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　　　　　　　　　　　　　　　WT/TPR/S/16128 February 2006
　　　　　　　　　　　　　　　　　　　　　　　　　　(06-0737)
Trade Policy Review Body



TRADE POLICY REVIEWReport by the SecretariatPEOPLE'S REPUBLIC OF CHINA



This report, prepared for the first Trade Policy Review of the People's Republic of China, has been drawn up by the WTO Secretariat on its own responsibility. The Secretariat has, as required by the Agreement establishing the Trade Policy Review Mechanism (Annex 3 of the Marrakesh Agreement Establishing the World Trade Organization), sought clarification from the People's Republic of China on its trade policies and practices. Parts of the report especially Chapters III and IV are without detailed comment from the authorities.Any technical questions arising from this report may be addressed to Ms. Rohini Acharya (tel: 022 739 5874) and Ms. Zheng Wang(tel: 022 739 5288).Document WT/TPR/G/161 contains the policy statement submitted by the People's Republic of China.

Note: This report is subject to restricted circulation and press embargo until the end of the first session of the meeting of the Trade Policy Review Body on the People's Republic of China.

CONTENTS
Page
SUMMARY OBSERVATIONS ix
(1) ECONOMIC ENVIRONMENT ix
(2) TRADE AND INVESTMENT POLICY FRAMEWORK x
(3) TRADE AND TRADE-RELATED REFORMS x
(4) OTHER MEASURES AFFECTING TRADE xii
(5) SECTORAL POLICIES xiii
(i) Agriculture, forestry, and fisheries xiii
(ii) Energy xiii
(iii) Manufacturing xiii
(iv) Services xiv
(6) OUTLOOK xiv
I. ECONOMIC ENVIRONMENT 1
(1) OVERVIEW 1
(2) MAIN DEVELOPMENTS: POLICY AND ECONOMIC PERFORMANCE 4
(3) MACROECONOMIC POLICIES 11
(i) Monetary and exchange rate policies 11
(ii) Fiscal policy 14
(4) MAIN STRUCTURAL REFORM ISSUES 16
(i) Tax reforms 16
(ii) Re-orientation of the economy from the state-owned to the private sector 18
(iii) Labour market reforms 18
(iv) Capital market reforms 20
(v) Competition policy 22
(5) DEVELOPMENTS IN TRADE AND FOREIGN INVESTMENT 22
(i) Composition of merchandise trade 22
(ii) Direction of merchandise trade 24
(iii) Trade in services 24
(iv) Foreign investment 24
(6) PROSPECTS 28
II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES 29
(1) INTRODUCTION 29
(2) INSTITUTIONAL AND LEGAL FRAMEWORK 30
(i) Institutional structure 30
(ii) Legal structure and the legislative process 34
(iii) Law enforcement 37
(iv) Transparency 37
(v) Centre–subnational relations and local barriers to internal trade 39
(3) FORMULATION, ADMINISTRATION, AND IMPLEMENTATION OF TRADE POLICY 40
(i) Main trade laws 40
(ii) Agencies involved in trade policy implementation 40
(4) TRADE POLICY OBJECTIVES 43

Page
(5) TRADE AGREEMENTS AND ARRANGEMENTS 44
(i) WTO 44
(ii) Regional agreements 45
(iii) Bilateral agreements 47
(iv) Unilateral preferences 51
(6) FOREIGN INVESTMENT REGIME 51
(i) Recent developments in FDI policy 51
(ii) Legislative framework and procedures 52
(iii) Examination and approval procedure 54
(iv) FDI incentives 55
(v) International investment agreements 57
Annex II.1: Restructuring of the State Council 58
III. TRADE POLICIES AND PRACTICES BY MEASURE 60
(1) INTRODUCTION 60
(2) MEASURES DIRECTLY AFFECTING IMPORTS 62
(i) Procedures 62
(ii) Tariffs 63
(iii) Other charges affecting imports 73
(iv) Customs valuation and rules of origin 74
(v) Import restrictions 75
(vi) Trading rights 81
(vii) State trading 82
(viii) Contingency measures 83
(ix) Standards and other technical requirements 88
(x) Government procurement 94
(xi) Other measures 98
(3) MEASURES DIRECTLY AFFECTING EXPORTS 98
(i) Procedures 98
(ii) Export taxes 99
(iii) Other tax measures affecting exports 100
(iv) Export prohibitions, restrictions, and licensing 102
(v) Other measures affecting exports 108
(vi) Measures maintained by importing countries 109
(vii) State trading and designated trading 110
(viii) Export promotion and marketing assistance 111
(4) MEASURES AFFECTING PRODUCTION AND TRADE 114
(i) Industrial policy 114
(ii) Incentives 115
(iii) Legal framework for business 127
(iv) State-owned enterprises 130
(v) The private sector 136
(vi) Small and medium-sized enterprises 137
(vii) Competition policy 139
(viii) Corporate governance 141
(ix) Intellectual property rights 145
Annex III.1: The use of AVEs in China's tariff 158

Page
IV. TRADE POLICIES BY SELECTED SECTORS 161
(1) INTRODUCTION 161
(2) AGRICULTURE 163
(i) Features and market developments 163
(ii) Policy objectives and administration 165
(iii) Policy instruments 167
(3) ENERGY 178
(i) Petroleum 178
(ii) Electricity 182
(4) MANUFACTURING 189
(i) Overview 189
(ii) Iron and Steel 189
(iii) Textiles and clothing 193
(iv) Automotive sector 199
(v) Electronic and communications equipment industry 204
(5) SERVICES 207
(i) Overview 207
(ii) Commitments under the General Agreement on Trade in Services 208
(iii) Financial services 209
(iv) Telecommunications services 229
(v) Transport 236
REFERENCES 247
APPENDIX TABLES 255


CHARTS
Page
I. ECONOMIC ENVIRONMENT
I.1 Exchange rates and consumer price index, 1998-04 12
I.2 Product composition of merchandise trade, 1998 and 2004 23
I.3 Direction of merchandise trade, 1998 and 2005 25
I.4 Trade in services, 1998 and 2004 26
I.5 FDI inflows by origin, 2000 and 2004 27
II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
II.1 Hierarchy of laws and regulations 35
III. TRADE POLICIES AND PRACTICES BY MEASURE
III.1 Bound tariff averages by HS section, 2002 and 2005 66
III.2 Distribution of MFN tariff rates, 2001, 2002, and 2005 68
III.3 Tariff escalation by 2-digit ISIC industry, 2001, 2002, and 2005 70
III.4 Import prohibition and prohibition under processing trade by HS section, 2005 76
III.5 Import licensing by HS section, 2005 79
III.6 Anti-dumping cases, 1 January 2002 to 31 December 2004 85
III.7 The structure of IPR administration and enforcement 146
IV. TRADE POLICIES BY SELECTED SECTORS
IV.1 Value added in services, 2000 and 2003 208


TABLES
I. ECONOMIC ENVIRONMENT
I.1 Selected macroeconomic indicators, 1998-05 2
I.2 Sources of output and productivity growth, 1983-03 6
I.3 Balance of payments, 1998-05 7
I.4 Basic economic and social indicators, 1998-05 9
II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
II.1 Main department/agency involved in trade policy implementation 42
III. TRADE POLICIES AND PRACTICES BY MEASURE
III.1 Structure of MFN tariff in China, 2001-05 65
III.2 Summary analysis of the Chinese preferential tariff, 2005 71
III.3 China's preferential rules of origin, 2005 74
III.4 China's national standards, 2000-04 90
III.5 Government procurement by project, 2002-04 94
III.6 Government procurement by procurement method, 2003-04 95
III.7 Government procurement by procurement entities, 2002-04 96
III.8 Products subject to export licensing, 2005 105
III.9 Selected central government transfers and subsidies, 2001-04 116
III.10 Tax revenue, 1998-04 118
III.11 Excise (or consumption) tax 120
III.12 Business tax rates 122
Page
III.13 Income tax concessions and preferences for foreign-invested enterprises 124
III.14 Performance of SOEs, 2001-04 131
III.15 Tradeable and non-tradeable shares of domestically listed companies 143
III.16 China's membership of international intellectual property rights conventions, October 2005 147
III.17 The number of patents applied for and granted, 2000-04 148
III.18 Enforcement of intellectual property rights, 2001-04 154

Annex Table III.1 Ad valorem equivalents compared to bound rates, 2002-05 159
IV. TRADE POLICIES BY SELECTED SECTORS
IV.1 Central institutions involved in agriculture policy-making and implementation 166
IV.2 Agricultural price subsidies, 1998-04 174
IV.3 Steel industry, 2000-04 190
IV.4 Textiles and clothing industry, 2001-04 194
IV.5 Automotive industry, 2001-04 200
IV.6 Performance of the banking sector, 2003 and 2004 212
IV.7 Basic telecommunications service providers, 2005 229
IV.8 The telecommunications sector in China, 1998 and 2001-05 230
IV.9 Registration requirements and application procedures in maritime transport services 241


APPENDIX TABLES
I. ECONOMIC ENVIRONMENT
AI.1 Merchandise exports by group of products, 1998-05 257
AI.2 Merchandise imports by group of products, 1998-05 258
AI.3 Merchandise exports by destination, 1998-05 259
AI.4 Merchandise imports by origin, 1998-05 260
AI.5 Trade surplus or deficit by country and region, 1998-05 261
AI.6 China's intra-industry trade with Chinese Taipei by WTO Tariff Study
Categories, 1998-04 262
AI.7 China's intra-industry trade with the world by WTO Tariff Study Categories, 1998-04 263
II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
AII.1 China's administrative jurisdiction 264
AII.2 China's major trade-related laws and regulations, as at 11 October 2005 265
AII.3 Principal notifications under WTO Agreements, as at 24 October 2005 270
AII.4 Involvement in the WTO dispute settlement mechanism, as at 7 October 2005 274
III. TRADE POLICIES AND PRACTICES BY MEASURE
AIII.1 Summary analysis of China's MFN tariff, 2001-05 277
AIII.2 Inward duty, 2005 278
AIII.3 Quotas allocated to state-trading and designated trading enterprises (tonnes), 2002-05 279
AIII.4 Products subject to compulsory certification 287
AIII.5 Exports quotas allocated to state-trading enterprises, 2002-05 284
AIII.6 Subsidies as notified to the WTO 286
AIII.7 Products subject to government pricing or government guidance pricing under China's
Protocol of Accession 290
AIII.8 Service and utilities subject to government pricing or government guidance pricing
under China's Protocol of Accession 293

Page
AIII.9 Minimum capital and registration requirements for companies 294
AIII.10 Criteria defining large, medium, and small enterprises in China 295
IV. TRADE POLICIES BY SELECTED SECTORS
AIV.1 Tariff quota utilization in China, 2002-05 296
AIV.2 China's sector specific commitments in the GATS 298



SUMMARY OBSERVATIONS

(1) ECONOMIC ENVIRONMENT
1. China's economic reforms, which began in 1978, have gradually opened up the economy to both international trade and foreign direct investment (FDI) and allowed the emergence alongside the public sector of a private (non-public) sector, whose contribution to GDP reached nearly 60% in 2003. As a result, the economy has grown by an average of over 9% per annum since then, while GDP per capita increased from US$148 in 1978 to US$1,700 in 2005. Furthermore, the proportion of China's population living below the poverty line (US$2 per day) fell from nearly 73% in 1990 to 32% in 2003. The nearly nine-fold rise in GDP per capita since 1978 and dramatic drop in people living in poverty demonstrate clearly the value of integrating more liberal trade and foreign investment policies into broader macroeconomic and structural reforms in order to promote economic development. Ongoing reforms have been given added impetus by China's membership of the WTO in 2001; its commitments have provided a catalyst for reform, paving the way for continuing strong growth in the foreseeable future.
2. Since 2001, real GDP growth has averaged almost 9% per year, driven mainly by exports and investment, especially as trade and investment reforms have increased China's integration into the world economy. Its total trade in goods alone accounted for around 64% of GDP in 2005 and 6.7% of global trade in 2004. Much of the trade is conducted by foreign-invested companies based in China as a result of more liberal FDI policies; these have attracted FDI (together with related technology) mainly to manufacturing as a platform for export. China is now one of the world's main destinations for FDI.
3. The accumulation of capital, financed for the most part by domestic savings, has also been vital, accounting for much of the growth in GDP as well as in labour productivity, a key determinant of living standards. Gross domestic investment and gross national saving amounted to 39.3% and 42.9% of GDP, respectively, in 2004. The widening gap between China's saving and investment is reflected in its growing current account surplus, which increased from 1.3% of GDP in 2001 to 3.6% in 2004, and is estimated to have been at least 5% of GDP in 2005.
4. Notwithstanding these remarkable achievements, a number of challenges remain. In particular, inequalities in the distribution of income have grown, especially between the urban and rural populations and between the coastal and inland regions. The Government is attempting to tackle this and other problems through structural reforms aimed, inter alia, at making the labour market more flexible, greater private sector participation and competition in the economy, and developing a more efficient capital market. China's proposals for its 11th Five Year Plan, which were approved in October 2005, emphasized the importance of a more balanced approach to development and the need to continue with these structural reforms.
5. Until July 2005, China's currency, the renminbi (RMB), was pegged to the U.S. dollar, maintaining its stability in nominal terms against the U.S. dollar, but resulting in a certain degree of volatility in inflation. In July 2005, the RMB was revalued by 2.1% in relation to the U.S. dollar, and China moved to a managed floating exchange rate regime with respect to a basket of currencies. The move to a more flexible exchange rate could enable China to operate a more independent monetary policy and allow the market to play a greater role in determining interest rates and therefore in allocating resources.
6. China is a moderately taxed country, with total tax revenues accounting for a little more than 15% of GDP in 2004. Fiscal policy has operated in a stabilizing fashion; the overall fiscal situation is seemingly sound with rapid growth of tax revenues and tight control over expenditure bringing the overall budget deficit down to around 1.3% of GDP and keeping the public debt stable at around 20% of GDP.
(2) TRADE AND INVESTMENT POLICY FRAMEWORK
7. The economic reform process has necessitated a number of changes in China's trade and investment policy framework. A large number of trade-related laws have been reviewed and revised as part of China's accession to the WTO in 2001. Legislation includes laws enacted by the National People's Congress (the legislature), or its Standing Committee, and regulations issued by the State Council (the Executive). Ministries and government departments may issue rules to implement legislation. Local people's congresses and local governments have the authority to issue local regulations and rules until these are superseded by the same legislation at national level. The State Council also issues "interim provisions" under responsibilities delegated to it by the National People's Congress; these interim provisions relate mainly to economic and tax reform and may be replaced by laws after they are tested and when the authorities deem it appropriate. In addition to this overall hierarchy of legislation, policy is often implemented in the form of "trials". China's gradual reforms have often resulted in an overlap of policies and institutions. While new policies and institutions are continually being introduced to address the needs of the economy, old policies and institutions are only partially amended or dismantled, thus adding to the complexity of the overall legislative and policymaking framework.
8. The gradual nature of China's reforms is also reflected in changes in its trade and FDI policies. Trade policy has gradually shifted away from direct intervention in the economy aimed at promoting import substitution and exports. Import barriers have been reduced and investment is permitted in a larger number of sectors, particularly if the investment involves high and environmentally sound technologies. As a result, there is significantly less intervention in the economy. However, the Government provides "guidance" to the economy reflecting, inter alia, domestic supply considerations. In this regard, measures such as interim export taxes and VAT rebates are used to "manage" exports of products in short supply. FDI policy has largely directed investment into the manufacturing sector, particularly export processing activities.
9. Since becoming a Member of the WTO in December 2001, China has been an active participant in the multilateral trading system. It provides at least MFN treatment to all WTO Members except El Salvador and the territories of some European Union members. At the same time, however, it is actively pursuing regional and bilateral free-trade agreements. China has signed Closer Economic Partnership Agreements with the Special Administrative Regions (SARs) of Hong Kong and Macao, a Framework Agreement with ASEAN countries, a free-trade agreement with Chile, and a preferential trade agreement with Pakistan, and is currently negotiating bilateral agreements with a number of other countries. It appears that all its bilateral agreement partners have recognized China as a market economy.
(3) TRADE AND TRADE-RELATED REFORMS
10. Since beginning its programme of economic liberalization, and especially as a result of its accession to the WTO, China has carried out major trade and trade-related reforms. The average applied MFN tariff was reduced from 15.6% in 2001, just before China acceded to the WTO, to 9.7% in 2005; the average MFN duty rates for agricultural (WTO definition) and non-agricultural products were 15.3% and 8.8%, respectively, in 2005. The tariff is entirely bound and applied rates are generally at or close to bound rates; this lends a high degree of predictability to the tariff. The bound tariff rate averaged 10% in 2005 and is due to fall to 9.9% by 2010, when China completes implementation of its current commitments on bindings. China also extends bilateral trade preferences under the Bangkok Agreement, to ASEAN countries, to Pakistan, and to the SARs of Hong Kong and Macao. Unilateral preferences (zero rates of duty) are offered to 39 least developed countries for some products.
11. Non-tariff measures have also been falling progressively as China implements its commitments under its Protocol of Accession. Import quotas as well as trading rights (the latter granted to certain qualifying traders) were discontinued at the end of 2004, while import prohibitions and licensing have been reduced progressively. The administration of the import licensing regime has also been simplified. China maintains import prohibitions, largely for health and safety reasons and under international conventions. It also prohibits imports of certain products only for processing and re-export purposes; such imports include some agricultural products, minerals, fertilizers, and other used and waste materials. Automatic as well as non-automatic import licences are used to regulate some imports. Non-automatic import licences are currently used mainly for imports that are restricted under international conventions. Automatic licences are used mainly for monitoring purposes and to ensure that trade in these products "does not fluctuate drastically". The number of tariff lines subject to automatic licences has increased slightly since 2002; they currently apply to around 16% of the tariff. Import quotas have been phased out. However, tariff rate quotas still exist for some agricultural products and fertilizers and state trading is used to manage imports of some products.
12. China has taken steps to simplify its administration of other border measures, such as standards, sanitary and phytosanitary measures, and contingency measures. In 2005, 32% of standards were based on international standards; as a result of a recent review, 44% of current standards are to be revised to ensure their conformity with international standards, while 11.6% are to be abolished. The SPS regime and SPS inspection procedures for imports remain complex and not very clear; a large number of laws and regulations govern implementation in this area.
13. Under the Law on Government Procurement, which covers purchasing by state organs and public and social institutions but not state-owned enterprises, procurement is expected to facilitate the achievement of state goals for economic and social development. Purchasing preferences also exist for "domestic goods, construction and services," although these may be purchased from foreigners under exceptional circumstances. China is an observer to the WTO's Government Procurement Agreement.
14. Export barriers, while falling, have not tended to keep pace with reform to import measures and are used in part to ensure stability in domestic supplies of certain products. The export regime, which includes export taxes, export prohibitions, export licensing, and export quotas, remains complex. Export restrictions, including prohibitions and licensing, are maintained, inter alia, to avoid domestic supply shortages and to meet international obligations. Prohibitions are also announced from time to time on exports under the processing trade regime to discourage processing of certain products or to ensure their supply to domestic industry. China has global export quotas on some agricultural products, as well as on petroleum and some minerals, while destination specific quotas are maintained for exports of live cattle, swine, and fowl to the SARs of Hong Kong and Macao. Under memoranda of understanding signed with the European Union and the United States, China also maintains export restraints on certain textiles and clothing products; these restraints are due to remain in place until the end of 2007 and 2008, respectively. In addition, export of rice, maize, cotton, coal, crude and processed oil, tungsten ore and products, antimony ore and products, silver, and tobacco products are subject to state trading to, inter alia, ensure stable domestic supply of these products, prevent disruption in the international market, and protect exhaustible resources. Frequent changes are also made to VAT rebate rates and interim export tax rates to, inter alia, ensure adequate domestic supply of certain products.
(4) OTHER MEASURES AFFECTING TRADE
15. As trade barriers have been liberalized, domestic structural problems have become more evident. China has taken gradual steps to tackle some of these challenges, including reform of the public sector, which until recently dominated most sectors of the economy, as well as improvements in the legislative framework concerning competition and corporate governance. The investment climate has also been improved by legislation and steps to improve enforcement of intellectual property rights, although problems with the latter remain.
16. As a result of economic reforms, direct government intervention in the economy has declined. Nevertheless, industrial policy remains an important feature of government policy and various measures are used to encourage investment in certain sectors and discourage investment in others. The measures include administrative "guidance" for example, to financial institutions to stop providing financing for certain types of projects, or to administrative authorities to stop approving certain kinds of projects. China has also used its tax system to encourage investment, especially by foreign companies, which enjoy lower tax rates (15% and 24%) than domestic companies (33%) and also have access to tax holidays if they invest in targeted sectors or regions.
17. The reform of state-owned enterprises (SOEs) has been ongoing since the late 1970s. It has been undertaken gradually mainly because of the pervasive presence of SOEs across large sections of the economy as well as the social functions performed by the large SOEs, which are difficult to replace. Nevertheless, the reforms have thus far reduced the number of SOEs by almost half since the late 1990s, and improved profitability among those remaining. Further closures of a number of loss-making SOEs and depleted mines are expected over the next four years. Efforts are also under way to improve competition and corporate governance in SOEs and other companies, including by permitting them to list on local and foreign stock exchanges.
18. While the authorities intend to retain the public sector as the mainstay of the Chinese economy, efforts are being made to encourage the development of private enterprise, especially in certain sectors. For example, amendments to the Company Law ease the establishment of private companies, especially small and medium-sized enterprises (SMEs), which are also being provided with assistance to gain access to capital. The State Council also issued guidelines in 2005 permitting private investment in a number of activities previously restricted to the public sector (including electric power and other utilities, railways, civil aviation, and oil). In this regard, further development of a competition policy framework will be important to ensure a level playing field for the public and private sectors. Competition at present is enforced through a number of laws, but appears not to be very effective; China is currently finalizing an Anti-Monopoly Law.
19. Effective enforcement of intellectual property rights is also needed to ensure an investment environment conducive to the development of an innovative private sector and foreign investment. Steps have been taken to ensure better enforcement and coordination between the various government agencies involved in enforcement. However, relatively low fines and other penalties that appear insufficient to deter IPR violations remain among the significant problems to be addressed.
(5) SECTORAL POLICIES
(i) Agriculture, forestry, and fisheries
20. The agriculture sector accounted for around 12.5% of GDP in 2005 (according to GDP data issued in early 2006), although its share of employment is some 45%, indicating that labour productivity is much lower than elsewhere in the economy. Agricultural policy is aimed at ensuring an adequate supply of food for the population at affordable and stable prices. Restrictions on production, distribution, and sales of food, including through procurement, pricing, and export and import restrictions, have been used to meet this goal. The sector was also heavily taxed. However, agricultural reforms were introduced in the late 1970s, gradually liberalizing these restrictions and allowing farmers a greater degree of flexibility in making their own production decisions. Border measures have also been relaxed: the average MFN tariff on agriculture (WTO definition) fell from 23.1% in 2001 to 15.3% in 2005; import quotas have been converted to tariff-rate quotas mainly for some cereals, some edible oils, sugar, mineral and chemical fertilizers, and wool and cotton. Nevertheless, state trading is maintained to manage trade in some products, as are price controls for some products, largely to maintain stability of supply and prices. In a major reversal of previous policy, tax reforms are addressing the disproportionate tax burden borne by rural areas, and direct subsidies have been introduced for agriculture; the policies are expected to reduce or remove the net transfer of resources out of agriculture that resulted from previous measures.
(ii) Energy
21. Production in China is, by and large, relatively energy-intensive. Rapid economic growth has resulted in the Chinese economy becoming increasingly reliant on imported energy. In 2004, 120 million tonnes of crude oil were imported; imports for 2005 are expected to have increased to 130 million tonnes. China is increasingly supplementing domestic petroleum supplies through imports and outward investment by its SOEs in the global petroleum industry; China is also to establish a national oil reserve to stabilize prices and supplies. Prices of both petroleum and electricity are set by the Government and stability of supplies is maintained through state trading and supply by SOEs. China plans to supplement its current source of electricity, mainly coal, with others such as hydroelectric and nuclear power; it also intends to reduce energy costs, although it is not clear how this is to be achieved given current intensive energy use by certain sectors and energy prices, which do not appear to reflect their true cost.
(iii) Manufacturing
22. Emphasis in the manufacturing sector has been placed on investment in export-oriented, capital-intensive activities, including through government assistance and public investment. The result is that manufacturing, especially export-oriented manufacturing, has developed more rapidly than other sectors. According to figures released in early 2006, the share of industry, which includes manufacturing, mining, and production and supply of electricity, gas and water, accounted for over 40% of GDP in 2005. Manufacturing, much of which is dominated by foreign-invested enterprises, now accounts for over 90% of China's merchandise exports. Foreign-invested enterprises appear also to account for a greater share of output of higher value-added production. To encourage domestically owned firms to move up the value-added chain, China is currently encouraging investment in high technology based manufacturing and uses "guidance" as well as trade policy instruments for this purpose.
23. Such "guidance" in the past resulted in the rapid development of key industries. There is currently overcapacity in steel production and the Government is trying to rationalize the production structure through mergers and acquisitions, relocation of enterprises, and closure of small-scale producers. Although the MFN tariff is lower than for other industries (5% in 2005), import and export restrictions continue to be used to regulate supply. In the automotive industry, previously applied technology transfer requirements appear to have been relaxed in a new policy issued in 2004. In addition, as part of its WTO commitments, import quotas previously applied to certain automotive products were removed by the end of 2004 and the overall applied MFN tariff was reduced from 30.1% in 2001 to 14.8% in 2005. In textiles and clothing, relatively greater liberalization has resulted in productivity gains, and efforts are under way to move domestic production up the value-added chain. Trade barriers have also fallen. In particular, the number of silk products subject to export quotas and licensing has been reduced and state trading in silk products discontinued. Furthermore, the tariff declined from 20.7% to 10.9% between 2001 and 2005 for textiles and from 24.1% to 15.8% for clothing. However, cotton imports remain subject to state trading and tariff rate quotas. In electronics and communication equipment, one of China's largest exports, similar efforts are being made to encourage domestic production and export of higher-value-added products. Exports have been encouraged by the Government through, inter alia, assistance for research, export financing, and VAT rebates.
(iv) Services
24. China has liberalized its services in line with its schedule in the General Agreement on Trade in Services (GATS); its specific commitments in this regard are relatively extensive by developing country standards, covering nine out of the 12 large sectors in the GATS list. According to GDP figures released in early 2006, services accounted for 40.7% of GDP in 2004 (40.3% in 2005) and for almost 25% of employment in 2002. Liberalization of key services has been slower than for other sectors of the economy. Banking, insurance, telecommunications, and transport services are characterized by significant state ownership and little private, especially foreign, presence. Four banks with majority state holding control 54% of bank assets. They also continue to be burdened with large non-performing loans (NPLs), although these are declining as China continues to reform the financial services subsector. Efforts are being made to improve governance in banking through improvements in the supervisory framework as well as structural reform of the state-owned banks. Insurance is dominated by six state holding companies, which account for 85% of premiums; foreign presence is sparse, although this is likely to increase with further market access provided under China's GATS commitments.
25. In telecommunications, basic services are dominated by six majority state-owned companies, while value-added services are provided largely by private enterprises. Price controls are maintained, although increasingly in the form of price ceilings or "guidance prices" set by the Government. A limited amount of foreign investment in some of the basic telecommunications service providers has been permitted, mainly through investment in the stock market. Air and maritime transport services are similarly dominated by majority or fully state-owned companies. Some regulatory reform has taken place in recent years, although the increased use of market-based incentives and further deregulation are likely to be crucial in meeting increasing demand for these services.
(6) OUTLOOK
26. China's economic reforms, although gradual, have increased the market orientation of its economy, making it one of the fastest growing in the world. Proposals for the 11th Five Year Plan for National Economic and Social Development, approved in October 2005, aim to double GDP per capita by 2010 relative to 2000, while paying attention to disparities in income distribution, energy efficiency and the environment, and the need to develop a "harmonious society".
27. Given the pace of economic growth and reform in the past two decades, there is no reason to believe that the goal of doubling GDP per capita by 2010 cannot be achieved. There remain, however, a number of key challenges. Continued restructuring of the economy, especially of the agriculture sector and of state-owned enterprises, is expected to result in the need to create over 100 million jobs over the next decade. This may require a reappraisal of current policy of giving priority to attracting investment in export-oriented, capital-intensive manufacturing, with a view to placing greater emphasis on removing impediments to the expansion of the services sector, which tends to be less capital-intensive. The Government is also faced with the challenge of raising the quality of the labour force in order to move away from traditional low-skilled, labour-intensive industries, which

are losing their external competitiveness, into higher value-added production.
28. Other challenges include: the widening regional and urban-rural income disparities that the Government is addressing through investment incentives and assistance; bottlenecks in land, water, and energy resources together with environmental problems resulting from rapid economic growth; as well as the continued need to restructure the financial sector and capital markets, by making them more market-oriented, so as to address the misallocation of resources, including "overinvestment" in certain sectors.