on its foreign trade.

The positive influence of China’s entry into the WTO on its foreign trade The improvement of China’s external market conditions The operation of the WTO is based on a series of principles. China’s entry into

the WTO enables China to fully enjoy non-discriminatory treatment as well as other basic rights, which provides China with a more relaxed and impartial

international environment for its foreign trade. Concretely speaking, the

improvement of external market conditions for China is shown in the following aspects:

(1) China is entitled to enjoy a stable most-favored-nation clause. Before

its entry into the WTO, China could only gain most-favored-nation status

in some countries with which China had reached bilateral agreements, and this was rather unstable and vulnerable to the bilateral political relationship.

For instance, every year the U.S. threatened China by basing its decision of

whether to extend the most-favored-nation clause to China on the issues of human rights, religion, policies for students studying abroad, trade deficit

and intellectual property rights protection; and some other members of WTO such as the EU and Argentina carried out some quantitative restrictions

and antidumping measures which did not accord with the WTO rules upon

China’s exported products. After its entry into the WTO, China can enjoy the multilateral, unconditional and stable most-favored-nation clause of all WTO

country members. For example, the U.S. Congress passed the bill of Permanent

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Normal Trade Relations to end the annual deliberation on the normal trade relationship with China. In addition, it is provided in the 17th article of the

Protocol on the Accession of the People’s Republic of China—Reservations by WTO Members — that “All prohibitions, quantitative restrictions and other measures maintained by WTO Members against imports from China in a manner inconsistent with the WTO Agreement are listed in Annex 7. All such prohibitions, quantitative restrictions and other measures shall be phased out or dealt with in accordance with mutually agreed terms and timetables as specified in the said Annex.” Therefore, according to the provisions in Annex 7, the quantitative restrictions, antidumping measures and safeguard measures implemented by the EU, Argentina, Hungary, Mexico, Poland, Slovakia and Turkey that were not in accordance with the WTO agreements should be phased out within five or six years after China’s entry into the WTO. This undoubtedly laid a good foundation for the strengthening of China’s economic and trade interactions with foreign countries. (2) China has obtained its discourse right in the multilateral trade system. Before its entry into the WTO, China participated in the multilateral trade system as an observer and its role and significance were restricted in many ways. However after its entry into the WTO, China can fully enjoy the rights for a formal WTO member. It can take full part in all the formal and informal meetings of WTO councils and committees, in the new rounds of multilateral trade negotiations, and in the formulation of multilateral trade rules, in order to safeguard the interests of China. China can also fully participate in the examination of trade policies and make good use of the principle of transparency to get to know and have a better understanding of other countries’ trade policies, while at the same time inquiring into and supervising the trade policies of important trade partners, urging other WTO members to fulfill their multilateral obligations. China can request to hold bilateral negotiations with nations applying to enter into the WTO and with which China has important trade relations. Moreover China can solve some problems in bilateral trade through multilateral negotiations to create more and better opportunities for the expansion of China’s export of products and services. (3) China can enjoy the special preferential treatment for developing countries. Developing country members in the WTO can enjoy special and differential treatment as provided by the agreements. For example, the developed members should implement the “Generalized System of Preferences (GSP)” for the developing members, offering unilateral tariff concessions on

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manufactured goods and semi-manufactured products exported by developing country members. As a further example, on the issues concerning subsidies

and countervailing measures as well as safeguard measures, China enjoys the treatment provided to developing countries by agreements, which includes the fact that China is entitled to take advantage of the safeguard measures for 10

years. China can not only enjoy the treatment afforded to developing countries, but also maintain certain flexibility in adopting international standards on

the basis of the level of its own economic development, which creates more

favorable conditions for the development of China’s export trade. For instance,

it is stipulated in the Special and Differential Treatment of Developing Country

Members of the Agreement on Technical Barriers to Trade that developing country members should not be expected to use international standards which are not appropriate to their development, financial and trade needs as

a basis for their technical regulations or standards. This article provides the development of foreign trade in China with more space for expansion.

(4) China can enjoy the fruits of the negotiations that have long been held

by WTO members. As the WTO promotes a multilateral trade system which is based on most-favored-nation treatment, China, as a WTO member, can fully

enjoy the achievements made in all the negotiations both with the GATT and the WTO, including the substantial tariff concessions and other eliminations of trade

barriers. Thus the tariff burden and trade barriers in China’s export trade are

reduced, which enhances the international competitiveness of Chinese products. For instance, the tough Uruguay Round negotiations of the GATT and the efforts made after the founding of the WTO resulted in the passing of the Agreement on

Textiles and Clothing (ATC), according to which agreement all WTO members should adopt measures such as tariff reductions and restriction, reduction or elimination of non-tariff barriers and improved market access system for textiles and clothing products, and in terms of the dumping and antidumping measures, subsidies and countervailing measures and intellectual property rights protection, all WTO members should ensure the implementation of policies that could maintain the equity and impartiality of trade in textiles and clothing products. Among all China’s export products, textiles are products of comparative superiority and thus benefited a lot from the WTO’s opening of the textile market.

The improvement of the domestic policy environment relevant to foreign trade Since the WTO requires all its members to ensure the marketization and

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transparency of their trade policies, China launched and amended relevant

policies both before and after its entry into the WTO, which although making it

harder for the Chinese government to make use of trade policies to intervene in

the export-import trade as well as the national economy, is beneficial not only to the uniform and just implementation of trade policies nationwide but also to the

establishment of an open and fair market competition environment in China, and thus facilitates the sound development China’s foreign trade.

In terms of the marketization of trade policies, China has promised to

comply with the WTO rules on state trading and to further relax trading rights. In state trading, the WTO allows its members to set up or maintain their state trading enterprises (STEs) and defines the STEs to be enterprises which

“have been granted exclusive or special rights or privileges” by WTO country

members. The STEs make use of their exclusive or special rights or privileges to “influence through their purchases or sales the level or direction of imports or

exports”. The STEs can be either governmental or non-governmental, and the

key to decide whether an enterprise is a STE lies in whether it has been granted exclusive or special rights or privileges. Meanwhile Article XVII of the GATT 1994, which is the principal Article dealing with STEs, sets out that STEs must

“act in accordance with the general principles of non-discrimination” and that STEs’ decisions on imports and exports can only be guided by “commercial

considerations” such as price, quality, marketability, transportation and other purchase and sale conditions. In order to ensure the transparency of the activities of STEs, the WTO members shall notify such enterprises to the

Council for Trade in Goods, and while maintaining the state trading system,

WTO’s country members should allow a proportion of exports to be operated by non-governmental trading enterprises. China has undertaken to comply

with the article, and thus the STEs in China are operated within the system of

commercial trading enterprises. In terms of the opening up of trading rights, China has long carried out an examination system for the acquisition of trading

rights while the internationally accepted method is to grant enterprises with rights to operate export and import after they are legally registered. According to the relevant provisions in the Protocol as well as the reports of the working party, China abolished the trading rights examination system and replaced it

with a registration system three years after its entry into the WTO, making the trading rights for trade in any kinds of goods available to all Chinese enterprises

after their registration. China’s compliance with the WTO’s provisions on state trading and the relaxation of the restrictions on acquisition and range of

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trading rights indicate that China has reduced its planned and administrative

intervention in trade policies and that the marketization of trade policies has

been enhanced. Henceforth, market economy rules will play an increasingly important role in China’s foreign trade.

In the aspect of transparency of trade policies, according to the WTO

provisions, members should publicize their trading measures as formulated and implemented as well as changes in the trading measures. Any measures

that are not publicized should not be implemented, and members should notify their trading measures along with any changes to these to the WTO. Therefore

after its entry into the WTO, China has only been implementing the trading laws, regulations and other measures that have been publicized and that are

available to other WTO members, individuals and enterprises, and China designates official publications to publicize this kind of information. Meanwhile

relevant laws and regulations in China clearly provide that in the formulation

of laws and regulations, the authorities should accept the opinions of sectors

via seminars and hearings. Rules and regulations cannot be implemented until a period of time after their formulation, and in some regions the system of lawmaking hearings and audit has been established. The enhancement of

the transparency of trade policies does not only make it more convenient for foreign enterprises to acquire information but also strengthens Chinese trading enterprises’ timely grasp and prediction of trade policies, thus benefiting the enterprises’ arrangements for production and trade.

Facilitation of the diversified development of the export-import market in China Before China’s entry into the WTO, the export-import market in China was excessively centralized—the major export market lay in Hong Kong and European and American countries and regions, and the major import market

was the Eastern Asian regions. The simplicity of the export-import markets

tended to make China’s export and import China more likely to fluctuate

fiercely, which would harm the development of the national economy. Many years ago, the U.S.’s cancellation of the GSP for the “Four Asian Tigers” (Taiwan,

South Korea, Singapore and Hong Kong) was a heavy blow to the exports and

imports of the four regions and depressed their economies to their lowest point. China’s entry into the WTO endows China with an open multilateral trading

system in which it can permanently enjoy the most-favored-nation treatment

unconditionally, which will facilitate the stable development of export-import

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trade in China. In addition, China in the WTO can enjoy the GSP treatment offered by developed country members, which creates the conditions necessary for the diversification of China’s international export-import market.

The negative influence of China’s entry into the WTO on its foreign trade Protection for the domestic market is weakened According to the provisions of the WTO, China must reduce import barriers and

at the same time restrict the policies that encourage export. Therefore compared

to the trade policies before its entry into the WTO, under the framework of the

WTO, the foreign trade policies in China after its entry into the WTO have less

protective features and more liberalization features, which are mainly embodied in the following aspects:

Firstly, tariffs have been reduced substantially. Tariff concession is one of the

approaches to accomplish the trade liberation of the WTO. All countries which apply to accede to the WTO, in the negotiations concerning their accession,

should make commitments to reduce their tariffs. These commitments are one of the major conditions for the countries to enjoy multilateral benefits after their entry into the WTO. Tariff concessions reduce the costs and prices of imports, thus enhancing the competitive edges of the imports, which motivates the

importers to increase their imports and encourages foreign exporters to boost their exports, hence increasing the volume of imports. At the same time, with the decreasing prices of imported commodities, the consumers’ demands for imports

are increased thus accelerating the increase of imports. During the process of China’s application for its resumption of its GATT membership and its entry into the WTO, 37 WTO country members, which are major trading partners of China and the trades with which take up more than 80% of China’s foreign trade,

requested that China reduce its tariffs. China made commitments to reduce its

tariffs in the negotiations, which commitments are shown in China’s Schedule of Concessions and Commitments on Goods — Annex 8 to the Protocol on the

Accession of the People’s Republic of China. The substantial tariff concessions enable more foreign commodities, especially the commodities with a strong competitive edge produced in developed countries, to swarm into China, which commodities will in some degree impact on the relevant enterprises in China,

among which enterprises in the automobile, petrochemicals and pharmaceuticals industries would be the most seriously affected.

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Secondly, the non-tariff barriers have either been reduced or eliminated.

Non-tariff barriers refer to all the trade-restricting measures except tariffs. With

the progressive tariff concessions, non-tariff barriers with their changeability and quality of concealment had become the major barriers in international trade development. In order to promote the global trade liberalization, the WTO made

special agreements on some measures that are likely to restrict trade in order to standardize its members’ relevant behaviors and reduce the non-tariff trade

barriers. Since the end of 1992, China has progressively relaxed or cancelled

non-tariff barrier measures. In accordance with its commitments made to the WTO, China cancelled the non-tariff measures on more than 400 tariff-numbered

products on January 1, 2005, and further undertook that it would never adopt or carry out new non-tariff measures that do not accord with the WTO regulations.

In addition, China made commitments on technical trade barriers, sanitary and phytosanitary measures, customs valuation and state trading. For example, China made a commitment to comply with the Customs Valuation Agreement

of the WTO, basing its Customs valuation on the knock-down prices instead

of on the “lowest price limit” or “reference price”. As a further example, in state trading, China made a commitment to comply with the WTO rules and to follow the principle of non-discrimination and base the operation of state

trading on commercial elements such as the price, and to notify the WTO on the conditions of its state trading enterprises at regular intervals. The reduction and cancellation of non-tariff barriers simplifies the procedures for products to enter a country and then enter the domestic commercial channels, decreasing the import barriers and increasing imports.

Thirdly, export subsidies are no longer implemented. Export subsidies refer

to the subsidies given legally or virtually on the condition of performances on exports. For example, a government may provide industries or enterprises

with direct subsidies or currency retaining programs as well as other programs

concerning export encouragement, and subsidies on export shipments on the basis of the export performances of the industries and enterprises. The WTO clearly prohibits export subsidies and import-substitution subsidies, which

means that no WTO member may implement or maintain these two kinds of

subsidies. In the legal documents concerning China’s entry into the WTO, China made commitments to follow the WTO rules and cancel those subsidies

measures that do not accord with the rules, which subsidies include priority

in getting loans and foreign exchange on the basis of import performances, and other subsidies stated in the Notification Agreement. In this way, China’s

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export-encouraging subsidies have been restricted to a large extent. For many years, many export products in China did not have a competitive edge and

they obtained their advantages in costs, prices and competition only through

the protection of high subsidies. Now, as they have lost all these advantages, China’s export trade is under a lot of pressure.

It is worth mentioning that since different industries and products are

in different situations, the increasingly open market will result in different conditions of import increase in different industries and products. In addition,

the expansion of imports as well as the decreasing prices of import products, although it puts a lot of pressure on China’s foreign trade, has positive

significance for the overall economic development of China. On the one hand, consumers are offered more choices and benefits; on the other hand, the increase

in the import of raw materials and components and parts will reduce the costs

of downstream manufacturing enterprises, thus enhancing the competitiveness of China’s manufactured products in the international market.

The commitments of the “transitional period” restrain the development of export trade in China China’s commitments to the WTO include some special terms in the transitional period, which greatly restrict the development of export trade in China. These

restrictions are mainly embodied in the “Transitional Product-Specific Safeguard Mechanism” and the “Transitional Period Non-Market Economic Status”.

Firstly, the transitional product-specific safeguard mechanism puts a lot of

pressure upon China’s exports. China undertook in Article 16 of the Protocol

on the Accession of the People’s Republic of China that within 12 years after China’s accession, “in cases where products of Chinese origin are being imported into the territory of any WTO Member in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of like or directly competitive products, the WTO Member so affected may request consultations with China with a view to seeking a mutually satisfactory solution”; “if, in the course of these bilateral consultations, it is agreed that imports of Chinese origin are such a cause and that action is necessary, China shall take such action as to prevent or remedy the market disruption”; “if consultations do not lead to an agreement between China and the WTO Member concerned within 60 days of the receipt of a request for consultations, the WTO Member affected shall be free, in respect of such products, to withdraw concessions or otherwise to limit imports only to

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the extent necessary to prevent or remedy such market disruption”. The above

article indicates that when China exports an increasing number of products to a WTO Member, the Member could easily limit China’s exports with the help of the article, which sets a huge obstacle to the increase in China’s export trade.

Secondly, the restriction on non-market economy status puts China at a

disadvantage in antidumping investigations. In the Antidumping Agreement of

the WTO, the definition of “dumping” is clear, “a product is to be considered as being dumped, i.e. introduced into the commerce of another country at less than its normal value, if the export price of the product exported from one country

to another is less than the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country.” Therefore “normal value” is the key concept to determine “dumping”. However,

in the determination of “normal value”, the comparable prices of like products

in a third country are referred to as a standard in determining the normal value

of the products exported from non-market economy countries. The agreement says, “Sales of the like product in the domestic market of the exporting country

or sales to a third country at prices below per unit (fixed and variable) costs of production plus administrative, selling and general costs may be treated as not being in the ordinary course of trade by reason of price and may be disregarded in determining normal value only if the authorities determine that such sales

are made within an extended period of time in substantial quantities and are

at prices which do not provide for the recovery of all costs within a reasonable

period of time.” As China is undergoing a transformation from a planned

economy to a market economy, and due to some other subjective and objective reasons, China undertook in Article 15 of the Protocol on the Accession of the

People’s Republic of China — Price Comparability in Determining Subsidies and Dumping that “within 15 years after China joins the WTO, the importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail in the industry producing the like product with regard to manufacture, production and sale of that product”. According to this standard, the WTO members always adopt the “non-market economy methodology” to decide dumping issues concerning China. On the one hand, in determination of the normal value, not the product’s domestic prices but the prices of like products in a third country are referred to as the standard to determine the normal value of a product; on the other hand, in final determination of antidumping duties, the amount of

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antidumping duties is assessed not according to each exporter respectively but

by considering all the enterprises that export the products as a whole and the

same level of antidumping duties is imposed on enterprises. Therefore products exported from China are likely to receive unjust antidumping investigations and

retaliation. In the antidumping suits of other countries against China, since not only India, Thailand and South Korea but also the U.S. and Australia have been referred to as a substitution country to determine whether China was dumping

products in other countries and to assess the antidumping duties, it is obvious that Chinese export enterprises have been receiving unjust treatment.

Observing the Influence of China’s Entry into the WTO on Foreign Trade in China from the Perspective of Industries The WTO has impacts and influences of different degrees on different existing

industries in China. The discussion about the WTO’s influence can be categorized

from the perspective of different industries: influence on agriculture, influence on manufacturing industry and influence on service industry.

The influence of China’s entry into the WTO on agriculture in China Agriculture is the basic industry of a nation, and China is a major producer as well as a major consumer of agricultural products. However the resource per

capita in China is inadequate, the production scale of agriculture is small and

the foundation of agriculture is shaky. In addition, the property rights system in rural areas, the circulation system on the agricultural products market and the macro-control system of agriculture still need to be improved, and the restriction on the rural labor flows needs to be relaxed. After its entry into the

WTO, China made commitments to reduce its agricultural tariffs, to implement tariff quota management, to cancel export subsidies, and to carry out a standard

for plants and animals quarantine, and China strictly fulfilled its commitments. After the three years of “protection periods”, the agriculture of China entered

the WTO “post transitional period” in 2005, during which it opened wider to the

outside world, and China has become one of the countries whose agricultural markets are among the most open. The influence of China’s entry into the WTO on China’s agriculture has been emerging.

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Opportunities brought by China’s entry into the WTO to agriculture in China Firstly, China’s entry into the WTO is advantageous to the adjustment of the agricultural industrial structure. For many years, in order to feed its citizens,

China has paid a lot to maintain its high self-sufficiency rate in grain. It has adopted many measures merely to maximize the agricultural output. For example, dams were built to reclaim land from a lake, forests were destroyed

and vegetation was burned for land reclamation, and a large amount of fertilizers and pesticides were dusted on the crops, which measures have seriously damaged the eco-environment in China. After its entry into the WTO, China is able to make better use of its comparative advantages to import

land resources-intensive and water resources-intensive agricultural products

(such as grain, cotton, oil and sugar) while exporting labor-intensive products (such as fruits, vegetables, aquatic products and animal products), and hence China can promote the adjustment of its agricultural industrial structure

towards a rational exploitation of resources to lighten the pressure on domestic agricultural resources to a large extent and to generate more land and water resources to improve the eco-environment in China.

Secondly, China’s entry into the WTO is advantageous to the enhancement of

both the quality of agricultural products and the technical level of agriculture. At the present stage, the emphasis of agricultural products in China still lies in quantity not quality. However China’s entry into the WTO enables foreign

agricultural products to enter the market in China and compels Chinese agricultural producers to better the quality of their products to enhance their

competitive edge. Meanwhile, after China’s entry into the WTO, it is becoming

easier for foreign capital to flow into China, which capital will bring more advanced agricultural technologies that can develop agricultural management

and production in China. Moreover China will have increased exchange and cooperation with other countries on the education, scientific research and

technology of agriculture, which will not only help to advance agricultural technology but also to enhance the quality of agricultural products in China.

Lastly, China’s entry into the WTO is advantageous to the reform of the

agricultural products distribution system in China. The management of staple agricultural products in China is over-centralized and always monopolized

by large state-owned enterprises, which results in the low efficiency, excessive segmentation and high costs of distribution. After its entry into the WTO, China undertook within a certain period of time to gradually allow non-governmental

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departments to take part in the distribution system of agricultural products

and to compete with governmental enterprises on an equal basis, which would

be propitious both to the establishment of a distribution system with multiple channels, forms and entities, and to the formation of an open and orderly market.

The impact brought by China’s entry into the WTO on agriculture in China Firstly, the reduction of trade barriers increases the pressure upon agriculture

in China. The reduction of trade barriers is embodied in two aspects: tariff concessions and the implementation of tariff quotas. In terms of the tariff

concessions, the average tariff rate on agricultural products fell to 15.3% in

2006, 1/4 of the average tariff rate of the agricultural products all around the world2 — 62%, and the rate fell further to 15.1% in 2008. Currently, China has

become one of the countries with the lowest general tariff levels. Seen from the tariff structure, China has promised to maintain the tariff rate on agricultural

products between 10% and 20%. In addition, the tariff rate on products beyond the quotas in China will never be higher than 65%, whereas the rates in the U.S.,

the EU and Japan can be higher than 100%. In terms of the implementation of tariff quotas,3 the agricultural products China has promised to implement tariff quotas on mainly include wheat, rice, corn, cotton, edible vegetable oil, sugar

and wool. The tariff levels on the products within the quotas are quite low — all of the tariff rates on agricultural products are 1% except that on vegetable oil which is 9% and that on sugar which is 15%. The final tariff rates on agricultural

products beyond the quotas are kept between 40% and 65%. Compared to other countries, the quota quantities of agricultural products that are managed by the tariff quota system occupy a high proportion of domestic production, and since

2004 the import quota quantities of grain, corn, rice, sugar and cotton produced

in other countries has occupied over 5% of the total domestic consumption in China, which proportion is higher than the upper limit determined by the WTO rules.4 Moreover, the tariff rate within the quota to which China has committed

is fairly low, and the domestic prices of these agricultural products are higher than the international market prices. Therefore, to a large extent, the tariff quota quantity has become the actual import volume. All the above factors lower the

threshold for foreign agricultural products’ entry into the Chinese market and put enormous pressure upon the prices of China’s domestic agricultural products.

Secondly, the government’s support for agriculture is restricted and thus

the international competitive edge of Chinese agricultural products is reduced.

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The major domestic agricultural support policy that is restricted by the WTO is the “amber box subsidies”—the domestic agricultural support policy that would distort trade and notably stimulate the production. The WTO Agreement

on Agriculture stipulates that every country should prevent their “amber-box subsidies” from exceeding a so-called “de minimis” levels of support, which level is 5% of gross agricultural product in the case of developed countries and 10% in the case of developing countries. The “amber box” subsidies mainly include subsidies on agricultural products prices, subsidies on agricultural input and subsidies on productive investment etc., among which the latter two subsidies could be abandoned in developing countries. In China’s commitments made to the WTO, two kinds of subsidies in developing WTO member countries that can be free of concessions are included in China’s calculation of “amber box” subsidies concerning domestic support: the first one is the investment subsidy, and the second one is the agricultural input subsidy offered to medium and low-income workers or producers in regions that are deficient in resources, which means that China waives part of its rights as a developing country. In the meantime, China undertook that the total volume of all its domestic “amber box” subsidies for agricultural products would not exceed the “de minimis” standard which is 8.5% of the gross agricultural product. China further promised to completely cancel the agricultural products export subsidies, including the price subsidies, physical goods subsidies and all the subsidies that can be enjoyed by developing countries for their processing, storage and transportation of export products. Currently, export subsidies prevail in other major agricultural products export countries, which positions the agricultural products export of China in an unfair competitive status thus greatly reducing the international competitive capacity of China’s agricultural products.

The countermeasures adopted in agricultural development in China China’s entry into the WTO did not mean that China would give up its protection and support for its agriculture. In its development in the new period,

agriculture in China should not only make sufficient internal changes which include active adjustment of the agricultural production structure, improvement of the technological development system and reform of the marketization

course, but also make use of the WTO rules to safeguard the interests of Chinese farmers and promote the development of domestic agriculture.

Firstly, China should take full advantage of the WTO “green box” and “amber

box” clauses to enhance its support for agriculture. Six of the twelve domestic

support measures that are identified as “green box” policies and approved

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by the WTO Agreement on Agriculture are blank in China, and support in

the six measures that do exist in China is rather limited. From now on, China should adopt the “green box” policies to further increase input in agricultural

technologies, construction of agricultural infrastructure and rural environmental eco-construction. In addition, China could adjust and reinforce the “amber box” policies support. The WTO stipulates that the “amber box” subsidies in China should be no higher than 8.5% of China’s gross agricultural product, but the current subsidies are far lower than the percentage approved by the WTO, so

China should make full use of the gap and in the meanwhile adjust the structure of subsidies — China should transfer more subsidies from the circulation links to the production links and farmers.

Secondly, China should set up an agricultural products safeguard

mechanism. China should take full advantage of the WTO rules to establish

an agricultural products early warning mechanism, which is important in

ensuring self-protection and enhancement of the competitiveness of China’s agriculture. On the basis of understanding the connotations of other countries’ technical barriers, China should accelerate its construction of an agricultural

products information dissemination mechanism, an agricultural products

export early warning mechanism and a trade emergency system to guide the

trade of domestic agricultural products and to avoid major problems. In the meanwhile, China should comply with the WTO rules in improving its trade protection measures centered on technical barriers and green barriers, and build

up antidumping and anti-subsidies safeguard mechanisms to strengthen the capability of China’s agriculture to protect itself.

Lastly, China should actively participate in a new round of agricultural

negotiations to strive for an advantageous trade environment for agricultural

products. At present a new round of WTO agricultural negotiations has already started, aiming at setting down the negotiation concession models on market

access, export competition and domestic support. China should take full

advantage of its rights as a WTO member and be actively engaged in the new

round of agricultural negotiations, striving for a favorable and just international agricultural trade environment for the development of China’s agriculture.

China should also make efforts to eliminate the serious imbalance between

the developed members and developing members in export competition

and domestic support, lobbying for more effective differential treatment for developing members.

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The influence of China’s entry into the WTO on manufacturing industry in China After China’s entry into the WTO, China further opened up its market. The

specific industries in China’s overall manufacturing industry would be in a different market environment. The highly-competitive industries could take

advantage of their superior status to further their development while the vulnerable enterprises would become more mature in their participation in

the international competition. In the following paragraphs, the textile industry

and auto industry will be taken as examples to analyze the influence of China’s entry into the WTO on the manufacturing industry in China. (1)

The influence of China’s entry into the WTO on the textile industry of China.

The textile industry enjoys a long history in China, and it is both a pillar industry in the national economy and a primary industry in exporting goods to earn foreign currencies. After China’s entry into the WTO, the textile industry

has become the most promising industry in China. After China’s entry into the WTO, especially after the textile quotas were eliminated, there has been an enormous increase in the export volume of textiles made in China. In the

meantime, all kinds of trade barriers have caused huge problems in China’s export of textiles. The textile industry in China has been confronted with both opportunities and challenges in its development.

The opportunities brought by China’s entry into the WTO to the textile industry in China Firstly, the export environment for China’s textile industry has been greatly

improved. The WTO Agreement on Textiles and Clothing (ATC) which was reached in the GATT Uruguay Round negotiations stipulates that in the 10 years

that began in 1995, the quota restrictions on import of textiles and clothing

products should be phased out among the WTO members in order to realize free trade of textiles and clothing. In the process of its regression from Multi-

Fiber Arrangement (MFA) to the GATT, the textile industry in China gained unprecedented opportunities to enjoy various kinds of benefits brought by

the trade liberalization of the textile industry. The industry could, on the one

hand obtain the “integration percentage” and “increased growth rate”, and on the other hand it could take the initiative in international multilateral

trade negotiations and the formation of trade rules. In addition, with the tariff

concessions and cancellation of import licenses, the textile industry could select

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the cheaper raw materials in the international market and thus reduce the costs of textiles and enhance its international competitiveness.

Secondly, China’s entry into the WTO is propitious to the legitimate

protection of the domestic textile industry. After its entry into the WTO, China

can make use of the WTO to solve some trade frictions concerning textiles and

change the passive situation it was in previously. Under the regional trade protectionism in North America and the European Union, China could take full

advantage of its WTO membership to take advantage of various WTO rules to protect its textile industry and strive for legitimate profits.

The challenges brought by China’s entry into the WTO to the textile industry in China Firstly, some major trading countries have set new limitations that have become the biggest barriers to the export of Chinese textiles. After China’s entry into

the WTO, the continuous increase in China’s export of textiles made some major importers of textiles worry that the large influx of Chinese textiles would impact

on and cause damage to their relevant industries. Therefore after January 1, 2005, when the textile trade quota system was cancelled, it was still hard for us

to be optimistic about the international environment faced by the China’s textile

trade. Many countries implemented various kinds of restrictive measures on

Chinese textiles one after another, which measures mainly include antidumping,

safeguard measures, special safeguard measures, technical trade barriers and labor standards. In recent years, China’s export of textiles has been mainly

influenced by special safeguard measures, according to which as long as a WTO member country believes that the import of textiles and clothing products originating in China causes market disruption in that country, the member can request to have negotiations with China to ease or avoid market disturbances.

In the meantime, the import members can exercise quotas and quantitative limitations upon relevant products originating in China for no more than one

year. Because of its easy initiation, simple procedures and simple subject, the special safeguard measures have been adopted consistently by foreign countries against textiles originating in China.

Secondly, the opening up of domestic market investment imposes heavier

pressure on domestic textile enterprises. After China’s entry into the WTO, the tariff rate on clothing in China was reduced from 22% to 17%, and then

licenses were phased out and the non-tariff measures that restricted import were reformed. Therefore foreign designer clothes could swarm into China and

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increase the competitive pressure on the domestic clothing market. Meanwhile, the foreign raw materials pouring into China after China’s entry into the WTO would impact on and endanger the survival and development of the alreadyfragile enterprises which manufacture textile raw materials.

The countermeasures adopted by the textile industry in China In order to develop the textile industry in China, we should face up to the

fact that China’s textile and clothing products are large in amount and low in

quality, and we should fundamentally increase the technical contents of the products and strengthen brand awareness. Only in this way can the textile

industry in China consolidate its status in the international market and further

increase its share of the market. At present, corresponding measures should be

adopted to improve the passive situation whereby exports of Chinese textiles are restricted everywhere.

Firstly, an early warning mechanism for the textile industry should be

established and perfected. Currently the Textile Early Warning System Platform of the Shanghai WTO Affairs Consultation Center which was established in

2003 is in operation. However, as the enterprises are always afraid of leaking business secrets, they are unwilling or unable to provide data, and they lack of a sense of potential danger and attach no importance to the exploitation of

early warning information. Stimulated by the U.S.-Sino trade frictions in 2005,

the China Chamber of Commerce for Import & Export of Textiles is drafting a

series of measures, including measures to sort with numbers, to limit the lowest normal price, to implement management enterprise admittance qualifications

for sensitive products, and to establish the Red-, Orange-, Blue-, Green- and

Yellow-level early warning mechanisms. In an environment where trade frictions are likely to happen all the time, it has become an urgent matter for

state authorities, enterprises and experts to establish an advanced export early warning mechanism, actively monitor and track the export situations

of domestic products, and provide valuable early warning information to enterprises, thus avoiding trade frictions.

Secondly, the textile industry in China should strengthen integration and

cooperation among industries and enterprises. In the developed countries, people pay special attention to integrated competitiveness in the industries. In the post-quota age of textiles, the trade frictions involving Chinese textiles are

bound to increase greatly, and it would be rather difficult for a single enterprise to deal with its rivals. In China’s export of textiles, the relevant authorities

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should lead the enhancement of textiles import management and coordination,

playing its role in the organization of antidumping, anti-subsidies and safeguard measures, and hence promoting the advancement of Chinese textiles industrial international competitiveness. (2)

The influence of China’s entry into the WTO on the auto industry in China.

The auto industry is a pillar industry in China and it has a strong domino effect

in promoting the industry chain. The development of the auto industry can not only enhance the technical level of both itself and other relevant industries,

but also provide more job opportunities for the surplus labor in the country. However, unlike the textile industry, the auto industry is not a predominant

industry in China but an immature one which has long been protected by high tariffs. China’s entry into the WTO has a dual influence on its auto industry.

China’s entry into the WTO has brought opportunities to the auto industry.

Firstly, it is helpful in promoting domestically-produced automobiles’ competitiveness. Before China’s entry into the WTO, with the high trade

protection for China’s auto industry, domestic auto enterprises and components

and parts enterprises could make profits even though their costs were rather high. At present the pressure of competition from foreign auto enterprises

could motivate domestic auto enterprises to reduce their costs and increase their efficiency. At the same time, as most of the components and parts needed

by auto enterprises in China are imported from foreign countries, the tariff concessions on components and parts further reduces the costs of domestic auto enterprises. In addition, after China’s entry into the WTO, foreign enterprises’

direct investment in the Chinese auto industry could accelerate the technical

advancement of domestic auto enterprises and factories, which would help cultivate the competitive edge of domestic automobiles. Secondly, China’s entry

into the WTO is beneficial to the development of the automobile consumer market. Before China’s entry into the WTO, the exorbitant prices of automobiles

restrained the development of the automobile consumer market. After China’s entry into the WTO, with the increase in automobile imports and the decrease in

the prices of domestically-produced automobiles, a huge automobile consumer market will be generated which will in turn promote the development of auto industry in China.

China’s entry into the WTO has also brought challenges to the auto industry

in China. After China’s entry into the WTO, the auto industry in China, as an

immature industry, obtained a five year protection period which ended on

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July 1, 2006. In line with China’s commitments made to the WTO, the tariff rate was reduced to the bottom line — 25% — on June 1, 2006 and at the same time the quota was cancelled, foreign enterprises were granted full-scale trading rights and distributing rights in the automobile service and trade fields, and

foreign funds were permitted to operate automobile loans and financing. All the above changes impose tremendous pressure upon the immature automobile production and components and parts production in China as well as the seriously backward automobile service industry.

Faced with the new competition environment after China’s entry into the

WTO, the auto industry in China has adopted strategies that are focused on encouraging enterprises to research and develop new products independently.

In the history of China’s auto industry, the most disappointing thing is that

the industry has not cultivated its competency in independent research

and development. At present the auto enterprises with comparatively

higher technical capabilities in China, such as First Automobile Workshop (FAW) and Dongfeng Motor Corporation lag far behind the international

level in exploitation capability. FAW has only developed the Red Flag brand automobiles and no other mature sedans. The Shanghai Automotive

Industry Corporation (SAIC) has set up jointly-funded technical development

institutions — the Pan Asia Technical Automotive Center and the Volkswagen Technical Automotive Center, but the technical property rights are preserved

by the foreign partners so the SAIC cannot cultivate its independent capability to develop technologies. In 2004 the Automobile Industry Development Policy

was promulgated, which has played an important role in the promotion and

standardization of the import automobile market in China. The policy attaches great importance to the protection of independent intellectual property rights, and in terms of the automobile research and development in China, the policy

points out that China should insist on a combination of technology introduction and independent development and at the same time develop products with independent intellectual property rights and carry out the strategy of brand management.

The influence of China’s Entry into the WTO on the service industry in China The service industry, which includes the warehousing and transportation industry, the post and communications industry, the wholesale and retail

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industry, the catering industry and the finance and insurance industry, is

closely related to people’s living. After the reform and opening up, although

the service industry in China has developed rapidly it still lags far behind the service industries in developed countries. According to its commitments made

to the WTO, China has progressively opened its service industry market and made many changes in all the specific industries involved. In the following

paragraphs, the banking industry will be taken as an example to analyze the influence of China’s entry into the WTO on the service industry in China.

On the first day after China’s entry into the WTO, the People’s Bank of China

(PBC) announced cancellation of the restrictions imposed on regions and clients in foreign-invested banks’ forex transactions, and further permitted foreign-

invested banks to start forex transactions for Chinese enterprises and residents. The PBC also set a transitional period of five years, during which regional

and time restrictions would be phased out. When the transitional period

ends, the banking industry in China would be completely open. This worldshaking change also confronts the banking industry in China with tremendous opportunities and challenges. (1)

The opportunities brought by China’s entry into the WTO to the banking industry in China.

Firstly, China’s entry into the WTO is beneficial to the improvement of

managerial and administrative expertise in the banking industry in China.

After China’s entry into the WTO foreign-invested banks are allowed to set up

affiliated agencies in China, with which agencies the Chinese banks have not only competition on business but also cooperation on transactions relevant to

the RMB, settlements of domestic and foreign currencies, and syndicated loans provided to large projects. Therefore the commercial banks in China can study

the mature management experience of foreign banks without going abroad and then apply the knowledge learned to accelerate the reform and development.

Meanwhile, the pressure of competition imposed by foreign banks is propitious

to the transformation of operational mechanisms, the enhancement of internal management and the improvement of management and operation of the stateowned commercial banks in China.

Secondly, China’s entry into the WTO is favorable to Chinese banks’

expansion of overseas business. After China’s entry into the WTO, the relaxing of market access barriers in other countries will boost China’s trade volume

and thus provide favorable opportunities for China to develop its international

settlement service and forex credit service. In addition, the most-favored-nation

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treatment and national treatment China received after its entry into the WTO could fundamentally resolve the problems of Chinese state-owned commercial

banks’ founding of overseas agencies, which include the policy barriers and the

unjust treatment received in competition, and hence the Chinese state-owned commercial banks can set up overseas agencies directly which promotes the internationalization of Chinese banking services. (2)

The impact of China’s entry into the WTO on the banking industry in China.

Compared with Chinese banks, foreign banks enjoy advantages in mixed operations and more mature experience in marketized operation, and they are

proficient in making use of both the international and domestic markets and

both the currency and capital markets to conduct marketing, avoid financial risks and optimize assets.

With the ending of transitional period, the foreign banks will receive

the same national treatment as Chinese banks and their advantages will be constantly strengthened, thus impacting on Chinese banks. Firstly, the foreign

banks with their outstanding and efficient services will attract a large number of important clients who used to be served by Chinese banks, and the loss of

clients will greatly reduce the Chinese banks’ capacity to earn profits. Secondly,

the foreign banks have many superior services at low risk and low costs. Currently, the export settlements transacted by foreign banks occupy over 40% of the market share, but the Chinese banks are only competent to offer the high

risk and low profit conventional services such as deposits and loans. Thirdly, the foreign banks will attract and skim off valuable skilled personnel from Chinese commercial banks with flexible motivation mechanisms that involve higher wages, broad development space and opportunities to receive training

abroad. In every country there exists an awkward situation where the domestic

commercial banks become the HR training base for foreign banks. These

skills enhance the foreign banks’ strengths. Lastly, the foreign banks will take advantage of their management and operation experience accumulated in the international cooperation market to facilitate financial innovation and develop

derivative financial products, thus obtaining generous profits. However the Chinese banks are short of competence in independent innovation and their innovative financial services are always imitations of the foreign banks’, so it is difficult for them to gain the initiative in the competition of financial derivative products and on the frontier of finance. (3)

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After China’s entry into the WTO, faced with the intense impact of foreign

banks, the Chinese banks should adopt measures in several aspects to enhance their competencies. Firstly, they should enhance the quality of their assets.

The quality of assets is the lifeline of commercial banks, and risk control is a precondition to ensure the steady development of business and asset quality. With the deepening of opening up, the banking industry in China will be

exposed to more international and domestic uncertain factors and more risks.

Therefore the Chinese banks must accurately assess and evaluate the risks and improve their measures to control and reduce risks, thereby ensuring the quality of their assets and enhancing their advantages in international competition. Secondly, the Chinese banks should improve their management

system of legal persons in the banking industry. The Chinese banks must improve and ameliorate their management and operation system in accordance with the basic framework of the modern enterprise system to explore a path

for the development of modern commercial banks in the socialist market economy environment. Thirdly, the Chinese banks should encourage financial

innovation and actively develop new services. China’s banking industry should, on the basis of financial risk avoidance, energetically increase the number of

services, expand the service range and cultivate a brand awareness of financial services. Lastly, the Chinese banks should improve their management of human

resources to develop advantages in the competition for skills. Human resources are invisible assets of banks and key in competition, and so they should be

managed systematically and scientifically. Favorable mechanisms of motivation, welfare and education and training should be set up to strengthen the enterprise

culture, thus enhancing cohesion and a sense of belonging to attract and retain human resources.

The Trade Frictions China Encounters after Its Entry into the WTO and China’s Countermeasures against Those Frictions Before its entry into the WTO, China could resolve its trade frictions with other countries by adopting unilateral trade retaliatory measures and diplomatic

negotiation measures. And Chinese enterprises, if they were compelled to

respond to civil actions, lost nine lawsuits out of ten. After China’s entry into the WTO the enterprises in China could, like those in other WTO member

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countries, appeal to the trade dispute settlement system to safeguard their

own benefits. However, from the overall view Chinese enterprises, in their WTO strategic practice, are more likely to be passive than active in dispute settlements.

The trade frictions China encountered after its entry into the WTO The information released by the WTO shows that by 2007, China had been the country on which the largest number of antidumping investigations and

antidumping measures were imposed for 12 successive years. After China’s entry into the WTO, the forms of trade remedy investigations imposed on

China have increased from two — the antidumping and safeguard measures — to four: antidumping, countervailing, safeguard measures and product-

specific safeguard measures. According to the statistics of the China Trade

Remedy Information, 566 trade remedy investigation had been imposed on China with 24.6 investigations on average per year before China’s entry into the

WTO, and of the investigations 539 were antidumping and 27 were safeguard measures. After China’s entry into the WTO, 385 trade remedy investigations

had been imposed on China by October 2006, of which investigations 268 were antidumping, 4 were countervailing measures, 44 were safeguard measures

and 69 were product-specific safeguard measures.5 The trade frictions China is confronted with have been continually extended to new areas.

The number of anti-dumping accusations against China from other countries as well as the amount of money involved remains consistently high Since 2002, many Chinese products including steel, windscreens, lighters, machinery and electrical equipment, textiles and some agricultural products

have been challenged by dozens of antidumping and safeguard measures.

Among the countries which instigated the largest number of antidumping cases are the U.S., the EU and India.

Technical trade barriers have an increasing influence on exports Currently, technical trade barriers have seriously influenced China’s exports. Technical trade barriers in the name of environmental protection and security, including the pesticide residues in agricultural products, lead in potteries and porcelains, the security of toys, the emission standard of automobiles and the

dyes in textiles have been growing as a major hindrance to China’s exports.

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As most of export commodities of China are labor-intensive products and hence greatly influenced by environmental considerations, China’s export of agricultural products, foods, textiles and building materials is affected by technical trade barriers set by other countries on China to varying degrees.

A succession of special safeguard provisions aimed at China have emerged Since China undertook in the Protocol on the Accession of the People’s Republic of China that it would allow other WTO members to impose “special safeguard measures” on China, after China’s entry into the WTO all members have reinforced their legislation on product-specific transitional safeguard systems aimed at China, which legislation is unfavorable to China. According to statistics, by the end of June 2005, the U.S., Japan, the EU, South Korea, Canada, India and Turkey had completed their domestic legislation on product-specific safeguard clauses on products exported by China. At present, the productspecific safeguard measure cases launched against the Protocol on the Accession of the People’s Republic of China has become a new issue in the trade frictions China is confronted with after its entry into the WTO.

Trade frictions have developed from individual cases to a system In recent years, the U.S. and the EU have intensified their “monitoring” of the RMB exchange rate system in China, and in 2006 they even submitted a case to

the WTO against China’s export mechanism for automobile components and parts.

The scope of friction has expanded The scope of friction has gradually expanded from trade in goods to trade in

services, the products involved have been extended from labor-intensive ones

to others, and the industries involved have been upgraded from the traditional industries of agriculture, textiles and automobiles to high-tech industries such

as the electronics and information industry, communications industry, aircraft industry and bio-engineering industry.

The frictions have extended from developed countries to developing countries Currently, the antidumping cases initiated against China by developing

countries such as India, Brazil and Turkey make up 60% of the antidumping investigations against China.

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There is every indication that the economic and trade frictions with China

have escalated from simple trade areas into the economic structure as a whole,

and the trade environment for China has changed from one of average trade frictions to strategic trade frictions — China has stepped into a period with a high incidence of international economic and trade frictions.

The constant incidence of trade frictions between China and other countries,

if judged from the externals, is due to the rapid development of China’s exports.

If judged from the internals, it indicates the flaws and deficiencies in the economic structure and market economy system in China.

Firstly, the economic structure in China is not perfect. On the one hand

the export products of China, observed as a whole, are of comparatively low

standard. Although in the past 20 years China’s exports have developed rapidly,

the backward economic development has led to a simple product mix and most of China’s exported products are labor-intensive products. Even though China does export some products with high technical content, the core components and

parts of these products were not produced in China but were imported from other

countries and only the simple processing and assembling of the components and parts were conducted in China. The large-scale export of labor-intensive products will inevitably have an intense impact on the relevant industries and employment

in the developed countries. In order to ease the pressure of their domestic employment issues, the developed countries will adopt different methods to

obstruct the entrance of products made in China into their countries. On the other hand, as most exported products from China are labor-intensive products with

low technical content, it is easy to start a manufacturing business in China but the

scale of the enterprises is always small. When finding something profitable, many enterprises would rush headlong into action. These small-scale enterprises are not competent enough to develop new technologies, and hence price competition

becomes the primary and even the only way to compete for the market, which leads to a disorderly export and makes it difficult to prevent dumping at low prices.

Secondly, the market economy system in China still needs to be improved.

At present China is still in a transition economy, and has not yet formed a sound market economy or an open economic system. The transition of government

functions is not yet complete and problems concerning government enterprises

have not been fundamentally solved. Low protection continues despite repeated prohibition. In particularly, China’s NME status is an important reason why China is frequently confronted with economic frictions.

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China’s major countermeasures against the trade frictions it encounters after its entry into the WTO Facing constantly upgraded and increasingly complicated international trade frictions, China could make efforts in the following ways:

Establish and improve the enterprise coping mechanism of “four entities’ cooperation” The enterprises, guilds, central government and local government, which are the four entities in the mechanism, should determine their positions, understand

their obligations, mobilize the initiative of all parties, and play an active role in coping with trade frictions. (1)

The enterprises play the main role in dealing with international economic friction.

Faced with increasingly frequent economic frictions at home and abroad, the

enterprises in China should attach great importance to the improvement of

systems and regulation of behavior in their daily business activities to avoid

international economic friction as far as possible. Once encountering frictions,

the enterprises should be active in coping with them and try to resolve them effectively. In the past economic frictions both at home and abroad, Chinese enterprises’ passivity led to their inactive response to international lawsuits such

as antidumping suits and then brought about chain reactions which intensified

the friction. From now on, when confronted with international economic frictions, the domestic enterprises and especially the large-sized enterprises must

respond actively. Meanwhile the enterprises should not only be courageous but

also tactful in dealing with international economic frictions, and they should follow the relevant state laws and pay attention to every procedure.

Among good examples of Chinese enterprises’ active response to trade

friction is Masteel Company’s win in the antidumping suit started by the U.S. On January 23, 2001 the Nucoe — Yamato Steel Co. and another three steel

companies which produce structural steel submitted an application to the U.S. Department of Commerce for investigations against structural steel produced

in eight nations and regions including China, Russian, Germany and Italy. An investigation was initiated against the “dumping behavior” of Masteel and it was determined preliminarily that Masteel’s margin of dumping was 152%.

In December 2001, the U.S. Department of Commerce further decided that as Masteel had conducted “dumping” and the duty on the entry of H-type steel produced by Masteel into the U.S. market surged from 0% to 159%.

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Faced with this ruling, Masteel Company actively responded to the suit on

the premise of its compliance with WTO rules. Firstly, a response team was set up to prepare for the response to the suits. Secondly, the company consulted

with experts on response strategies and hired excellent overseas lawyers. In order to increase the probability of winning the suits, Masteel sent staff to the

Ministry of Foreign Trade and Economic Cooperation, Ministry of Justice, State

Economic and Trade Commission (under the National People's Congress) and China Iron and Steel Association to investigate good strategies and conducted a

bid negotiation to hire O’Melveny & Myers LLP — a famous U.S. law firm with

considerable reputation, outstanding achievements and excellent defending competency — as attorney for Masteel. Lastly, Masteel accepted and actively

cooperated with the U.S. antidumping investigation. With the coordination of O’Melveny & Myers, the U.S. commissioners went to 11 direct manufacturing factories and more than 20 auxiliary factories involved in the H-type steel’s

production. They tracked the whole manufacturing process, including the purchase of raw materials, iron making, steelmaking, rolling, inspection and

packing, and they paid special attention to the statements and reports about raw materials, data and documents. In order to prove their own theory, the U.S. commissioners even investigated Masteel’s manufacturing techniques, product development and product marketing, on which links Masteel provided the

commissioners with sufficient, detailed and careful information and reports

that were not expected by the commissioners. The facts proved that Masteel, as an international listed company whose operation is standardized, was

operated and managed in accordance with international practices and that all its operational activities, including product pricing, were open to testing.

In May 2002 the U.S. International Trade Commission (USITC) gave a final

verdict on USDOC’s ruling on Masteel’s “dumping” case. The USITC declared

that Masteel had not been dumping and thus Masteel could continue to enjoy the 0% import rate. Masteel’s success put an end to its one-year-long response to

the antidumping investigations conducted by the U.S., which marked Chinese enterprises’ first success in international trade lawsuits. (2)

The guilds are the organizers and coordinators in enterprises’ coping with international trade frictions.

As a cooperative organization that involves all the enterprises in an industry,

a guild is the best “actor” to represent all the enterprises in the industry

in dealing with international economic frictions. However at present it is difficult for the guilds in China to play their role well because they have a

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lot of serious problems themselves, such as the confusion between the role of guilds as coordinators and the role of administrative departments, their lack of

authority, and their redundant establishment. China should use the successful experience of other countries for reference in accordance with the requirements of the market economy and an open economy, making efforts to carry out a

thorough reform of guilds as soon as possible, which reform should be aimed

at completely separating guilds from government departments on the issues of

personnel, funds and functions and turning the guilds into independent civilian legal persons. The significance of the guilds’ role in coping with international trade frictions is mainly embodied in several aspects: representation of

enterprises’ benefits; obtaining government support, and provision of services such as abundant trade information to enterprises.

The role guilds play in dealing with international trade frictions is well

exemplified in the case of Wenzhou Lighter. At the end of 2001, the Wenzhou Lighter Factory heard that the EU was about to set up a CR technical barrier

— the EU was drafting a regulation specifically against lighters produced in

China, which would demand that all the lighters priced at less than 2 Euros be equipped with a safety lock that would prevent children getting hurt by the lighters accidentally. Since this regulation would seriously endanger

the survival of lighter export enterprises in Wenzhou, 300 Wenzhou private companies were mobilized to make every effort to reject the CR statute.

The Wenzhou Lighter Association, as a representative of more than 300

enterprises, started its arduous struggle against the CR regulation. The Bureau

of Fair Trade in the Ministry of Foreign Trade and Economic Cooperation sent officials to lead representatives of lighter enterprises in Wenzhou in conducting negotiations and lobbying in Europe from March to April in 2002. However the European Parliament passed the CR Bill, and in May 2002 the EU initiated the

antidumping trade barrier measure to carry out sanctions on lighters made in Wenzhou, which meant that Wenzhou lighters would be compelled to leave the EU market. But the Wenzhou Smoking Set Association did not give up. They

organized 15 enterprises to respond to the antidumping suits by declaring that

the industries were undamaged. The Association’s unyielding efforts saw a positive result in September 2003 when the European Commission formally

stopped its antidumping investigations against Chinese lighters. Thus the lighter industry of China succeeded in coping with the antidumping measures

adopted by the EU, which was the first success of a Chinese civil society in an international lawsuit.

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(3)

The central and local governments are the protector of the enterprises in their dealing with international trade frictions.

Firstly, the governments should accelerate their system reform to ensure fair competition in the domestic market and put a stop to the hostile competition

in which the enterprises do their best to undercut each other’s prices at source.

Secondly, the governments should take full advantage of their resources at hand

to offer resources guarantee to the enterprises’ dealing with other countries’ antidumping measures against China. Thirdly, the governments should establish an early warning mechanism on a national level. When exported

products are treated unjustly and the suit-responders with their attorneys do not succeed in legal negotiations, the governmental organizations should make a timely appearance and negotiate with the governments of the countries where the cases are filed. Fourthly the governments, when confronted with trade

partners’ discriminatory behavior in antidumping, should adopt corresponding retaliatory and deterrent measures.

Make good use of the dispute settlement mechanism Although it has some flaws, the WTO dispute settlement mechanism, which

was generated after a “revolutionary” reform of the GATT dispute settlement mechanism, may after all be accepted as an effective multilateral trade dispute settlement mechanism. In particular the WTO dispute settlement mechanism

provides the developing countries with effective approaches to settle disputes and prevent them developing countries from becoming mired in passivity because of their comparatively weak economic strength. In order to bring the WTO dispute settlement mechanism into full play, we should not only actively make use of

it but also know how to make best use of it, which demands that we carefully study and research the mechanism, enhance our cultivation of WTO specialized

personnel, set up a cooperation system in which the work of officials and citizens is coordinated, and lay emphasis on international cooperation and coordination.

Adjust the strategies for economic development and improve the market economy system In its strategies for economic development China has for a long time followed the strategy of “export is supreme”, which has generated many problems.

Firstly, the “export-supreme” strategy inevitably leads to the excessive growth of exports which then has a serious impact on some countries’ domestic market and industries, which brings about some trade barriers such as safeguard

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measures by the importing country and thus results in international economic frictions. Meanwhile, the “export-supreme” strategy has worsened trade conditions and increased the fiscal burden. Therefore we should change our ideas to reduce the stress on exports and attach more importance to imports. We should not sacrifice our domestic market in entering the international market. In improvement of the market economy system, China should meet the requirements of regulating the market economy system by deepening its reform of prices and the market and completely altering the functions of the government to eliminate the system elements that could induce international economic frictions. At the same time, China should combine multilateral and bilateral negotiations to win other countries’ recognition of China’s market economy as soon as possible and get rid of China’s passive role in antidumping and other international economic frictions.

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Chapter

The Trend of Regional Integration and China’s Choices

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The Development of Economic Diplomacy and Foreign Trade Relations of China After the end of the Cold War, the economic diplomacy has been generated in

the global development of market economy. The world economy today is of more integrity and unity than ever before. As a famous idiom goes, “the flap

of a butterfly’s Wings in the Caribbean could set off a tornado in the continent

of North America.” In the fields of diplomacy, the energy sources diplomacy and environmental diplomacy have emerged in succession, which, as a matter of fact, is a phenomenon that originates from the globalization of economy

— the globalization of economy unifies the world as a whole thus motivating

the human beings to maintain a sustainable development of world economy which is “a development that aims to meet human needs while preserving

the environment so that these needs can be met not only in the present, but

also for generations to come.” Therefore, the issues of energy sources and of environment are not only economic issues but also an increasing concern to

many sovereignty countries. The revolution in science together with the rapid development of information network provides material guarantees to the

development of economic diplomacy: the foregone diplomacy was operated in a

comparatively small scale so that the diplomacy and the staffs who are engaged in diplomatic activities are always mysterious to average citizens; however, with the development of information network technologies, more people nowadays could be among the first to get informed of the diplomatic events,

and more people could participate in the events, which on one hand, provides a more comprehensive democratic environment to the making of diplomatic

decisions thus making the decisions more scientific, and on the other hand, might influence or even determines the diplomatic policies with the emotions

commonly existing among the citizens. To conclude, the update of material means is a double-blade sword.

Economic diplomacy is not exactly a new concept and it enjoys a profound

history as a social practice: it has been a political tradition since the ancient

times that the authorities should govern and benefit the people while maneuvering among various political groupings. For example, Duke Huan of Qi (reigned 685–643 BC) — one of the Five Hegemony — strived to improve the lives of his people and make his military powerful to maintain internal

security and to expel foreign invasion, and he succeeded in proclaiming himself

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hegemony by adopting the proposal of Guan Zhong — a famous politician of Spring and Autumn Period — that “people can better their spiritual life only

when they are satisfied in material life; Yen Ping Chung (a famous statesman

from Qi of the Warring States) was good at getting along with people, and he would continue to treat the people he had known after a long period of

acquaintance with respect, so Confucius accorded great importance to Yen’s wisdom in his lectures.

At the beginning of the 1950s, China mainly developed its economic

diplomacy with Soviet Union and East European countries on a basis of equality and mutual benefit. The Soviet Union and East European countries provided China with a large number of favorable loans and aid of technologies, experts

and equipments, and on the other hand, China offered many mineral resources and agricultural and sideline products to the Soviet Union and East European

countries. The economic aid offered by Soviet Union and East European countries played a vital role in new China’s economic construction in its early days, and helped China in establishing an independent national economic system. During

this period, China’s economic diplomacy with Western countries served just as a complement which was much less important than the economic diplomacy

with Soviet Union, East European countries and the Third World countries. In addition, through offering disinterested help to Third World countries, China has enhanced its reputation and resumed its legitimate status in the United Nations.

After the Third Plenary Session of the Eleventh Central Committee of the

CPC, a policy that was centralized on economic construction and attached

great importance to the reform and opening up was implemented. In China, the foreign policies, which serve to advance the modernization of China, aim

at vigorously exploring a new prospect of diplomacy. Under the leadership

of Deng Xiaoping, the Chinese government has been engaged in developing

national economy. An overall view of the constant adjustment and development of China’s diplomacy will show that the foreign policies in China has become increasingly rational and practical.

During the years from the beginning of the 1970s to the end of the 1980s,

China started to participate in the international systems, which was mainly

reflected in its opening of economic trade mechanism and regions, its passive response to the security mechanism and its diplomatic activities on the basis

of bilateral diplomacy. Influenced by Deng Xiaoping’s important speech which was given in his Southern Tour, China reinforced its opening to the outside

world, which did not only maintain the steady increase of economy but also

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greatly enhanced China’s comprehensive national strength. China blended itself in most of the international systems in an active way, and has played an increasingly significant role in the development of the bilateral relationships,

regions, and the world as a whole and international organization. And China has changed its major way of foreign activities from a passive “reacting but not acting” way to an active way that would influence the international affairs.

Since the 1990s, the third generation of central leaders with President Jiang

Zemin at the core insisted in following the theories of Deng Xiaoping to pursue

an independent foreign policy of peace, acquiring favorable opportunities

and external environment for China’s reform and opening up. The CPC Central Committee with President Jiang Zemin as the Secretary-General has

carried on and developed the foreign policy of peace, and makes it clear that the fundamental tasks and basic goals of China’s diplomacy at present and

for some time to come is: to building a well-off society in an all-round way by maintaining the period of important strategic opportunities for China’s development, striving for a peaceful and steady international environment as

well as a favorable climate in its periphery in which China develops friendly relations with neighboring countries, accomplishing cooperation’s with other countries on the basis of equality and mutual benefit, and developing

an objective and friendly public environment. Influenced by the reform and opening up, the relation between domestic affairs and diplomacy has become

closer and closer, and the interplay of the two has become increasingly evident, which is embodied in three aspects: Firstly, the formulation of domestic policies is inevitably linked to the grasp of international situations. It was exactly because of China’s accurate evaluation of how China is influenced by the

changes of international situations that China could not only overcome the

difficulties brought about by domestic disturbances, the collapse of the Soviet

Union and the radical changes in East Europe, but also insist on the policy of reform and opening up. Secondly, with the continuous reform of domestic economy and politics, the development of diplomacy must be compatible with the central task as well as the requirements of domestic economy and

politics. Lastly, China’s participation in the economic globalization would in some degree influences the course of China’s reform of domestic economic and political systems.

Firstly, economic interest has become the core of China’s national interest,

and development has become a pressing task of both China and the world as a whole. Deng Xiaoping had a strong hold of this change in the international

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situations and made the right judgment — he decided that China should improve its productivity and set itself to economic construction. In 1987, it

was affirmed at the Twelfth National Congress of the CPC that economic

construction would be at the centre of national interest at that time and for some time to come. Therefore, the development of diplomacy must be subject to the centre.

Secondly, after the reform and opening up, the diplomacy of China laid

emphasis on the conformity of domestic and foreign policies. Since the 1980s, China has been emphasizing the central position of economic construction, and has pointed out that diplomacy should serve for the modernization program of China. Deng Xiaoping brought forward in his opening speech at the Twelfth National Congress of the CPC the three major tasks of “accelerating the

modernization, opposing hegemonies and working to safeguard world peace”, and he further emphasized that “economic development is at the core of these

tasks; it is the basis and the most important condition for the solution of our

external and internal problems”. On the one hand, Deng particularly stressed the economic construction’s influence on diplomacy of China — he held the

opinion that “the significance of China’s international role depends on China’s achievements in economic construction. China’s international significance will

be enhanced if China’s getting more developed and more prosperous. Already China’s international role is not insignificant, but with a stronger material base,

China will be able to enhance its significance.” Deng further pointed out that “if China wants to withstand the pressure of hegemonies and power politics and to uphold the socialist system, it is crucial for it to achieve rapid economic growth

and to carry out its development strategy.” On the other hand, Deng specially

emphasized that it was a general guideline of foreign work that diplomacy served for the modernization program. He made it quite clear that the overwhelming task of China was to develop socialist modernization, in order to accomplish

which task China was in need of a favorable international environment, and thus China’s foreign policy was to oppose hegemonies. China should maintain world peace in accordance with the prior task and policy, solving international

problems, the problems between China and other countries and China’s domestic problems such as Hong Kong issue and Taiwan issue.

Lastly, it was affirmed at the Third Plenary Session of the Eleventh

Central Committee of the CPC that opening to the outside world was a long-

term fundamental state policy of China. Based on his scientific analysis of the development of international situation and the needs to accomplish the

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domestic central task, Deng Xiaoping innovatively brought forward the strategic policy of opening to the outside world, which is for China to be engaged in

economic cooperation, technological exchange and trade contacts with other countries while insisting on independence and self-reliance. China should not only introduce advanced science and technology, management and operation

methods, and other advanced results, but also make good use of domestic and

international resources to explore domestic and international markets thus

accelerating modernization. Over the last 20 years, China initiated its opening up by setting up special economic zones, and then proceeded continuously, and now China has formed an all-directional and multi-layered opening

pattern which ranges from coastal areas to areas along rivers as well as borders, and to inland provincial capitals. Since the policy of reform and opening up

was put forward, China insisted to develop economic and trade relations

with all countries on the basis of equality and mutual benefit; in multilateral communications, China attaches great importance to developing its relations

with economically advanced countries and international economic institutions; in bilateral communications, China lays emphasis on the development of

bilateral economic relations. Meanwhile, China unyieldingly gives priority to

the maintenance of state sovereignty and independence, and never sacrifices

the national interests. Since the Third Plenary Session of the Eleventh Central Committee of the CPC, China has made great progress in developing economic

relations with other countries, especially the Western developed countries. China has attracted more and more foreign investors who has invested in

more and more areas in China and the scales of whose investment projects has been expanding. China’s foreign economy is progressing from a simple one to

a diversified one, and from bilateral to multilateral. Since the construction of market economy system was proposed in China, to integrate China’s economy into the international market has become what the times need; therefore, China’s economic relations with other countries has been flourishing.

After the Cold War, three emphases of China’s foreign policies have been

gradually formed: the first one is to actively build good relations with the powerful nations, and make great effort to develop long-term, steady and

friendly cooperation relationships and establish all sorts of partner relations

with the nations, enhancing leeway of China; the second one is to develop

friendly relations with neighboring countries; and the third one is to develop relations with other developing countries. China should strengthen its unity

and cooperation with developing countries from a strategic perspective, which

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would solidify and enrich China’s traditional friendship with other developing countries. These three emphases are direct and practical. Economic diplomacy

is an important component of China's overall diplomacy, and the strategic goals

of economic diplomacy serve and are subject to the general plans of diplomatic

strategies in China. Economic diplomacy, as an important diplomatic concept, has been greatly coinciding with China’s diplomacy with powerful nations, China’s multilateral diplomacy and peripheral diplomacy.

The Course of China’s Participation in the Trade Agreements and the Regional Economic Integration In the world today, the waves of economic globalization and regionalization are surging forward. With the acceleration of economic globalization and the integration of world market, it is inevitable for all nations and regions to organize or participate in the regional economic integration. All countries, including the developed and developing countries, must take participation in the regional economic integration.

Since the 1990s, China has been actively participating in the regional

economic integration, which is brought about not by accident but by the rapid growth of the global regional economic integration and the influence of China’s entry into the WTO.

In the 1990s, China started to vigorously participate in the regional economic

cooperation. At present, China is facilitating the regional economic cooperation

from three levels: the first level is of some regional cooperation’s in the form of

forums, such as APEC and ASEM; the second level is of some regional economic

cooperation’s with institutional arrangements, which include the Bangkok

Agreement and China-ASEAN Free Trade Area; the third level is of strategic and loose regional economic cooperation organizations, such as SCO.

China and APEC Asia-Pacific Economic Cooperation (APEC), when firstly founded, was an ordinary regional economic forum and negotiation organization. However,

after more than ten years’ development, APEC has gradually become the top-

level inter governmental forum for economic cooperation in the Asia-Pacific region, an important bond to link both sides of the Pacific and a stage for its participants to carry out cooperation’s.

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In the 1980s, as the Cold War ended, the international situation was

eased up, and the waves of economic globalization, trade and investment liberalization and regional economy collectivization were gradually formed.

At that time, the economic integration in Europe accelerated, the free trade

zone in North America had formed its initial shape and the Asia region

evidently played an increasingly important in the world economy. Against this background, in January 1989, Australian Prime Minister Bob Hawke called for a ministerial conference in the Asia-Pacific region to discuss about the proposal of

establishing more effective economic cooperation across the Pacific Rim region. The proposal received enthusiastic responses from the U.S., Canada, Japan

and ASEAN (Association of Southeast Asian Nations), which led to the first meeting of APEC in the Australian capital Canberra in November 6–7, marking

the founding of APEC. In November 1991, the Seoul APEC Declaration was approved at the third ministerial conference of APEC, officially affirming the

principles and objectives of APEC: to increase interdependence, to sustain the growth and development of the region for the common good of its peoples, to insist on the open multilateral trading system, and to reduce barriers to trade in goods and services and investment among participants.

APEC is in nature an official forum in which the secretariat plays an auxiliary

role in its operation, and the decisions are made by achieving agreements

among members. Relevant cooperations of APEC seek to promote trade and investment liberalization and economic cooperation throughout the Asia-Pacific region. APEC has 21 members, which account for approximately 45% of the

world’s population — about 2.5 billion, approximately 55% of world GDP — more than USD 19 trillion, and over 47% of world trade. Therefore, APEC is of special importance in the global economic activities.

In November 1991, China joined the APEC as a sovereignty country, and

Chinese Taipei and Hong Kong (adopting the name “Hong Kong, China” since July 1, 1997) joined the APEC in the name of Regional Economies. Up to now,

APEC has 21 Member Economies, which are Australia; Brunei Darussalam; Canada; Chile; People’s Republic of China; Hong Kong, China; Indonesia;

Japan; Republic of Korea; Malaysia; Mexico; New Zealand; Papua New Guinea; Peru; The Republic of the Philippines; The Russian Federation; Singapore; Chinese Taipei; Thailand; United States of America; Vietnam. And among the Member Economies, Australia, Brunei, Canada, Indonesia, Chinese Taipei,

Thailand, the U.S. and Vietnam joined the APEC in November 1989 when APEC was founded; China, Chinese Taipei and Hong Kong, China joined the APEC

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in November 1991; Mexico and Papua New Guinea joined in November 1993; Chile joined in 1994; Peru, Russia and Vietnam joined in November 1998. The ASEAN Secretariat, the Pacific Economic Cooperation Council (PECC) and the Pacific Islands Forum are observers of APEC, and can attend the conferences

of ministerial-level and lowers levels. APEC’s acceptance of new members in

should be approved by all member economies. These observers participate in

APEC meetings and have full access to documents and information related to these meetings. The observer groups provide partnership, expertise and

insight that assist APEC to attain its goals and implement its initiatives. It was declared at the APEC leaders’ conference in Vancouver, Canada in 1997 that

APEC entered the consolidation period of ten years and stopped to accept new members.

APEC is an open regional organization with its principles to promote trade

and investment liberalization and facilitation, and economic and technical cooperation. Trade and investment liberalization and facilitation and economic and technological cooperation represent two wheels pushing forward the

advance of APEC, and the combination of their coordinated unilateral development and collective development is major feature of APEC. There are

several sub regional trade blocs in Asia-Pacific Region, such as North American Free Trade Agreement (NAFTA), ASEAN Free Trade Area (AFTA) and Australia

New Zealand Closer Economic Agreement (ANZCERTA). Some of APEC Member Economies participate in different sub regional trade blocs.

In 2001, the APEC ministerial-level conference and informal conferences

were held in Shanghai, China. The 2001 Leaders’ Declaration issued at the

conferences reflected the agreements made by all APEC Member Economies on major issues such as coping with opportunities and challenges brought about

by globalization and new economy in the new century, vigorously promoted the steady progress of Asia-Pacific regional cooperation at this crucial moment, and enhanced all members’ confidence and resolution in overcoming economic

difficulties and resuming global economic growth. The “Shanghai Accord” approved at the conferences restated all members’ resolution in achieving

goals set in Bogor and in pursuing common prosperity. The Shanghai Accord

would have far-reaching implications on the future development of APEC, and

also promote the sustainable development of the Asia-Pacific Region. And, the

“e-APEC Strategy” approved at the APEC Shanghai conferences guided the

development of information and telecommunication industries among all its member economies and the closure of the digital divide between members.

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APEC members are the most important trade and investment partners of

China. In 2001, the volume of China’s trade with the APEC members added up

to 366.84 billion US dollars, accounting for 72% of China’s total volume of trade in that year. Except the EU, the ten major trade partners of China are all APEC members, including Japan, the US, Hong Kong, China, ASEAN, South Korea,

Chinese Taipei, Russia, Australia and Canada. In terms of attracting foreign investments, in 2001, 26,136 new foreign-invested enterprises were set up in

China (among which enterprises 22,136 were from APEC members, accounting for 84.68%), involving USD 69.195 billion of contracted foreign capital (among which USD 49.403 billion were from APEC members, accounting for 71.40%),

and the volume of foreign funds China virtually utilized was USD 46.878 billion (among which USD 34.461 billion were from APEC members, accounting for 73.51%).

In September 2007, President Hu Jintao attended the 15th APEC Leaders’

Informal Meeting held in Australia. The declaration titled Strengthening Our

Community, Building a Sustainable Future was published in the meeting. The declaration pointed out that the APEC members would accelerate the economic integration of the Asia-Pacific region by: further reducing barriers to trade and investment including through free trade agreements and regional trading arrangements; improving economic efficiency and the regional business environment, including capital markets; and facilitating integration in sectors such as transportation, telecommunications, mining and energy. T h e A P E C S e c re t a r i a t p u b l i s h e d a re p o r t c o n c e r n i n g i n v e s t m e n t liberalization, commending China’s important progress made in reducing investment barriers. The report pointed out that China did not only open its trade and investment areas, but also adopt a series of measures including accelerating reform of state-owned enterprises, improving the construction of legal framework, increasing input in the infrastructure and enhancing property rights protection. “The results of reform have been seen by the world.”

China and the Bangkok Agreement (BA) The full name of Bangkok Agreement is First Agreement on Trade Negotiations

among Developing Member Countries of the Economic and Social Commission for Asia and the Pacific . Presided and promoted by the United Nations Economic Commission for Asia and the Far East (later renamed as United Nations Economic and Social Commission for Asia and the Pacific ), the

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agreement was signed in by 7 developing countries, namely, People’s Republic of Bangladesh, India, Republic of Korea, Sri Lanka, Lao People’s Democratic

Republic, the Philippines and Thailand, in Bangkok — the capital of Thailand, so the agreement was named as Bangkok Agreement for convenience. Currently,

the formal members of Bangkok Agreement include Republic of Bangladesh, People’s Republic of China, India, Republic of Korea, Lao People’s Democratic Republic and Sri Lanka. Bangkok Agreement is the only reciprocal tariff

agreement developed by developing countries in the Asia-Pacific region, and the principle of the agreement is to promote the common development

of economy and trade among its country members through the adoption of mutually tariff and non-tariff preferences among its members.

Bangkok Agreement , as a preferential customs territory in the form of economic regional integration, boosts a characteristic that the members in the agreement should offer special preferential treatment on tariff to each other, and any nations, regions or organizations outside the territory could not receive the preferential treatment. The agreement was made for two reasons: The first reason is that, it can provide its members with equal special preferential treatment inside this regional economic integration organization. The agreement would be meaningless if the preferential treatment within the territory is lower than that in the global economic integration and the global unilateral scheme; therefore, the agreement could make it more convenient and flexible for all kinds of resources in the territory to flow. For example, 60% of EU’s export is conducted inside EU. The second reason is that the strength and status of the agreement and its country members. On the current international stage, the emergence of a regional organization or a regional member would be of more power than the emergence of a single country. For instance, the ASEAN, with its group identity, could initiate and organize the ASEM. Driven by the above two reasons, Bangkok Agreement as an economic regional organization has been developed. Approved by the State Council, Deputy Foreign Minister Liu Huaqiu, who was also the head of Chinese delegation, officially declared at the 50th Annual Meeting of ESCAP that China was going to apply for a membership in the Bangkok Agreement . From April 3–5, 2000, the 16th committee meeting of Bangkok Agreement was held in Bangkok, Thailand, which approved China’s joining in the Bangkok Agreement . In accordance with relevant procedures, China became a formal member of Bangkok Agreement on May 23, 2001. According to its commitments made in the Bangkok Agreement , China started to carry out the “Bangkok Agreement Tariff Rate” on 739 kinds of products originating in

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Bangladesh, South Korea and Sri Lanka, and carry out the “Bangkok Agreement

concessionary rate of tax” on 18 kinds of products originating in Bangladesh. In 2002, the average tariff rate of “Bangkok Agreement tariff Rate” was 12.6% with

a preferential scale of 19.6%; there into, the average tariff rate on 309 kinds of products concerning Bangladesh was 14.2% with a preferential scale of 27.7%;

the average tariff rate on 388 kinds of products concerning South Korea was 11%

with a preferential scale of 9.8%; the average tariff rate on 51 kinds of products concerning Sri Lanka was 18.2% with a preferential scale of 16.4%. The average

“Bangkok Agreement tariff Rate” against Bangladesh was 6.4% with a preferential

scale of 67.6%. In 2004, the Bangkok Agreement preferential tariff rates were exercised on 902 kinds of tariff-numbered products originating in South Korea,

India, Sri Lanka, Bangladesh and Laos with an average tariff rate of 9.9%, which

rate, compared to the rate against the non-Bangkok Agreement countries, showed a preferential scale of 18.9%.

The accession to the Bangkok Agreement will definitely have far-reaching

influence on the politics, economy and other aspects of China.

(1) From the geopolitical perspective, we are neighbored with the East

Asian and South Asian countries, which are all developing countries except

Japan and a few least-developed countries, such as Bangladesh and Laos, etc.

Regardless of the levels of development, the land areas and the populations of

the above countries and the degree of development of those countries, China’s

relationship with them will directly affect the security and stability of China.

China’s accession to the Bangkok Agreement is in accordance with China’s soft policy towards the neighboring countries. And China’s accession also stimulates the development of regional economic and trade cooperation, based upon the

principle of seeking common ground while shelving differences, which ensures the security and stability in surrounding areas.

(2) From the economic perspective, Bangkok Agreement is a critical factor

for the development of China’s economy within Southeast Asia and South Asia development particularly important. At present, the population of the Bangkok

Agreement country members is up to 2.4 billion, about 40% of the world’s population, which has great potential commodity markets. According to the numbers from China’s customs, the trade volume between Bangkok Agreement country members and China was 133 billion dollars in 1994, and has been increased to 728.6 billion dollars in 2003. The volume is growing exponentially. The rapid growth, on the one hand, reveals the robust growth of the economy in China. On the other hand, it shows China and Bangkok Agreement member

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countries are getting more economically dependent. After China’s accession to

the Bangkok Agreement , the organization is now being more active. Having China in the group has further facilitated the economic and trade links among

country members. Research shows the potential trade volume among existing country members is approximately 149 billion dollars.

China-ASEAN Free Trade Area (CAFTA) At present, among all the regional economic cooperation’s China participates in, the economic cooperation with ASEAN is of the greatest realistic significance,

fastest development and most effectiveness. The China-ASEAN free trade area is not only the first free trade area China set up with other countries, but also the first free trade area that was established by developing countries.

Among the free trade area negotiations that China has taken part in, the

CAFTA was the earliest one. In November 2002, China signed the Framework

Agreement on Comprehensive Economic Co-operation between ASEAN and China with the leaders of ten ASEAN country members; in November 2004, China and ASEAN formally signed the CAFTA Agreement on Trade in Goods and CAFTA Dispute Settlement Mechanism Agreement . In July 2005, the Agreement on Trade in Goods was put into effect, which indicated that the CAFTA was brought into a comprehensive and actual operation stage. The tariffs on more than 7,400 kinds of products in China and the ASEAN started to be reduced and the two markets were opened to each other. By 2015, the tariffs on most of the products originating in China and the ten members of ASEAN will be eliminated completely. Currently, China and the ASEAN are both developing rapidly in trade. According to the statistics of China Customs, since 1993, the ASEAN has been the fifth important trading partner of China in eleven successive years, and the volume of trade between China and the ASEAN increased from USD 6.691 billion in 1990 to USD 78.252 billion in 2003 with a growth rate per year of 20.82%. The initiation of CAFTA will further promote both China’s expansion of export and its export competitiveness, optimize the export product structure and achieve the results of export market diversified strategies. The CAFTA will also promote the increase in China’s absorption of foreign capitals and its implementation of the “going-out” strategy. In recent years, China has actively been engaged in economic cooperation with the ASEAN, and the investments from both sides have maintained a sound momentum of

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growth. By the end of June 2007, the ASEAN’s real investment in China had accumulated to USD 34 billion; according to available statistics, by the end of

June 2007, Hong Kong and Macau excluded, Chinese enterprises’ investments on agreements had accumulated nearly to USD 1 billion.

Both China and the ASEAN consider the political security as an important

issue in the CAFTA agreement. By initiating the CAFTA, China could establish

a strategic partner relationship with the ASEAN countries, which will create a good regional political environment for China and enhance China’s

international political status, enabling China to have a greater voice in the

world economic and trade, political and security affairs thus making China more politically influential in the world.

Asia-Europe Meeting (ASEM) In October 1994, the Prime Minister of Singapore — Mr. Wu Zuodong proposed

to initiate the ASEM in his visit to France, which gained support from the EU. There are 25 member countries in the ASEM, namely, fifteen countries in the EU (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,

Luxemburg, Holland, Portugal, Spain, Sweden and Britain) and three Asian countries (China, Japan and South Korea) and seven ASEAN countries (Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam).

Since the first ASEM meeting held in March 1996, China has actively

participated in all talks of different levels and fields in the framework of ASEM, and also hosted a series of important activities, including ministerial-level

member meetings on customs, technology, diplomacy, inspection, environment, economy and trade as well as anti-terrorist seminars and discussions on culture and civilization. It is commonly accepted in the world that the ASEM and “Shanghai Five”— Shanghai Cooperation Organization, which were initiated

almost at the same time, marks that the diplomacy of China has developed from

a conventional bilateral relationship mode to a new multilateral diplomatic mode. In the past ten years, the ASEM has become an important stage for China

to develop summit diplomacy and have multilateral talks and cooperation with

many countries both in Asia and in Europe. The ASEM does not only strengthen the top-level dialogues and communication with the EU countries and East Asian countries, but also benefits the development of global multi-polarization and the construction of a harmonious world, and it could create a favorable external environment for China’s peaceful development.

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China has been actively participating in and promoting the course of ASEM

in order to bring the multilateral stage function of ASEM into full play. The top-

level dialogues and comprehensive cooperation with the Asian and European countries on politics, economy, science and technology, and culture could ease

the restriction and pressure on China, eliminate the misunderstanding and bias on China, enhance the influence of China, promote the regional cooperation

in the East Asia area and the cross-area cooperation between Asia and Europe, improve the geopolitical politics and economic environment in China’s periphery, and thus facilitate the global force to develop in a direction that would be beneficial to China.

China has been actively participated in the Asia and Europe cooperation

and has attached great importance to the function of ASEM. Based on the

guideline of operating in a positive and down-to-earth manner, seeking

common ground while holding back differences, extending common sense and promoting cooperation, China has actively taken part in the ASEM and various follow-up activities, further proposed various rational viewpoints and

opinions, and donated to the Asia-Europe Foundation and ASEM Trust Fund, playing an active and constructive role in the promotion of the cooperation and communication between the Asia and Europe. China has important economic

and trade relationships with the members of ASEM. In 2002, the volume of

trade between China and the members of ASEM reached USD 287.496 billion,

accounting for 46.3% of the total volume. In 2001, the volume of ASEM members’ contracting foreign capitals in China added up to USD 17.211 billion and the volume of real investment was USD 13.295 billion, accounting for

24.87% and 28.38% of the total volume respectively. By the end of 2001, China

had introduced 13,495 kinds of technologies with a total contracting volume of

USD 67.17 billion. The technical contracting amount introduced from the EU member countries occupied 48.95% of the total technical contracting amount in that year.

Shanghai Cooperation Organization (SCO) The Shanghai Cooperation Organization, previously known as the “Shanghai

Five”, is a permanent inter-governmental international organization which was

founded on June 15, 2001 in Shanghai by the leaders of China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan and Uzbekistan.

The SCO aims at strengthening mutual trust as well as good-neighborly and

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friendly relations among member states; encouraging effective cooperation in political, economic, technological, cultural, education, energy, transport,

tourism, environmental protection and other fields among member countries;

working together to safeguard and protect regional peace, security and stability

and promoting the establishment of a new international political and economic order with the features of democracy, justice and rationalism.

The SCO internally follows the “Shanghai Spirit” which is mutual trust,

mutual benefit, equality, consultation, respect for diversified civilizations and common development while externally pursuing the principle of non-aligned,

the principle of targeted exclusively to member countries and the principle of openness.

The SCO is the first inter-governmental international organization which is

announced in our country and named after a city in our country.

Since its founding, the SCO has made great achievements: firstly, the SCO

has formulated dozens of documents on cooperation, which have not only laid

down and improved the legal basis of the organization but also established a

stable and cooperative mechanism; secondly, the SCO has carried out fruitful cooperation in the security field thus maintaining the overall stability of the

situation in the region; thirdly, the member countries in the SCO have launched

close economic and trade cooperation on the basis of reciprocity, mutual benefit and win-win principle, in which the members have reached agreements on and

initiated a number of large projects, promoting the economic developments of the member countries; fourthly, the SCO has been deepening exchanges

and cooperation in the field of humanities; fifthly, the SCO has actively been engaged in international cooperation— the increasing number of foreign exchanges has enabled the organization to be more internationally influential.

Mainland’s economic and trade relations with Hong Kong and Macau At the beginning of 2002, the governments of the Mainland and the Hong Kong Special Administrative Region started to negotiate on the “Closer Economic

Partnership Arrangement” (CEPA). Complying with the guideline of “one country, two systems” and the WTO rules on free trade agreement, the two parties had sufficient discussions and negotiations on the “arrangement” of

trade in goods and trade in service under accounts as well as the facilitation of trade investment. The two parties signed the Mainland and Hong Kong

Closer Economic Partnership Arrangement in June 2003. In September 2003,

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Mainland and Hong Kong formally signed the 6 annexes of the Arrangement

were officially signed. In order to promote the economic development of Macau and at the same time maintain the balance between Hong Kong and Macau,

Mainland vigorously developed close negotiations with Macau recently and

has achieved agreements, and the two parties signed the Mainland and Macau Closer Economic Partnership Arrangement in October 2003. The CEPA includes contents in three aspects: The first one is in the aspect of trade in goods. Since January 1, 2004, 273 kinds of product originating in Hong Kong could enjoy the zero-tariff treatment as long as they accord with the rules of origin, which was implemented until January 1, 2006. With the preferential treatment, any local manufacturer could apply for the zero-tariff preference so long as their products accord with the rules of origin. It is said that the 273 kinds of products occupy 90% of the total products exported from Hong Kong to the Mainland. The second aspect is trade in service, which covers the loosening of market access in 17 industries, including management consulting, exhibition, advertising, accounting, architecture and real estate, medical treatment and dentist, commodity distribution, logistics, freight forwarding, storage, transportation, tourism, audio-visual services, legal services, banking, securities and insurance. In most of the service areas, the Hong Kong enterprises and service suppliers were allowed to enter into the Mainland market before the agreement on WTO timelines were reached. And the third aspect is the trade investment facilitation. Mainland and Hong Kong agreed to strengthen cooperation in a wide range of different issues, including customs facilitation, commodity inspection and quarantine, quality standard, food safety, cooperation of medium and small-sized enterprises, cooperation in the TCM industry, electronic commerce, trade investment facilitation and transparency of laws and regulations. “After the signing of CEPA, the GDP of Hong Kong in 2004, 2005 and 2006 maintained a trend of rapid development, exceeding the average world economy growth rate by more than 100%.” The implementation of CEPA establishes a closer relationship between Hong Kong and the Mainland, combined the favorable investment environment in Hong Kong, Hong Kong has become the primary choice in transnational enterprises’ selection of areas in Asia where to expand their business. In 2006, there were 3,845 headquarters and agencies of enterprises in Hong Kong with an increase of 638 compared to the number in 2003, breaking historical records. CEPA also benefits the Honking citizens a lot. According to the statistics

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of the administrative government, CEPA generated about 36,000 new job opportunities in Hong Kong during the years between 2004 and 2006, and the

unemployment rate in Hong Kong reduced from 8.5% in 2003 to 4.3% at present, which is the lowest unemployment rate in Hong Kong’s history.

Although it seems that the CEPA does not bring much direct benefits to the

mainland, it has considerable indirect influence on the economy of mainland. Among the areas which get the most profits with the help of CEPA are Guangdong Province and the Pearl River Delta area.

It is predicted by experts that CEPA will help launch a comprehensive layout

and industrial arrangement in the Pearl River Delta area as a whole (including

Hong Kong and Macau), composing forces for economic development and re-establish the area’s competitive edges in both domestic and international markets.

The Construction of the Global Production Network and China’s New Strategies in Reform and Opening up The construction of the global production network The global production network, which is formed on the basis of international division of labor, is a network that results from the formation of global

production market and that enables economic factors to be arranged and linked freely across national boundaries in the world.

The global production network can be divided into three levels. The first

level is the micro-level, on which the transnational companies, as entities, bring the research and development, production, manufacturing, marketing and

services into the network system of transnational companies. The developing trend of transnational companies’ network challenges the conventional theory

of the firms thus casting doubt on the dichotomy of enterprises and market, and the network of enterprises is recognized as the intermediate structure between enterprises and the market. In the global production network, the structures of enterprises have great changes and show flexible developing trend. The

changes in transnational companies’ behaviors and the search process of global strategical resources establish the competitions and close cooperation’s between

transnational enterprises and domestic enterprises, enterprises in host countries

as well as other transnational enterprises, which leads to the generation of the micro-level of production network.

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The second level is the medium-level, observed from which level,

the economic globalization does not reduce the geographical production

agglomeration, and the regional space structure has not reached a full balance

yet. In addition, as the economic entities — the enterprises, government and

the public — start to realize that geographical particularity is a key factor to increasing the competitive edges, areas are playing increasingly important roles in the location of economic factors. Seen from the perspective of production

network, the force of economic globalization promotes both the global expansion of transnational companies’ production and the formation of global production network; meanwhile, the localization force leads to the increase of

enterprises’ dependence on local production network and then results in the formation of industrial clusters. Industrial clusters, which exceed the direct market transaction and change the market trading system, is an important

representation of the enterprise network — a medium organizational structure between enterprises and the market. The developing trend of regional industrial

clusters fundamentally changes the competitive edges of an area, and at the same time construct the medium-level of global production network.

And the third level is the macro-level, observed from which level, the state

and government are important nodes in the global production network. On the

one hand, the global production network brings opportunities to the industrial

development of the countries which actively participate in the network; and on the other hand, as an important representation of globalization, the global production network will further break down the barriers in politics, economies

and cultures while maintaining the national sovereignties in property transfers.

Meanwhile, the global production network raises new demand for function

transfers of all state governments, only by satisfying which demand could the countries better take advantage of the global production network to generate

more profits while reducing impact to them. Nations and governments should

actively adapt themselves to the needs of global production network to construct a macro-level of the global production network.

In the global production network, the orientation and competitive edges of a

country have changed enormously. In the continuous deepening of international division of labor, the focus of the national economic developments has shifted

from an adaption to internationalization to an adaption to globalization. Internationalization is a concept generated in the observation of the world from the perspective of a single country, and it is a process of passive adaption to

the international division of labor; however, globalization indicates to observe

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the orientation of a country’s economy from the perspective of the world, and it is a process of active adaption to the international division of labor. It is exactly because of its timely changes in developmental strategies and its

correct understanding of its role in the international division of labor that China

succeeds in seizing the unprecedented developmental opportunities. Thus it can be seen that the national orientation is of great importance, and a country will

inevitably lose external opportunities for its economic development if it makes mistakes in understanding its orientation.

In the global production network, the complete manufacturing of a product

in a single factory is not what we are pursuing, and the completion of a product’s overall production procedures in a single factory is not what the

factory is in pursuit of; not even the complete manufacturing of a product in a single country is what we are seeking, and the completion of a product’s overall production procedures in a single country is not what the country is aspiring after. The reason of the above phenomena lies in the increasing independence of

the production link in the value chain, which results from the global production

network. For example, the “Airbus” is a production of the EU as a whole, and a Boeing aircraft is a compound of the products of more than 80 relevant factories

in 16 countries. A country could succeed in participating in the whole global production network as long as it could take the preemptive opportunities and have a firm grasp of a link of the value chain. The location of the independent

production link is not restricted at home, but should be at the places where

there are the most favorable conditions for the production in the world. A country’s success in participating in the global production network on the basis

of the country’s comparative advantages could lead to the country’s success in attracting capitals, technologies and talents.

The independence of production link involves not only the independence

of processing, but also the independence of research and development, finance

and legal services. In the global production network, the developing countries lay emphasis on the supply of raw materials and the processing and assembling

links while the developed countries emphasize the formulation of product

standards, the grasp of core businesses and the realization of ultimate increase of value. The key embodiment of international labor division is that the industrial

chain is lengthened, and the product link as well as its supporting services is made independent. Therefore, during the process of acquiring capitals, it is aggregate cost but not the labor cost that decides whether the capitals would

be brought in successfully. A country in its economic development, if could not

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grasp all the links in production, should at least have grasp of part of the links in production, and only in this way could the country be competent enough to maintain the balance with upstream and downstream links.

In the global production network, the core competency is not totally

determined by core technologies. The competency of a country is embodied in its control of many factors including the resources flows, the output flows, the formulation of control standards and the development of game rules; the

competency of a large enterprise is embodied in its control of global resources,

integration of supply chain and capability in accomplishing increase of value; and the competency of a small or medium-sized enterprise is embodied in its capability to participate in the supply chain, to conduct differentiated

production and services, and to reduce the costs. Furthermore, the competency of a region or an industry lies in its capability to form scale economy and industrial clusters.

In the global production network, China should guide its future integration

into the world economy by better following but not challenging the basic operational rules of world economy. China should not strive to control all

links of production, but should take full advantage of the conditions of global production network on the basis of insisting on its own orientation, and at the

same time make effort to update the industries to advance faster and more sustainable development.

China’s new strategies in reform and opening up (a)

Incorporate in the global production network vigorously.

The formation of the global production network confronts the world economy in the 21st century with profound strategic reorganization — the developed

countries such as the U.S., Japan and European countries, while maintaining their monopoly of high and new-technologies, are aiming at reducing production

costs and enhancing their market competitiveness, in order to achieve which aim, the developed countries are undertaking a new round of resources

optimization on a worldwide scale. The large-scale transfer of the world’s manufacturing industry provides hard-won opportunities for China to develop its manufacturing industry by making good use of the expansive market and cheap labor in its homeland.

During the process of China’s opening to the outside world, the developed

nations and regions transferred their labor-intensive processing and

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manufacturing industries to the coastal areas in China one after another, and then they transferred the labor-intensive high-tech manufacturing industries (such as industries of electronic devices, communication and computer

assembling) into China, and later transferred part of their resource-intensive

heavy and chemical industries (such as the petrochemical industry) into China. In the meantime, some developed countries’ withdrawal from some industries

has made some room for China’s industrialization. China should seize the opportunity of industrial transfer and take advantage of the advantageous

convergence of all kinds of resources (including capitals, technologies, talents and managements) to accelerate both the industrialization course of its

traditional industries and the leapfrog development of knowledge economy in which there are information industry and biotechnology industry, taking the

initiative to integrate China into the global production network. The Chinese

enterprises should actively participate in the global cooperation of research

and development, trying to figure out the “blind spots” not only to avoid developing in homeland some products that have been quite developed in foreign countries but also to enhance the enterprises’ introduction, assimilation, absorption and innovation of technologies to a higher level, encouraging the

enterprises to follow their own ideas in understanding and evaluating the development of technologies in the world from the global perspective and at the same time facilitating their technological development and introduction.

Transnational transfer of industries is a bilateral action. The megatrend

of world economy’s future development is the continuous strengthening of

economic integration and informationization. China should make the best of this trend to build a road of “opening-up, competition and development”. The large and medium-sized enterprises in China must adopt the strategy of international

management. With the deepening network development of world economy, whoever can take full advantage of the international market can develop at the

highest speed thus becoming the most competitive. On the basis of attracting a great number of foreign funds, China should cultivate its own transnational companies step by step, entering a new stage where the absorption of foreign

funds and the launch of foreign investment develop simultaneously, and making more profits in the global production value chain. China’s turning into a “world factory” is not only a goal but also a process of objective development, which

is closely related to transnational companies’ global networking production as well as China’s role in the current international labor division. What China is in pursuit of is not just “Made in China”, but becoming the center of world

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economy. Only by actively integrating itself into the global production network can China make good use of the global resources to enhance the level of its economic development thus building up China’s great economic status.

In the global production network, the first thing China should do is to

participate in the international labor division with its natural endowment of

factors as its advantages. At the present stage, China’s most advantageous natural factor is its cheap labor. It is an inevitable and practical choice for China to biome a “world factory” by combining the absorption of foreign funds and

the labor force factors. The industrial civilization is insurmountable, and the developmental trend of world economy shows that manufacturing industry

is the footstone of a country’s economic development, an important area to solve the employment problems, a carrier of high and new technologies, and a motive power of the high and new technologies’ development. As to China

which is still in the medium term of industrialization, its economic growth mainly depends on industries, and the manufacturing industry, especially

the equipment manufacturing industry, will be a prime mover of China’s industrialization; therefore, the development of manufacturing industry is of great importance.

The global production network provides favorable opportunities for China

to make good use of its labor force advantage to participate in the international division of labor, and now, China’s advantage is not only shown in the

manufacturing of labor-intensive products but shown more in the production of the labor-intensive link. Currently, the products manufactured in China with

high technical contents have not become mainstream commodities in the global

market yet; however, in terms of the labor-intensive production link, China is still one of the most competitive countries in the world, which is reflected not only in the labor force resources that are cheap but of good qualities, but

also in what China has accumulated in its development of many years — the advantages of a large-scale processing and assembling industry as well as an enormous market scale that is absolutely necessary to the development

of industries, and these comparative advantages would ensure the future

development of China’s manufacturing industries. In the next 20–50 years, the biggest advantage of China lies in the manufacturing of low costs. Meanwhile, the underway reorganization of international industrial structure would

also provide uncommon opportunities for China to take full advantage of its advantages in natural factors to develop its manufacturing industry.

In the global production network, according to China’s national conditions

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and characteristics as well as its level of economic development, China should

aim at becoming the center of the overall world manufacturing industry. China’s goal of becoming the center of manufacturing industry indicates that

China is going to allocate the economic resources mainly to the newly-emerged industries and the manufacturing and producing links in traditional industries that have been updated by modern technologies, and at the same time China will lay emphasis on the links of research and development, and management

and operation. In the global production network, the developed countries, with their advantages in stock and increase of knowledge, continue to maintain their central position in the innovation while the developing countries still have to

accept the developed countries’ dissemination of technologies and transfer of industries. In addition, new technological reform and globalization lead to the split up of developing countries as a group and some developing countries are becoming more and more marginalized. Therefore, although all developing

countries has more or less manufacturing industries, only a small number of developing countries could become an integral part of the global labor division

and cooperation system that is under the leadership of developed countries,

and only a few developing countries could become the center of modern manufacturing industry.

China enjoys several comparative advantages in its course of accomplishing

its goals to be center of the international modern manufacturing industry:

(1) China is rich in labor force resources. The average wage of a worker in the manufacturing industry in China is only a small percentage of that in the developed countries, and one-tenth of that in South Korea. And the gap

between the productivity per worker in China and that in developed countries

and regions is narrower than the gap between the labor cost (wage) in China and that in developed countries and regions, which shows that the cheap labor

force resources is an objective advantage of China. (2) The market in China enjoys enormous potentials. As China is a country with a large population, with the steady increase of national income per capita in China, the real and potential

demands in domestic market would lay a foundation for the expansion of

enterprises in China. (3) China has acquired and enjoys a large amount of existing capital. After 20 years’ rapid economic growth, China has shown a

substantial increase in its amount of capital — the total volume of household savings is tremendous in China and China’s absorption of foreign funds ranked

first among developing countries in successive years. The statistics and China’s

economic performance show that China is no longer short of capitals. (4)

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China boosts a strong and solid industrial foundation. China has a complete

industrial system that ranges from basic industries to IT industries, and enjoys a robust foundation in heavy and chemical industries, which could provides raw materials and semi finished products for manufacturing industries to expand.

The industry mix in China has developed in step with that in developed countries, and has the industrial foundation to participate deeply in the global production network of transnational companies. Having undergone the self-

dependent technological reform and attracted foreign capitals, the conditions of technological equipments in major manufacturing enterprises in China

have been improved in a large scale compared to the conditions in the 1980s, which lay a foundation for China’s development to be center of the modern

manufacturing industry. (5) China is well equipped with infrastructure. Since its reform and opening up, China has improved its infrastructure year after year, especially in recent years, the active fiscal policies implemented to enlarge

domestic demand have driven the construction of infrastructure in China to stride forward, offering powerful support to China’s attempt to be center of the international manufacturing industry.

That China should participate in the international labor division on the basis

of its own real advantage — abundant labor force does not mean that we should

always consider our cheap labor force as our foundation in our participation in the international division of labor. On the contrary, we hold the belief that

China should continuously enhance the quality of its economic factors and thus constantly raise China’s status in the global production network. (b)

Enhance enterprises’ level of internationalization.

Transnational companies are not only important carriers of a country’s participation in the global production network, but also the most significant organizational forms in today’s international competition. Whether China’s

industries could keep up with the progress of the global production network

depends, to a large extent, on whether the Chinese transnational enterprises

could constitute the leading force in China’s participation in the international competition. Whether the enterprises are competent enough to effectively carry

out the global development program in the global production network concerns not only the enterprises’ own survival but also the prosperity and decline

of the nations they are in. Roland Berger Strategy Consultants—a famous German company predicted that with the further development of industrial globalization, only the global companies, such as Electrolux, Whirlpool,

Panasonic and Hitachi, as well as other regional companies could survive after

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10 years. Therefore, the Chinese enterprises should actively participate in the

global production network of transnational companies, and should be aware of that joining the global production network is a stage in the enterprises’ course

of international management. The objective of joining the global production network is that the enterprises, by the medium of the network nodes’ operation in the production network, should take full advantage of both the resources in

the production network such as capitals, technologies and management and all sorts of potentials possessed by the value chain, to enhance the enterprises’

own international competitive capacity and the level of their international management, which would help them find room to survive in the world market. In order to achieve the objective above, the Chinese enterprises should

design their own developmental strategies in accordance with the characteristics of the global production network and on the basis of transnational companies’ global strategies, ensuring a long-term steady development of the enterprises. Meanwhile, against the globalization, Chinese enterprises should make

good use their advantage to develop out of the country with international

management ideas and participate in the allocation and sharing of global

resources, making every effort to grow to competitive transnational companies. The Chinese enterprises should make the best of their comparative advantages in the production network to obtain greater economic profits. The key to

enterprises’ profit-making lies in their maintenance of comparative advantages in only the strategic links of production network instead of all links. In the past 30 years after China’s “reform and opening up”, China has not only shown its advantages in its manufacturing of some products, but also accumulated

great experience in marketing. The Chinese enterprises could conduct their transnational investments either in upstream links or in downstream links to

obtain greater economic profits. The enterprises should take a world-embracing view and search for the best areas for them to bring their comparative advantages into play.

In the internationalization of enterprises, the cooperation and co-development

with transnational companies should be valued. Most enterprises in China,

compared with similar enterprises in the developed countries, are smaller in scale

and less competitive in strength, which, however, cannot be obstacles to obstruct the Chinese enterprises’ implementation of global network operation strategy.

Due to the comprehensiveness and flexibility of the scale of global network strategical cooperation, any two companies with common strategical goals, even

two companies which differ from each other a lot, could form an alliance to realize

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mutual benefits. With China’s entry into the WTO, the enterprises are facing an

increasingly fierce competition, and many enterprises pay too much attention to the competition but neglect the cooperation. However, in recent years, the relationships among enterprises have changed qualitatively: they are no longer

simple competition relationships, but are considered by business circles as the

most important means to expand market, and they have gradually become the mainstream in enterprises’ development. In the global production network, the competition and cooperation among enterprises both can be implemented without coming into conflict — the enterprises cooperate with each other in competition

and compete with each other in cooperation, and they cooperate to compete and compete by cooperating — the competition in cooperation is becoming a new

competition mode of enterprises. The global production network, aiming at a strategic height and long-term profits, is striving for resources sharing, advantages

promoting, mutual trust, mutual independence and common development. The Chinese enterprises should set up a variety of cooperation’s with other domestic

enterprises and foreign transnational companies, and should be courageous in and good at cooperating in competition and competing in cooperation, making use of

the network to avoid risks and develop their strengths. Meanwhile, we should have

a correct understanding and grasp of the essence of the transnational companies’ adoption of cooperation instead of rivalry — which is actually a fierce competition of higher level. Furthermore, we should insist on the principle of “strengthening

cooperation in competition and enhancing competition in cooperation” when we form alliances with transnational companies, and avoid the one-sided inclination

that emphasizes cooperation but neglects competition. At the same time, the enterprises should attach significance both to the construction of internal resources and to the utilization of external resources. (c)

Facilitate the update of industries and the advancement of technologies.

In the history, Japan, “Four Asian Tigers” and ASEAN made full use of the largescale structural adjustment of post-war world economy to actively participate in

the international labor division, in which participation they constantly adjusted

their own industrial structure and promoted industrialization, and finally achieved a high-speed economic development. An overall view of the current

situation of East Asia tells us that the production network of East Asia is at a

crucial moment of industrial structural adjustment — Japan and the “Four Asian Tigers” are optimizing their industrial structure, in which optimization they are transferring part of their resource-intensive and technical-intensive industries,

and China’s industrial structure could exactly merge into the East Asian

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countries’ industrial structural optimization. There is no time like the present, and China should seize this historical opportunity and use the successful

experience of “Four Asian Tigers” and ASEAN in adjusting industrial structure as a reference to adapt itself to the developing trend of international industries,

and China should participate in different levels of industrial cooperation’s based on division of labor to accelerate the transfer and update of our industries.

China boosts a vast expanse of territory, abundant and easy-to-exploit natural resources, sufficient cheap labor force, a considerable number of scientists and

technicians and some high technologies that could run neck by neck with the

technologies in developed countries. China could well bring its advantages in

resources into play and build on its strengths by developing its labor-intensive industries while in other East Asian nations and regions, their lack of resources, shortage of labor force, and the increase in payroll costs have seriously obstructed their economic development. Meanwhile, China could take advantage

of the increase in the direct investment from Japan and “Four Asian Tigers” to vigorously bring in funds and technologies, and then increase both the technical

level of the investment and the investment in high-tech industries, developing resource-intensive industries and industries that are rich in technologies, such

as technical-intensive industries and knowledge-intensive industries, and in this

way China could make better use of its advantages as late starters to accelerate its industrialization. To conclude, in the development of the global production

network, China should seize the opportunities to update its industries, and only in this way could China consolidate its status in the global production network.

In order to join the global production network, the enterprises must

accelerate their industrial updates and technological advancement. We must

be aware of the fact that acquiring slender profits in downstream or affiliated

positions is not a strategy that will help enterprises to enjoy a long-term

development, and participation in the global production network is absolutely not an escalator to boost the enterprises’ competency. China should make some

change to its backward status in the international division of labor, and enhance

its technological innovation, management and competitive edges, and what

is of most significance is that China should exploit this opportunity to endure hardship and study strenuously, and finally achieve its purpose as the global

value chain provides a shortcut for the late coming learners and innovators to acquire knowledge, technologies and competencies which would enable the latecomers to progress rapidly and then surpass the formers.

The enterprises which are positioned at the lower part of the “smile curve”

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always start to participate in the global production network by packing

products, assembling components and producing low-tech products by processing materials supplied by clients or processing according to buyers’

samples; therefore, those enterprises are facing pressure to update their

technologies all the time, which pressure requires the enterprises to make great effort in building and improving their won competency. Those enterprises

should co-operate with transnational companies, in which cooperation the enterprises should absorb the techniques, knowledge, technologies provided

by the transnational companies, master management skills and accumulate marketing experience to learn how the international market works, and by this

means improve their competency in technical innovation and enhance their working efficiency; the broad distribution of transnational companies could

bring great opportunities to developing countries in the aspects of investment,

technology, technique and market access, enabling the enterprises or regional enterprise clusters in developing countries to participate in the global production network; only by learning and innovating could the enterprises

move upward along the “smile curve” — move from the stage of low added

value to the stage of comparatively high added value, and thus reach a higher world standard.

An enterprise needs to go through the imitative learning and then the

innovative learning. The introduction of new technologies create favorable

conditions for the technological innovation in developing countries, but the introduction of technologies could not replace the promotion of enterprises’

inner strength. Therefore, while introducing technologies, enterprises must

reinforce their research and development, attach significance to the cultivation of independent innovative capability, train innovative talents, assimilate and

absorb the introduced technologies, and then act bold in blazing new trails. The innovations in technologies and products could develop from small ones

to big ones, from the processing and manufacturing of simple components and parts to the manufacturing of complicated components and parts, and then to

manufacturing of a whole machine by others’ brand, technology licensing and processing deals, during which the Chinese enterprises could progressively master the core technologies and enhance the capacity on technological

innovation, and then develop products with independent intellectual property rights and set up internationally renowned trademarks and brands, and finally

become transnational enterprises that are highly competitive and predominant in relevant fields.

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The Chinese enterprises’ learning and innovation in the global production

network are not limited in the aspects of technologies and products — the learning and innovation on management, operation and market development are of the equal importance. The technological innovations are market-oriented and impenetrate the whole process of realizing the market value. By means of technological innovations the enterprises could increase the technical contents

as well as added value of their products and thus enhancing the competitiveness

of the products in the export. And by means of innovation on management and

operation, the enterprises would acquire the capability to expand international market and operate the market; therefore, innovation on management and

operation is another magic weapon of the enterprises in the global competition, and hence they are indispensable to the enterprises.

Many late coming enterprises finally surpass the formers by taking advantage

of the global production network, which enterprises include many famous transnational companies and some small or medium-sized enterprises, for example, the Hyundai and Samsung in Korea, Acer in Taiwan, China, Haier and

Lenovo in Mainland, China. It is particularly worth mentioning that Wenzhou (a

city in Zhejiang Province, China) generates an industrial cluster by assembling many enterprises which produce low voltage electric apparatus, lighters and

clothing products, and the Wenzhou cluster has formed many new modes and accumulated considerable new experience in the global production network. (d)

Promote the regional industrial clusters’ development.

Due to the acceleration of economic globalization, the world value creation system is undergoing an unprecedented worldwide vertical chorisis and

reorganization, and the global allocation and integration of the value chain have become more and more intense; meanwhile, the industrial clusters—one of the carriers of regional economic development—has shown new characteristics:

they are implanted in the global production network rapidly in different ways. Today, the successful clusters are constantly adjusting their developmental

strategies in their progress, making great contributions to the growth of regional economy. The industrial clusters in China have played important roles in enhancing the competitive edges of regional industries and stimulating the

economic growth. However, these spontaneously growing industrial clusters have shown serious problems, e.g. their small business scales and low levels,

and thus they can only experience the passive and initial cluster effect and have an inadequate understanding of the industrial clusters, and what’s more, in these clusters, the roles of the government and agencies are not well played.

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In the process of Chinese economy’s active integrating into the global

production network, the regional industrial clusters should be developed vigorously, a good layout of clusters development should be made, and the

cultivation and development of specialized industries clusters should be

adopted as the primary mode of regional economic development. The regions should work on the basis of the authorities’ regional development layout,

and in accordance with the natural features of resources, the current industry

development situation and the formation rules of industry chain, to instruct the development of regional industrial clusters, clarify the focus of support and

guide the introduction of foreign merchants and investments; a region should insist on the market-orientation and select the most predominant industries and products by referring to the construction of the central cities in the regions and

the promotion of the urbanization, and then the regions should give priority to the cultivation of their pillar industries and special and dominant industries while vigorously developing the high-tech industries; the construction of parks, especially the industrial parks and agricultural parks that are designed and

constructed with high standards and that are rich in regional characteristics and special functions, should be considered as the most important, and the regions

should lead the scattered medium and small-sized enterprises to congregate towards the industrial parks.

All regions should make full use of the present comparative advantages

to develop the predominant industrial clusters, providing all-around public

services to the industrial clusters that have been formed; based on its own

advantages and industrial foundation, a region should encourage the implementation of policies that support the continuous capital and technology

input into the same industry, and then cultivate and develop its predominant industries; a region should utilize the financial and tariff policies to lead

enterprises to advance their technology and expand their scale in a specialized way and thus promote the speedy advancement of industries; a region should

design special policies to facilitate the standing out and expanding of the enterprises which boost high technology, high management and high added-

value and have a determining influence on the regional competitiveness; a region should lay emphasis on attracting the enterprises that enjoy high

technologies, high management and high added value and that are relevant to the regional industries. Particularly, all regions should shift their focus from

the support for “enterprises–industries” to “industries–enterprises”, fostering the industrialization and industrial clusters. All regions should center on their

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pillar industries to support and develop auxiliary industries, service industries and downstream industries by improving environment, offering policy support

and attracting foreign merchants and investments. The region should develop the pillar industries into dominant industries, transform the single industry into industrial clusters, extend the isolated dot-like enterprise into chain industries, and then turn the chain into board, forming the industrial clusters.

Regional competition is a process where the non-current factors attract the

current factors. All regions should be actively engaged in creating favorable

investment, scientific research and living environments for the specialized development of industries, and vigorously promote the construction of technical infrastructure that is suitable for the development of regional industries, creating hard environment for the development of scientific innovation and high-tech industries; meanwhile, the regions should actively improve the

software factors, create rational system environment, enhance the trust between

manufacturers, enrich the social resources of the regions, establish good image of the regions, set up regional brands and strengthen the competitive edges

of the regions. In addition, all regions should attach importance to the role played by culture in the growth of the special industries in the regions and

the enhancement of competitiveness, making effort to create a relaxed and

free cultural atmosphere that incorporates diverse things, shows respects to knowledge and talents, lays emphasis on credit standing as well as equality

and fairness, encourages individuality and motivates people to innovate, which is propitious to the establishment of an environment that is propitious both to innovation and competitive development.

Nowadays, the developmental idea of industrial clusters has been adopted

in many regions; however, when using the industrial clusters as policy tools,

we need to pay attention to the fact that the industrial clusters ought to be a spontaneous product of the market, and though certain governmental guidance

is necessary, if we lay too much emphasis on the governmental intervention and industrial clusters but ignore the practice of industrial development, market scale,

technological factors and industrial peculiarity, our actions would result in waste

of resources. Furthermore, the essence of industrial clusters lies in the sharing of knowledge, technology and infrastructure as well as the organic relations among enterprises and between enterprises and universities. A merely geographical

cluster is not really an industrial cluster. To conclude, we must have a regard for the forms of industrial clusters as regional production networks, and facilitate the development of regional industries by promoting the industrial clusters.

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(e)

New ideas of Reform and Opening up.

Opening China wider to the outside world would be beneficial to China’s further integration into the global production network of higher level. Since its entry into the WTO, China has blended itself in the globalization more

profoundly, and the reform and opening up of China has developed to a

new horizon, which exactly requires China to deepen its participation in the overall system of world economy. China should make full use of the favorable

conditions and opportunities brought by the globalization, opening China wider to the outside world in an all-round way, actively attaching itself to the

globalization course of economy and technology, and expanding the room for economic development.

In the global production network, China needs to develop new ideas to

better its opening to the outside world. The protectionism holds the belief

that the more export, the better, which has been proved wrong and needs to be corrected. The exclusive pursuit of export would lead to the cut-throat competition among enterprises, and result in the unceasing falling prices of

exported products and the deterioration of trade conditions, which would bring about more and more antidumping lawsuits against China. Moreover,

we could not ignore the importance of import as during the process of importing foreign products, China could control the flows of resources and thus controlling important links in the global production network. In addition, the

barriers in trade and in flows of production factors would increase the costs of products and factor flows and thus obstruct China’s participation in the global production network.

In order to truly establish China’s status as a “world factory” and make

China an important link in the transnational companies’ global resource allocation, it is necessary for China to reduce investment and trade barriers and promote trade and investment liberalization. As long as we continue to

maintain the steady politics, the harmonious society and the gratifying situation of economic development, further promote the reform of economic system

and create a sound system environment for both the domestic and foreign

enterprises to compete and develop on a basis of equality, bigger developmental opportunities will be brought by our opening China wider to the outside world.

As a matter of fact, the globalization would confront both the developing countries and the developed countries with challenges and opportunities, and what is essential is how the countries cope with the challenges and

opportunities. The global production network changes the traditional forms of

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the complementary international labor division between developed countries and developing countries. In the circumstance where there exists international factor flows, the free trade will be beneficial not only to developed countries but also to developing countries. In order to further expand its opening up, the Chinese government should shift its focus from maintaining international rules to designing international rules. After its entry into the WTO, China, as a developing country which is undergoing system transmission, could only participate in a limited number of international economic activities, and did not frequently have a share in the design and formulation of international economic rules, especially the market economic rules. However, at present, there have been fundamental changes in China’s economic strength as well as China’s role played in international economic activities. Therefore, China as a responsible country, should actively participate in the design of international rules. We should make good use of our status as a developing power to vigorously facilitate the trade and investment liberalization in the framework of WTO, and energetically participate in the regional economic integration and cooperation, continuously opening up new prospects of an open economy.

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Notes Chapter 4 The Reform of China’s Foreign Trade System and Its Effects 1.

Incorporated from the former State Import and Export Regulatory Commission, Ministry of Foreign Trade, Ministry of Foreign Economic Relations and the Administrative Commission for Foreign Investment. 2. Guangdong, Fujian, Tianjin, Beijing, Shanghai and Shandong. 3. The proportion was usually 25%. 4. From 1985–1988, tax refunds only included the value added tax of production and the product tax of the last link of production. 5. From China Statistics Yearbook (1996) . 6. Obtained through calculating WTO statistics. 7. World Bank, “China Foreign Trade Reform: Meeting the Challenge of the 1990s”, 25. 8. From the 1988 Plan for Foreign Trade Structural Reform . 9. From 1988–1993, a complete implementation of tax rebates was carried out. It set a comprehensive ratio of tax rebates for export products taxed by product tax, and refunded the turnover taxes of all previous processes according to the specific proportion of tax contained in the product. 10. Source: China Statistical Yearbook (1996). 11. Duan Ying and Feng Zongxian, “Effective Protective Rate Theory in the Performance of Tariff Concession in our Country,” Journal of International Trade , Dec 1998. 12. World Bank. “China Foreign Trade Reform: Meeting the Challenge of the 1990s”, 28. 13. From the China Statistical Yearbook 1995 . 14. After 1994 the system of tax rebates was continually adjusted, which involved the shared responsibility system, calculation, rate of refund, etc. The refund rate altered as the overall economy and the status of the BOP changed. For example, the rate continued to fall from 16.63% on July 1, 1995 to 12.86%; due to the impact of the Southeast Asian economic crisis it rose from 1998 to 2003, during which time it jumped from 12.56% to 15.51% on July 1, 1999. 15. See Note 11. 16. Obtained through calculating data from the China Statistical Yearbook 2002. 17. Source of data: http://www.fmprc.gov.cn/ce/cejp/chn/zgbk/t225762.htm. 18. On January 1, 2004 a new round of reforms for tax rebates was put into effect. As proposed by the State Council, the principles of the reform were to settle old debts, contract no new debts, perfect the mechanism, share responsibility, and facilitate reform and development. In the following years, based on the categories of the export products, tax rebates were cancelled or reduced. Some of them, after being deprived of tax rebates, now enjoy a tax-free policy.

Chapter 5 A Retrospective on and Prospects for the Reform of the Foreign Exchange Control System in China 1. 2.

3.

4.

On July 5, 1986, the RMB/USD exchange rate was adjusted from 1:3.2 to 1:3.7 with a depreciation of 15.8%. On December 16, 1989 the RMB/USD exchange rate was adjusted from 1:3.72 to 1:4.72 with a depreciation of 21.2%. The four kinds of foreign remittances are: advances on sales; entrepot trade forex receipts; remittances that, according to the foreign remittance regulations, should be remitted into the forex settlement account under current accounts but the transaction type cannot be determined by the banks; remittances that, according to the foreign remittance regulations, should be settled in the RMB account but the transaction type cannot be determined by the banks. In order to provide better services to its clients, who had increasing requirements for guaranteed value of forex, the BOC resumed the transaction of forward forex settlements and sales under capital accounts on April 1, 2003 on the basis of the “real needs” principle. At the beginning of August 2005, the forward forex market was opened in China and the BOC was the first bank that was authorized to transact forex swap between the RMB and foreign currencies in the inter-bank forex market (at the beginning of September 2005). The swap between RMB and foreign currencies, which serves for hedge and position adjustment, could be transacted. At the end of September 2005 the SAFE authorized membership of the inter-bank forward forex market of five Chinese banks including the Bank of Communications, and nine foreign-invested banks. Including computer and information services, consultation, education, medical care, health care, advertising and publicity; film and other video or audio products, other products, commission, brokerage.

Notes

5. 6. 7.

8.

Including computer and information services, consultation, education, medical care, health care, advertising and publicity, film and other video or audio products, other products, commission, brokerage. There are some differences between the evaluations of the control of forex under capital accounts in China at home and abroad. Here, the evaluation of the IMF is chosen because it is widely accepted in the world. The aim of inflation is set at 3% by the central bank. In the six months from March to August in 2007, the CPI indexes were 3.3%, 3%, 3.4%, 4.4%, 5.6% and 6.5% respectively. In 2008, restraining the inflation has become the primary goal of macro-economic control in China. The list of forex reserves in China in the past years, 1950–2005. http://www.safe.gov.cn/model_safe/tjsj/tjsj_detail.jsp?ID=110400 000000000000,1&id=5.

Chapter 6 The Development and Change of Foreign Trade Financing in China 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

12. 13.

Information from the official website of the SAFE. Information of the official website of the BOC. Information from the official website of the SAFE. “Suggestion on Innovative Service in Finance of Supply Chain,” International Business Daily, May 22, 2007. “China Merchants Bank’s Detailed Analysis of New Strategies in Trade Financing,” International Business Daily, July 17, 2007. “China Construction Bank’s Strategic Construction of a Trade Financing Platform,” International Business Daily, April 3, 2007. “Focusing on Trade Finance, Enjoying Access to the Whole World,” International Business Daily, September 16, 2007. “The Trajectory of the BOC in 2008: International Settlement That Determines the Fate,” International Business Daily, January 5, 2008. “Bank Settlement—A Bank Service that Has Been Existed in China for A Hundred Years—Has Taken on New Appearance,” International Business Daily , December 25, 2007. “The Thirty Years of China’s Ship Export: The Building of A Great Power in Shipbuilding,” International Business Daily, December 18, 2007. Please refer to Lu Jiang’s speech entitled “The Features of the Development of Logistics in China in 2007” and “A Prospect for Development in 2008” given in the Report of the Development of Logistics in China in 2008 and the 15th Forum of Logistics Experts . “China Construction Bank’s Strategic Construction of a Trade Financing Platform,” International Business Daily, April 3, 2007. Please refer to the official website of the China Export & Credit Insurance Corporation.

Chapter 7 The WTO and Foreign Trade in China 1. 2.

http://www.cacs.gov.cn. Information from the official website of China Trade Remedy Information, http://www.cacs.gov.cn “China Has Strictly Fulfilled Its Commitments: The Tariff on Agricultural Products Has Reduced by Nearly 40% After China’s Entry into the WTO,” People’s Daily, June 20, 2007. 3. The WTO stipulates that the import tariff quota system can be implemented during the transitional period. The tariff quota, compared to import quota, is a looser restriction as it does not impose limitation on the import quantities but only imposes low tariffs on the products within the quota with high tariffs on the products beyond the quota. 4. The WTO Agreement on Agriculture stipulates that the volume of final import tariff quota should occupy 5% of the domestic consumption, which is also called “market access opportunities”. 5. http://www.cacs.gov.cn.

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Chinese Translation James D. Hamilton. 1999. Time Series Analysis . Beijing: China Social Sciences Press. William H. Greene. 2007. Econometric Analysis . Beijing: China Renmin University Press.

English Materials Gerber James. 2005. International Economics 3rd. Pearson Education. Ronny Bechmann and Stefan Jansen. 2007. Rising Giants, Development and Cooperation , (12). World Trade Organization. International Trade Statistics, http://www.wto.org/ english/.

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278

Index 2-Crude materials 13-15, 22 Actual amount 45, 48-51 advertising 61, 75-6, 78-82, 249, 267 APEC (A sia-Pacif ic Economic Cooperation) 239-41 Asia-Pacific Economic Cooperation see APEC Asia-Pacific region 194, 239-43 Asian financial crisis 48-9, 51, 166-7 authorized banks 120, 127-8, 130, 134, 136-8, 140-1, 151 average tariff rate 106, 200-1, 213, 244 BA see Bangkok Agreement Bangkok Agreement (BA) 242-5 Bank of China 8, 24, 123, 126, 130, 135, 157, 159, 181, 221 BOC (Bank of China’s) 159-62, 164, 170, 178, 181, 267-8 CAFTA (China-ASEAN Free Trade Area) 245-6 capital accounts 121-2, 124, 130, 134, 140-1, 143, 146, 148, 150-2, 168, 267-8, 270-1 China-ASEAN Free Trade Area see CAFTA China Construction Bank 177, 181, 190, 268 China Merchants Bank see CMB China Statistical Yearbook 8, 12, 14, 44, 56, 147, 267 China Trade Remedy Information 26, 224, 268 China’s accession 200, 209, 244-5 China’s development 82, 199, 236, 257 China’s diplomacy 235-6, 239 China’s entrance 145, 147, 165-7, 170, 172, 176 China’s entry 25, 113, 196, 202-3, 206-8, 211-14, 216-25, 239, 259, 268

China’s export products 25, 158, 204 China’s exports 16-17, 71, 80, 105, 163, 203, 206, 209, 216-18, 224-6 China’s imports 2-3, 5, 20, 70-1, 79, 114 China’s reform 2, 52, 94, 197, 236 China’s services exports 73-4, 79-80 China’s services sector 72, 83, 87, 114 China’s services trade 69-70, 72, 76-8, 80, 82-3, 193 China’s trade 69-73, 80-1, 83-8, 146, 242 China’s utilization 32, 43, 45, 89 clothing products 204, 216-18, 262 CMB (China Merchants Bank) 176-7, 268 commercial services 55-6, 73-6, 78, 81-2 competitive edges 181, 183, 187, 207, 209, 212, 219, 250-1, 260, 262, 264 construction services 75-6, 78, 81-2, 84-5 contracting parties 196-9 contractual amount 39-40, 43-5, 48-51 countries, developed 162, 194, 199, 207, 214, 218, 221, 225-6, 252-4, 256-8, 260, 265-6 current accounts 34, 109, 121-2, 124, 126-8, 131-3, 137-8, 140, 143, 145-8, 162, 168, 267 developing countries 34, 149, 162, 194, 203-4, 214, 225, 230, 238-9, 243-5, 252, 256, 261, 265-6 developing nations 16, 21, 61-3, 68, 84-6, 118 Development and Change of Foreign Trade Financing in China 157, 159, 161, 163, 165, 167, 169, 171, 173, 175, 177, 179, 181, 183, 185 Development of Foreign Direct Investment in China 31, 33, 35, 37, 39, 41, 43, 45, 47, 49, 51, 53, 55 economic construction 123, 157, 185, 235, 237

Index

economic cooperation 34, 40, 68, 110-11, 228-9, 238-40, 245 economic diplomacy 234-5, 239 economic globalization 2, 58, 68, 91, 131, 236, 251 economy, domestic 111, 164, 198, 236 enterprises, medium-sized 178, 180, 190-1, 253-4, 262 EU and Japan 67, 79, 85, 213 expenditure 103, 120, 123, 126-7, 133, 140, 144, 146, 148, 150, 152, 158, 160 export enterprises 124, 147, 170, 173 Export-Import Bank of China 110, 162-4, 166, 183 export-import policy finance system 162-4 export-import trade 167-8, 177, 205 export markets 16-17, 79, 245 export products 13-14, 23, 26, 159, 209, 214, 226, 267 export subsidies 105-6, 208, 214 export trade 2, 147, 156, 163, 166, 272 FDI (foreign direct investment) 31-3, 35, 37-9, 41, 43-53, 55, 65-6, 84, 134, 151, 153, 194 financial services 74-6, 78, 81-2, 85-6, 139, 158, 160, 162, 164-5, 171, 186, 223 financing 157, 177-88, 190-1, 220 financing products 170, 180-1, 188, 194 financing services 177-8, 180, 186 foreign banks 37, 136-7, 142, 160, 171, 184, 221-3 foreign capital 32-6, 160, 212, 245, 247 Foreign Direct Investment 31-3, 35, 37, 39, 41, 43, 45, 47, 49, 51, 53, 55, 65, 134, 194 foreign direct investment see FDI foreign economy 156, 158, 160, 162-4, 167, 172-3, 189, 238 foreign enterprises 20-1, 33, 110, 117, 127, 131, 160, 206, 219-20, 265 Foreign Exchange Control System in China 119-23, 125, 127, 133, 135, 137, 139, 141, 145, 147, 149, 151, 153

280

foreign-funded enterprises 33, 40-1, 112 foreign-invested banks 160, 167, 171-2, 180, 221, 267 foreign-invested enterprises 140-2, 152, 160-1 foreign investment, utilization of 43-5, 54, 87 foreign investment policies 32-4, 37-8, 271 foreign policies 235-8 foreign trade, development of 2, 10, 103, 106, 111, 117, 144, 166 foreign trade companies 95, 97, 99-100, 103, 110-12, 174 foreign trade enterprises 94, 96, 98, 10410, 164-5 foreign trade financing 146, 156-8, 160-1, 167-8, 170-6, 178, 181-2, 184-5, 191-4 foreign trade laws 113, 115, 118, 200 foreign trade rights 101, 110-12, 200 foreign trade system 93-105, 107-18, 124, 197-8 forex 120-8, 130-3, 135, 138, 140-5, 148, 151-3, 157-61, 163, 168, 267-8 forex accounts 120, 127-8, 131-3, 137-8, 142, 145, 147 forex control 121-2, 124, 131, 133-5, 140, 142, 148, 152-3, 168, 268 forex control departments 131, 133, 138, 140-2 forex control system 122, 124, 126, 130-1, 143-5, 147, 149-51, 153, 160-2 forex earnings 123-4, 127, 132-3, 137-8, 140-1, 144, 158, 161, 163 forex expenditure 131-3 forex markets 121, 126, 129, 135-6, 144, 148-51, 170 forex receipts 128-9, 138, 152, 170 forex reserves 121-2, 125, 137, 144, 148-9, 153, 161, 268 forex revenue 126-7, 133, 140-1, 144, 146, 148, 150, 152, 158 forex sales 127-8, 133-4, 146, 153 forex settlements 121, 124, 126-8, 133, 136-8, 153

Index

GATT (General Agreement on Tariffs and Trade) 196-200, 204-5, 216 General Agreement on Tariffs and Trade see GATT global production network 250-63, 265 government, central 32, 88, 95-100, 102, 123, 160-1, 227 government services 75-6, 78, 81 Growth of China 2-3, 5, 7, 9, 11, 13, 15, 17, 19, 21, 23, 25, 27, 29 ICC (International Chamber of Commerce) 165-6 IIP (International Investment Position) 149-50, 275 import volume 3, 5-6, 8-12, 16-21, 64, 112, 147, 159, 207 imported material 18-20, 98, 139 industrial products 13-16, 22-3, 100, 201 industrial structure 27, 54-5, 67, 70, 80, 867, 146, 163-4, 259 information services 59, 67, 76, 78-80, 82, 86, 89, 267 insurance, export credit 163, 166, 182, 191 insurance services 75-8, 81, 83-6 international business 160, 162, 172, 194, 273 international companies 41, 66-7, 85-6, 91 International Investment Position (IIP) 149-50, 275 international payments 120-1, 149, 188-9, 270 international standards 107, 109, 112-13, 118, 204 International Trade Statistics 66, 81, 275 investment liberalization 240-2, 265-6 market economy system 226, 230-1, 238 Ministry of Foreign Trade and Economic Cooperation 34-5, 40, 110-11, 228-9 National Bureau of Statistics of China 8, 12, 14, 88

N D RC (Nat i o n a l D e v e l o p m e n t a n d Reform Commission) 37, 141-2 PBC (People’s Bank of China) 157-9, 221 People’s Bank of China see PBC planned economy 20, 33, 95-6, 100, 111, 117-18, 156-8, 210 PRC (People’s Republic of China) 94-6, 120, 130, 133, 156, 161, 196, 200 processing trade 2, 18-20, 117, 138-9 production network 42, 250-1, 258-9 Reform of China 93, 95, 97, 99, 101, 103, 105, 107, 109, 111, 113, 115, 117, 270, 273 Regional Integration 233, 235, 237, 239, 241, 243, 245, 247, 249, 251, 253, 255, 257, 259, 261 SAFE (State Administration of Foreign Exchange) 74, 76-8, 124, 127-8, 131-4, 140-2, 149, 159, 268 scale, economies of 2, 21-3 SCO (Shanghai Cooperation Organization) 239, 246-8 service outsourcing 67, 69, 85-6, 90 service sector 37, 55, 58, 61, 66, 68, 70, 83, 85-7 service trade 68, 81, 85, 87, 134, 274 services export 60, 69, 72, 79-80 services trade 59, 61-2, 64, 66-70, 72, 77-9, 82, 84, 87-9, 147, 150, 185, 193 volume of 59, 66, 73, 84 socialist market economy 33, 108, 111-12, 115-18, 161 special economic zones 32, 34, 115, 238 State Administration of Foreign Exchange see SAFE state-owned enterprises 2, 20-1, 168, 242 trade barriers 67-8, 204, 216, 230, 265 trade financing 160, 162, 165-7, 169-72, 183, 191, 194, 268

281

Index

trade frictions 2, 25-6, 148, 217-18, 223, 225-7 trade policies 144, 198, 203, 205-7 trade surplus 2, 25, 108, 146-7 trade volume 18-19, 58-9, 61-2, 64-5, 71-2, 74, 79, 82, 101, 104, 108, 111, 147, 2445, 247 transnational enterprises 171, 249-50, 261, 271-2 transport equipment 13-15, 22 Trend of Regional Integration and China 233, 235, 237, 239, 241, 243, 245, 247, 249, 251, 253, 255, 257, 259, 261

282

volume of China 2-3, 70, 242 western China 34, 38, 52-4 world economy 23, 27, 69, 166, 196-8, 234, 240, 253-5, 265, 271-3 World Trade Organization see WTO WTO (World Trade Organization) 25, 35, 66, 68, 72, 112-15, 118, 130-1, 167, 170-2, 196-7, 199-225, 265-6, 268

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