Professional Documents
Culture Documents
LI Xiaoxi
1 Introduction
LI Xiaoxi( )
Institute of Economic and Resources Management, Beijing Normal University, Beijing
100875, China
E-mail: lxx62205058@263.net
Notes: This project was presided by LI Xiaoxi and finished by Institute of Economic and Re-
sources Management, Beijing Normal University.
312 Front. Econ. China (2006) 3: 311−372
Issues of interest to the EU and the US include the possession, allocation and
control by government of natural, capital and human capital resources, the
control and management by government of the national economy, production
decisions (such as, who produces what in what amounts and for whom,
which involves the ownership structure, profit distribution and bankruptcy
mechanism), international and domestic trade, and intermediaries (such as
chambers of commerce and trade associations), etc. All these questions boil
Front. Econ. China (2006) 3: 311−372 313
down to the role of the government, or to be more precise, the role of the
government in the market economy and its relations with the firms. In the
final analysis, it involves such questions as who allocates the resources and
makes decisions regarding the use and pricing of resources, the government
or the market; whether the government respects and protects the right of
economic entities in their operations; whether it treats enterprises unfairly and
etc. We summed up this criterion as “rules-based government behavior”.
The EU, US and others are interested in such issues as whether transactions
are free or suppressed in both international and domestic trade, whether
market infrastructures and market legislation and judicial system are
well-functioning, whether market intermediaries are independent and what
role they play, whether enterprises are independent in pricing their products
under a country’s trade policies, how the government administers exports
and exporters and whether enterprises are free in their commercial activities.
All these relate to trade environment and conditions and we name this crite-
rion “fair trade environment”.
The EU, US and others are particularly interested in whether the interest rate
and exchange rate of the investigated country are shaped by the market, if
there are differences in terms of interest rate among different enterprises,
domestic trade, foreign trade and various industries, whether financials of an
enterprise are not subject to distortions by the previous non-market eco-
nomic system, whether enterprises may remit profits or capital abroad,
whether they are free to transact in and deposit foreign exchange etc. To sum
up, they are concerned with the fairness of the formation and scope of the
two major financial parameters of interest rate and exchange rate and, further,
the reasonableness of the basis on which these parameters are established,
i.e., the financial institutions. These criteria may be summed up as “ration-
alization of financial parameters”.
It is clear that the above five factors for judging a market economy are put
forward within the context of fair trade, based on our understanding of the
modern theories and realities of market economy and by drawing upon the
market economy criteria contained in antidumping rules of the EU and the
US. We consider them to be pragmatic market economy measurements to be
used for comparisons and discussions.
We welcome comments from readers from both home and abroad, par-
ticularly those from abroad on the developments in China’s market economy.
We will adhere to an objective and scientific approach in seeking the truth,
having full exchanges and reaching consensus so as to do our part for a
comprehensive resolution of China’s “non-market economy status”, acceler-
ating the process of improving China’s market economy and advancing
non-discriminatory global trade.
Front. Econ. China (2006) 3: 311−372 315
Compared with the Report of 2003, a new section (Section II) was added to
examine, assess and illustrate the actual situation in China in light of each
and every MES criterion of the European and American sides. It responded
to some of the major theoretical and practical controversies concerning the
development of China’s market economy and addressed with balanced
comments some of the doubts and criticisms of Western scholars in particular.
In its analysis, the Report tried to address some of the “difficult issues”, such
as the convertibility of RMB and independence of China’s financial sectors.
Given China’s specific conditions and the way academic issues are presented
in China, in order to make the communication as effective as possible, the
Report used to the extent possible concepts and statistics that are compre-
hensible to all sides to explain the current state of affairs in China. Aided by
comparative international study and an in-depth examination of China’s ac-
tual situation, the Report gave an objective analysis of the efforts and pro-
gress China has made over the recent years in building its market economy
system.
Thirdly, as far as the analytical method is concerned, the Report is more
scientific and standardized in that it combined both quantitative and qualita-
tive analysis, and Chinese features with international standards. As usual, the
Report is based on large amounts of research and study, drew upon various
methods of research and calculation from both home and abroad, had them
improved and readjusted in light of China’s national conditions and features
so that the methodology and indices are more scientific and complete. At the
same time, it paid special attention to harmonizing the international stan-
dards for analyzing market economy development by fully absorbing the
outcomes of relevant research efforts both at home and abroad. In another
word, the issue of the development of China’s market economy should first
and foremost be viewed within the context of China while international
standards must be applied to the assessment and analysis of the degree of
such development. The Report once again assessed the market development
degree of the main components of China’s economic system. For example, it
assessed and analyzed again the consistency of the structure of government
administration and the extent of market-orientation in terms of the enter-
prises, means of production and the financial sector and, on that basis, as-
signed a value to the overall progress in China and identified the develop-
ment degree of China’s market reforms in recent years. By listing large
amounts of facts, statistics, policies as well as laws and regulations, the Re-
port gave an institutional inspection and a well-structured theoretical expla-
nation to the level of market economy in China, which corresponds with the
results of quantitative calculations. Such detailed empirical analysis has pro-
vided in a timely fashion comprehensive information for judging the devel-
318 Front. Econ. China (2006) 3: 311−372
opment of market economy in China and an objective basis for friends both
in and outside China in identifying the level of such development.
The years of 2002 and 2003 are the first two years after China’s accession to
WTO and an important time period for China’s economic development and
restructuring. The Report of 2005 analyzed in detail the five aspects of gov-
ernment, enterprises, means of production, trade environment and financial
parameters.
facilities.
namely, grains, wool, cotton, acrylic, polyester, PET, fertilizers and certain
tires. China cut the number of products under import license management
from 26 to 12 in 2002 and then to 8 in 2003. In 2003, China cancelled all
non-tariff measures over agricultural products. In terms of improving the or-
der of import and export trade, China, in accordance with WTO rules, has set
up a state trading regime and designated trading regime. Currently there are
ten categories of imports that fall under state trading and five categories un-
der designated trading. There are 13 categories of exported products under
state trading and 2 under designated trading. Since 2002, China has fulfilled
its WTO accession commitments in a number of service sectors, such as
business services, telecommunications, construction, distribution, financial,
tourism and transport, and opened them further to the outside world.
-- Composition of trading entities is further diversified. Foreign trading
rights have been made widely available and trading entities have become
more diversified. Since 2002, SOEs have taken a decreasing share in import
and export trade while foreign invested enterprises and private enterprises
have seen their share rising rapidly. SOEs’ share dropped from 42.52% in
2001 to 32.95% in 2003 while that of foreign invested enterprises went up
from 50.83% in 2001 to 55.48% in 2003, making them the leading force in
China’s foreign trade. At the same time, private businesses have emerged as
a new growing force in trade. Their share in total import and export trade in
2003 grew by 307.69% over 2001.
-- The legal framework of market economy has been further improved.
Laws promulgated or implemented during 2002 and 2003 include: (1) with
regard to government administration, the promulgation of the Law of PRC
on Government Procurement and the Law of PRC on Administrative Ap-
proval; (2) with regard to foreign trade, the implementation or promulgation
of the Regulation of PRC on Import and Export Administration of Goods,
Regulation of PRC on Import and Export Administration of Technologies,
Provisional Measures on Establishment of China-Foreign Joint Venture
Trading Companies, Regulation of PRC on Import and Export Tariffs, Cus-
toms Measures for Determining Customs Value of Imported and Exported
Goods and the Law of PRC on Inspection of Imported and Exported Goods;
(3) with regard to foreign investment, the promulgation or revision of the
Rules for Guiding Foreign Investment Destinations, Industrial Catalogue of
Guidance for Foreign Investment, Provisional Measures on Investment in
Domestic Securities by Qualified Foreign Institutional Investors, Circular on
Relevant Issues Concerning Transfer to Foreign Investors State-Owned
Shares and Legal Person Shares of Listed Companies, Provisional Rules on
Restructuring SOEs with Foreign Investment, Provisional Rules on Merger
& Acquisition of Domestic Enterprises and Rules on Foreign Investors
326 Front. Econ. China (2006) 3: 311−372
items were added to the fully convertible and basically convertible catego-
ries, up by 58%. The number of items under the strictly restricted category
was cut from 15 to 6, down by 60%.
-- The market-based exchange rate determination mechanism has taken
shape. In 1994, China replaced the double-track exchange rate system of the
country’s RMB yuan with a market supply-and-demand-based, unitary and
managed floating exchange rate system and preliminarily established the
prominent role of the market in allocating forex resources. In June 2002, the
inter-bank lending business was introduced into China’s forex market. Start-
ing from October 1, 2003, two-way transactions have been permitted on the
inter-bank market, which has contributed to the convergence of the domestic
and international markets and helped to further improve the RMB exchange
rate regime. China took further steps in 2004 to improve its forex market by
allowing more entities to participate, the China Forex Transaction Center to
officially open its forex transaction business and more banks to engage in
enlarged forward settlement and delivery services on a pilot basis. On July
21, 2005, the exchange rate between the USD and RMB yuan was changed
to 1:8.11 and it was announced that the float band would be readjusted in
light of the developments on the market and the changing economic and fi-
nancial situation. Hence, the exchange rate of RMB is no longer pegged to
the USD and a more flexible RMB exchange rate mechanism has taken
shape.
The above analyses have shown that in 2002 through 2003, major progress
has been made in China’s market economy in the following five fields:
rules-based government administration, liberalized economic entities, mar-
ket-based reallocation of means of production, fair trade environment and
rationalized financial parameters. The market economy in China has grown
in greater breadth and depth, which has come as both the result of China’s
faithful fulfillment of its WTO accession commitments and the logical out-
come of the reform and development of China’s economic system.
This research team has developed a system of factors and indices for meas-
uring market development within the context of antidumping investigations,
in light of the European and American criteria for MES in antidumping pro-
ceedings, general theories of market economy and the system for measuring
economic freedom, after taking into full account the state of China’s market
economy. We have developed the scoring standard and index formula for
Front. Econ. China (2006) 3: 311−372 329
Continued
Indices 2001 2002 2003
Foreign Investment, Self-Raised Funds and Other Funds as Share of
17 1 1 1
the Total Fixed Asset Investment
Foreign Capital as Share of the Total Registered Capital of Foreign
18 1 1 1
Invested Enterprises
Auctioned Urban Land Use Right as Share of Total Land Use Right
19 3 3 1
Transferred
20 Market-Based Pricing as Share of Total Consumer Retails 1 1 1
Market-Based Pricing as Share of All Agricultural Product Pur-
21 1 1 1
chases
22 Market-Based Pricing as Share of All Means of Production Sales 2 2 2
23 Average Tariff Levels 4 3 3
24 Revenues from International Trade as Share of Total Trade Volume 3 2 2
Closed Cases as Share of Case Initiated for Contravention of Laws
25 3 2 2
and Regulations on Unfair Competition
26 Closed Cases as Share of IPR Case Initiated 2 3 2
27 Assets of Non-State Owned Banks as Share of Total Bank Assets 4 4 4
Savings with Non-State Owned Financial Institutions as Share of
28 3 3 3
Total Savings with Financial Institutions
Short-Term Loans to Foreign Invested, Self-Employed and Private
29 Businesses as Share of All Short-Term Loans Issued by Financial 4 4 4
Institutions
30 Average of Inflation Rates in the Most Recent Five Years 1 1 1
Range Co-efficient of Interest Rate of One-Year Loans of Financial
31 3 1 1
Institutions
32 Unrestricted Items as Share of All Items under Capital Account 4 3 3
Deviation Between RMB/US Dollar Exchange Rate and Monthly
33 Average Absolute Difference of Singapore Non-Deliverable For- 2 1 4
ward (NDF)
An analysis of the 33 indices has shown that from 2001 through 2003, 19
of the indices were going up, indicating improvements in market develop-
ment and 7 were going down, indicating negative impact on the market de-
velopment. Among the remaining 7 indices, 5 got worse in 2002 over 2001
but improved in 2003 over 2002, and 2 improved in 2002 over 2001 and
worsened in 2003 over 2002. The overall performance of the 33 indices has
shown that the economy is increasingly market-oriented.
The 11 sub-sets are based on the above 33 indices and they have covered all
the various aspects of market development assessment.
Front. Econ. China (2006) 3: 311−372 331
The results of the above tables have shown that the market index of China
in 2002 and 2003 was 2.36 and 2.31, respectively on the five-point scale of
332 Front. Econ. China (2006) 3: 311−372
the economic freedom index of the U.S. Heritage Foundation. To give read-
ers both inside and outside of China a more direct understanding, we have
converted the above scores based on the five-point scale into scores on the
100-point scale by dividing the 100 points into five zones, i.e., 0–20, 20–40,
40–60, 60–80, 80–100. According to the index system of the heritage foun-
dation, 3 points and plus indicates freedom for the most part and thus are set
as 60 points on the 100-point scale. On this basis, zone 1 corresponds to 5
points on the five-point scale, zone 2 to 5–4 points, zone 3 to 4–3 points,
zone 4 to 3–2 points and zone 5 to 2–1 points. Clearly, the overall market in-
dices for 2001 to 2003 fall within zone 4 (60–80 points). The indices may be
easily converted into indices on the 100-point scale by interpolation, i.e., to
insert a point (x, y) between point (2, 80) and point (3, 60) to satisfy the con-
dition that (x-2)/(3-2)=(80-y)/( 80-60) which is simplified to y=120-20x.
Based on this formula, the market indices for 2002 and 2003 are 72.8% and
73.8%, respectively (see Table 4).
Table 4 Overall index on two scales
Year 2001 2002 2003
Score on 5-Point Scale 2.51 2.36 2.31
Score on 100-Point Scale 69 72.8 73.8
This is a very important table and shows the final results of multi-layered
computations. We may find from the table the concrete progress made in the
market economy of China in 2002 and 2003.
Table 5 has shown clearly that economic freedom of China after its WTO
accession has improved notably. The findings of the Heritage Foundation
indicated that China climbed 16 places in 2002 on 2001, and 10 places if
measured by Frazer’s results. Such a speed of development is in keeping
with that of market development index of this Report. It must be noted that
both international indices were based on information up to the year of 2002
only, lagging by two years.
Let’s begin by probing deeper into the eleven subsets of factors. Judging
from the assessment of the eleven subsets, compared with 2001, six subsets
improved in 2003, in which, the grade of “contribution by non-SOEs” im-
proved from 2.4 to 2, “enterprises’ operations” from 2 to 1.67, “capital and
land” from 1.67 to 1, “legal protection of fair trade” from 2.5 to 2, “interest
rate and exchange rate” from 3 to 2.67, and “freedom in foreign trade” from
3.5 to 2.5. The level of 2 subsets remained unchanged, namely, “banking and
currency” and “fiscal burden of government” which remained 3 and 2.5, re-
spectively for the past three years. In addition, scores of two subsets deterio-
rated, one being the “government intervention in the economy” which went
from 3 in 2001 to 3.33 in 2003, mainly as a result of the increased share of
the government investment in GDP. This reflected the expansionary fiscal
policy of the Chinese Government and the accelerated pace of government
investment in response to the SARS epidemic. However, this was the result
of short-term macro-economic policy and would not last for long. The other
deteriorating factor is “labor and wages” which went from 2.67 to 3. This
was mainly caused by inappropriate statistical methodologies. The
“by-region ratio of the difference between permanent residents and regis-
tered population to registered population” is calculated based on the total net
national change. This index declined from 2.57% in 2001 to 2.53% in 2003.
However, calculated on the basis of the absolute values of provincial
changes, the index has kept rising since 2001, from 3.40% in 2001 to 3.43%
in 2002 and then 3.60% in 2003. Although the absolute value approach is
more objective, the previous method was adopted to keep the stability of the
index. The “inter-sectoral job reallocation variance ratio”, another index un-
der the “labor and wages” subset, has a similar problem. The score was cal-
culated based on the overall net change in the sector and thus was made
lower. But if calculated based on the overall variance ratio, the value would
rise from 4.10% in 2001 to 6.30% in 2003. If calculated on the basis of the
overall scale, the market development level of the “labor and wages” subset
would have been higher. We hold that, compared with calculation by net
amounts, calculation by aggregates is more accurate in reflecting the labor
flow between different regions and sectors. Therefore, we are contemplating
modifying the method of calculation of the above two indices in future an-
nual reports.
An analysis of the five category-indices has shown that all factors, except
for “rules-based government behavior” have improved in terms of market
development and contributed to the overall market development index. The
downward readjustment of the score of “rules-based government behavior”
was mainly the consequence of the expansionary fiscal policy of the gov-
ernment and the increased government investment as a result of the SARS
Front. Econ. China (2006) 3: 311−372 335
epidemic. And with changes in the economic policies, this index is expected
to change significantly.
Based on the above, we may reach the following conclusions:
First, findings of the sub-sets and categories of market development fac-
tors in 2002 and 2003 were positive. Negative results of a small number of
indices came mainly as a result of special macro-economic policy changes
and different statistical methodologies.
Secondly, development of the market economy has been uneven in differ-
ent sectors. The fastest-improving factor is “freedom in external trade”
whose score was down by one point in 2003 over 2001. “Capital and land”
came second, down by 0.67 points, followed in descending order by “legal
protection of fair trade”, “contribution by non-SOEs”, “interest rate and ex-
change rate” and “enterprises’ operations”, all of which have improved to
varying degrees. If calculated based on the aggregate values of labor flow,
the score of “labor and wages” would have improved by a bigger margin.
Thirdly, the standstill or decline in the value of a small number of factors
is quite normal and shall not be construed as indicating the deterioration of
the overall market development level, as the intensity of government inter-
vention in the economy would change with time as a result of the fluctua-
tions in the macro-economy or certain contingencies. At the same time, there
are statutory limits to government intervention. In addition, even though
macro-control was strengthened in China, the overall level of market devel-
opment has shown a pattern of improving.
The facts and data in the Report of 2005 on Development of Market Econ-
omy in China were up to the end of 2003. Here we summarize as follows the
latest developments in China’s market economy in 2004.
-- The legal framework was further improved. On 1 July 2004, the Law of
the PRC on Administrative Approval was officially implemented. To better
implement this law, the State Council issued the Guidelines for Implement-
336 Front. Econ. China (2006) 3: 311−372
regime, power generation plants and power grids have been by and large
separated and a pattern of power generating plants competing with each
other came into being. The power grid in south China was established. The
power markets in the northeast and east China came into simulated opera-
tions. The direct power purchase by key customers program already took off
on a pilot basis. The power price forming mechanism continued to be im-
proved. With regard to reform of the civil aviation sector, price of air cargo
services is now guided instead of set by the Government. With regard to re-
form of the railway regulation regime, the reform of five transport enter-
prises with the shares system was carried out on a pilot basis, efforts to have
enterprises spin off their social functions made steady progress and the pro-
gram of separating the main business from the supporting business and re-
structuring the supporting business was launched on a pilot basis in three
Railway Bureaus (or Sub-Bureaus).
-- Reform of urban utilities. The State Council introduced the water price
reform plan that has allowed the price mechanism to play a more prominent
role in saving water and protecting water resources. The Ministry of Water
Conservancy continued to improve the price determination mechanism and
regulatory system of water supply by water conservancy projects. The Min-
istry of Construction opened further the urban public transport market. In
Beijing, Hebei, Henan and Guizhou, intensive efforts were made to separate
administrative affairs from enterprise functions and social affairs and to
separate social affairs from enterprise functions with regard to the public
utilities and to open these sectors to investment, management and operations
-- The regulatory framework for SOE assets took shape. State Asset Com-
missions in all 31 provinces and the Xinjiang Production and Construction
Corps were established. By the end of 2004, State asset regulatory bodies
had been established in 203 cities, accounting for 45.3% of the total, in
which state asset commissions had been set up as a separate body in 176 of
them, or 39.3% of the total. The framework of law and regulations were im-
proved further. Budgetary work of the State owned assets took off. The su-
pervisory board of SOEs was strengthened. Some provincial State asset
commissions began to experiment with combining supervisory board super-
vision with other means and ways of supervision.
-- Market-based State owned shares transfer of publicly listed companies
was promoted further. In December 2004, the Shanghai Stock Exchange,
Shenzhen Stock Exchange and China Securities Depository & Clearing
Corporation Limited jointly issued the Rules for the Transfer of
Non-Circulating Shares of Publicly Listed Companies. The Rules provide
that transfer of the shares of publicly listed companies must be made at stock
exchanges and handled by the Shanghai Stock Exchange, Shenzhen Stock
Exchange and the China Securities Depository & Clearing Corporation Lim-
ited. Illegal OTC shares transactions are strictly prohibited. The introduction
of the Rules played a positive role in regulating transactions in State owned
shares of listed companies and in promoting the market-based approach for
their transfer.
and the verification process of the implementation plan for the SME boards
was kicked off. This was a symbol of the beginning of the process of foster-
ing the development of SMEs with good growth potential and high technol-
ogy content by making use of the capital market. On 2 June 2004, Zhejiang
Xinhecheng Co. Ltd (002001) became the first company listed on the SME
board. By the end of 2004, a total of 37 enterprises had raised funds at the
SME board.
-- The bond market had developed rapidly. The Measures for Regulating
Short-Term Financing by Securities Firms, implemented in November 2004,
further expanded the financing channels of securities firms, specified the is-
sue and transaction of short-term bonds by securities firms, promoted the
further development of the currency market and protected the lawful rights
and interest of investors. In December 2004, the People’s Bank of China
(PBOC) introduced the Detailed Rules on Examination of Inter-Bank Bonds
Transactions and Circulation, which, in order to promote the issue of corpo-
rate bonds, encourages qualified enterprises to issue bonds and provides the
necessary conditions for inter-bank deposit and circulation of the bonds, thus
creating a development opportunity for the corporate bonds.
the existing Law on Foreign Trade that were not in conformity with the
WTO rules; providing for the mechanism and procedures for implementing
China’s rights as a WTO Member in accordance with China’s accession
commitments and WTO rules; and revisions made in order to adapt the ex-
isting Law on Foreign Trade in light of the developments since it came into
force and the need for promoting the healthy development of foreign trade.
On 1 January 2004, the People’s Bank of China (PBOC) lifted the upper
limit of the float band of the lending interest rate of commercial banks and
urban credit cooperatives to 1.7 times the base rate, that of the rural credit
cooperatives to two times the base rate and lifted the restrictions on the way
the lending interest rate is determined and how the interest is settled. On 25
March of the same year, PBOC announced the float of the re-lending interest
rate. On 29 October, PBOC announced the lifting of the upper limit of the
Front. Econ. China (2006) 3: 311−372 345
lending interest rate of commercial banks, that the interest rate of both urban
and rural credit cooperatives was enlarged to 2.3 times the base rate and that
the downward float system for RMB deposit interest rate be implemented.
This marked another important step in the process of steadily moving the
market-based interest rate forward and would help the lending interest rate to
better cover the risk premium, ease the difficulty facing SMEs in securing
loans and at the same time create the conditions necessary for financial in-
novations.
5.5.3 The financial sector was opened further to the outside world
The newly revised Detailed Rules for the Implementation of the Regulation
on Foreign Invested Financial Institutions that officially came into effect on
1 September 2004 relaxed further the market access standards for foreign
invested banks. By the end of December 2004, foreign banks had set up a
total of 211 for-profit entities in China, in which there were 167 branches, 14
foreign invested legal person entities and 220 representative offices. A total
of 111 foreign invested banks had been licensed for RMB business, 61 had
been licensed for RMB business of domestic enterprises, 13 had been per-
mitted to launch online bank services, 33 had received derivatives license
and five had been approved as depositors of QFII. Permitted to provide over
100 services, foreign invested banks had USD 67.8 billion dollars in com-
bined assets in China in 2004, up by 37% over the year 2003. Their foreign
exchange lending accounted for 18% of all lending by financial institutions
in China. Their cumulative profits reached USD 282,000,000 dollars in
2004.
eign exchange payment and settlement system and improving foreign ex-
change settlement of FIEs under the capital account as well as in terms of
strictly administering the regulatory policies regarding the external debt in-
curred by FIEs. On 16 November 2004, the PBOC issued the Provisional
Measures on Foreign Exchange Sale and Payment for Outward Transfer of
Private Property, which eased, starting from December 2004, restrictions
over the outward transfer of lawful assets of emigrants by allowing individu-
als to take the principal of and returns on their property and their assets out
of China in the form of cash in foreign exchange.
During 2002 and 2003, the policy regarding foreign exchange under the cur-
rent account was improved further and the degree of convertibility under the
capital account continued to increase.
6.1.1 RMB under the current account has already achieved complete
convertibility
During 2002 and 2003, the reform of China’s financial sector accelerated,
resulting in greater market orientation and independence.
-- The relevant articles in the Law on the People’s Bank of China clearly
set forth the independence of the central bank in terms of policy-making,
funds and financials. The Law on Regulation of the Banking Sector promul-
gated in December 2003 provides that the China Banking Regulatory Com-
mission (CBRC) regulates independently and according to law financial in-
stitutions including the banks and their business activities. The General
Rules of Loans and the Law on Commercial Banks provide that the commer-
cial banks shall operate under the principles of safety, liquidity and earnings
and do so independently, bear the risks, be responsible for profits and losses
and exercise self-discipline.
interest has met fully the needs of commercial banks and has at the same
time helped financial institutions to improve their operations and manage-
ment, the internal pricing and risk management mechanisms.
-- The shares system reform enhanced the independence of the commer-
cial banks in their decision-making process. In December 2003, the Bank of
China and the China Construction Bank started shares system reform on a
structure of modern commercial bank. So far the two banks have finished
asset reevaluation conducted by international accounting standards and im-
plemented reforms to improve the governance structure. Shares system re-
form of other State-owned commercial banks is also proceeding steadily.
Such reform has created conditions necessary for strengthening the inde-
pendence of the commercial banks in issuing loans.
-- The commercial banks follow an independent policy of making loans.
Under the Law on Commercial Banks, various kinds of commercial banks no
longer provide any enterprise or individual with policy loans or issue
government guidance loans and thus have become truly market entities. The
General Rules of Loans prohibits exemption of loan repayment without ap-
proval of the State Council. Meanwhile requirements by commercial banks
for issuing loans for different types of enterprises are uniform and SOEs no
long enjoy any privilege in terms of bank credit.
but also a mature practice of the market. In 2000, China promulgated the
Provisional Measures on Collective Wages Bargaining, which clearly stipu-
lated the wages consultation and negotiation mechanism between the em-
ployee and the employer and further clarified the wage setting by consulta-
tion system. By the end of 2003, the collective wages bargaining system was
established in nearly 300,000 enterprises in China. Governments at local
levels are forcefully promoting the implementation of this system.
-- The lawful rights and interests of the employee are protected. The
workers may join labor unions according to law to safeguard their own law-
ful rights and interests. China has also, according to the international practice,
established and improved the minimum wages standard so as to protect the
most fundamental and reasonable rights and interests of the employee. The
workers have their rights awareness constantly reinforced in handling their
labor disputes with the employers and the results of the disputes are increas-
ingly in their favor.
During 2002 and 2003, the freedom with which foreign investment entered
into China was greatly enhanced.
-- Limited restriction is in place for the production and sale of only a very
small number of products. Guidance plans have all been eliminated for agri-
cultural products. As for industrial products, the State only implements
guidance plans for five products, namely tobacco, edible salt, timber, gold
and natural gas and all other products are produced under market conditions.
-- Direct Government intervention in monopolistic sectors has also been
eliminated. The Chinese Government stepped up the market-based reform of
such monopolistic sectors as telecommunications, aviation, power, grain and
cotton. On the one hand, market access has been made easier to allow multi-
ple market players to compete with each other. On the other hand, the tradi-
tional administrative system has been replaced with the modern regulatory
Front. Econ. China (2006) 3: 311−372 355
-- The great majority of the products are priced by the market. In 1992, the
Government set the prices of 5.6% and 10.3% of the total consumer retail
sales and total purchases of agricultural products. The figures dropped to
3.0% and 1.9%, respectively in 2003.
-- The Chinese Government exercises price regulation over a small num-
ber of products in line with the international practice. Under the Price Law
of China, when necessary, the Government may set out a Government
guided price or Government set price on the following five categories of
commodities and services: (1) a very small number of commodities of vital
importance to the national economy and people’s livelihood; (2) a small
number of commodities that are rare resources; (3) commodities under natu-
ral monopoly; (4) important public utilities; and (5) important public ser-
vices.
-- Price regulation has been eased up further. The pricing mechanism for
natural gas is moving towards a market-based one. Urban water price is to be
floated. The reform for power suppliers to compete in price has continued to
be deepened. The purchase price of grains and cotton is already mar-
ket-based. The regulation over aviation pricing has become indirect.
tic loans and self-raised funds taking up a rising share of the total national
investment in fixed assets.
During 2002 and 2003, substantial progress was made in China in building
the legal framework for the protection of property rights.
--. The law has been improved further. The Amendment of 2004 to China’s
Constitution explicitly provides that the lawful private property of citizens is
inviolable, further improving and developing the regime for protecting pri-
vate property. The draft Civil Code contains a special chapter on property
rights that clearly stipulates for the protection of the private property. Local
regulations have been adopted in 26 provincial jurisdictions in China that
protect the property rights of private enterprises.
-- Thanks to the support of law and policies, the private enterprises in
China have enjoyed exceptionally rapid growth. The total wealth created by
them since 1992 have been growing at an annual average rate of over 30%.
In 2003 they created a total of RMB 1,896.45 billion yuan in industrial out-
put, up by 31% over the previous year, 91.5 folds higher than the year of
1992.
-- The protection of intellectual property rights (IPR) has been stepped up.
Over ten laws and regulations such as the Detailed Rules for the Implemen-
tation of the Law on Trademarks and the Regulation on Protection of Com-
puter Software have been revised or promulgated since 2002, resulting in a
more complete legal system for IPR protection. IPR tribunals have been es-
tablished in courts at different levels. The IPR cases accepted by the judicial
agencies cover all the areas under the TRIPS Agreement. A parallel
two-track system for IPR protection involving enforcement by the courts and
administrative agencies has been established.
-- The protection of the land property rights has been strengthened. The
Front. Econ. China (2006) 3: 311−372 357
Various types of enterprises in China are subject to practically the same law
in terms of investment and taxation.
6.8.1 Enterprises of different types are equal before the law on in-
vestment and taxation
-- As for taxation, apart from the tax on enterprise income, foreign and
domestic funded enterprises are subject to the same law. Such laws and
regulations as the Provisional Regulation on Value-Added Tax, Provisional
358 Front. Econ. China (2006) 3: 311−372
-- There has been constant improvement in the legal framework. Over the
past decade and more, the Chinese Government, drawing upon the interna-
tionally accepted rules, has introduced a series of important laws and regula-
tions such as the Company Law, Securities Law, Rules on Governance of
Listed Companies and the Guidelines on the Establishment of the System of
Independent Directors, which have played a fundamental promoting role for
improving the governance of companies in China.
-- The mechanism of corporate governance was further improved. In 2003,
among the large enterprise groups in which the parent company had already
been restructured, 90.63% established the conference of shareholders system,
97.16% established the board of directors and 81.18% established the board
of supervisors. Information disclosure of listed companies was improved too,
providing greater protection for the rights and interest of investors.
-- The Board became more independent. A great majority of the listed
companies had independent directors and nearly half of all listed companies
established special committees under the board. The right of shareholders to
elect Board members was strengthened with over half of the listed compa-
nies prescribing in their Constitution the election of Board members by cu-
mulative vote. The deliberation function of the Board was gradually im-
proved as over 90% of the listed companies have developed rather detailed
rules for Board deliberations.
-- The ratings of China’s corporate governance by authoritative foreign
agencies are higher than some market economy countries and regions. In the
report on corporate governance across the global emerging markets issued by
Credit Lyonnais Securities Asia (CLSA) in 2001, the score for China’s
mainland was 49.1 (on a 100-point scale), higher than such countries as
ROK, the Philippines and Indonesia. In the Standard & Poor’s report that
assessed corporate governance of 1,600 listed companies across the world,
the score for China’s mainland was 5 (on a 100-point scale), which was
higher than Indonesia, the Philippines and Chinese Taipei, at par with ROK,
but higher than ROK in terms of financial transparency and disclosure.
The Chinese law has set forth rules for the accounting treatment and use of
the State-owned assets that are clear and consistent with the international
practice.
6.11.1 The way the use of SOEs’ assets is treated in the accounting
books is in conformity with the rules of the market economy
6.12.1 Corruption
countries in the world, corruption would exert a huge impact on the domestic
political life and economic development. However, it has little effect on
dumping as it has no direct impact on the cost and price of products. Even if
it has an impact, the result is uncertain as it may either raise or lower the cost
or price. For example, in industries such as color TV set and furniture where
competition is fierce and the profit margin is thin, acts of corruption such as
bribery may only drive up the cost, add to the burden for the enterprises and
dull their competitiveness.
-- China has taken seriously the fight against corruption and stepped it up.
First, by streamlining the government structure, introducing laws and regula-
tions to restrict government intervention and reducing administrative ap-
proval, China has sought to stem corruption at its root. Secondly, China has
further regulated and improved the bidding procedures for projects, intro-
duced a comprehensive system for bidding, auction and listing for transfer of
the right to use land for profit and implemented the government procurement
system to make the market regulation more transparent and open. Lastly, a
relatively complete system that balances and restrains power and a legal
framework that fights corruption have been established.
-- China has improved its trade laws and regulations according to the
WTO rules. China has fully opened up the access to the import and export
trade right. All domestically invested enterprise registered in China are sub-
ject to a uniform policy in terms of qualifications regulation for import and
export trade and all of them may apply for the trade right, which is obtained
by registration and filing. Rules such as the Provisional Measures on En-
quiry to China-WTO Notification and Enquiry Center have been formulated
to increase the transparency of foreign trade administration.
-- Export rebate rates have been significantly reduced. In October 2003,
China reformed the existing export rebate system. The revised export rebate
rates were set at five levels, i.e., 17%, 13%, 11%, 8% and 5%. The average
rebate rate was three percentage points lower.
-- The export license system is more rules-based. The Regulation of the
PRC on Imported and Exported Commodities that became effective in Janu-
ary 2002 implements a classification-based system for managing the import
and export of commodities and requires public bidding for exported com-
modities subject to quota and license management. The Chinese Government
has also constantly cut back the restrictions on import and export trade. By
the end of 2003, the number of commodities subject to export license man-
Front. Econ. China (2006) 3: 311−372 365
1
Speech entitled “Work Together to Write A New Chapter in China-US Economic Cooperation and Trade”
made by Premier of China Wen Jiabao at luncheon hosted by American Bankers Association on December 8,
2003 in New York. In the speech, Premier Wen put forward five principles for advancing fair trade between the
two countries.
Front. Econ. China (2006) 3: 311−372 367
countries or in all lines of products. Not all China’s firms or industries are
happy with foreign imports into China either. But China is aware that trade is
done by the firms and the choice of millions of consumers. The increase or
decrease in trade volume is governed by economic and market laws. There
are bound to be profits and losses in the competition. China incurs a
long-term deficit in its trade with ROK and South-East Asian countries. Has
China ever expressed complaint or raised any excessive requests with these
countries? The answer is negative. The developing trends show an even
clearer picture of complementary trade ties between China and other coun-
tries. China’s import volume in 2003 ranked the third in the world. It is ex-
pected that the annual import of China by the year 2010 will top one trillion
USD2. The frequent resort to trade barriers to roll back China’s export may,
in the short run, serve the interest of some enterprises in Europe and the US.
However, it may cause greater long-term losses for China’s trade partners in
terms of reduced exports to China. It is fair to say that to give support to
China’s economic development today, putting trade with China in perspec-
tive and playing by fair rules are actually supporting their exports to China in
the future.
Some developed countries have always claimed that they support China in
its reform and opening-up and its transition to a market economy. However,
when it comes to specific economic interest, they more often than not would
develop their fair trade policies by proceeding from their own interest only.
If every country should act this way, international rules would be
non-existent. What we recognize is the fair trade under the WTO rules, not
the fair trade under the rules of one single country. It is hoped that those de-
veloped countries which have manifested a strong inclination for unilateral-
ism in their fair trade policies will not only protect their domestic enterprises,
but also set an example in safeguarding the internationally recognized rules.
It is important that in addressing China’s MES, they will show a truly fair
approach and give their support to China’s economic reform with concrete
action.
From a technical point of view, to recognize a country’s market economy
status, though it may simplify somewhat the antidumping procedures, does
not preclude antidumping investigations. In fact, to grant China the market
economy status does not impede, and may even facilitate antidumping pro-
ceedings by China’s trade partners targeting Chinese firms. First, by re-
questing the status, China is not asking for some preferential treatment, but
for the right to trade on an equal footing. Therefore, it is not against anti-
2
Speech by China’s Minister of Commerce Bo Xilai at the International Forum on Common Development of
China’s Economy and the World Economy jointly organized by the Ministry of Commerce, UNCTAD and Ren-
min University of China on September 10, 2004.
368 Front. Econ. China (2006) 3: 311−372
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