By Zhang Xiaoji

Research Report No 226, 2005

I. Evaluation of Market Opening and Economic Performance in the First Three Years after WTO Accession

Joining the World Trade Organization can enable China to enjoy the long-term unqualified most-favored-nation treatment and can create a fair-trade environment for enterprises to explore new markets. Reducing tariffs, eliminating quantitative restrictions and liberalizing access requirements for foreign investment can undoubtedly introduce competition. Competition can play a positive role in promoting structural adjustment, improving efficiency and pushing forward reforms. As long as its positive role outweighs the cost of structural adjustment, competition can greatly promote China’s social and economic development and its structural reform.

1. Fulfilling WTO accession commitments has accelerated the process of market opening

First, trade in goods.Since China joined the WTO, its overall tariff level has been lowered year after year, at an average annual rate of 1 percentage point. Specifically, it dropped from 15.3 percent in 2001 to 9.9 percent in 2005. Lower tariff level has helped Chinese enterprises to take full advantage of both domestic and foreign resources, to optimize resource allocations oriented toward both Chinese and foreign markets, to cut production costs and to improve product quality. With lower tariff rates for the commodities that are closely related to the people’s daily life, more foreign commodities will enter the Chinese market and consumers can benefit more from less spending and more choices.

Lowering tariffs did not bring about any serious impacts on imports. In the past three years, China’s import and export trade has been largely in balance. The total volume of foreign trade has been increased successively, surpassing 600 billion U.S. dollars, 800 billion U.S. dollars and 1 trillion U.S. dollars respectively. China’s share in the global market has also expanded. Therefore, these three years have witnessed the best period for foreign trade development since China began reform and opening up.

Beginning from the second half of 2002, China’s export has entered a fast-growing track. In the 36 consecutive months till June 2005, the monthly rate of export growth has been above 20 percent, with the monthly export rising from 20 billion U.S. dollars to 60 U.S. dollars and breaking one record after another. Both internal and external demands jointly spurred a rapid import growth. In most months, the growth rate of import outpaced that of export. In 2003, the export growth of the general trade was higher than the import growth of the processing trade. Before 2005, the proportion of trade surplus in total foreign trade had declined progressively.

This round of export growth began hand in hand with the growth of the domestic economy. In the past three years, in general, the proportion of mechanical and electrical products in China’s export has been rising, trade structure has visibly improved, and import has met the needs of the domestic market and the processing trade.

Second, trade in services. China’s service market has been more widely opened after its accession to WTO. But foreign investment in the service industry has not grown as drastically as expected. On the one hand, some service sectors, such as retail, had been opened earlier than scheduled (including some irregular opening). On the other hand, investment in the service industry is different from that in the manufacturing industry. Although investment in fixed assets is not large in most cases, the international network advantage, the brand-new concepts and ideas of operations and modes of service brought in by multinational companies have played an important role in raising the levels of the local service industry. Its positive impact on the efficiency of economic performance could far surpass that of the investment of the same size in the manufacturing industry.

The banking industry is a sector where China’s competitiveness is relatively weak. But market opening has been smooth in its early years of WTO accession. By the end of 2004, a total of 18 cities had opened their Renminbi business to foreign investors. As a result, 62 foreign banks from 19 countries and regions had established 204 business institutions in China, of which, 105 had been allowed to take up Renminbi business. In addition, 9 Chinese commercial banks had been allowed to absorb foreign investments and four companies including Volkswagen had been approved to engage in auto finance in China. Accordingly, the assets scale of foreign banks had also expanded, with their shares in the total assets of China’s banking industry beginning to rise. By October 2004, the total assets of foreign banks were roughly 12 times thatof the year when China joined the WTO. But as local banks had an advantage in service networks, the entry of more foreign banks did not constitute a threat to local banks. In all, foreign banks accounted for only 1.8 percent of the total assets of the financial institutions in China’s banking industry.

2. The amendment of laws and regulations and the change in government functions have promoted economic restructuring

Over the past three years, nearly 30 departments of the State Council revamped more than 2,300 laws, regulations and departmental rules in accordance with the WTO rules and the need of China’s reform of the economic management system. In addition, 325 documents were amended and 830 documents were cancelled by the National People’s Congress, the State Council and various government departments. They covered trade in goods, trade in services, intellectual property, investment and some other sectors.

The Chinese legislature also revised the Law on Sino-Foreign Joint-Venture Enterprises, the Law on Sino-Foreign Cooperative Enterprises and the Law on Foreign-Invested Enterprises and the related implementing rules. The State Council and the related departments revised the Regulation on the Guidance of the Orientation of Foreign Investment and the Catalogue for the Guidance of Foreign-Invested Industries. In 2004, China promulgated the Law on Foreign Trade, providing a legal guarantee to ensure that government administration and corporate operations conform to the basic WTO rules.

In addition, the State Council also revamped, reduced and standardized the procedures for administrative examination and approval. Currently, the governments at all levels are standardizing their behaviors on examination and approval in accordance with the requirements specified in the Law of the People’s Republic of China on Administrative Permission. Besides, they are improving the system for public announcement of examination and approval, perfecting the mechanism for information feedback and establishing the system for examination and approval accountability.

In order to fulfill the WTO accession commitments and increase the transparency of the formulation and implementation of economic and trade policies, the State Council explicitly stipulated that all the rules and policies concerning trade and investment formulated in the future by the government departments at all levels must be published on the designated publications and those that are not published are not allowed to be implemented. The drafts of the related laws and regulations may be published in advance to seek public opinions. In order to improve WTO reporting and consulting, China established a department in the Ministry of Commerce to be in charge of the Chinese government’s WTO reporting and consulting. It also established in the State Administration of Quality Inspection and Quarantine the consulting units on Technical Barriers to Trade (TBT) and on Sanitation and Plant Sanitation (SPS) measures. They provide WTO with reporting on a regular basis and offer consulting on trade policies.

All these measures have helped increase the openness, transparency and justice of China’s trade and investment system and are of important significance to the building of the socialist market economy.

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