State of Business in S China (Amcham White Paper 2015)

2015 White PaPer
on the
Business environment in China
2015
2015 The American Chamber of Commerce in South China
2015
Reproduction for commercial use is strictly prohibited. This document is available free of
charge in electronic form at: http://www.amcham-southchina.org
Last updated: Feb 15, 2015
2015215
The American Chamber of Commerce in South China
Suite 1801, Guangzhou International Sourcing Center,

No. 8 East Pazhou Avenue, Haizhu District Guangzhou,
Gungdong, PRC 510335
8
1801510098
(86 20) 8335 1476
(Tel.)
(86) 20 8332 1642
(Fax.)
amcham@amcham-southchina.org
http://www.amcham-southchina.org
February 2015
20152
Guangzhou, Peoples Republic of China
Review Committee
Contents
Harley Seyedin (Chairman)

President, Sithe Global Pacific
.
Presidents Message
(In alphabetical order )

1.1
2013
1.2
2013
1.3
2013
1.4
2015
1.5
1.6
(BIT)
1.7
2014
1.8
9
11
25
33
39
57
67
73
89
David Buxbaum
Attorney, Anderson & Anderson L.L.P.
Thomas Podgurski
Group Director, Royal Service Air Conditioning
Part I
1.1
1.2
1.3
Steven Cheng
Vice President of Finance, Greater China Region
Amway (China) Co. Limited
Guy Robertson
Vice President, WMGS Consulting (Shenzhen) Co. Ltd
Guy Robertson
1.4
1.5
1.6
1.7
Diane Fermin Roeder

Editor in Chief, Paper Magazine
1.8
8
Just Do It (in 2013)
10
The Double-edged Sword of SOEs (in 2013) 24
The Foreign Investment Environment
in China (in 2013)
32
Redefining Reform (in 2015)
38
Shanghai Free Trade Zone
56
US-China Business Investment Treaty (BIT) 66
An Overview on the Annual Development of
Intellectual Property Law of the P.R.C. in 2014 72
Suggestions
88
Part II
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
92
94
112
134
148
160
176
188
198
212

2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
Agriculture
Chemicals, Bio-Chemicals and Energy
Machinery and Electrical Equipment
Transportation and Logistics
Products Classified by Materials
Construction
Manufactured Articles
Hospitality
Services
93
95
113
135
149
161
177
189
199
213
Part III
3.1
3.2
3.3
3.4
3.5
3.6
3.7
232
234
238
246
250
254
258
264

3.1
3.2
3.3
3.4
3.5
3.6
3.7
Introduction to South China

Guangdong Province
Fujian Province
Guangxi Zhuang Autonomous Region
Hainan Province
Hong Kong Special Administrative Region
Macau Special Administrative Region
233
235
239
247
251
255
259
265
Part IV
4.1
4.2
4.3
4.4
4.5
268
270
278
282
284
292

4.1
4.2
4.3
4.4
4.5
Demographics
Revenue and Profitability
South China
Investment Trends
The Business Environment in South China
269
271
279
283
285
293
David Hon, Ph.D.

CEO, Dahon Technologies
Frederick Hong
Attorney at Law / Chief Representative,
Frederick W. Hong Law Offices
/
Christopher Laidlaw
Director, Penultima Ratio Regum L.L.C.
Penultima Ratio Regum L.L.C.

Li Si
General Manager, AmCham South China
Yuki Lu
Communication Manager, AmCham South China
David Peng
Chief Representative,
C.V. Starr & Co. Beijing Representative Office
Andy Rusie
Vice President Finance, Greater China
Mead Johnson Nutrition (China) Ltd.
Andy Rusie
Richard Ren
VP-Corporate Affairs, Vitasoy (China) Investments Co.,Ltd.
-
Tim Shaver
Club Manager, Harbour Plaza Golf Club Dongguan
Hui Sun
International Attorney
Tim Wen
VP & China Rep., Allway Co. Inc.
Joe Zhou
Vice President, American Appraisal China Ltd.
2015 White Paper on the Business Environment in China
Presidents Message
UR 2015 WHITE Paper on the Business Environment

in China occurs during an undoubtedly interesting
junction in the two year old administration of President
Xi Jinping.
In 2013 and most recently in 2014, each years Plenum of
the Communist Party of China has unveiled frameworks for
broad, bold and ambitious economic and legal reforms platforms for reform which, if fully implemented, are bound not
only to transform the China of the future, but also have the potential to affect the rest of the world. The fact that implementation of these groundbreaking and far-reaching reforms are
beginning to occur amidst the backdrop of the Chinese governments aggressive anti-corruption campaign, makes President
Xi Jinpings two-year milestone even more remarkable.
This 2015 White Paper outlines, in exhaustive detail,
the ongoing plans and initiatives being implemented by the
government in the wake of these reforms and cites a crosssection of informed opinions and analyses from both China
and overseas about the impact of these policies. At the same
time, to illustrate how far China has come since the time of
President Xis ascension to power in late 2012 and provide
a solid basis for comparison of China then and now, highly
relevant sections of our 2013 White Paper are incorporated
in this latest version. Given all that is documented here, it
is evident that China is now embarking on a transformative
decade, one that should exponentially benefit its own people,
as well as the foreign investors who are stakeholders in the
countrys continued growth. It is noteworthy to point out that
results of our latest Special Report on the State of Business
in South China indicate that member companies intend to
increase investment in their China business operations as long
as they feel they are being treated equally and with utmost
transparency.
Providing a well-researched, objective and comprehensive
overview of the business environment in China continues to be
our goal with the publication of the 2015 White Paper which,
we hope, adds value to businesses operating in this rapidly
evolving world. Last year, a combined total of 1,351 copies of

the 2014 White Paper and Special Report were downloaded
from our website, in addition to the printed copies we had in
circulation. This year, we are increasing our print run by 60%
in the wake of Chinas continuing evolution.
A critical question confronts the leadership at this stage:
Can President Xi Jinping and his administration continue to
press forward in aggressively tackling corruption while also
fiercely undertaking economic reforms?
Our conclusion is, they must they have to and they
should. Last year, we urged Chinas leaders to Keep moving
forward, to continue to offer more opportunities for health,
wealth and happiness for the Chinese people and elevate their
quality of life. This year, while we examine the issues and challenges, we also applaud this administrations accomplishments
and successes and encourage Chinas leadership to continue
to Keep moving forward and accelerate the pace.
With best regards,
Harley Seyedin
President
Vice Chairman, China Affairs
The Asia Pacific Council of American Chambers of Commerce
2015
20132014
2012
2013
2014
1351
60%
Part I
Commentary
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
Just Do It (in 2013)

The Double-edged Sword of SOEs (in 2013)
The Foreign Investment Environment in China (in 2013)
Redefining Reform (in 2015)
Shanghai Free Trade Zone
US-China Business Investment Treaty (BIT)
An Overview on the Annual Development of Intellectual Property Law of the P.R.C. in 2014
Suggestions
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
2013
2013
2013
2015
(BIT)
2014
1.1 Just Do It (in 2013)
1.1 (2013)
2013
(The following sections have been incorporated from our 2013 White Paper.)
Standing Still or Turning Back Would be

A Dead End
ONG YONGTU, THE man who negotiated Chinas

entry into the WTO in the late 1990s, is worried. The cost
of [failing to reform] could be high, he told a symposium in
2012, adding that essentially, after 10 years, it seems China is
drifting away from the WTO.1
Expanding on his concerns, Mr. Long argues that, A
statist model that denies fair competition for all enterprises,
domestic and foreign, could stifle Chinas economic growth,
and that [China] cannot only have large-scale and stateowned enterprises. That is only the skeleton of the economy.
We need thousands upon thousands of small and mediumsized private enterprises. They are the flesh and blood of the
Chinese economy, reinforcing the argument made in section
1.2 of this White Paper. 1
Mr. Longs concerns are not unique to him, either.
Increasingly, diverse stakeholders seem to agree that despite
rhetoric and ideology, reality in China demands substantive
political reform.
In a sense, both the CCP and its critics agree on the need
for political reform, writes Wall Street Journal commentator
Yiyi Lu. Critics argue that the Party cannot stay in power for
much longer if fundamental reforms are not introduceda
notion echoed by an essay in the latest issue of the CCPs
own theoretical journal, Seeking Truth, that called for further
reform and opening-up. [S]tanding still or turning back
would be a dead end, it said.2
But even declarations of the need for reform from the
likes of Chinese leader Hu Jintaowho warned in a July
23 [2012] speech that the party must never ossify, never
stagnatefail to convince critics that the party is willing
or able to undertake reforms that would genuinely tackle
corruption or threaten vested interests.2
Progress has certainly been made in terms of further
reform and opening up. In a survey of Chinas economic
performance under President Hu and Premier Wen, The Wall
Street Journals China Real Time blog observed that:
and elimination of agricultural taxes helped raise

incomes for Chinas 650 million rural dwellers.
In the financial sector, the big four state-owned banks
were listed on the public markets, bringing an element
WTO
2012[]
WTO1
of market discipline to their lending decisions. Interest

rates, a key instrument of economic rebalancing, have
been partially liberalized. That means higher returns
to household savers a step to increasing incomes and
boosting consumption.
Chinas
exchange
rate
another
instrument
of
[]
rebalancing has also been liberalized. The yuan has

risen 31 percent against the dollar since the peg was
broken in 2005. In 2012, the band in which the yuan
trades was widened giving the markets a great say in
how it moves.
2005
31%2012
2011
2.8%
200710.1%
40
2000
1000160
400050003
A stronger currency has helped reduce the imbalance

in Chinas trade, with the current account surplus
shrinking to 2.8 percent of GDP in 2011 from a high
of 10.1 percent in 2007.
Rebalancing is also receiving support from forces
outside of the governments control. A diminished
supply of workers is driving up wages at a rapid clip.
Liu Xingshun, a 40-year-old migrant worker from
Jiangxi province, currently working in a furniture
factory in Shenzhen, told China Real Time he made
about 1,000 yuan ($160) a month in the year 2000.
Now he makes 4,000 to 5,000 yuan.3
Although Higher wages are essential to fuel an increase

in Chinas household consumption, [] key elements of
the reform agenda, from opening state-dominated sectors of
the economy to competition, to strengthening farmers land
rights, and reforming the iniquitous system of urban and rural
residence rights, remain undone.3
In last years White Paper, we argued that further reform
and opening up is not yet complete:
2
[2012]723
2011
4%20022.2%
6.5
Top of the list of achievements is improved public
10
20122
services and welfare provision. Education spending hit
We are not alone in advocating further reform: China
4 percent of GDP in 2011, up from 2.2 percent in
Investment Corporation Chairman and CEO Lou
2002. Health and pension coverage have expanded,
Jiwei last year argued that although reform efforts
11
over the past thirty years have created a market

economy framework that is now firmly in place,
this framework is also incomplete, and that has led
to many problems including injustice, and that In
the words of some Chinese government officials, the
current system is unbalanced, uncoordinated and
unsustainable.4
We furthermore highlighted a series of recommendations

put forth by the U.S.-China Business Council in February
2012 as areas likely to see measurable, concrete gains from
reasonable investments in time and attention:
Ensure fair and open investment environments that
create jobs. The United States and Chinese governments
should jointly affirm the principle that foreign direct
investment is good for economic development, employment,
innovation, competition, consumers, and public welfare.
Reduce investment ownership restrictions in China and
encourage Chinese investment in the United States. China
has far too many ownership restrictions on US and foreign
investors seeking market access. More investment by Chinese
companies in the US means more jobs for Americans.
Continue to use WTO cases to settle trade disputes.
Both countries have effectively used this channel to resolve
trade disputes in a non-politicized manner and should
continue to do so.
is able to be accomplished.6
Not all are so pessimistic, however: Li Jiange, chairman
of China International Capital Corp., [predicts that] General
Secretary Xi will introduce economic reforms in late 2013
to reduce Beijings role in the economy and break up state
monopolies.7
European Union Chamber of Commerce in China, Beijing President Davide Cucino commented (somewhat idealistically) that The transition of power offers the new leaders an
historic opportunity to quickly implement a decade of stalled
reforms that would allow China to shift its economy to a new
stage of sustainable growth and towards a more inclusive,
higher income society. This will not be an easy task, but we are
confident that the new leaders will take bold moves because
they know that the required reforms are not only necessary,
but now also urgent. In not doing so we see the risk of dangerous outcomes in the business environment.8
But instead of speculating about various officials attitudes,
writes The Wall Street Journals China Real Time blog, there is
a simpler way to test the Partys seriousness [about reform]:
Wait and see if the leadership makes a big move on the issue
of asset declaration by cadres after the 18th Congress.2
Watch Brother, Uncle House, Smashing

Black
In August, a Shanxi provincial official earned the ire of the
Chinese public on not one, but two counts. Time summarizes
the events thusly:
20128
WTO
WTO
2012826
37
36
30
[]
6300010000
15000
Further improve rule-making transparency. Chinas

central government has significantly improved rulemaking transparency over the past several years, but further
improvements are needed. China should fully implement its
commitment to publish all draft trade and economic-related
laws, administrative regulations and departmental rules for a
full 30-day period.
[On] Aug. 26, a long-distance bus carrying 37 passengers collided with a tanker loaded with highly
flammable methanol on a Chinese highway in Shanxi
Province. Both vehicles burst into flames, killing 36
passengers.
Shortly after the tragedy, Yang Dacai, chief of the
Shanxi provincial work safety administration, was
Eliminate duplicative and inconsistent payroll taxes.

The US and China should quickly move to ensure its respective
companies and employees are not required to pay payroll taxes
(social insurance taxes in China) in both countries.
caught grinning widely amid the wreckage. As Weibo

users tried to figure out who this strangely smiley official was, pictures of Yang wearing luxury watches
went viral. [] Yang was quickly dubbed the smiling
brother, and his laughing visage became Septembers
Adhere to non-discriminatory, mutually-beneficial

innovation policies. China should continue to implement its
pledge to delink its innovation and government procurement
policies. This issue impacts the level playing field for American
companies in the China market, but also impedes Chinas
goal of becoming a more innovative economy.5
most comical Internet meme.

[]
One day after the Shanxi accident, Sina Weibo users
posted five photos of Yang wearing five different luxury watches, including a $63,000 Vacheron Constantin
Some scholars worry that intra-party competition and

some groups concerns may limit the speed with which reform
12
and a $10,000 Rolex. Many netizens questioned how
9219
[]2013
7
Davide Cucino
[]
160022
63010
11
12
13
a government worker who would have not been making more than $15,000 a year could afford so many
expensive watches on his public salary. In a nation
struggling with rampant local corruption, Yang soon
acquired another nickname: watch brother.9
By September 21, Watch Brother had been relieved of

his position and accused of serious discipline violations.9
Less than a month later, the [former] deputy chief of
[Guangzhou suburb] Panyu districts public security bureau
and head of the districts urban management bureau, a civic
official drawing a salary of roughly $1,600 per month, was
found to own 22 properties throughout Guangzhou valued
at over $6.3 million.10 The official, named Cai Bin but nicknamed Uncle House, reportedly told his superiors that he
owned only two.11
The ouster of Bo Xilai based on a laundry-list of disciplinary violations, however, was certainly the highest-profile
incident of the year.
Mr. Bo, formerly the party secretary of the state-level
Chongqing Municipality and once a front-runner for a seat
on the prestigious Standing Committee of the CPC, was investigated within the party for alleged crimes including abuse
of power, bribe-taking and involvement in his wifes murder
of the British businessman Neil Heywood, before being
ejected from the Communist Party and Chinas parliament
and thus losing his former immunity from prosecution.12
The Australian reported in December 2012 that in addition to the host of charges Mr. Bo already faces, Chinese
prosecutors building a corruption case against Bo Xilai are
believed to be investigating whether the fallen politician laundered an illicit fortune through Macau.12
Public demand for a transparent asset declaration system for government and party officials has grown strong in
recent years. For a party that calls itself communist, argues
commentator Yiyi Lu, Refusal to publish information about
the assets of office holders is clearly indefensible, especially
when such disclosures are already the norm in many other
countries.2
The partys many failures in the past to reign in corruption among its ranksbar a few high-profile scapegoatshas
led to Tsinghua University professor Sun Liping arguing that
there are few options left to stem the spread and intensification of corruption other than forcing officials to disclose their
assets.2
Ill-gotten wealth is an increasingly problematic issue for
the Party as income inequality continues to grow.
An academic survey conducted in 2008 found that The
top 10 percent of Chinas urban dwellers had average disposable income of 139,000 yuan a year, 7 times more than average earners, and 25 times more than the bottom 10 percent.
14
With rich households saving more of their income than poor,

that income inequality helps explain Chinas high savings rate
and low consumption.3
A more recent study by a professor at Southwestern University of Finance and Economics and Texas A&M University
shows that the gap between Chinas haves and have nots is extremely wide, perhaps the widest of any country in the world
[and that] Chinas top 20 percent command 68.4 percent of
income, and the bottom 20 percent just 0.5percent.13
The Gini coefficient is a widely used measure of income
inequality, writes The Wall Street Journals China Real Time
blog. A score of 1 means perfect inequality, with one person
controlling all a countrys income, a score of 0 means perfect
equality. [Recent independent results] put Chinas Gini
coefficient at 0.61. Thats significantly higher than an estimate
of 0.44 by a Chinese NGO based on the official household
income data.13
Corruption among Chinas top earners will feature in any
explanation for the growing wealth gap: Government control
of major investment projects, and key resources like land, offers multiple opportunities for graft.3
Moreover, in the face of vague official data one professor
at a prestigious Mainland university estimates 180,000 mass
incidents in 2010, compared to 50,000 in 2002. Corruption
is considered one of the most widespread causes of protests,
along with land grabs and environmental degradation.3
Rule of law, the oft-cited catchall category for systemic improvements in favor of which foreign stakeholders like AmCham South China member companies have been tirelessly
arguing for more than a decade, still proves elusive and is an
excellent example of the central proto-issue that manifests itself in arguments for reform, arguments against corruption,
arguments against SOEs privileges and more.
That issue is simple: doing the right thing for the countrythe thing that nearly everyone seems to agree is necessaryrequires the Partys loosening its grip on governance in
favor of a system defined by the rule of law .
Notably, it seems that whenever an editor needs a polemic
against the crass capitalism of the West they roll out the same
tired, ridiculous universal-suffrage-demanding straw man:
When it comes to political systems, Western opinion
201212
12
in the 21st century, as scholar Zhang Weiwei says, is

between good and bad governance. China has developed the right formula for choosing political leaders
on the basis of this formula, not Western-style democracy. 14
21
200810%
139000
710%25
20%
68.4%20%0.5%13
1
0
[]
0.61
0.44.13
14
15
11
2010
1820025
3
that is consistent with its culture and history and suitable to modern circumstances. It should be improved
leaders are still stuck in a narrative of dichotomy: democracy versus authoritarianism. But the competition
11
11
15
This passage from China Daily hits all the right rhetorical
notes but is totally tone-deaf in terms of its overall argument.
Rule of law, not Western-style democracy (the phrase itself
being somewhat handwavey in terms of what it signifies), is
what most informed critiques of Chinese politics call for.
Indeed, things like transparency, accountability and rulebased governance are what is sorely needed and what would
be bolstered by meaningful political reform.
This position is certainly not limited to foreign observers.
China Daily itself quotes Shandong University president Xu
Xianming as saying that, The rule of law, if implemented
properly, will be instrumental in helping the country cope
with prominent risks, such as corruption [because] government officials will be deprived of their privileges, which are a
root cause of corruption.15
Xinhua, ever one to join a popular cause, notes that not
only has the Party itself warned that corruption could lead to
the collapse of the Party and the fall of the state,11 but that:
monopolized by state-owned enterprises, given the

vested interest of [certain groups].16
This is arguably an understatement of the economic

challenges that China currently faces.
Discussing why Chinas domestic stock markets are
languishing near three-year lows and on the nose with retail
investors,17 Reuters offers a laundry list of issues currently
facing the economy:
[]
Two-thirds of Chinese companies that have posted
third-quarter earnings missed expectations, according
to Citi Private Bank. Profits fell an annual 5.8 percent,
and analysts, on average, are still cutting earnings ex-
pectations for next year.
Leverage has soared above comfortable levels, with

Beijing-based
consultancy
GaveKal-Draganomics
Seven hundred years ago, during the Ming Dynas-
by the end of the year, up from 108 percent at end-
ty, Chinese officials convicted of taking bribes were
2011.
skinned alive in public. But even severe penalties like

those failed to deter greedy and reckless officials; the
Rising non-performing loans (NPLs) pose a risk for
national disease of corruption contributed signifi-
the banks, a hangover from cheap credit as part of the
cantly to the fall of the dynasty.11
2008/09 stimulus. Goldman Sachs & Co estimates

the NPL ratio is more than six times the official re-
The Economic Picture
expecting corporate debt to hit 122 percent of GDP
Having tried out different remedies, Xinhua concludes,

China is just one step away from a cure that has been proven
effective in countries the world over: the public disclosure of
government officials assets.11
ported rate of 0.97 percent.
IMF
[]
50%60%70%
19
19
16
Michael Pettis
20
Further, Chinas industrials were owed more than 8
trillion yuan in net receivables at the end of Septem-
5.8%
ber, up 16.5 percent from a year earlier, according to
the National Bureau of Statistics.17
Beyond public anger over officials conduct, observers are

increasingly pointing to signs that Chinas economy is in need
of fundamental rebalancing.
The Washington Post writes:
The first and most pressing issue [the newly-appointed
Standing Committee of the CPC] will tackle is Chinas
slowing and hamstrung economy. The party has long
said its goal is to wean the country off its dependence
on investment growth and exports while increasing
domestic consumption. But changing policies could
prove difficult, requiring a host of reformssuch as
allowing interest rates to rise and letting Chinas currency float freelythat party leaders have long resisted.
Equally difficult will be disassembling industries
16
Today, Chinese economic policy-makers are hamstrung

in trying to revive economic growth, writes widely-published
professor of government Minxin Pei. The combination of local government indebtedness, massive bad loans hidden in the
banking system, anemic external demand, and diminishing
returns from investments has made it all but impossible for
Beijing to use the same old economic playbook to fire up the
economy.18
The issue of primary concern is that there is currently no
feasible replacement for the investment-driven growth model that has propelled the Chinese economy over the past 30
years, and the that same investment-driven model grows more
dangerous by the day.
A recent International Monetary Fund (IMF) report observed that a sustained period of over-investment [means]
that China now [requires] ever higher investment to generate the same amount of growth, forecasting that investments
share of GDP could soar to 60-70 percent from current levels
GaveKal-Draganomics
122%2011108%
2008-
2009
0.97%
16.5%17
18
20
Peterson Institute
Nick Lardy
17
around 50 percent, and that Under such a strategy, vulnerabilities will likely grow in the form of hidden deadweight
that will have to be paid in future in one form or another. The
cost of financing such an elevated level of investment could
undermine overall economic stability.19
Reuters notes that The potential for severe internal economic imbalances in China stemming from an extended period of investment-driven growth, plus the risk that the excess
capacity it creates spills into the global economy, are a recurring theme of IMF research.19
Many countries in the past one hundred years have gone
through periods of extraordinary growth, powered by very
high and rising levels of investment, observes Peking University professor of finance Michael Pettis. In every case these
countries developed serious imbalances, either internally, if
the investment was financed by consumption-constraining
policies, or externally, if they were not.20
He continues:
wages, borrowers at the expense of savers, and manufacturing

at the expense of services.21
Still, Mr. Pettis argues, rebalancing is likely to be harder,
rather than easier, than precedent cases in other countries:
21
[After many years] several groups within China have
benefitted mightily from the distortions associated

with the current growth model, especially distortions
in interest rates, the currency, and Chinas heavy de-
[]
pendence on investment. Given how deep these dis-
tortions have been, and how long they have been in
place, it would be surprising if these groups had not
become extremely powerful.
ed to reverse similar distortions, however, suggest that
the biggest impediment to the adjustment process will
be opposition from these groups. Jeffrey Frieden in his
In the early stages, it was always relatively easy to find
1993 book on Latin America, for example, argues that
Jeffrey Frieden1993
economically viable investments, but as institutional
the Latin America adjustment in the late 1970s was
constraints required the persistence of high levels of
extremely slow and painful precisely because power-
investment, and as it became increasingly difficult to
ful vested interests were so successful in retarding or
ensure that investment was economically viable, in
diluting reform.21
21
later stages investment was always misallocated and
This combination of extreme imbalances and high levels of debt, driven by misallocated investment, resulted in a subsequent period of rebalancing that turned
out to be far more difficult than even the skeptics had
predicted. Chinas development model has differed
from its predecessors only in that the imbalances have
exceeded any that we have seen in prior history, and
the amount of misallocated investment may have also
exceeded all precedents.
For this reason it would be surprising, and an historical anomaly, if Chinas rebalancing were not a very
difficult one. Not only has China pushed the imbalances associated with the investment growth model
to extremes that exceed any seen before, but it is becoming increasingly clear that the obstruction to any
meaningful adjustment by sectors that have benefitted
most from domestic economic distortions will make
the adjustment politically very difficult.20
Nick Lardy, a China expert with the Peterson Institute,

takes the position that Rebalancing is a medium term project
that will not be easy. To be successful the government will
need to phase out policies that favor profits at the expense of
18
[]
7
These distortions need to be reversed. The historical

precedents for developing countries that have attempt-
debt grew faster than debt servicing capacity.
The intellectual case for an accelerated pace of economic

reform has been well established in China, argues Mr. Lardy.
If Xi and Li can overcome the entrenched vested interests
that have slowed reform to a crawl in recent years they will be
laying the foundation for stronger economic growth over the
medium term.20
Problematically, It is still unclear what Beijing can do
to replace the source of growth [after the required dramatic
transformation of the financial sector and the relationship between the state and the economy]. One option, a consumption-driven model, is possible but unlikely in the short term
as China would have to not just to maintain the last decades
consumption growth rate [but] substantially to increase it.21
A massive transfer of wealth from the state sector and
from Chinas economic elite to the household sector would
of course do the trick, says Mr. Pettis, But it may well be
the only way.21
Mr. Lardy argues that major policy changes, including
further [reducing] and eventually [eliminating government]
intervention in the foreign exchange market; [eliminating]
subsidies to industrial energy consumption; [continuing] to
build out the social safety net [and] ending the extreme financial repression of recent yearsreflected in a real one-year
deposit rate that has on average been in the negative territory
beginning in 2004 will all contribute to a controlled rebalancing on the back of increased domestic consumption.21
20
[
]
21
1978
7
Brookings Institute
22
22
21
21
[]3%4%21
19
If reforms such as these can be accomplished, says Mr.

Lardy, China will not resume double digit growth but it will
probably escape [Mr. Pettis] postulated 3 percent to 4 percent
pace of expansion.21
Works Cited
1
Paul Eckert and Stella Dawson. Ten years on, American

business rethinks China dreams. Reuters. December 9, 2011.
http://www.reuters.com/article/2011/12/09/uk-usa-trade-wtoidUSLNE7B801C20111209. Accessed December 6, 2012.
Yiyi Lu. A Test Case for the Communist Partys Commitment

to Reform. China Realtime Report. October 23, 2012. http://
blogs.wsj.com/chinarealtime/2012/10/23/a-test-case-for-thecommunist-partys-commitment-to-reform/. Accessed December
6, 2012.
Tom Orlik. Charting Chinas Economy: 10 Years Under Hu.

China Real Time. November 16, 2012. http://blogs.wsj.com/
chinarealtime/2012/11/16/charting-chinas-economy-10-yearsunder-hu-jintao/. Accessed December 6, 2012.
Lou Jiwei. Six Paths for Advancing Chinas Market Reform.

Caixin. August 2, 2011. http://english.caixin.com/2011-0802/100286752.html. Accessed February 14, 2012.
Statement of Priorities for the US-China Commercial Relationship.

The U.S.-China Business Council. February 10, 2012. https://
www.uschina.org/public/documents/2012/02/board_priorities.
pdf. Accessed February 14, 2012.
Ben Blanchard and Sui-Lee Wee . China names conservative,

older leadership. Reuters. November 15, 2012. http://
www.reuters.com/article/2012/11/15/us-china-congressidUSBRE8AD1GF20121115. Accessed December 6, 2012.
Gordon Chang. Chinas Anti-Reformers Take Over.

Forbes. November 18, 2012. http://www.forbes.com/sites/
gordonchang/2012/11/18/chinas-anti-reformers-take-over/.
Accessed December 11, 2012.
Nick Edwards. Analysts View: Chinese Communist Party

unveils new leadership. Reuters. November 15, 2012. http://
www.reuters.com/article/2012/11/15/us-china-congress-viewidUSBRE8AE0C720121115. Accessed December 6, 2012.
Gu Yongqiang. Bringing Down Watch Brother: Chinas Online

Corruption-Busters Tread a Fine Line. Time. October 10, 2012.
http://world.time.com/2012/10/10/bringing-down-watchbrother-chinas-online-corruption-busters-tread-a-fine-line/.
Built to Last
China has progressed about as far as it can within its
existing political framework. Further reform would threaten
the Communist Partys hold on power, so it will not sponsor change of that sort, writes Forbes commentator Gordon
Chang.
Claremont McKenna College professor of government
Minxin Pei holds that a market economy requires the rule
of law, which in turn requires institutional curbs on government. Because these two limitations on power are incompatible with the Partys ambitions to continue to dominate society, China cannot make much progress toward them within
the current system. China [] is now trapped.7
China has been caught in such situations before, continues Mr. Chang, But has managed to implement critical
reforms. That happened at the end of 1978, for instance,
when Deng Xiaoping launched more than three decades of
growth.7
Brookings Institution analyst Cheng Li argues that Without political reform, China cannot have structural change
from an export-led economy to an innovation-driven, domestic consumption-driven economy, because an innovationled economy needs political openness. And consumption or
service-sector development needs stronger rule of law.22
Mr. Li furthermore posits that Chinas fifth generation
face a tough choice: Either save the party, which means bold
political reform and even giving up some of their power and
privilege, or they will be out of history.22
The trillion dollar question, it seems, is whether or not the
Party will display the strength of character necessary to wrest
itself from various self-defeating loops7 and start the nation
on another 30 years of growth, prosperity andhopefullya
new era of Chinese rule of law.
10
20
Zheng Caixiong. Uncle House under investigation. Peoples

Daily. October 23, 2012. http://english.peopledaily.com.
cn/90882/7987674.html. Accessed December 11, 2012.
21
22
11
Time to publicly disclose officials assets. Xinhua. December

6,2012.http://usa.chinadaily.com.cn/china/2012-12/06/
content_15992478.htm. Accessed December 11, 2012.
12
Bo Xilai linked to illicit fortune in Macau. The Times.

December 4, 2012. http://www.theaustralian.com.au/news/
world/bo-xilai-linked-to-illicit-fortune-in-macau/storyfnb64oi6-1226529215946. Accessed December 11, 2012.
13
Tom Orlik. Charting Chinas Family Value. China

Real Time. December 10, 2012. http://blogs.wsj.com/
chinarealtime/2012/12/10/perception-vs-reality-chartingchinas-family-value/. Accessed December 11, 2012.
14
Chinas political system suits it best. China Daily. November

1 6 , 2 0 1 2 . h t t p : / / u s a . c h i n a d a i l y. c o m . c n / 2 0 1 2 - 1 1 / 1 6 /
15
Rule of law crucial to stability, prosperity. Xinhua. December

4,2012.http://usa.chinadaily.com.cn/china/2012-12/04/
16
William Wan and Keith B. Richburg. Chinas new leadership

team not expected to push drastic reform. The Washington
Post. November 15, 2012. http://www.washingtonpost.com/
world/asia_pacific/chinas-new-leadership-team-not-expectedto-push-drastic-reforms/2012/11/15/6cfe8b9a-2f29-11e2-9f500308e1e75445_story.html. Accessed December 11, 2012.
17
Vikram Subhedar. Analysis: Caveat emptor as foreigners rush

to ride China rebound. Reuters. November 26, 2012. http://
www.reuters.com/article/2012/11/26/us-china-investmentidUSBRE8AO0D720121126. Accessed December 12, 2012.
18
Minxin Pei. Superpower Denied? Why Chinas Rise May

Have Already Peaked. The Diplomat. August 9, 2012. http://
thediplomat.com/2012/08/09/superpower-denied-why-chinasrise-may-have-already-peaked/. Accessed December 12, 2012.
19
Nick Edwards. China investment levels excessive, risks are

rising: IMF research. Reuters. November 28, 2012. http://
www.reuters.com/article/2012/11/28/us-china-economy-imfidUSBRE8AR09Z20121128. Accessed December 12, 2012.
20
Nick Lardy and Michael Pettis. Lardy vs. Pettis Debating

Chinas Economic Future. China Real Time. November 2, 2012.
http://blogs.wsj.com/chinarealtime/2012/11/02/lardy-vs-pettisdebating-chinas-economic-future/. Accessed December 6, 2012.
21
Nick Lardy and Michael Pettis. Lardy vs. Pettis: Debating Chinas
Economic Future, Round 2. China Real Time. November 7,
2012.http://blogs.wsj.com/chinarealtime/2012/11/07/lardyvs-pettis-debating-chinas-economic-future-round-2/. Accessed
December 12, 2012.
22
Cheng Li and Minxin Pei. Li vs. Pei on Chinas Prospects for

Political Reform. China Real Time. November 8, 2012. http://
blogs.wsj.com/chinarealtime/2012/11/08/li-vs-pei-on-chinasprospects-for-political-reform/. Accessed December 12, 2012.
23
1.2 The Double-edged Sword of SOEs (in 2013)
1.2 2013
SOEs Enjoy A Second Life
HE CHINESE GOVERNMENTS preferential

treatment of and strategic mandate for state-owned
enterprises, or SOEs, has a curious history. According to
some, it also has a grim outlook if substantive changes are
not made.
In the mid-to-late1990s, former President Jiang Zemin and
then-Premier Zhu Rongji took a knife to Chinas bloated and
unprofitable state sector, closing thousands of unproductive
enterprises. That opened up space for private sector firms to
flourish, underwriting the growth of the last decade [20002010].1
Since that time, however, some of those gains have been
reversed, as the government has thrown its weight behind
state champions. The number of state-owned enterprises as a
share of the total has continued to fall, dropping to 5 percent
in 2011. But with SOEs still dominant in the commanding
heights of the economy, their share of total output has remained relatively buoyant at 26 percent.1
According to a study performed by Curtis Milhaupt, a
scholar of comparative corporate law at Columbia Law School,
and Li-Wen Lin, a graduate student in sociology at Columbia
University [] the network of SOEs in China Is based on
vertically integrated groups of large state-owned and related
companies. Each group has a central holding company, the
State-Owned Assets Supervision and Administration Commission (SASAC), which is the majority shareholder in a
core company. That company, in turn, owns a majority of
shares in the state-owned companies that comprise the group,
including a finance company that is a source of finance for
members.2
Additionally, the Chinese Communist Party (CCP) structure exists parallel to the structure noted above. The Organization Department of the Party is decisive in choosing top
managers of the SOEs, and in turn some managers hold positions in government and the CCP The authors emphasize that
more than a chain of command from top to bottom is implied
by this structure: These hierarchical structures are embedded
in dense networks not only of other firms, but also of party
and government organs, and exchange and collaborate on
many matters of production and policy implementation.2
Milhaupt and Lin also observe several significant issues
with Chinas current model for the administration of SOEs.
One such issue is that SOEs are exempt from anti-trust
enforcement. Also, as the Economist noted in a recent overview,
the government enforces rules selectively, to keep private-sec-
24
tor rivals in their place and foreign firms can be blocked from
acquiring local firms.
Another is that Corporate governance is very weak.
Shareholders have no voice in corporate affairs and can not
access the courts. Lack of transparency means that corporate
misgovernment is easy to hide.3
Also at the Communist Party Congress, SASAC chief
Wang Yong told reporters that The direction of the SOE
(state-owned enterprise) reform should be: SOEs must be
more market-oriented and they must keep strengthening their
vitality and influence.3
According to author and former AmCham China (Beijing)
chairman James McGregor, the group of 117 huge central
SOEs, of which many are monopolies, have evolved over
the past decade so that the party controls these SOEs more
than the government does.4
Mr. McGregor explains:
The Central Organization Department of the party
appoints the top leaders and they outrank the bureaucrats who are nominally supposed to be the SOEs
regulators. The party is also able to use the SOEs for
preserving political power as much as for building the
economy. Thats the heart of [what McGregor terms]
the Authoritarian Capitalist system in China today.4
Mr. McGregor, who has been in China for 25 years and has
witnessed the nations extensive changes since opening up,
posits that some officials saw the Russian oligarchs taking
over state assets as private individualsand the party decided
it would be the oligarchy. And so in 2003 they formed the
SASAC [State-owned Assets Supervision and Administration
Commission] to bring the state shares under central control.
Then in 2006 there was a directive that took about two dozen
key industrial and technology sectors and made them fully
state controlled or majority state controlled. Finally, you have
the global financial crisis and the 600-billion-dollar stimulus
program. That money flushed into SOEsand they were off
and running.4
Curiously, this has all happened as many observersthe
authors includedexpected that the Chinese government
would continue to open markets and cultivate a more dynamic and sustainable economy based on private enterprise. [The
Chinese economy] was headed toward a more free market
economy with more private companies. But the country has
strongly reversed course to building up state-owned enterprise
that is increasingly incompatible with global trade regimes
[2000-2010]1
20115%
26%1
James
McGregor117
SASAC
The Economist
[]
4
2003
SASAC[]
2006
6000
[]
25
and threatening to multinationals.4

The move is even more curious because, in the words of
Mr. McGregor, SOEs add zero growthzero job growth,
zero innovation. The private sector is what Deng [Xiaoping]
used to pull this country out of a hole and theyre going to
have to use the private sector to move it to the next step.
Moreover, while it is unlikely that these SOEs will become
the new General Electrics in 10 or 20 years [] they can destroy a lot of companies and distort global markets and business practices along the way.4
According to Reuters, Chinese reformers and Western
governments say [SOEs] sheer size and market dominance
creates a drag on the economy through vast opportunity for
corruption and waste, leading to higher costs for consumers, and that critics of current SOE-related policy claim that
without further reform of the state sector, Chinas growth
will stagnate. They call for equal opportunity for private firms,
which provide most of the new jobs in China.3
The Chinese governments oft-repeated call for indigenous
innovation and the development of key high-tech industries is
exceedingly unlikely to be answered successfully by complacent
SOEs and those entrepreneurs who are the nations best hope
in achieving a substantive economy based on innovation are
unable to get financing so they often live off loan sharks.4
Banks in China offer SOEs preferential treatment, often at the
expense of private enterprises.
Overseas Expansion No Easy Task

In more global terms, Wall Street Journal commentator
Stanley Lubman argues that, The need to better understand
Chinas system goes beyond abstract arguments about the future of the global economy. The continuing expansion of the
state sector of Chinas economy limits the private sector and
favors state-owned enterprises (SOEs) over foreign companies
in some domestic markets. As SOEs extend their investments
abroad, nations in which China seeks to invest need to become more aware of frequent links between state ownership
and state control.2
Chinas increasing support for SOEs at the expense of
market-based competition in a variety of industriesChina
going in a direction that the West didnt think China was going in4 after joining the WTO in 2001is likely to be a
source of increasing friction between the P.R.C. and the rest
of the world.
At the above-mentioned 18th Communist Party Congress,
[SASAC leader Wang] and other state-firm bosses emphasized their importance to what they called national economic
security in their gathering, laying out plans for further investment and overseas expansion.3
Historically, Chinese companies that are given licenses to
26
invest abroad have been SOEs or otherwise related to the government. But the governments intimacy with companies
and not only SOEswhich are looking to invest in abroad
has been a source of considerable suspicion among foreign
regulators in recent years. Several high-profile acquisitions of
foreign companies by Chinese firms have been halted, blocked
or aborted in recent years.
In September 2012, President Obama issued an executive
order prohibiting a Chinese company from owning and operating a wind farm near the Naval Weapons Systems Training
Facility in Boardman, Ore [which] is said to be home to a
fleet of unmanned drones and planes specializing in electronic
warfare. This was the first time in 22 years that a president
had prevented a foreign acquisition of a US business.5
The Chinese company in questionmachinery giant
Sanyis controlled by Chinas second-richest man, Liang
Wengen, who has recently been appointed to the Central
Committee of Chinas Communist Party.5
Around the same date, Chinese authorities were shocked,
just shocked when the U.S. House of Representatives Intelligence Committee warned [] that Beijing could use equipment made by Huawei, the worlds second-largest maker of
routers and other telecom gear, as well as rival Chinese manufacturer ZTE, the fifth largest, for spying.6
Although neither Huawei nor ZTE is state-owned, the
report cited the presence of a Communist Party cell in the
companies management structure as part of the reason for
concern while suspicions of Huawei are partly tied to its
founder, Ren Zhengfei, a former Peoples Liberation Army
officer.6
Reuters recalls that:
China suffered the biggest knock to its deal-making
confidence in 2005, when state-controlled oil firm
[]
4
Stanley
Lubman
CNOOC Ltd withdrew an $18.5 billion bid for U.S.

oil firm Unocal after the Senate moved to block it on
national interest grounds.
[]
20129
22
5
[]
2005
CNOOC
185
Unocal
[]
2001
4
2009
4
Lynas50.6%Lynas
In 2009, the state-owned China Non-Ferrous Metal

Mining (Group) Co dropped a $400 million bid for
50.6 percent of Lynas Corp , owner of the worlds
richest deposit of rare earth minerals, saying the conditions set by [Australias Foreign Investment Review
Board] were too stiff.
[]
[Also in 2009,] Treasurer Wayne Swan forced Chinese
metals group Minmetals to withdraw a $1.7 billion bid
[
]
[
]
[]
[2009]
Wayne Swan17
OZ
7
[]
27
for OZ Minerals until it revised the deal to exclude a

mine situated in a restricted weapons testing area.7
More generally, the U.S. report found that for the most
part [overseas] investment [is] spearheaded by Chinese stateowned enterprises that enjoyed government subsidies and
other market-distorting policies that support industrial policy
and non-market goals of the Chinese government.3
As Mr. Lubman observes, Chinas state capitalism will
continue to number among those issues on which leaders in
Washington are likely be hard-edged, and rightly so. If an
SOE appears as a possible investor, [the Committee on Foreign Investment in the United States] will most likely have
difficulty probing its relations to Chinese government agencies of concern. And the Chinese side will most likely not
display satisfactory transparency.2
The U.S. Chamber of Commerce further notes that China and other countries lavish regulatory favors and generous
subsidies on their state-owned firms, making it very difficult
to compete, and that No adequate and effective international disciplines now exist to deal with this problem.8
In December 2012, Canadian authorities approved Chinas biggest ever foreign takeover [a $15.1 billion bid by statecontrolled CNOOC Ltd for energy company Nexen Inc.] but
drew a line in the sand against future buys by state-owned
enterprises.9
Prime Minister Steven Harper said: To be blunt, Canadians have not spent years reducing the ownership of sectors
of the economy by our own governments, only to see them
bought and controlled by foreign governments instead.9
Reuters notes that The international community has demanded greater transparency from China on a number of
fronts for years, wary of its intentions as the country grew to
become the second-biggest economy in the world and symbolic of a shift in global power to emerging nations.10
Moreover, Chinas state-secrets laws, massive bureaucracy
and cronyism [which] make it difficult to get key, verifiable
information from Chinese companies. even in cases where
the largest security concern is financial.10
More pragmatically, Mr. McGregor argues that fast-moving and adaptable entrepreneurs, not SOEs, present the best
hope for Chinas future overseas investments: [The going
out policy] cant be led by SOEs: Theyre not Chinas best
and brightest.4
What Next
At this point it appears that the continuing relevance of
SOEs in China owes more to political influence and vested interest than in their ability to successfully compete domestically
or even internationally; while the Communist Partys de-facto
control over the enterprises themselves may insulate them
28
from significant failures in their domestic market, that same

control will likely lead to increasing backlash against Chinas
overall mandate to go out and invest abroad. In other words,
the continuing prosperity of SOEs at home due to practices
that, once again, [are] increasingly incompatible with global
trade regimes and threatening to multinationals.4
This is just one facet of the overall paradox of reform in
contemporary China: despite a wide-ranging consensus within
and without China that substantive political reform is necessary
for the long-term relevance of the Communist Party, the shortterm consequences of that reformboth real and imagined
remain too unpalatable for much progress to be made.
In light of the overall situation, it would appear that nobody in a position of authority has yet been willing to risk
halting the flow of lucre that many vested interests in Beijing
no doubt enjoy as a result of SOEs success-by-fiat, even if it
would mean an overall healthier national economy and even
as an increasing number of economic measures indicate that
China may be on the cusp of significant economic hardship.
Strictly pragmatically, the most likely candidates for successful investment overseas are not the SOEs that authorities
seem to want to prop up as industry champions, but rather
smallerand more independententerprises which are more
likely to evade significant concerns about propriety and transparency. In our opinion, these firms are also most likely to
make significant positive contributions to overseas economies
and Chinas own.
[]
8
201212
[151
]
9
StevenHarper
10
10
[]
4
29
Works Cited
30

China Real Time. November 16, 2012. http://blogs.wsj.com/
chinarealtime/2012/11/16/charting-chinas-economy-10-yearsunder-hu-jintao/. Accessed December 6, 2012.
Stanley Lubman. Chinas State Capitalism: the Real World

Implications. China Real Time. March 1, 2012. http://blogs.
wsj.com/chinarealtime/2012/03/01/chinas-state-capitalism-thereal-world-implications/. Accessed December 6, 2012.
Charlie Zhu and Lucy Hornby. WRAPUP 1-Chinese state

firms say reform should mean more growth. Reuters. November
9,2012.http://www.reuters.com/article/2012/11/09/chinacongress-idUSL3E8M91LK20121109. Accessed December 11,
2012.
Andrew Browne. Eight Questions: James McGregor, No

Ancient Wisdom, No Followers. China Real Time. October
1, 2012.http://blogs.wsj.com/chinarealtime/2012/10/01/eightquestions-james-mcgregor-no-ancient-wisdom-no-followers/
Christopher Helman. Obama Blocks Chinas Second-Richest

Man From Owning Wind Farm Near Secret Navy Base.
Forbes. September 29, 2012. http://www.forbes.com/sites/
christopherhelman/2012/09/29/obama-blocks-chinas-secondrichest-man-from-owning-wind-farm-near-secret-navy-base/.
Lucy Hornby. China derides U.S. Cold War mentality

towards telecoms firm Huawei. Reuters. November 10, 2012.
http://www.reuters.com/article/2012/11/10/us-china-huaweiidUSBRE8A905520121110. Accessed December 11, 2012.
Zhou Xin and Tom Miles. UPDATE 1-China to vet inward

M&A deals for national security. Reuters. February 12,
2011. http://www.reuters.com/article/2011/02/12/china-maidUSTOE71B00L20110212. Accessed December 11, 2012.

Michael Erman and David Ljunggren. Canada OKs foreign

energy takeovers, but slams door on any more. Reuters. December
8, 2012. http://www.reuters.com/article/2012/12/08/us-cnoocnexen-idUSBRE8B619M20121208. Accessed December 11,
2012.
10
Rachel Armstrong and Michael Flaherty. CNOOC pledge small

step for China transparency, skeptics abound. Reuters. December
10,2012.http://www.reuters.com/article/2012/12/10/usinvestment-china-idUSBRE8B80FJ20121210.Accessed
December 11, 2012.
31
1.3 The Foreign Investment Environment in China

(in 2013)
Recent developments
N THE YEAR from November 2011, Foreign Direct

Investment (FDI) into China dropped 11 out of 12
months, with only minimal growth in May 2012 bucking the
trend.1
The Chinese government has blamed the slump on the
slowdown in global economic growth, the prolonged European
debt crisis and rising costs and weak demand at home.1
The South China Morning Posts Victoria Ruan reported in
November 2012 that For the first 10 months [of 2012] FDI
is down 3.45 percent at US$91.7 billion [while] outward
investment by non-financial Chinese firms rose 25.8 per cent
in the 10 months to US$58.2 billion.2
The steady decline in foreign investment, she observes,
Highlights the challenges facing Beijings new leaders as they
cope with a global economic downturn while rebalancing the
domestic growth model as rising labor costs begin to hurt the
countrys manufacturing competitiveness.2
A more detailed breakdown of FDI shows that Services
sector inflows in the first 10 months of the year were $43.7
billion, down 1.8 percent on a year ago, while Manufacturing sector inflows meanwhile stood at $40.4 billion between
January and October, down 7.3 percent versus the same period in 2011.3
Curiously, the year-on-year decline in newly approved
foreign-invested enterprises was significantly higher, at 10.49
percent, than the drop in overall investment volume.4
This suggests that FDI in 2012 has been more concentrated in large projects, and that fewer Small and Medium-sized
Enterprises (SMEs) are seeing value in enteringor expanding withinthe Chinese economy.
Contemporary to the Ministry of Commerces relatively
gloomy FDI figures, the State Administration of Foreign Exchange announced that it would cancel the complex review
procedures related to capital flows and currency exchange
quotas of foreign enterprises, a move which Standard Chartered economist Li Wei suggested will encourage more foreign direct investment.5
Still, Li cautioned, its yet to be seen whether the weakening FDI trend will reverse in the short term because it hinges
more on the domestic and overseas economic situation.6
The Good
Despite increasing wagesand thus ever-shrinking
competitiveness for low-end manufacturinglarge amounts
32
of money continue to be invested in China.

Reuters observes that What keeps the money coming to
China is a steady shift away from cheap assembly lines to high
value-added production and from volatile external demand to
the spending power of a new mainstream consumer class that
analysts at McKinsey reckon will rise 10-fold between 2010
and 2020.6
Accordingly, Vietnam, Bangladesh, Indonesia and Thailand
combined managed to snag only $141.6 billion in FDI between
them from 2007 to 2011, despite being repeatedly touted as the
places to which manufacturers fleeing China flock.6
The continuing evolution of FDI in China has led the
nation to capture $625 billion [since 2007], based on data
from United Nations agency, UNCTAD.6
AmCham South China members have been at the forefront of this transition from labor-intensive manufacturing to
higher value-added services.
In addition to focusing mainly on the manufacture of electrical equipment, appliances and other higher-tech products,
in 2013 fully 80.7 percent of State of Business study participants indicated that their primary business focus was the production of goods or services for the Mainland China market,
rather than for export.
Furthermore, study participants report that Investment
in new China facilities is among their top business priorities,
in addition to reporting a more than 40 percent increase in
3-year investment budgets over last years results. Both these
points suggest that companies are beginning to resume expansion plans that had been put on hold following the global
financial crisis.
The Bad
Bloomberg reports that Companies are less optimistic
about their business prospects in China than they were three
years ago. Chinas recent economic slowdown is one reason
for that, but so is a rising concern about favoritism given to
Chinese companies in the market.7
Similarly, Many companies say that they can only expand
so far into certain sensitive industries, such as oil and information technology, before hitting a ceiling in which the government makes it difficult to expand.7
A Foreign Policy opinion piece observes that, Although
there are individual exceptions, U.S. companies share of the
Chinese market has been shrinking. Industrial output by foreign-invested firms in China as a share of the national total
1.3 2013
201111
FDI1120125
1
1
Victoria Ruan201211
201210
3.45%917
58225.8%2
20102020
106
20072011
14166
UNCTAD2007
62506
437
1.8%404
20117.3%3
2013
80.7%
10.49%4
340%
2012
2003
33
peaked around 36 percent in 2003 and has declined ever since

to about 27 percent in 2010, the most recent year for which
data is available.8
This decline can be attributed to several causes. For one,
a November 2012 report by the Economist Intelligence Unit
found that, half the executives surveyed in big companies
[out of the total 328] were concerned or very concerned they
would be forced to give up their intellectual property in exchange for market access.8
Similarly, technology transfer can also happen through
less official channels: Technology firm American Superconductor claimed 70 percent of its business disappeared in 2011
after a Chinese partner convinced one of its employees to steal
some of its technology.8
According to one CEO who asked to remain anonymous,
The government can close us down suddenly, or it can help
native Chinese firms to steal our technology and gradually
replace us in the market.8
Another hazard for foreign investors is the fact that China
can de facto nationalize assets by exercising such strict control over taxes, regulations, and costs that it effectively controls
and drains foreign firms profits, as was the case with Nearly
40 foreign electricity producers [that] rushed into China in
the 1990s [of which nearly all] have since exited, often selling
their plants to the Chinese after being unable to make money
as rising coal prices outstripped electricity-rate increases set by
the state and as Chinese firms benefited from access to state
credit and subsidized coal.8
A 2012 survey conducted by AmCham South Chinas
counterpart in Beijing found that 61 percent of companies
surveyed report operating margins that are comparable to, or
less than, their worldwide margins, with Foreign Policy adding that, Many CFOs would disqualify investments that
have only a 39 percent chance of exceeding average profits, in
a country much riskier than their home market.8
None of these issues should be particularly surprising at
this point in time, as foreign companies in aggregate have accumulated extensive experience operating in the China market
for 30-plus years. What is surprising, however, is the fact that
these concerns are essentially the same ones that have colored
foreign business dealings with China since the opening up.
For many observers, there seemed to be an implicit promise
that when China joined the WTOand as it became more
prosperousit would also adhere more closely to international norms in terms of transparency, corruption and rule of law.
In retrospect, this was perhaps nave.
The country took a huge leap in the 1990s as it prepared
for WTO entry, slashing red tape, removing layers of protection for domestic factories and farms and opening its markets.
That work is widely credited inside and outside China with
turning the country into the industrial dynamo of today.9
34
But the work was never finished. Some U.S. experts, say
Reuters, hold that China turned away from market liberalization as early as 2003 9
Nobody who was watching China enter the WTO back
then saw this change coming, said Heritage Foundation analyst Derek Scissors. It was as if a different government with
different priorities came in. 9
General Electric CEO Jeffrey Immelt says, The notion
was, if were part of the Chinese economy, we should be allowed to win.9
Just over ten years later, a new pragmatism seems to be
offsetting bright-eyed enthusiasm about the potential for farreaching success in China. Some chief executives are questioning whether the United States is pressing China hard enough to
hold up its side of the bargain in joining the elite trade club.9
Until recently, Reuters continues, American business
leaders had been loath to speak of Chinas practices for fear
it would lose them lucrative contracts or result in regulatory
scrutiny that harms their China operations. Several have gone
public in the past few months.9
Indeed, China has been known to punish companies that
publicly complain about doing business there, explains Foreign Policy.8
These issues have not escaped foreign governments attention.
In Europe, EU Trade Commissioner Karel De Gucht even
floated the idea of speaking out against abuses on companies
behalfand taking the heatsparing companies from retaliation triggered by the filing of official complaints.8
At the macro level, Washington is growing concerned
that China has lost its commitment to freer trade and that
as new leaders prepare to take over next year, China is abandoning its march toward market capitalism in favor of state
mercantilism.9
Foreign Policy summarizes growing pessimism about foreign companies future success in China: U.S. companies are
banking their future success on tapping into the enormous
Chinese market. Theyre in for a nasty surprise.8
Simultaneously, China is becoming increasingly aggressive in its overseas ambitions. This, combined with foreign
companies growing dissatisfaction with their opportunities in
Chinas domestic economy, is beginning to have a significant
qualitativeif not yet quantitativeeffect: the worsening of
Chinese image around the world.10
Academic and commentator Minxin Pei writes: As
countries around the world, for their own reasons, raise their
vigilance against Chinese influence and start to push back,
Beijing no longer enjoys a free hand in expanding its economic
foothold and securing access to markets and resources.11
How this sort of resistance will change foreign-invested
enterprises experiences on the Mainlandif at allis yet to
be seen.
36%201027%
20108
201211
[328]
8
2011
70%8
40
8
2012
61%
39%
8
2003
9
(Derek
Scissors)
10
35
Works Cited
1
10
Foreign direct investment in China declines. Taipei Times.

November 21, 2012. http://www.taipeitimes.com/News/biz/
archives/2012/11/21/2003548206. Accessed December 12,
2012.
11
36
Victoria Ruan. Foreign direct investment in China drops

further. The South China Morning Post. November 21, 2012.
http://www.scmp.com/business/money/markets-investing/
article/1086948/foreign-direct-investment-china-drops-further.
Aileen Wang and Nick Edwards . China 2012 FDI inflows slow,
stay on track for $100 billion. Reuters. November 20, 2012.
http://www.reuters.com/article/2012/11/20/us-china-economyfdi-idUSBRE8AJ06C20121120. Accessed December 12, 2012.
Statistics of FDI in January-October 2012. The Ministry of

Commerce of the Peoples Republic of China. November 23,
2012. http://english.mofcom.gov.cn/aarticle/statistic/foreignin
vestment/201211/20121108461051.html. Accessed December
12, 2012.
Victoria Ruan. China eases rules on foreign investment. The

South China Morning Post. November 22, 2012. http://www.
scmp.com/business/economy/article/1087879/china-easesrules-foreign-investment. Accessed December 12, 2012.
Kevin Yao. Analysis: Investors make $100 billion bet on Chinas

drive up value chain. Reuters. November 20, 2012. http://www.
reuters.com/article/2012/11/20/us-china-economy-investmentidUSBRE8AJ1FH20121120. Accessed December 12, 2012.
Elizabeth Dwoskin. Its Not Currency Thats Sapping U.S.

Confidence in China. Bloomberg Businessweek. October 10,
2012. http://www.businessweek.com/articles/2012-10-10/itsnot-currency-thats-sapping-u-dot-s-dot-confidence-in-china.
Richard DAveni. The China Bubble. Foreign Policy. August

30, 2012. http://www.foreignpolicy.com/articles/2012/08/30/
the_china_bubble. Accessed December 12, 2012.

Minxin Pei. Sorry World: What Happens in Beijing WONT

Stay in Beijing. The Diplomat. October 22, 2012. http://
thediplomat.com/2012/10/22/sorry-world-what-happens-inbeijing-wont-stay-in-beijing/?all=true. Accessed December 12,
2012.
Minxin Pei. Superpower Denied? Why Chinas Rise May
Have Already Peaked. The Diplomat. August 9, 2012. http://
thediplomat.com/2012/08/09/superpower-denied-why-chinasrise-may-have-already-peaked/?all=true. Accessed December 12,
2012.
11
2012
2013
The previous highly relevant sections of our 2013 White Paper have
been incorporated into this latest 2015 version to provide a solid basis for
comparison of the late 2012 situation in China with the present.
37
1.4 Redefining Reform (in 2015)
CONOMIC REFORM IN China had begun slowly in

the 1980s but radical reforms only took place after Deng
Xiaopings southern tour in early 1992. According to a 2007
report by the China Policy Institute, it was heavily debated
whether China should adopt a market economy approach,
until 1992 when the 14th National Congress of the Chinese
Communist Party (CCP) clearly stated that Chinas economic
reform intention was to establish a socialist market economy.
The clarification of market economy status provided the
necessary conditions for China to begin large-scale economic
decentralisation.20
In the decade succeeding Deng Xiaopings rule, Chinese
President Jiang Zemin and his Premier Zhu Rongji oversaw the
handover of Hong Kong in 1997 and led their country until
2002, by which time it had propelled millions out of poverty
and become one of the worlds most powerful economies.
They guided China into the World Trade Organization and
presided over a series of wrenching reforms that saw much
of the state-sector dismantled and the welcoming into the
[Chinese Communist] Party of advanced productive forces,
i.e. businessmen. 18
Zhu Rongji was appointed Vice Premier in charge of
Chinas economic reform in 1991. As Dengs economic czar,
Mr. Zhu drew many admirers as he tamed inflation without
snuffling out growth by devaluing the yuan in 1994 by 33
percent. He also laid the foundation for a banking system and
was even considered as a possible recipient of the Nobel Prize
for economics.20In the mid-1990s, Zhu Rongji formulated
a new strategy for SOE reform, which was called grasping
the big and letting go the small (zhua da fang xiao). It was
officially established as Chinas new economic reform strategy
at the Fifteenth National Congress of the CCP in 1997, when
Zhu Rongji became the Premier-elect. This strategy gave the
SOE reform a clear direction, especially in the case of large
SOEs. After Mr. Zhu became the Premier in 1998, this
strategy was implemented to its fullest extent. 20 Grasping the
big meant making efforts to cultivate strong and competitive
large enterprises and enterprise groups and develop them
into cross-regional, cross-sectional, multi-ownership and
multinational firms. Letting go the small implied that the
government allow the small and medium-sized SOEs to face
market forces. The ultimate goal of this strategy was that the
government would be able to privatize most of the SMEs and
would only control a limited number of large central and local
SOEs. 20
Mr. Zhu is regarded as the architect of the economic policies that ushered in Chinas second wave of growth. He broke
38
down trade barriers, cut runaway inflation, rescued China

from the Asian economic crisis in 1997, sold off state enterprises, broke up monopolies, ended state planning, introduced
competition and deregulation, streamlined the bureaucracy
and secured Chinas membership to the World Trade Organization. Mr. Zhus tough-minded policies included driving the
military out of many of its commercial enterprises, reducing
the number of easy loans and credits to money-losing stateowned enterprises, introducing a value added tax and diverting tax revenues to the central government. To create jobs, he
launched Keynesian public works programs.
In 1997, the Chinese government set a three-year phased
goal for the SOEs to turn around their loss-making condition. In September 1999, during the Fourth Plenary Session
of the Fifteenth Congress, the government adopted the policy
of diversifying SOEs share ownership to establish a modern
corporate system. 20
In a 2009 special report published by FIRST Magazine to
commemorate the 60th anniversary of the founding of the
Peoples Republic of China, James McGregor, China expert
and former journalist for the Wall Street Journal, paints a
colorful description of China during the early Jiang years,
China is simultaneously experiencing the raw capitalism
of the robber baron era of the late 1800s; the speculative
financial mania of the 1920s; the rural-to-urban migrations
of the 1930s; the emergence of the first-car, first-home, first
fashionable-clothes, first college-education, first-familyvacation, middle class consumer boom of the 1950s; and even
aspects of the social upheaval similar to the 1960s.23
At the Sixteenth National Congress of the CCP in 2002,
when Hu Jintao and Wen Jiabao came to power, the direction of SOE reform was further readjusted. The government
continued to make efforts to restructure the state-owned
economy and reform the state assets management system. In
the first half of 2003, the Stateowned Assets Supervision and
Administration Council (SASAC) of the State Council was
established to guide the reform and restructuring of state
assets.20 However, most pundits observe that China during
the decade of rule under Hu Jintao and Wen Jiabao, while
marked by breakneck economic growth and seeming to remain stable despite an overseas financial crisis in 2007-2008,
was generally characterised by a lack of action on reform.
Much of the credit for that economic boom must go
to Mr. Hus predecessor Jiang Zemin and his Premier Zhu
Rongji, who had spearheaded far-reaching reforms that laid
the foundations of the decades growth. Under Mr. Hus
administration, some of those gains have been reversed, as
1.4 2015
1992
2007
1992
CCP
20
19972002
[]18
1991
1994
33%
20
1997
1998
20
20
1997
1997
19999
20
2009
James
McGregorFIRST
19
20202030
2050
2060
23
2002
2003
SASAC
20
2007-2008
2011
5%
26%21
20092010
2002
116%2011172%21
39
the government again lent support to its state champions.

According to the Wall Street Journal, the number of stateowned enterprises as a share of the total continued to fall,
dropping to 5% in 2011. But with SOEs still dominant, their
share of total output remained relatively high at 26%. 21
A lending splurge in 2009-10 as China responded to the
global financial crisis also hurt its future growth prospects.
The ratio of outstanding credit to GDP increased from
around 116% in 2002 to 172% in 2011, according to China
Real Time [Wall Street Journal] estimates.21
Critics of [Mr. Hu and Mr. Wen] argue that reforms stalled
on their watch, as they focused, above all, on keeping China
stable. Hu Jintao and Wen Jiabaos generation could have
achieved a lot, but they did not, said Yao Bo, a former China
Daily columnist. They inherited good foundations, but they
did not make a difference, he added.22
On November 2012, President Xi Jinping assumed
leadership of China as a strong advocate for a new wave of
economic reforms. He inherited an economy that was already
showing a sharp deceleration, likely to sink to 6.8 percent in
2015 and 6.5 percent in 2016, according to a recent forecast
outlined in Newsweek magazine by Wang Tao, the chief China
economist at UBS.2
After years of double-digit annual growth, this type of
slowdown growth that falls too far below 7 percent could
be dangerous for Chinas ruling Communist Party, states
the same Newsweek report, visualizing that the prospect of
young college graduates not being able to find jobs, or of poor
farmers migrating to new urban areas only to be unable to
find work, or of large firms going bankrupt, triggering layoffs,
worries Chinas leadership.2
Mindful of this, Chinas leadership had earlier already
begun an active discussion on the process of promoting and
implementing economic reform but the discussion was not
accompanied by any actual meaningful implementation. As
observed by the US-China Business Council Economic Report
Scorecard, the discussion process really advanced in late
2011, more than a year before Chinas 2012-2013 leadership
transition, just a year before the ascension of Xi Jinping as
Chinas president and head of the Chinese Communist Party
(CCP) and Li Keqiang as premier and head of the powerful
State Council. The US-China Business Council noted that
Mr. Xi came to power as a strong proponent of economic
reform, fueling speculation about its scope, scale, and speed. 1
In 2013, the US-China Business Council continued to observe, Chinas government agencies began issuing official regulations, statements, and editorials supporting reform goals
and hinting at the evolving internal discussions about reform
implementation. These releases covered an array of reform issues, including financial liberalization, the role of state-owned
enterprises (SOEs) in the economy, administrative licensing,
40
and tax reform.1

Also in 2013, two major developments of significance
occurred widely perceived as the response of President Xi
Jinping and his new generation of advisers and leaders to
mitigate the risks of a major economic slowdown:
In September 2013, the Shanghai government announced
the launch of the China (Shanghai) Pilot Free Trade Zone
(SFTZ), a pilot area for broader economic reforms in areas
such as investment approvals, trade facilitation, financial
innovation, risk management, and administrative licensing. 1
In November 2013, President Xi Jinping and his
government laid out, at the Communist Partys Third Plenum
of the CCPs 18th Party Congress, a road map for the
reform necessary to replace the current economic model and
reinvigorate Chinas growth. Known as the Decisions, the
report at its core called for market forces to assume a decisive
role in allocating resources.2 The Third Plenum served as
a platform for the broader reform agenda, through both
high-level statements and a set of post-plenum documents
that provided more detail on the direction of reform. These
documents included key indicators of priorities, including
setting a decisive role for the market in the economy,
reforming Chinas tax and finance regime, and improving
foreign investment1
Daniel Rosen, a principal at the Rhodium Group, a New
York consultancy, and author of a November 2014 report
published by the Asia Society on the prospects for economic
reform in China, argues that Chinas development model is
obsolete and in need of urgent, not gradual, replacement. 2
In Mr. Rosens report, he notes that to justify the risks [of
reform], President Xi quoted an impassioned plea for policy
modernization by his predecessor Deng Xiaoping: the only
way to avoid a dead end a blind alley is to deepen reform
and opening both at home and with the world. 15
In the same report, Mr. Rosen outlines the intriguing
conundrum faced by China in the next several years, speculating that if Beijing shifts direction along the lines it has
announced, the behavior of Chinese companies, government
agencies, and individual members of society is likely to change
in remarkable ways and thereby create opportunities for the
rest of the world. Should the reform program stall, the effects will be just as profound. Either way, Chinas new policy
design, and its success or failure in achieving it, will have a
major influence on the international economy and stability
and security in Asia and beyond.15
The core document issued in November 2013 during the
Communist Partys Third Plenum of the CCPs 18th Party
Congress, known as Decision of the Central Committee of the
Communist Party of China on Some Major Issues Concerning
Comprehensively Deepening Reform, or simply the Decisions,
was accompanied by personal Explanatory Notes under
22
201211
UBS
20156.8%20166.5%2
DanielRosen
Rhodium Group201411
7%
15
2011
2012-2013
1
2013
1
2013
20139
SFTZ
15
201311
<
>
2020
15
1.
2.
3.
4.
5.
201311
6.
7.
8.15
2014
15
41
President Xis name alone. With this, Mr. Rosens report notes,
the president was asserting his power and intention to drive
economic change, rather than settle for a speed limit imposed
by consensus. [President] Xis program set a hard date of 2020
for completing a broad slate of reforms. 15
The first important element in the Decisions was a revised
mission statement for government with instructions for focus on eight core objectives:
1. Maintain macroeconomic stability
2. Strengthen and improve public services
3. Safeguard fair competition
4. Strengthen oversight of the market
5. Maintain market order
6. Promote sustainable development
7. Promote common prosperity
8. Intervene in situations where market failure occurs15
In 2014, President Xi Jinping and his administration then
followed through with bold reform measures in several aspects
of the Chinese economy, confirming, in Mr. Rosens opinion,
that the Decisions was a starting point, not an empty text.15
In June 2014, Communist Party leaders approved a toplevel national plan for deepening fiscal and tax reforms; specifying reform priorities and tasks; and, boldly setting an interim
deadline of 2016 for basically finishing major tasks. Finance
Minister Lou Jiwei elaborated on specific implementation emphasizing measures to reform budget management and
improve the taxation system.15 Although Mr. Rosen stipulates
that further clarification is still required, the Decisions also
touched on reform of Chinas powerfully entrenched StateOwned Enterprises (SOEs). These reform goals include dilution of state shareholding through the introduction of private
shareholders; extracting more profit from SOEs to finance
public expenditures; specifying which industries legitimately
require state control; and making clear that when the state
remains a non-controlling shareholder in a competitive industry, normal market competition should apply. 15
Among SOE reform efforts to date, Mr. Rosens report
observes that President Xis team has successfully gone after
recalcitrant management at many of the most powerful SOEs,
raised SOE dividend payouts to the government, cut executive compensation, and sent auditors to smoke out corruption
and special interest dealings. 15
In June 2014, shareholders in Hong Kong-listed Citic
Pacific recently approved a plan to buy the key operating
assets, including stakes in Citic Securities and Citic Bank, of
parent Citic Group for US$36 billion. China Economic Review
hails this as a landmark deal involving Chinas first SOE to
be run on market-like principles which has been heralded
as a blueprint for state enterprise reform in the Xi Jinping-
42
Li Keqiang era, that the inclusion of private shareholders

into Citic Groups assets will [also] at least improve its
transparency. 19 The report noted many large SOEs including
China Mobile and Sinopec have listed in Hong Kong and
New York over the past two decades as part of governmentdesigned [SOE] restructuring.19
By late August 2014, Mr. Rosens report notes, the State
Asset Supervision and Administration Commission (SASAC)
in Beijing was broadening implementation of governance reforms at central SOEs, and more than 20 provinces had published SOE reform plans that involved listing or selling off
assets in up to 70% of provincial SOEs by 2017. 15
On issues directly and specifically relating to foreign
investors in China, however, it is noteworthy that the
Decisions is still unclear. While President Xis administration
is proposing to permit changes to SOE ownership structures,
it is not clear if foreign investors, with US$ 1.35 trillion in
operations in China, are allowed to buy out and restructure
SOEs in the form of joint ventures. In addition, while the
Decisions promises due process and fair competition policy to
private Chinese firms with regards to operating against SOEs,
it is not clear if private also means foreign private firms.15
The US-China Business Council, in its latest Economic
Reform Scorecard, declares that while Chinas economic
reform plans have the potential to promote reform in ways
that address market access barriers and operational challenges
of concern to foreign companies, these reforms have had only
a limited impact to date. The Scorecard goes further to state
that its main areas to monitor for progress include revisions
to Chinas foreign investment laws, future reductions in the
SFTZ negative list, and stronger efforts to ease administrative
approval burdens that impact foreign companies.1
Newsweek notes that it is precisely these SOEs, the statedominated sectors of the economybanking, energy, telecommunications, steel and autos, among others, which have
greatly benefited under the current economic model, and
which, and in many instances, may fiercely resist meaningful
change.2
A year later, after the recent Fourth Plenum, Mr. Rosen
stresses the urgency of the need for reforms to continue, declaring in his report that The most promising early sign of
reform would be the release of a negative list explaining which
industries are meant to be protected from competition. 15
On November 4, 2014, the Chinese government asked
for suggestions from the public about the revised draft of
the Catalogue for the Guidance of Industries for Foreign Investment. The draft substantially cuts restrictive items from 79 to
35, further lifting the restriction of foreign investment shares,
cutting restrictions of joint-venture/ cooperation items from
43 to 11, and lifting items which had to be controlled by Chinese parties items 44 to 32. The draft removes restrictions for
20146
2016
15
15
15
20146
360
-
[]
19
19
20148
SASAC
20
201770%
15
1.35
15
15
2014114
7935
431144
32
11
11
2013
45%
36%
43
foreign investments on iron and steel, ethane, oil refining, papermaking, coal chemical equipment, automotive electronics,
hoisting machinery, electric transmission and transformation
equipment, brand liquor, feeder railway, subway, some pharmaceutical products and other general manufacturing industries.
Worth mentioning here is that these industries with removal of
foreign investment restrictions have overcapacities. 11
The draft also removes restrictions for foreign investment
on e-commerce, financing companies, insurance brokers,
franchises, land development, and import and export commodity inspection. The draft drew on the experience of some
pilot practices in the Shanghai Free Trade Zone (SFTZ), with
some lists more open to foreign investment than the Negative List of the SFTZ.11
Still, the core of the reform agenda is financial liberalization in general and interest rate liberalization in particular.
Fixed-asset investment in 2013 (investment in plants, equipment and infrastructure) in China was 45 % of GDP, while
household consumption was only 36 % of GDP. A Newsweek
media report indicates that it is a critical part of the reform
process for Beijing is essentially flipping those numbers with
market forces, not the government, dictating where resources
should go in Chinas economy and market forces, not the government, allocating credit.2
Newsweek notes that the subsidized system has led to
overcapacity across the manufacturing spectrum in Chinas
economy. That in turn increases deflationary pressure, as too
few companies have the pricing power to increase profits.
Banks tend to lend money almost unthinkingly to favored
local employersoften state-owned themselves, usually big
employers in any case, with close ties to local party officials.
Since local party officials were usually evaluated by the growth
in jobs created in their own districts, all the incentives were
aligned in one direction: more. More investment, more factories, more jobsand more debt.2
According to Newsweek, to its credit, President Xis
new government has already started to cool bank lending.
Before interest rates can be completely liberalized, however,
a deposit insurance system needs to be set up. Newsweek cites
Zhang Ming, a senior research fellow at the Chinese Academy
of Social Sciences in Beijing, who quotes officials from the
Peoples Bank of China and says that a national deposit
insurance company will be set up by early 2015. Setting up
national deposit insurance, Zhang says, would pave the way
for small and medium-sized banks to fall into bankruptcy
without triggering widespread panic or runs on the remaining
banks. Newsweek notes that Chinas Central bank governor
Zhou Xiaochuan has said deposit rates would therefore be set
free within two years.2
44
When The Going Gets Tough

It is patently obvious that going ahead with the reform
program is bound to inflict pain in some very powerfully
entrenched interests in the Chinese economy, so all China
watchers eyes fall inevitably on the man in the driving seat.
Since assuming the post of general secretary of the
Communist Party in November 2012, Newsweek observes
that President Xi Jinping has launched a tougher than
expected crackdown on corruption, which has included
an investigation of the family of a fellow member of the
Politburo Standing Committee, Chinas highest ruling body.
He is largely surrounded by reform-minded advisers and has
given no sign that he will retreat from his agenda. He has
until 2020 to get what he wants done, and the government
is moving on key areas like financial reform and a host of
other issues, such as allowing private companies to move into
sectors now dominated by state-owned firms. 2
Part of this market transition is the perceived uneven enforcement of Chinas six year old anti-monopoly law.
According to Businessweek, a 2014 report by the U.S.-China
Business Council shows that 86% of member companies
are concerned about Beijings anti-monopoly enforcement
activity, with 30 % fearing it will be used against them.
The report said that China has stepped up investigations into
the auto industry and conducted dawn raids at foreign
IT companies.16 Also according to Businessweek, a separate
2014 survey by Beijings American Chamber of Commerce
in China found that 60 % of respondents believe foreign
business is less welcome in China than before, up from 41%
late last year. Nearly half of those surveyed said they have been
targeted in pricing or anticorruption campaigns.16
The U.S. Chamber of Commerce, the U.S. China Business Council, the European Union Chamber of Commerce in
China and the American Chamber of Commerce in China all
lodged complaints within a few weeks of each other in September 2014.17
In August 2014, Chinese regulators had levied fines of
US$200 million on 10 Japanese auto-part makers for alleged
price manipulation. Audi AG, BMW AG and Mercedes-Benz
parent Daimler AG also suffered similar pricing probes. Both
Microsoft Corp and Qualcomm Inc. were investigated for
potential monopolistic activity. BMW, Audi and Daimler responded to the investigations by cutting prices. Both Qualcomm and Microsoft said that their firms are abiding by laws
in China and are cooperating with authorities. 17
In September 2014, at a meeting with foreign executives
at the China International Fair for Investment and Trade
(CIFIT) in Xiamen, an annual event organized by Chinas
Ministry of Commerce, Vice Premier Wang Yang declared
that China is not targeting foreign multinationals in the en-
20149
17
2015
20148
102
(Audi AG)
(BMW AG)-(Mercedes-Benz)
(Daimler AG)(Microsoft
Corp.)(Qualcomm Inc.)
17
201211
2020
201486%
30%
16
2014
60%
41%
16
20149
20149
NDRC
33533
14
17
17
9
1860
17
45
forcement of its anti-monopoly law. Mr. Wang said that of

335 pricing investigations conducted by the National Development and Reform Commission (NDRC) as of September
2014, only 33 affected foreign companies. Moreover, fines
imposed on state-owned enterprises were not less than those
levied on foreign companies, Mr. Wang said. He added that, if
anything, China will be tougher on Chinese companies than
on their foreign competitors. He explained that the intensified enforcement of the anti-monopoly law reflected Chinas
transition to ongoing supervision of companies and markets,
rather than simply approving companies plans and then failing to monitor their activities. 14
Also in September 2014, Chinese regulators echoed Vice
Premier Wangs comments and denied allegations made by
foreign business groups that China is using its anti-monopoly
law to unfairly target foreign companies. In a rare joint press
briefing, according to the Wall Street Journal, Xu Kunlin, an
official at the National Development Reform Commission
accompanied by senior officials of the Ministry of Commerce
and the State Administration for Industry and Commerce,
three of the main entities that have been spearheading antimonopoly and pricing investigations of the commercial
sector in China, said that China treats foreign and domestic
companies fairly and reiterated that China does not specifically
foreign companies for anomalies probes. 17
The same report speculates that Chinese regulators may be
trying to curry favor with the general population by tackling
high consumer prices in China. Critics claim that Chinese
regulators have used questionable tactics, the Wall Street
Journal says, such as advising companies under investigation
not to seek legal representation, to control product pricing in
industries ranging from dairy to auto parts. Mr. Xu countered
by declaring that those companies have been allowed to bring
their own legal counsel to meetings. Ren Airong, a director of
antimonopoly at the State Administration for Industry and
Commerce, added that during the Microsoft investigation,
regulators were frequently outnumbered by the software
companys lawyers.17
According to the Wall Street Journal, Chinese companies
havent been spared the intensified scrutiny. Last September,
regulators fined three Chinese cement companies a combined
US$18.6 million for price fixing.17
Emphasizing The Rule of Law

Continuing the reform platform boldly introduced
during the Third Plenum in 2013 and recognizing that in
order to make these reforms work, it is vital for China to
have strong regulatory institutions, the Fourth Plenum of
the CCPs 18th Party Congress in October 2014, passed the
Decisions on Major Issues about Promoting the Rule of Law in
46
a Comprehensive Way, laying down the framework for a series

of regulations about the development of a market economy,
including power list, setting restrictions on rent-seeking,
protecting property rights, opposing monopolization and
stimulating innovation. Chinese media reported that all these
regulations aim to draw a line between the government and
the market, and focus on building a legalized, regulatory
economy. These regulations will, the report said, no doubt
play an active role in keeping a fair competitive environment,
improving economic effectiveness. The dividends brought
about by these regulations will help greatly Chinas economic
transformation and upgrading. 9
In an October 2014 editorial released after the Fourth
Plenum (whose main topic of discussion was implementing
a stronger rule of law), Peoples Daily, the de facto broadcaster
of political agendas from the perspective of the Communist
Party of China, defined the rule of law as governance
according to the Constitution. To respect the Constitution
and implement it in letter and spirit is to lay the foundation of
the socialist rule of law with Chinese characteristics.4
That same month, various online Chinese netizens and academics took to the interwebs to express their opinion about
the rule of law in China, as aggregated by China Daily:13
(The following are quoted verbatim from China Daily,
October 21, 2014)
To prevent the authorities from abusing the law, it is
2013
201410
13
20141021
necessary to promote transparency in governance and
allow ordinary citizens to supervise power. Sunshine
is the best cure for corruption and an indispensable
guarantee of the rule of law.
fawan.com1015
hexun.com), 1020
1017
201412
JHarold J. Berman
3
20143
fawan.com, Oct 15
Much needs to be done to establish the rule of law
in a society that had long been under the rule of man.
Officials can abuse their power, while citizens dare not
challenge their illegal behavior. Rooting the spirit of
the rule of law in peoples hearts will be a longer pro-
yicai.com)1015
cess than drafting laws on paper.

Wang Yukai, professor at the Chinese Academy of Governance, yicai.com, Oct 15
Various levels of peoples congresses sometimes en-
trust their legislative power to government agencies.
This has resulted in a number of unjust laws that pro-
tect the agencies interests at the cost of peoples rights.
To promote the rule of law, such distorted practices
1020
must change first, and the absurdity of the same pair

of hands holding both legislative power and administrative power must end.
5
20147
2014
288
21
84
2014121
47
Liu Junhai, professor of law at Renmin University of

China, The Economic Observer, Oct 20
Efforts to promote the rule of law might fail without
the protection of citizens property. We learn that lesson
from numerous violent demolitions of residents houses.
A complete system of property rights law must be established. Then the ordinary people, finding their rights
protected, will support the rule of law from the heart.
hexun.com, Oct 20
President Xi Jinping emphasized obedience to the
Constitution. But China has neither a constitutional
court nor a constitutional review system. We expect
the Fourth Plenum to be innovative and to discuss the
possibility of such a system so that the Constitution
will be truly respected. This is a prerequisite to the
rule of law.
Jiao Hongchang, professor of law at China University of
Political Science and Law, Beijing News, Oct 17 13
In December 2014, China Daily published a special

editorial entitled Constitution Day Matters in which
it points out that given the prevalent ignorance of and
disregard for the Constitution public officials have displayed,
it is necessary to have all State functionaries take an oath to
the fundamental law. It also went on to quote the American
legal scholar Harold J. Berman, who said The law must be
believed in, or it will exist in name only, before going on to
observe that that is precisely where [Chinas] problem lies.3
Anti-Corruption Crusade
In March 2014, while meeting with foreign media reporters after the closing session of the National Peoples Congress
and in response to questions about anti-corruption, Premier
Li Keqiang was quoted as saying: China is a country ruled by
law, no matter who you are, regardless of rank, there is equality before the law. For those who have violated party discipline,
it is necessary according to the law, to be severely disciplined
and punished.5
For the corrupt and for corruption, Premier Li said, China
has zero tolerance. He declared that corruption is the natural enemy of the peoples government.5
In July 2014, Xinhua reported that China had launched its
Fox Hunt operation, targeting corrupt officials and suspects
of economic crimes who have fled the country. Fox Hunts
goal: block the last route of retreat for corrupt officials after
the countrys crackdown narrows the space for abuse of power.
The hunt netted 288 suspects, including 21 who had been at
large for more than a decade, and 84 from developed coun-
48
tries such as the U.S., Canada, Japan and Belgium. An ultimatum was issued December 1, 2014 -- for escaped economic
crimes suspects, mostly corrupt former government officials,
to give themselves up in exchange for lenient sentences.
Xinhua noted the success of the operation as a positive sign
that the legal system and rule of law have been greatly improved
in China, with many countries strengthening cooperation and
coordination with China on law enforcement. Media reports
noted that President Xi Jinping referred to hunting for
economic crimes suspects overseas and recovering embezzled
money on various occasions during trips overseas, in a bid
to strengthen law enforcement cooperation with other
countries such as when visiting Australia, New Zealand, Fiji
or attending the G20 Summit in Brisbane. China has also
helped forge a cross-border law enforcement network to
strengthen transnational anti-corruption cooperation in the
Asia-Pacific region, which was adopted by APEC leaders
during the November 2014 summit in Beijing.6
Closer to home, the anti-corruption campaign continued
in November 2014 when Chinas deputy Procurator-General
Qiu Xueqiang announced that China will establish a new antigraft body to further increase pressure on corrupt officials.7
In an exclusive interview with Xinhua, Mr. Qiu said that the
plan for a new anti-graft agency was put forward by the Party
committee of the Supreme Peoples Procuratorate (SPP) and
was approved by the central authority. A vice-ministerial level,
full-time member of the procuratorial committee will hold a
concurrent post as head of the new anti-graft agency, Mr. Qiu
added. According to Xinhua, China had established the anticorruption bureau under the SPP in 1995 but after almost
20 years of development, the bureau has struggled to meet
the demands for anti-corruption work. Mr. Qiu promised
that the new agency will be better organized and better able
to help the SPP handle major cases and break institutional
obstacles. 7
In addition to tightened scrutiny from a new anti-graft body,
the anti-corruption drive continues unabated as companies
and public service groups supervised by the Communist Party
of China (CPC) and government departments will also face
a new round of top-level disciplinary inspections, Xinhua
reported. Anti-graft measures set by the CPC and disciplinary
inspections by superior authorities have played a great role in
uncovering and correcting misconducts.8
Over the past two years, central inspection teams have
covered Party and government departments at the provincial
level. Next, we will focus on organizations supervised by central authorities, Wang Ying, a senior official with the central
inspection team, said. He refused to disclose the time and duration of the upcoming inspections, but said certain Party and
government departments would be rechecked. In addition to
local Party and government units, the previous four rounds of
20
201411
6
201411
1995
20
76
28

201397
21
25
20145
25
20141121
4225
21
2014
25
201411163
25201410500
26
25
10
49
central inspections had covered seven public service institutes,

six state-owned enterprises and two universities.8
Xinhua observed that central inspections had been
responsible for the downfall of corrupt high-level officials
such as Su Rong, former vice chairman of the Chinese Peoples
Political Consultative Conference National Committee, the
countrys top political advisory body.8
The New Silk Road

The New Silk Road plan, comprising both a land-based
path and a maritime route, has been referred to as a Chinese
national strategy ever since President Xi Jinping first broached
the New Silk Road Economic Belt idea in his speech in Kazakhstan on September 7, 2013.25
The plan envisions an economic cooperation bloc from
China through to the Mediterranean that revives the old Silk
Road trading route. Bloomberg indicates that according to a
map published on the website of the official Xinhua News
Agency in May 2014, the land-based Silk Road starts from
Xian, stretching west through Lanzhou and Urumqi before
running southwest across Central Asia, the Middle East and
Europe. The sea-based Maritime Silk Road goes through
Guangdong and Hainan en route to the Malacca Strait and
Indian Ocean, traversing the Horn of Africa before entering
the Red Sea and Mediterranean. Both roads end up in
Venice.25
Guangdong in early November 2014 already hosted the
inaugural international expo for the maritime Silk Road, with
42 countries participating.25
President Xi has also already ramped up efforts to sell
his new strategy overseas. One month after his Kazakhstan
speech, when addressing the Indonesian parliament in Jakarta, he pitched the 21st Century Maritime Silk Road. During state visits in 2014, he secured verbal commitments from
three countries along the routes -- Tajikistan, the Maldives
and Sri Lanka, while both India and Afghanistan have reportedly expressed interest.25
The president has not hesitated to back up the plan with
the appropriate funding as of November 2014, media reports announced that China is planning a US$16.3 billion
fund to finance construction of infrastructure linking its markets to three continents along the New Silk Road route.25 He
also allocated US$50 billion in October to establish an Asian
Infrastructure Investment Bank to lend money to build roads,
railways and other transport links in poorer parts of Asia. 26
Experts expound on the New Silk Road plans significance,
that this could mean a shift in Chinas strategic thought,
says Zhang Yunling, director of the Institute of Asia-Pacific
Studies at the Chinese Academy of Social Sciences. To
Bloomberg, Mr. Zhang added that: The past three decades of
50
Chinas development have been focused on absorbing foreign

investment and the next step will be about the outflow of
Chinese development to its neighbors. 25
Moving Forward: Hope

Every year, China coins a catchphrase to describe the year
that has just passed, an activity organized by the governmentbacked Chinese National Language Monitoring and Research
Center in tandem with a publishing house and the website of
Peoples Daily. This year, according to Xinhua, for the first time
Chinese Internet users were invited to assist with the selection
process.10
According to Xinhua, the recommendations, which
flooded the Peoples Daily website by the thousands, include
the phrase pai ying da hu which means to hunt tigers and
swat flies, a phrase used by President Xi Jinping to show his
determination to root out corrupt officials, no matter how
powerful.10
Another recommendation is fa or law, which was
picked as the theme for this years Fourth Plenum. The word
not only reflects the fact that the government attaches a high
importance to it, it also means that more efforts are needed to
raise public awareness of rule of law, wrote one microblogger
named Zhou Yanrong on the Peoples Daily website.10
Mao Yushi, an economist, told local media that he had
recommended the character pan meaning expectations.
He said: I expect progress in Chinas constitutional reform,
which is a key issue in China now.10
Another scholar, Hao Mingjian the editor-in-chief of a
well-respected magazine that focuses on the study of Chinese
language suggested the character zhen which can be
translated to mean cheer up or rebounce. Mr. Hao said
he thinks 2014 was a year of cheer and hope, thanks to the
government crackdown against corruption. 10
While it may be simplifying things a tad to use a catch
phrase it is rather remarkable at how apropos these words do
seem to be - hunt tigers and swat flies, law, expectations,
cheer and hope at succinctly encapsulating the breadth and
volume of what has transpired this year in the areas of reform,
anti-corruption and the rule of law in China. Yes, there are
challenges and occasional setbacks but reforms are ongoing
foreign companies in China can practise patience, exercise
vigilance and hope for the best.
Chinas leaders are not sitting on their laurels either. In
mid-December 2014, as of this writing, Chinas top leaders
began meeting to map out economic plans for 2015.
According to Bloomberg, as the economy continues to slow
with China facing deflation risks, economists expect the
government to lower next years economic growth target to
7 percent from about 7.5 percent this year as it adapts to
10
10
10
201410
2014
2014
12
2015
7.5%7%
24
51
the new normal of a slower expansion pace. Analysts say

this signals room for further monetary easing, with more
flexibility in combining interest rate and reserve requirement
cuts with targeted easing measures to maintain macro stability
and address structural imbalances. 24
Works Cited
1
USCBC Economic Reform Scorecard. US-China Business

Council. June 2014.
Bill Powell. Is This The End of Chinas Economic Miracle?

Newsweek. November 26, 2014. http://www.newsweek.
com/2014/12/05/china-after-gold-rush-286757.html
China marks Constitution Day amid legal push. China

Daily. December 4, 2014. http://www.chinadaily.com.cn/
china/2014-12/04/content_19025015.htm
Editorial by
Peoples Daily: Leapfrogging Development of the Rule of Law
with Historical Significance)Peoples Daily, October 23, 2014.
http://opinion.people.com.cn/n/2014/1023/c1003-25896876.
html
Li Keqiang: Equality before the law, regardless of rank. Central

Discipline Inspection Commission of Supervision, Peoples
Republic of China. March 14, 2014. http://www.ccdi.gov.cn/
gcsy/201403/t20140314_20079.html
Yuan Can. China Voice: Leave no space for escaped corrupt

officials. Xinhua. November 25, 2014. http://en.people.
cn/n/2014/1125/c90785-8814009.html
Liang Jun. China to set up new anti-corruption agency. Xinhua.

November 3, 2014. http://en.people.cn/n/2014/1103/c907858803765.html
Luan. Chinas graft inspection to target state-owned groups.

Xinhua. November 14, 2014. http://news.xinhuanet.com/
english/china/2014-11/14/c_133790640.htm
Li Jinlei.
Xinhua. November 1, 2014. http://finance.ifeng.
com/a/20141101/13238945_0.shtml
10
Zhang Xuejian, Ma Si. APEC Blue, Tigers and Flies: What Chinese
Phrase Best Describes 2014? Wall Street Journal. November 28,
2014.http://blogs.wsj.com/chinarealtime/2014/11/28/apec-bluetigers-and-flies-what-chinese-phrase-best-describes-2014/
Xiao Feng. . Xinhua.

November 12, 2014. http://www.qianzhan.com/indynews/
detail/150/141112-f7dff52d.html
11
52
53
12
Ministry of Commerce: China will set up first foreign investment

negative list Xinhua. September 10, 2014. http://www.yicai.
com/news/2014/09/4017187.html
13
Let rule of law take root. China Daily. October 21, 2014.http://
usa.chinadaily.com.cn/epaper/2014-10/21/content_18777973.
htm
14
15
16
54
Kenneth Jarrett. Anti-Monopoly Cases Tougher on Local

Companies. Insight, The Voice of the American Chamber of
Commerce in Shanghai. September 9, 2014. http://insight.
amcham-shanghai.org/anti-monopoly-cases-tougher-localcompanies-says-vice-premier/
Daniel H. Rosen. Avoiding the Blind Alley: Chinas Economic
Overhaul and its Economic Implications. An Asia Society
Policy Report produced in collaboration with Rhodium
Group. October 31, 2014. http://asiasociety.org/files/pdf/
AvoidingtheBlindAlley_FullReport.pdf
Dexter Roberts. US Companies Fear Growing Protectionism
in China. Businessweek. September 3, 2014. http://www.
businessweek.com/articles/2014-09-03/chinas-anti-monopolypush-creates-anxiety-for-u-dot-s-dot-businesses
17
Yang Jie, Laurie Burkitt. China Denies Using Anti-Monopoly

Law to Target Foreign Companies. Wall Street Journal. September
11, 2014. http://www.wsj.com/articles/china-denies-usingantimonopoly-law-to-target-foreign-companies-1410429955
18
Russell Leigh Moses. Of Politics, Pushback and Publishing in

Beijing. Wall Street Journal. August 16, 2013. http://blogs.wsj.
com/chinarealtime/2013/08/16/of-politics-publishing-andpushback-in-beijing/
19
China shuffles the decks of state ownership. China Economic

Review. June 18, 2014. http://www.chinaeconomicreview.com/
china-soe-reform-citc-pacific-hong-kong
20
Yongnian Zheng and Minjia Chen. Chinas Recent State-Owned

Enterprise Reform and its Social Consequences. China Policy
Institute, University of Nottingham, UK. June 2007. http://
www.nottingham.ac.uk/cpi/documents/briefings/briefing-23china-state-owned-enterprise-reform.pdf
21

Wall Street Journal. November 16, 2012. http://blogs.wsj.com/
chinarealtime/2012/11/16/charting-chinas-economy-10-yearsunder-hu-jintao/
22
Malcolm Moore. Communist Party Congress: A Decade

Under Hu Jintao and Wen Jiabao. The Telegraph. November
14,2012.http://www.telegraph.co.uk/news/worldnews/asia/
china/9677748/Communist-Party-Congress-a-decade-underHu-Jintao-and-Wen-Jiabao.html
23
Nick Lyne. China: Sixty Years of Progress. FIRST Magazine

Special Report. 2009. http://www.firstmagazine.com/Publishing/
SpecialReportsDetail.aspx?RegionId=4&SpecialReportId=68
24
China Deflation Risk Deepens Signaling Room for Easing:

Economy. Bloomberg. December 10, 2014. http://www.
bloomberg.com/news/2014-12-10/china-factory-gate-deflationdeepens-as-consumer-prices-moderate.html
25
Ting Shi and Steven Yang. China Planning $16.3 Billion Fund
for New Silk Road. Bloomberg. November 5, 2014. http://
www.bloomberg.com/news/2014-11-04/china-said-to-plan-163-billion-fund-to-revive-silk-road.html
26
The New Silk Road: Stretching the threads. The Economist.

November29,2014.http://www.economist.com/news/
china/21635061-impoverished-south-west-china-seeks-becomeeconomic-hub-stretching-threads
55
1.5 Shanghai Free Trade Zone
1.5
2009
1210.4
2011
20133
5
201373
.1
T THE END of 2009, the Shanghai Free Trade

Zones Administration was established and since then,
the organization has been overseeing three free trade zones
in Shanghais east coast, including Waigaoqiao Free Trade
Zone, Yangshan Free Trade Port Area and Shanghai Pudong
Airport Free Trade Zone, covering 1,210.4 square kilometers
of land. This was the predecessor of the China (Shanghai)
Pilot Free Trade Zone. Two years later, in 2011, the Shanghai
government applied to build a free trade zone inside the
Shanghai Free Trade Zones. In March 2013, Premier Li had
visited the Waigaoqiao free trade zone, and encouraged the
setting up of a free trade pilot zone in Shanghai. By May, the
plan was officially sent to the central government to approve.
The plan was first announced on July 3rd that year by the
State Council who had approved the plan and was personally
endorsed by Premier Li Keqiang who said he wanted to make
the zone a snapshot of how China can upgrade its economic
structure.1
The Shanghai FTZ opened to great fanfare and high
expectations on September 29, 2013. Backed by Premier
Li, the Shanghai FTZ was intended to provide a space for
the government to experiment with reforms and provide
companies with more freedoms in investment and how they
conduct business. According to the American Chamber of
Commerce in Shanghai, American businesses in China were
initially very optimistic about the FTZ and the prospects for
potential market access openings, financial sector deregulation
and improvements in trade facilitation. 2
As of September 15, 2014, some 12,226 companies have
registered in the SFTZ, including approximately 1,677 foreign firms, many from Hong Kong and Macau. Despite this,
however, experts state that only 10 percent are engaged in any
taxable activity.2 Newly registered foreign businesses, excluding those from Hong Kong, account for only about 5 % of
the total at the SFTZ. Foreign trade in the Shanghai FTZ
reached 747.5 billion yuan (US$121.7 billion) in its first year
of operation.11
The Shanghai FTZ marked the first time that the Chinese
government followed a Negative List approach in supervising investments. In the zone, foreign investors may participate
in any activities or investments that are not on the negative
list to the same extent as Chinese domestic investors. Previously, China had delineated areas for foreign investment and
Chinese regulators acted as gatekeepers.2
The concept is hardly new. Trade zones have been around
since the early days of Deng Xiaopings reforms, when
Chinas first special economic zones, notably in Shenzhen,
56
Guangdong, were created the strategy was, Wall Street

Journal observes, start small in a manageable laboratory and
expand once youre sure the results wont prove dangerous. 10
So what does Beijing want from a free trade zone?
According to the Framework Plan for the Shanghai Free
Trade Zone, the main goals are to expedite the functional
transformation of government, explore administrative
innovation, stimulate trading and investment facilitation, and
accumulate experience on achieving a more open Chinese
economy. In short, main goals seem to include opening up
the service sector and allowing more opportunities for foreign
investment.9 Shanghai Party chief Han Zheng told Caixin
that the Shanghai Free Trade Zones crucial reform has been
to transform the governments role, adding that the most
important task now involves reforming the administrative
review system.9
Xinhua quotes Han Zheng, Shanghai branch secretary
of Chinas Communist Party, as stating that the success of
the SFTZ is its replicability the mechanisms which can be
copied and promoted on a national scale. Mr. Han said:
The FTZ is a testing ground for all of China, not our private
plot. New measures here should be applicable elsewhere.
He declared that these new measures reflect Chinas intent to
continue opening up and deepen reform, saying, It is not
just for local development. He also added that a power list
within the next two or three years to increase transparency
is being considered.17
What do the features of the SFTZ mean for foreign
investors? Forbes enumerates:
The full convertibility of the yuan. Though the State
2013929
convertible by 2016, the SFTZ not only accelerates

the timetable but helps put it in action on the global
market.
13
2014915
122261677
5%
7475
121711
create more efficient trading.13

Even before the free-trade zone opened, the value of
real estate skyrocketed in the surrounding areas; there
are no more limits on the foreign percentage of joint
201112016
13
13
13
2014
10
construction projects with Chinese developers within

the SFTZ.13
Foreign companies are already allowed to invest freely

in bankswith reduced transaction costs for firms to
17
Administration of Foreign Exchange announced

in January 2011 that the currency would be fully
13
2013
57
China has started trading gold internationally within the

SFTZ starting in the final quarter of 2014. The newly
lifted restrictions are already having an effect; Singapore
is introducing a physical gold contract with China.13
Launched a day ahead of the October 1 National Day

holiday in 2013, the SFTZ had earlier been tipped to be
the testing ground for liberalizing interest rates, now subject
to central bank guidelines, and contribute to the longerterm goal of opening the capital account, which covers
investments. However, the Wall Street Journal was quick
to point out that these reforms got no specific mention on
opening day. According to an official statement, financial
experiments would proceed as conditions allowed and risks
would be controlled. Rules would be put in place over a
three-year period. The opening days no-show by Premier Li,
a key supporter of the SFTZ, sent a message of top-level
uncertainty about the SFTZ. 10
A negative list running to 10 pages with more than 200
restrictions was later announced. Those included limits on investments in auto, banking, insurance, telecommunications
and broadcasting as well as cinema, film and TV production. Investment in news portals and online gaming would
be banned. 10 In July 2014, the Shanghai municipality unveiled an upgraded version of the zones negative list with
the number of items on the list cut from 190 to 139, hailed as
a major breakthrough. 3
A thorough analysis of the changes to the revised negative
list, as conducted by Dezan Shira & Associates, reveals greater
cause for celebration.5Overall, the majority of these changes
are concentrated in the categories of (C) Manufacturing and
(G) Transportation, Warehousing, and Postal Services, and to
a lesser extent (F) Wholesale & Retail. The financial industry
received a strong boost in the revisions, with foreign investment now freely permitted into investment banks, financial
companies, trust companies, and currency brokerage companies. Terms governing investment into Chinas booming
healthcare industry were also revised, including abolition of
the RMB 20 million minimum investment and maximum
operation period of 20 years for medical institutions.5 The
cybercaf industry was liberalized, along with a larger trend
of relaxed restrictions on the entertainment industry in the
FTZ where previously Chinas twelve-year ban on video game
consoles was lifted. Investors from Hong Kong and Macau
were granted several preferential policies by the revised Negative List including freer investment into the construction and
operation of movie theaters, as well as a wide range of aviation
transport ground-based services.5
During President Xi Jinpings first visit to the SFTZ in
May 2014, he delivered a cautious endorsement. According
to Xinhua, President Xi declared: The decision to build the
58
zone was an important step of Chinas reform and opening

up in modern times. He added that management of the
SFTZ should combine structural reform and the exploration
of new methods, while controlling risks and gradually
making improvements. A few days later, he commented
that, The experience gained at Chinas Shanghai Pilot Free
Trade Zone (Shanghai FTZ) can be copied to more places as
soon as possible, comparing it to seeds cultivated from an
experimental plot. We should plant these seeds in more land
so that flowers will blossom and fruits be harvested as quickly
as possible. 11
Business leaders view the Presidents visit as symbolically
important and his endorsement, though mild, as significant,
say the Wall Street Journal. Even a brief visit by the president
to the SFTZ, said Stefan Sack, a Shanghai representative
from the European Chamber of Commerce in China, gives
it additional value.11 In October 2014, President Xi Jinping
made his endorsement even clearer by declaring, that more
than a year after its launch, the example of the SFTZ should
now be copied in more provinces as soon as possible.18
In September 2014, Premier Li Keqiang did a two-day
tour of the SFTZ, where he re-affirmed the central governments commitment to the FTZ, pushed FTZ authorities to
accelerate and deepen reforms, and stated that foreign and
domestic companies should be treated equally.2
Financial analysts say hints of positive change are appearing, in particular ways to move money into and out of China
using business entities registered in the zone. The adjustments
are highly technical but do suggest efforts to introduce a more
market-oriented currency-exchange policy.11
Measures such as the establishment of Free Trade Accounts
(FTA) which will allow companies registered in the FTZ to
conduct cross-border transfers of foreign currency and RMB
free from existing restrictions, cash pooling of RMB accounts
via a consolidated account, elimination of the SAFE approval
requirement for overseas investments under US$300 million,
streamlined customs and CIQ clearance procedures, and the
establishment of a Shanghai International Arbitration Court
aims to provide fairer dispute resolutions are examples of the
tangible benefits to those in the FTZ. 2
The most successful reforms have been rolled out quickly
nationwide, increasing the impact of the reforms. For example, Customs recently announced that it would roll out
nationally 14 Customs measures launched in the FTZ. The
measures simplified the efficiency of customs clearance procedures, boosting trade volume in the zone and improving the
overall business environment. In the financial sector, cancellation of the minimum capital requirement was first relaxed
in the FTZ and rolled out nationally in March 2014. Elimination of government-determined interest rates on forex accounts under US$3 million started in the zone and has now
10
10200
10 20147
190139
3
5
C
GF
2000
20.5
5
20145
11
Stefan Sack
11201410
18
20149
11
FTA
SAFE3
14
20143
300
59
expanded elsewhere, as has the planned elimination of restrictions on wholly foreign-invested hospitals.2
An example of how the SFTZ provides real business advantages is demonstrated by Amazon which decided establish a logistics warehouse in the FTZ and which will allow Amazon to open
its global platform for domestic markets and also to make crossborder payments and experiment with other financial reforms.2
A year after the launch, Beijing said it was lifting
restrictions on foreign investments in several industries,
such as the shipping sector in the SFTZ, reported the South
China Morning Post, in a bid to encourage the worlds biggest
shipping lines to expand in China, as they could now directly
tap the booming business at the Yangshan deep-water port,
which is part of the FTZ. The new measures also include
lifting of some restrictions in the manufacturing sector, such
as on motorcycles, aviation engine parts and railway-bridge
and station equipment, also aimed at wooing foreign investors
to the zone.3
The policy change follows Premier Li Keqiangs statement
in September 2014 that market forces would be allowed to
play a dominant role in the FTZ. The South China Morning
Post reports, according to a circular to ministries and provincial
governments from the State Council, more than 20 sectors
are to be opened up to overseas investors in the FTZ. For
the first time, they will be allowed to own a controlling stake
in joint-venture shipping agencies, with the investment cap
raised from 49 to 51 per cent. Foreign investors will also be
allowed to engage in salt wholesaling.3
In November 2014, the Post reported that Shanghai Mayor
Yang Xiong promised to speed up development of the SFTZ
as a chorus of foreign companies expressed disappointment
over the pace of pledged reforms a year after the zones opening. Mayor Yang said the government would work towards
making the yuan freely convertible, among other financial
liberalization plans for the FTZ, but gave no timetable. Yang
said the municipal government would also offer a revised
negative list in 2015, following criticism that the two previous lists were too long.4
One year after the launch, as the Wall Street Journal reports:
The removal of the projects leader on September 15 marked
the latest setback for the free-trade zone. 12
The seeming lack of clarity and glacial pace of reform in
Shanghai has not deterred Guangdong, which is attempting
financial experiments with Shenzhens Qianhai area, and is
seeking a new zone which, local media speculate, may be even
more ambitious than Shanghais possibly linking to Hong
Kong and Macau. And Guangdong isnt the only place waiting in line. Wuhan, Tianjin and even Ningxia, are also contemplating zone possibilities. 10
According to recent news reports, the State Council has
asked the Ministry of Commerce (MOFCOM) to give Tian-
60
jin and Guangdong assistance in drawing up their free trade

zone framework designs. Chengdu of Sichuan, Hefei of Anhui, Yinchuan of Ningxia and Shenyang of Liaoning have also
started to draw up proposals for their own free trade zones. 8
Guangzhou announced the scope of its proposed FreeTrade Zone (FTZ) plan in its unified Guangdong-Hong KongMacau FTZ application. In September 2014, Guangzhou
Mayor Chen Jianhua revealed that in the application
submitted to the State Council, two areas totaling 15.2
square kilometers were added to the proposed FTZ. These
are the 7.8 square kilometer Nansha Bonded Zone, to the
south of the city, and the 7.4 square kilometer Baiyun Airport
Economic Zone, which lies in the north. The former includes
a port, while the latter features Guangzhous international
airport.6The Guangzhou FTZ lists logistics, manufacturing,
land development and finance as its key industries. Although
other parts of the Nansha New Area and the South Railway
Station area have not been included, Guangzhous contribution
to the entire Guangdong-Hong Kong-Macao FTZ is larger
than many had originally predicted.8
Earlier, in November 2013, Governor Zhu Xiaodan had
declared Guangdongs hopes to become the home of Chinas
next free trade zone. The proposed Pearl River Delta Free Trade
Zone would encompass the special administrative regions of
Hong Kong and Macao as well as parts of the cities of Shenzhen, Zhuhai, and Guangzhou, making it potentially much
larger than the current free trade zone in Shanghai. The plan
received a boost when the Third Plenum expressed general
support for opening additional free trade zones in China.9
In June 2014, however, the government suspended the
approval of any further Free Trade Zones (FTZ) following a
wave of proposals imitating the Shanghai FTZ, according to
Xinhua. While Premier Li Keqiang had previously announced
that pilot projects would commence in several areas, these have
been indefinitely stalled based on a flood of unsatisfactory
applications.7 It was reported that local governments wanted
to secure licensing for such zones solely as means to secure
funding for land redevelopment.7
The ban affected some 20 cities believed to have submitted
applications for FTZs. Included is the Guangdong Free Trade
Zone, which had already received approval yet has now been
caught up in the blanket ban.7 Faced with downward pressure on GDP growth, many of these places have once again
resumed their free trade zone planning. Premier Li Keqiang
has said China would sum up the experience of the Shanghai
Free Trade Zone at an appropriate time and promote the replicable experience to other parts of the country. 8
In January 2014, Xinhua had erroneously reported that the
Ministry of Commerce (MOFCOM) had granted approval to
twelve further Free Trade Zones. Later this was revised in light
of a MOFCOM announcement that no further FTZs had
20149
20
49%51%
201311

201411
20132014
2015
4
2014915
12
10
MOFCOM
20149
7.8
7.415.2
6
20146
7
20
8
20141
MOFCOM
7
20146
202065
250
4000
65014
2012
61
yet received approval, though a number of applications were

subject to ongoing review, including zones in Guangdong and
Tianjin.7
By late June 2014, the overall plan for the proposed Guangdong free trade zone was back on track, having undergone
two rounds of consultation with the relevant ministries and
commissions. The proposed Guangdong FTZ will cover four
areas, namely, the Nansha New Area Bonded Zone, Qianhai
New Area, Hengqin New Area and Guangzhou Baiyun Airport Comprehensive Bonded Zone.6
Qianhai in Shenzhen is one of more than 10 newly created
or proposed special zones. Six years from now, the New York
Times reports that Shenzhen officials envision, Qianhai will
be a thriving, international finance district in Shenzhen to
rival Manhattan, the city of London or Hong Kong, with
a working population of 650,000 people generating annual
gross domestic product of around US$25 billion in Qianhai
by 2020 plans that call for total investment of nearly 400
billion renminbi, or about US$65 billion.14
Officials in Qianhai like to point out that President Xis
first trip outside Beijing after assuming leadership of the
Communist Party in late 2012 was to Shenzhen and Qianhai,
where he spoke of national rejuvenation and the pursuit of
what he has called the Chinese dream. The goal of Qianhai is to be a dream factory for the Chinese dream, said He
Zijun, deputy director of the Qianhai Authority, which administers the zone.14
In January 2014, according to the New York Times,
New York property developer Silverstein teamed up with
a Chinese firm in a winning bid of 13.4 billion yuan for a
plot of land in the district. The developer acquired rights to a
550,000-square-foot site, where it plans to build offices, retail
outlets, service apartments and hotels covering a total floor
area of nearly five million square feet. 14
In August 2014, the Peoples Bank of China, the China
Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory
Commission reached a consensus and put forward 26 policy
measures in support of financial reform and innovation in
Qianhai. For example, the China Securities Regulatory Commission agrees to allow the Shenzhen Stock Exchange to establish a cross-border investment and financing platform for
private equity products in Qianhai, allow qualified domestic
and foreign institutions and individuals to take part in investment transactions, and allow foreign enterprises to carry
out debt financing and equity financing on that platform.
The central bank agrees to let the overseas parent or holding
companies of companies in Qianhai issue yuan denominated
bonds in the domestic market and transfer the funds raised
to offshore markets. Besides supporting Qianhai in setting
up financial leasing companies, the China Banking Regula-
62
tory Commission also supports existing trust companies to

set up branches in Qianhai and allows the Qianhai branches
of mainland-funded banks with offshore business license to
obtain an offshore business license. The China Insurance
Regulatory Commission also agreed to let Qianhai launch the
Shenzhen-Hong Kong stock connect pilot scheme, starting
with reinsurance services.8
On December 13, 2014, both Xinhua and China Daily
reported that at a State Council meeting the day before, three
new pilot free trade zones, namely in Guangdong, Fujian and
Tianjin, will be launched to test greater opening-up and
tap the economys huge potential to hedge against mounting
downward pressure next year. The report said that the State
Councils proposal can win the top legislatures approval at
the end of December at the earliest. A statement issued after
the meeting, stated that the three areas will take on most
of the reform initiatives now being applied to the Shanghai
pilot zone and will be built based on existing development
parks, with Xinhua speculating that these are likely going
to be the Qianhai Special Economic Zone in Shenzhen,
Guangdong province, the Tianjin Binhai New Area and
Pingtan Comprehensive Pilot Zone in Fujian.19
While the Shanghai FTZ still has far to go to satisfy its
many critics, the increase of support from the central government and the small but significant reforms implemented in
the FTZ indicate that the FTZ still has the potential to play
a significant role in Chinas economic reform process as well
as deliver concrete benefits to foreign companies registered in
the zone.2
Ultimately, the Shanghai Free Trade Zone poses an
important test for a possible China-U.S. bilateral investment
treaty, as Peking University professor Yiping Huang writes for
the East Asia Forum.
The next few years will be interesting for Chinas bold experiments in free trade. Will the government slowly ease away
from some restrictions, as Shanghai Party chief Han Zheng
predicts? Will the central government continue to support the
opening of other free trade zones, such as the one Guangdong
envisions for the Pearl River Delta? Will the reforms truly allow for market forces to play a larger role in Chinas financial
markets, including setting both the value of the RMB and
interest rates? It remains to be seen if Chinas flirtation with
free trade will migrate to the national stage, thereby completely transforming how the worlds largest economy does
business.9
14
20141
Silverstein
134
55
50014
20148
26
8
20141213
1212
12
19
63
Works Cited
10
William Kazer, Olivia Geng, Li Yue. Free-for-all over Chinas

free trade zones. Wall Street Journal. October 17, 2013. http://
blogs.wsj.com/chinarealtime/2013/10/17/free-for-all-overchinas-free-trade-zones/
Background of Shanghai FTZ. CCTV.com. September23,2013.

http://english.cntv.cn/program/bizasia/20130926/101804.shtml
Veomayoury Baccam. Shanghai FTZ Promises New Reforms

and Vows to Further Trim Negative List. Insight, American
Chamber of Commerce in Shanghai. September 29, 2014.
http://insight.amcham-shanghai.org/shanghai-free-trade-zonepromises-greater-reforms-shorter-negative-list-second-year/
11
James T. Areddy. Xi Jinpings Shanghai Free-Trade Zone Remarks

Seen as Mild, but Welcome Endorsement. Wall Street Journal.
May 25, 2014. http://blogs.wsj.com/chinarealtime/2014/05/25/
xi-jinpings-shanghai-free-trade-zone-remarks-seen-as-mild-butwelcome-endorsement/
Beijing eases restrictions on foreign firms in year old Shanghai

free trade zone. South China Morning Post. September 29, 2014.
http://www.scmp.com/business/economy/article/1603520/
beijing-eases-restrictions-foreign-firms-year-old-shanghai-free
12
Shen Hong. Shanghai Free-Trade Zone, One Year On,

Disappoints. Wall Street Journal. September 29, 2014. http://
blogs.wsj.com/chinarealtime/2014/09/29/shanghai-free-tradezone-one-year-on-disappoints/
Shanghai mayor pledges to speed up financial reforms in free trade

zone. South China Morning Post. November 3, 2014. http://
www.scmp.com/business/china-business/article/1630765/
shanghai-mayor-pledges-speed-financial-reforms-free-trade
13
Daniel Broderick. What Do Chinas New Free Trade Zones

Mean for North American Businesses? Forbes. August 14, 2014.
http://www.forbes.com/sites/hsbc/2014/08/14/what-do-chinasnew-free-trade-zones-mean-for-north-american-businesses/
Matthew Zito, Camille Chen and Rainy Yao. Shanghai FTZ

Revised Negative List Introduces Targeted FDI Reforms. China
Briefing, Dezan Shira & Associates. July 3, 2014. http://www.
china-briefing.com/news/2014/07/03/shanghai-ftz-revisednegative-list-introduces-targeted-fdi-reforms.html
14
Neil Gough. A Muddy Tract Now But By 2020, Chinas

Answer to Wall Street. the New York Times. April 2, 2014.
http://dealbook.nytimes.com/2014/04/02/a-financial-center-isenvisioned-on-a-muddy-tract-in-southern-china/?_php=true&_
type=blogs&module=Search&mabReward=relbias%3Aw&_r=0
Liu Zhen. Guangzhou Reveals Free Trade Zone Application. Asian

Legal Business. February 25, 2014. http://www.legalbusinessonline.
com/news/guangzhou-reveals-free-trade-zone-application/63752
15
Shanghai Trims List of Restrictions on Foreign Investment.

Reuters/the New York Times. July 1, 2014. http://www.nytimes.
com/2014/07/02/business/international/shanghai-trims-list-ofrestrictions-on-foreign-investment.html?_r=0
China Puts The Brake on Additional Free Trade Zones. China

Briefing, Dezan Shira & Associates. June 5, 2014. http://www.
china-briefing.com/news/2014/06/05/china-puts-breaksadditional-free-trade-zones-citing-poor-applications.html
16
Xi says China to found more FTZs following Shanghais

example. Xinhua. October 27, 2014. http://news.xinhuanet.
com/english/china/2014-10/27/c_133746159.htm
17
Replicability key to Shanghai FTZ success. Xinhua. September

28, 2014. http://news.xinhuanet.com/english/china/201409/28/c_133680190.htm
18
Mary Swire. China Planning Additional Free Trade Zones. Taxnews.com. October 30, 2014. http://www.tax-news.com/news/
China_Planning_Additional_Free_Trade_Zones____66244.html
19
Gu Liping. Three pilot trade zones proposed. Xinhua. December

13, 2014. http://ecns.cn/business/2014/12-13/146478.shtml
64
MOFCOM to lend help to planned free trade zones in Tianjin and

Guangdong. Hong Kong Trade & Development Council Research.
September 26, 2014. http://economists-pick-research.hktdc.
com/business-news/article/Business-Alert-China/MOFCOMto-lend-help-to-planned-free-trade-zones-in-Tianjin-andGuangdong/bacn/en/1/1X000000/1X09ZGN1.htm
Shannon Tiezzi. Guangdong: Chinas Next Free Trade Zone?
The Diplomat. November 29, 2013. http://thediplomat.
com/2013/11/guangdong-chinas-next-free-trade-zone/
65
1.6 US-China Business Investment Treaty (BIT)
URING THE 2013 Strategic and Economic Dialogue,

the United States and Chinathe worlds two largest
economies agreed to restart negotiations on a bilateral
investment treaty (BIT). The United States currently has BITs
with 42 countries. 1
A BIT is an agreement between two countries that
outlines a road map for foreign investment in each others
countries. When countries enter into a BIT, both countries
agree to provide protections for the other countrys foreign
investments. A BIT provides major benefits for American
investors in another country, including national treatment,
fair and equitable treatment, protection from expropriation
and performance requirements for investments, and access
to neutral dispute settlement. A BIT ensures that foreign
governments will treat American investors the same as domestic
companies, a practice known as national treatment. BITs
also guarantee that American investors are given the same
types of preferences that other foreign investors are given in
a market, also called most-favored nation treatment. Under
a strong US-China BIT, the Chinese government would treat
US companies the same as Chinese companies. .1
The promise of equal treatment applies to investments
made prior to the time the BIT enters into force and to new
investments in the market. That means that BITs bar foreign
governments from using investment restrictions, like ownership caps, to prevent American companies from investing in
their markets. 1
This is particularly important in China, which currently
restricts investment in more than 100 industry sectors,
ranging from manufacturing to services to agriculture. By
contrast, the United States restricts foreign investment
outright in only five sectors, and maintains 24 mostly minor
conditions or restrictions that would be removed if the United
States is given reciprocity in Chinas market. Since foreign
investors already enjoy access to the United States market,
a BIT would primarily serve to better protect American
investors in China.1A BIT would ensure US companies
would not have to meet unfair investment requirements,
such as licensing requirements, which are not required of
Chinese companies. The US-China Business Council states
that currently, US investors often face difficultiesand at
times discriminationwhen applying for business licenses in
China.1
BITs also protect investors in several other ways. BITs limit
a foreign governments ability to require that American investors meet burdensome conditions to operate in their markets.
Finally, BITs ensure that American investors can move capital
66
freely in and out of the country in which they have invested.1

BITs give American investors access to a neutral, third-party arbitrator when a problem arises with another investor or
the host government. This provision can be extremely helpful
for investors in countries where the legal system is not mature
or well-established. Notably, the dispute settlement provisions
do not give foreign investors more rights than those already
established in US law, thanks to Americas mature legal system, but the benefits for American investors in China would
be significant. 1
BITs are tools to break down market access barriers and
give American companies greater protections overseas, but
they cant address every problem that companies face abroad.
For example, American companies in China face challenges
in protecting and enforcing their intellectual property rights
(IPR). A BIT would not fix those problems directly. Indirectly,
however, a BIT would help US companies protect their IPR
in China. The BIT would remove ownership restrictions that
force US companies in some sectors to partner with Chinese
firms in order to invest. Without these restrictions, companies
are in a better position to protect their IPR because they can
own 100 percent of their operations instead of sharing their
IPR with a partner.1
A BIT does not address government subsidies to Chinese
companies or give equal access to government procurement
markets. Those issues must be addressed under separate initiatives, either bilaterally or by getting China to join the World
Trade Organizations (WTO) Government Procurement
Agreement.1
A BIT would, however, bar the Chinese government from
granting preferential treatment to state-owned enterprises
(SOEs) and private Chinese companies. In addition, a BIT
would obligate SOEs to treat US investors fairly. This requirement would help protect US companies in China from unfair
treatment. Some SOEs are given authority to regulate aspects
of an industry even though they act as a commercial competitor in that industry. In these situations, the BIT would ensure
that US companies competitors do not have the ability to
regulate in their own favor.
Even if a BIT cannot address all SOE-related issues, even
if issues are currently outside of the BITs scope a BIT is
still good for Americans operating businesses in China. The
Obama administration spent three years revising the US
Model BIT, which is used as a basis from which the US
negotiates its BIT agreements. In that process, the United
States made important modifications that effectively address
concerns about SOEs.1
1.6
2013
BIT
421
100
24
IPR
100%1
WTO1
SOE
67
At the time of writing, the United States and China are in

the middle stages of negotiating the BIT. When the BIT text
is final and ready for government consideration, the treaty will
be submitted to the Senate and referred to the Committee
on Foreign Relations. Once considered, the Committee may
report the treaty to the full Senate favorably, unfavorably, give
no recommendation, or choose not to act it at all. When a
treaty has been reported to the Senate, it will be added to
the Executive Calendar and considered in executive session.
Two-thirds of the Senate must vote in favor of the BIT, via a
resolution of ratification, in order for it to pass.1
The importance of the US-China BIT was brought to the
attention of US President Barack Obama in October 2014,
when more than 50 business leaders called on the President
to make the completion of a bilateral investment treaty the
focus of meetings next month in China. According to top
political website The Hill, the 51 U.S. chief executives of
firms which included Fortune 500 companies such as Walt
Disney and Coca Cola, sent a letter of support for the BIT
to the White House and asking the president to make such
discussions a high priority with Chinas President Xi Jinping
in November 2014.2
According to the contents of the letter, the American business leaders wrote the following to President Obama: The
commercial relationship between the United States and China
is enormously important to our companies and the health of
the American economy. Getting this commercial relationship
right by expanding the opportunities and effectively addressing the challenges will help maintain American economic strength and leadership in the decades ahead. If China
can significantly reduce its negative list and open markets to
American manufacturers, agriculture producers, and service
providers, you will find the business community fully engaged
and supportive of your leadership to gain Senate approval of
the treaty.2
Leading the groups efforts was US-China Business Council head John Frisbie, who said the letter represents a strong
message and adding that completing a high-standard U.S.China BIT will have a significant and lasting impact on the
trajectory of the U.S.-China commercial relationship and a
more equitable commercial framework to guide the relationship forward.2
A few months earlier, the importance of the treaty between
the two countries was emphasized by US Ambassador to China
Max Baucus, who, in his first Beijing public engagement in
June 2014 since taking up the post in March, stated to the
Wall Street Journal that Theres a lot of work to do on the
[treaty], but moving forward on that will be a top priority for
me. According to the same media report, the Ambassador has
a proven track record in negotiating trade deals with China.
The Wall Street Journal recalls that in the 1990s, Mr. Baucus,
68
then a senator, worked with then-Premier Zhu Rongji to

promote Chinas entry into the World Trade Organization,
which proved to be Chinas catalyst for internal reform and
the beginning of a decade of breakneck economic expansion.
Mr. Baucus stated: I believe that the [treaty] could do for
Chinas investment regime what the WTO did for trade. He
recalled that when working on the WTO deal, Mr. Zhu told
him, I need you to push from the outside so I can push from
the inside. 3
Similar sentiments were echoed a few months later in November 2014, when during President Obamas visit to Beijing
for APEC, senior leaders from both countries had expressed a
desire to conclude treaty talks in 2015. US Trade Representative Michael Froman remarked: Our focus with China right
now is on the Bilateral Investment Treaty, which is one key set
of issues on investment that are part of an overall high-standard approach. The chief US trade negotiator said a short
negative list discussed under the BIT would mean everything
is open in China except for a few things that are specially
listed. He described it as a good test case for a high-standard
agreement with China. 4
The week before APEC, in early November 2014, China
and the US concluded talks on the tariff-cutting Information
Technology Agreement (ITA), hailed by Mr. Froman as a
major breakthrough.4 A month earlier, according to various
media reports, Vice-Finance Minister Zhu Guangyao had
stated that the US-led Trans-Pacific Partnership (TPP) is
incomplete without Chinas participation. 4,5,6. Speaking in
Washington DC, Mr. Zhu said: ...our position is clear. As
China becomes more open, its very important for us to be
integrated into the global trade system with high standard.6
According to China Daily, Mr. Zhus comments are widely
regarded as a major turning point in Chinas attitude towards
TPP. China has evolved from having a deep suspicion of TPP
as part of a US containment strategy of China to showing
an interest in the regional free trade agreement.4 According
to the same report, Ely Ratner, a senior fellow and deputy
director of the Asia-Pacific Security Program at the Center for
a New American Security, wrote in Politico magazine that the
growing consensus in Beijing that China should try to be part
of the TPP reflects not only the potential economic benefits
it could accrue by joining the grouping, but also the fact that
the changes necessary for China to qualify for membership
could advance President Xi Jinpings efforts to make domestic
economic reforms in areas such as market access, government
procurement, intellectual property rights, labor standards and
environmental protection. 4
American business interests in China are keenly watching
the proceedings. In September 2014, the American Chamber
of Commerce in China formulated a new initiative the BIT
Task Force to act as a committee specializing in advocating
201 41 0 50
The Hill 51
201411
John Frisbie
20146
3
3
201411
APEC
2015
Michael Froman
4
201411
ITA
4
TPP45
6
TPPTPP
Ely Ratner
Politico
TPP
TPP
20149
BIT
7
1.
2.
3.
4.
5.
6.
69
American business interests in US-China BIT negotiations.7

Key points included the following:
US negotiations are spearheaded by the Office of the US
Trade Representative and the Department of the State, both
of which focus on six core areas:
National treatment for foreign investors;
Prompt, adequate, and effective expropriation processes;
Transferability of assets between both countries;
Performance requirements;
Investor choice in hiring practices; and
Investor state dispute rights, due process, and mechanisms.
The US-China BIT is essentially a portion of a US model
Free Trade Agreement, as all such US FTAs include a chapter
on investment. The BIT is made of two components; the text,
or main body of the treaty, which includes agreements and
mandates applicable to both US and China, as well as the appendices, including the negative lists, which will contain each
countrys respective restrictions on foreign investment. Being
a treaty, the BIT must be approved by Congress, and hence
must contain sufficient compromises on Chinas part in order
for the final BIT to pass the bill.7
At the 2014 Strategic Economic Dialogue, US and Chinese negotiators affirmed their commitment to intensifying
Bilateral Investment Treaty Negotiations, setting a goal to
reach agreement on core issues and major articles of the text
by the end of 2014 and initiate the negative list negotiation in early 2015 based on each others negative list offers.7
The broad slate of domestic reforms in the Decisions
indicates that China knows these reforms are in its own
national interest and must be achieved, declares Mr. Rosen in
his Asia Policy report. It makes sense from Chinas perspective
to negotiate concessions from abroad for reforms that must
be taken in any case. However, it is important to recognize
that China is pursuing market-oriented economic reforms for
the simple, self-interested reason that it is simply a wise thing
to do.7
70
Works Cited
1
Stephanie Henry. Bilateral Investment Treaties: What They

Are and Why They Matter. China Business Review, US-China
Business Council. September 12, 2014. http://www.chinabriefing.com/news/2014/09/12/bilateral-investment-treatiesmatter.html
Vicki Needham. Business leaders call for completion of China

investment treaty. The Hill. October 15, 2014. http://thehill.
com/policy/finance/220856-business-leaders-call-for
Richard Silk. Investment Treaty with China a Top Priority, US

Ambassador Says. Wall Street Journal. June 25, 2014. http://
online.wsj.com/articles/investment-treaty-with-china-a-toppriority-u-s-ambassador-says-1403682377
Chen Weihua. Investment treaty key for US, China. China

Daily USA. November 20, 2014. http://usa.chinadaily.com.cn/
us/2014-11/20/content_18950741.htm
Chinas Zhu: Asia Pacific trade deal would be incomplete

without Beijing. Reuters. October 8, 2014. http://
www.reuters.com/article/2014/10/08/us-china-imf-zhuidUSKCN0HX2CY20141008
TPP is incomplete without China: Chinas vice finance minister.

China Daily. October 9, 2014. http://www.chinadaily.com.cn/
china/2014-10/09/content_18711231.htm
Daniel H. Rosen. Avoiding the Blind Alley: Chinas Economic

Overhaul and its Economic Implications. An Asia Society
Policy Report produced in collaboration with Rhodium Group.
October 31, 2014. http://asiasociety.org/files/pdf/AvoidingtheBlindAlley_FullReport.pdf
7
2014
2014
2015
7
71
1.7 An Overview on the Annual Development of

Intellectual Property Law of the P.R.C. in 2014
Preamble
NTELLECTUAL PROPERTY, WHICH is connected

with innovation on one hand and with the market on the
other hand, has a close relationship with the economic and
social development. Shen Changyu, the director of the State
Intellectual Property Office, said that intellectual property
shall play a good role as the ivy closely adhered to the tree
of economic and social development as well as the pillar of
the economical and social development. Secondly, in order
to become the pillar of economic and social development,
intellectual property should make the best of its unique
advantage to provide powerful support to the economic and
social development. Clearly Director Shen and the Chinese
government have come to realize the importance of Intellectual
Property in development and protecting innovation in China.
The most dramatic recent development in China with
regard to intellectual property was the establishment of
Intellectual Property Courts in Beijing, Shanghai and
Guangzhou. The Litigation Committee of the Supreme Court
decided on the jurisdiction of these courts on 27th October
2014, effective 3rd November 2014, pursuant to the Code
of Civil Procedure, Administrative Procedure Law, and the
decision of the Standing Committee of the National Peoples
Congress decision to establish these courts. The Provisions
of the Supreme Peoples Court on Jurisdiction in cases of
the Beijing, Shanghai and Guangzhou Intellectual Property
Courts, Article 1 states:
civil and administrative cases concerning patent, new
plant varieties, layout designs and integrated circuits,
technology secrets and computer software;
administrative cases arising from administrative
acts concerning copyright trademarks and unfair
competition conducted by the Department of State
Council of local Peoples Government above the
county level; and
civil cases concerning recognition of famous trademarks.
The establishment of Intellectual Property Courts together
with the dramatic changes in the judicial system resulting from
the recent meetings of the Plenary Session of the Communist
Party on the Rule of Law, which includes the formation of
circuit courts will enhance the ability of the judiciary to act
independently and to protect intellectual property in China.
72
1.7 2014
While in recent years there has been a substantial growth in

registration of trademarks, patents and copyrights in China,
there actually had been a decrease in the use of courts in some
IP areas, in part because of the problems with the judiciary.
With the governments decision to enhance the judiciary, it is
expected that parties will be more willing to use the judicial
and administrative organs to protect their intellectual property rights.
Major Development of Intellectual Property

in China in 2014
As for legislative developments, there were a host of new
and revised IP laws. The revision of the Trademark Law was
completed and the revised Trademark Law took effect on 1st
May 2014. Revisions of administrative regulations such as the
Regulations for Implementation of the Copyright Law, Regulations for the Protection of Computer Software, Regulations
for the Protection of the Right of Communication through
Information Network, Regulations for the Collective Administration of Copyright and Regulations for the Protection of
New Plant Species have been completed. The revisions of laws
and regulations such as Patent Law, Copyright Law, Law on
Promoting the Transformation of Scientific and Technological Achievements, Regulations for the Implementation of the
Trademark Law, Regulations for Patent Commissioning and
drafting of the proposed Service Invention Remuneration
Regulations have been facilitated. Administrative Measures
for Use of Copyrighted Software at Government Agencies has
been promulgated and regulations such as Management Measures for Forestry Plant New Species Protection Administrative Law Enforcement have been drafted.
The number of intellectual property applications has increased steadily and rapidly. In 2014, around 2.377 million
applications for the three kinds of patents were accepted and
1.313 million applications were approved. Of the accepted
applications, 0.825 million were applications for patent for
invention, increased by 26.3% compared with that of last year,
accounting for more than one third of the total applications
for the three kinds of patents for the first time in five years.
The number of PCT international patent application of our
country exceeded 20,000, accounting for more than 10% of
the total global application for the first time, and ranked the
third in the Patent Cooperation Treaty system. The number of
20141027
2014113
1
1.
2.
3.
2014
51
237.7131.3
82.5
26.3%PCT
210%
20123.234.02,
188.1514.15%12
723.79
84.522.89%
16.4
18.04%
1333
1200
5%
29
254
401.831.7379.46%
5301855
6438
2014
73
valid patents for invention owned per 10,000 people has increased to 4.02 from 3.23 in 2012, accomplishing the twelfth
five-year plan target in advance. In 2014, around 1.8815 million applications for trademark registration were accepted, an
increase of 14.15% compared with that of last year, ranking
the first place in the world for 12 successive years. The number of valid trademark registration was 7.2379 million, maintaining Chinas first place in the world. The number of registrations of copyright works was 0.845 million, an increase of
22.89% compared with that of last year, and accomplished
the twelfth five-year plan target in advance. The number of
registrations of computer software copyright was 0.164 million, an increase of 18.04% compared with that of last year.
Both the number of registrations of copyright works and the
number of registrations of computer software copyright have
broken their historical records. The number of applications
of agricultural plant new species in 2014 reached 1,333 and
the accumulative number of application of forestry plan new
species reached 1,200.
The legitimization of government software has made impressive achievements in the past year. All the prefecture-level
and county-level governments have completed the inspection and ratification of software legitimization. In 2014, with
strengthened cooperation, various departments carried out
sword nets action to seek special treatment to crack down
on network infringement and piracy, escort action to escort
the intellectual property laws enforcement and rights protection, special law enforcement action to crack down the leaning on famous brands all of which achieved notable results.
The utilization and management level of intellectual property has gradually increased. According to international convention, an industry accounting for more than 5% of a countrys gross domestic product can be called a pillar industry.
In 2014, 29 places in China launched intellectual property
pledge financing pilot projects and intellectual property investment and financing pilot projects. The scale of intellectual
property pledge financing was continuously expanding. The
respective realized pledged financing for patents, trademarks
and copyrights in 2014 was RMB 25.4 billion, RMB 40.18
billion and RMB 3.173 billion, respectively, the total amount
of which increased by 79.46% compared with that of last year.
In 2014, 530 enterprises purchased patent liability insurance,
covering 1,855 patents, the total insured amount of which
reached RMB 64.38 million.
International communication and cooperation about intellectual property has intensified. In 2014, the World Intellectual Property Organization made important progress in
establishing an office in China.
74
Interpretation of New Regulations for Implementation of the Trademark Law

On August 30th 2013, the Fourth Session of the Standing Committee of the Twelfth National Peoples Congress reviewed and passed the Decision on Revision of the Trademark
Law. The revised Trademark Law took effect on 1st May 2014.
The supporting administrative regulations of the Trademark
Law, the revised content of the Regulations for Implementation, have significant importance for the implementation of
the Trademark Law.
The new Regulations for Implementation of the Trademark Law made several significant revisions:
Based on the provisions of the new Trademark Law, the
Regulations for Implementation of the Trademark Law provided further regulations.
It further defines the application requirements for
new forms of trademarks. For the application of
three-dimensional sign as a trademark, the applicant
shall make a statement in the application, explaining
the method of using the trademark, and submit a
reproduction thereof by which the three-dimensional
shape can be determined. The submitted reproduction
shall include at least three side views of the threedimensional sign. For the application of sound as
a trademark, the applicant shall make a statement
in the application and submit an acceptable sound
sample. The applicant shall also provide a description
of the sound trademark and the method of using the
trademark. A description of the sound trademark shall
be made with musical notation or numbered musical
notation to describe the sound to be applied as a
trademark, together with a description in the text; if
the description of the sound trademark cannot be made
a musical notation or numbered musical notation, it
shall be made in the text; the description of trademark
shall be consistent with the sound sample.
The Regulations further define the methods of using
electronic messages. If the applicant submits documents
by means of an electronic message, the date of submission
shall be the date when the electronic message enters
into the electronic systems of the Trademark Office
or Trademark Review and Adjudication Board and
the content submitted shall be subject to the content
recorded in the databases of the Trademark Office or
Trademark Review and Adjudication Board, except if
the applicant has evidence to prove the incorrectness of
the records in the files and databases of the Trademark
Office or Trademark Review and Adjudication Board.
The Trademark Office may, with the consent of the
applicant, send documents to the applicant by means
2013830
51
15
15
20131
1.
537
2.
75
76
of electronic messages, which shall be deemed to have

been served 15 days from the date when the document
was sent, unless the applicant has evidence to prove
the date when the document entered into its electronic
system.
The Regulations further define the operation procedures
of the application division which not only applies to
multi-class applications but also applies to single class
applications, making it more convenient for the applicant
to obtain preliminary approval by the Trademark Office
of its trademark application. The Regulations for
Implementation of the Trademark Law provide that if the
Trademark Office rejects part of the designated products
in a trademark registration application, the applicant may
divide the preliminarily approved part of the application
into another application, which application date shall be
the original application date.
The Regulations for Implementation of the Trademark
Law have revised some of the content concerning
trademark review and adjudication, for the convenience
of the applicant and for the maintenance of fair
competition, by prohibiting what is called malicious
registration applications. New Rules applicable to all
Trademark Office procedures, defining the method
of using data messages, provide that documents
submitted by express-delivery companies shall have the
same validity as those delivered by postal authorities,
clarifying provisions of service of legal documents, and
perfecting time period calculations.
Previously, documents delivered through express services
were considered received from the Trademark Office when
the Trademark Review and Adjudication Broad received
the document. The new regulations provided that the
date of the documents delivery shall be the date when the
express delivery company receives such documents.
The Regulations provide that if during periods of
service of documents the additions and corrections are
made, such interruptions shall not be counted so as to
jeopardize a priority right.
To expedite applications new time limitations have
been provided for in the Regulations. Thus when
the Trademark Office considers the contents of a
Trademark Registration application needs explanation
or revision, the applicant is to revert to the Trademark
Office within 15 days of receipt of such notice.
The recording of licenses of trademarks need not be
made within three months of the execution of the
licensing contract, but can be made at any time within
the effective term of the licensing contract. Said
recording shall specify the licensor, licensee, licensing
term, scope of licensed products or services of the
registered trademark, etc.

The new Trademark Law makes significant revision
to the procedures related to raising objections to
registration. Once the Trademark Office decides
to approve registration, it shall issue a certificate of
trademark registration immediately and no application
for reconsideration will be considered. However, the
objector to registration, pursuant to the Trademark
Law, Articles 44 and 45 can apply to the Trademark
Review and Adjudication Board in an attempt to have
the registered trademark declared invalid.
Where foreign persons are applicants, they must designate
a recipient in China to receive certain documents from
the Trademark Office and/or Trademark Review and
Adjudication Board.
As to the provisions of the Trademark Law, Articles 39
and 40, the Regulations provide that the term of the
trademark shall commence on its registration date and
expire on the day before the same day of the last month
of the term, or the last day of the last month of the
term, if there is no corresponding day in the term.
Proposal of the Fourth Amendment to the

Patent Law
The State Intellectual Property Office, in January 2013
submitted a draft amendment to the Patent Law for approval
by the State Council. The Legislative Affairs of the Office of
the State Council is currently reviewing this draft. Pursuant to
this draft the State Intellectual Property Office held a seminar
regarding the contents of these draft amendments.
1.Decision on Announcement of Invalidation of a Patent and Its
Effective Date
Presently, the average time period for a patent administrative
procedure in China is 537 days, since patent infringement
cases involve counter-claims if patent of invalidity. Presently
if an Applicant is not satisfied with the decision made by the
Patent Reexamination Board, he may institute administrative
proceedings where the Patent Reexamination Board becomes
the Defendant, or if the Patent Reexamination Board is
unwilling to be the defendant, it may act as a quasi-judicial
organ. In the latter case, the Patent Reexamination Board
acts as a court of first instance. Its decision can be appealed
without the need to initiate another proceeding.
2. Punitive Damages
As to damages, for patent infringement, many patent
cases adopt statutory damage standards, which are generally
low, while the proceedings are very long. This is sometimes
referred to as win the lawsuit but lose the market. Punitive
3.
1.
2.
3.
100
20132014
2013
88583
8828620121.33%5.29%
91955.01%
2327217.45%51351
4.64%9491302
7215.94%
1697
18.75%
48311957
1155375
9650%
457417
20132886
2901697
8.29%21610.51%
325
66.67%
131245.23%
117
10476.92%
19
14
2013
9331
201228.79%
2013
85.95%
87.04%
68.45%
2013
61368
2013830
77
damages are being considered in patent proceedings.

3. Strengthening Administrative Law Enforcement
There are continual problems in China of repeated
infringement of patents, and even group infringements of
patents. While patents have the shortest duration of most
intellectual property rights, and relatively high costs, they
are difficult to protect. Furthermore, the time period for
application of a patent to its approval is much longer and
more difficult than for copyright and trademarks. Proposed
amendments to the Patent Law are considering this problem.
Proposal for the Third Amendment to the

Copyright Law
This Session of the National Peoples Congress has one
of its first priorities the significant revision of the Copyright
Law, to assist in promoting innovation pursuant to the requirements of government plans.
The key points of this revision are as below:
1. Copyright Objects: Generalization and Enumeration
Stipulations
A key element of this proposed revision of the Copyright
Law is a change in description of works that may be
copyrighted, for example: cinematographic works are to be
classified as audio-visual works. Computer software has
been defined as computer programs, all to more accurately
define what is the right subject in copyright.
2. Copyright Content: Separate Stipulations on Personal Rights
and Property Rights
Personal rights to copyright are reduced by the proposed
changes to the right of publication, right of authorship and
right of integrity. These revisions are in accordance with
international conventions. The revisions extend the scope of
the right of reproduction by incorporating digital forms into
the scope of reproduction. Other revisions include revising
the rights of radio broadcasting, to the right of broadcasting.
The proposed revisions includes the rights of secondary
remuneration and related rights, which provides that
broadcasting and television stations shall pay remuneration
to a performer if they broadcast recordings containing their
performance.
3. Protection of Copyright: Added Stipulations on Punitive
Damage
The Copyright Law provides for tortuous liability of
network service providers and users based on the Tort
78
Liability Law and Regulations on the Protection of the

Right of Communication through Information Networks. A
draft regulation proposed to increase the maximum amount
of statutory damages for copyright infringement to RMB
1,000,000.
The Status of the Administrative Protection

and Judicial Protection of Intellectual Property in China from 2013 to 2014
In 2013 the Courts improved their ability to protect intellectual property rights and some intellectual property cases
increased throughout the country compared to last year, first
instance IP cases that were accepted grew by 1.33% and those
disposed of grew by 5.29% to 88,583 new cases and 88,286
that were adjudicated by first instance courts. Of these cases
9195 were patent cases, 5.01% less than last year; 23272 cases
were trademark cases with an increase of 17.45% compared
with 2012; 51,351 were copyright cases decreased by 4.64%
compared with 2012; technology contract cases increased
substantially and there were 949 cases; and unfair competition cases also increased by 15.94% of which there was 1,302
cases, (among which 72 cases were first instance antitrust civil
cases). As to foreign related cases, 1,697 first instance civil
IP cases were adjudicated, an increase of 18.75%; and Hong
Kong, Macau and Taiwan cases amounted to 483. Second
instance civil IP cases improved substantially to 11,957 that
were accepted and 11,553 that were adjudicated. Rehearings
of civil cases remained very low of new received cases being
75 and adjudicated cases being 96, a substantial decrease by
more than 50% since 2012. However, IP cases at the Supreme
Peoples Court, though small in number, grew substantially to
457 new cases and 417 that were adjudicated. In summation
civil adjudication of IP cases remains very significant.
As for administrative cases accepted by the courts in 2013,
as a first instance, 2,886 new cases were accepted and 2901
were disposed of. Of the new cases accepted, 697 cases were
patent administrative cases, decreased by 8.29% compared
with that of 2012; 2,161 cases were trademark administrative cases, increased by 0.51% compared with that of 2012; 3
cases were copyright administrative cases, remaining the same
as that of 2012; 25 cases were other administrative cases, increased by 66.67% compared with that of 2012. A significant
portion of these cases were foreign related, and Hong Kong,
Macau or Taiwan, namely 1,312 cases, amounting to 45.23%
of the first instance administrative intellectual property cases.
Intellectual property appeal cases were few and far between, with new cases numbering only 117 and those adjudicated numbering 104. Most appeals were rejected, namely
76.92%. There are also a few cases that the Supreme Court
heard on the equivalent of a writ of certiorari. Interestingly
[2014]4
2013--2014
20144212013
10
,1994228
1998
655
2900
2013
2013621
2005930
197634
A9
1976
79
enough, of the nineteen cases that were disposed of, fourteen

cases were reversed.
Major Intellectual Property Cases from 2013

to 2014
Criminal Trials
With regard to criminal cases involving intellectual property, they declined in number in 2013. Local courts accepted
only 9,331 cases of first instance, a decrease of 28.79% compared to 2012, more than half of which were criminal infringement actions, primarily trademarks.
In general in 2013, there was an overall slowdown in acceleration of civil cases involving intellectual property, as well
as a slowdown in administrative and criminal cases, but the
rate of disposition of cases accelerated substantially. For example, 85.95% of civil cases that were accepted were disposed
of in the Basic Level courts. Similarly 87.04% of administrative intellectual property cases were disposed of in the Basic
Level courts.
Mediation prospered in China and resulted in a total of
68.45% of its civil IP cases that were mediated. Additionally,
the decisions of many more cases were publically disseminated
and in 2013 61368 judgments of courts at all levels were
publically withdrawn.
The Supreme Court published ten major intellectual property cases handled by courts in China in 2013 on April 21st
2014. We shall summarize some of the cases below.
New Judicial Interpretations

The revision of the Trademark Law itself was approved by
the Standing Committee of the National Peoples Congress
on 30th August 2013. For the purpose of handling trademark cases correctly, the Supreme Peoples Court formulated
and promulgated the Interpretation of the Supreme Peoples
Court on the Jurisdiction and Application of Law Concerning
Trademark Cases after the Decision on Revision of Trademark
Law Takes Effect (legal interpretation No. [2014] 4, Interpretation), which clarified and confirmed the issues concerning jurisdiction and application of law of trademark cases accepted by the court.
The Interpretation added three categories of trademark
disputes to be accepted by the peoples courts, namely disputes concerning confirmation of non-infringement of the exclusive right to use registered trademarks,contract disputes
with a trademark agency and disputes concerning liability
for damages arising from applications to cease infringement
of the exclusive right to use registered trademarks. Therefore
there are now thirteen categories of trademark disputes which
courts will accept in China.
As to jurisdiction, appeals from administrative cases from
the Trademark Review and Adjudication Board or the Trademark Office, shall be heard by an Intermediate Court in Beijing. Civil and administrative cases concerning the protection
of famous marks shall be heard by intermediate courts in the
locality where the dispute arises.
80
New Material Technology Field Cases Regarded as Patent

Infringement Cases
Hunan Corun New Energy Co., Ltd. (Corun), has an
invention patent to make spongy foam nickel. The patent
applicant during the application for registration provided
information on the technological conditions for magnetron
sputtering and merged that claim with its original claim.
Corun sued Alantum Advanced Technology Materials (Dalian)
Co., Ltd (Alantum) and Hunan Kaifeg New Energy Co.,
Ltd (Kaifeng) for infringement of their invention patent.
The Changsha Intermediate Court held that the method of
Alantums production was the same as those described in the
patent and awarded Corun RMB 29 million for its losses.
The High Court of Hunan Province sustained the original
judgment. Alantum applied to the Supreme Court for retrial
and the Supreme Court ordered the High Court of Jiangsu
Province to retry the case. Jiangsu Province High Court held
that the base vacuum pressure and working vacuum pressure
of the patent and that of Alantum were very different, and
therefore the results may be different. However, the vacuum
pressures adopted by Alantum were technical specifications
that any ordinary technical personnel in the field could obtain
without any creative work. Therefore, the characteristic of
the base vacuum pressure and working vacuum pressure of
the accused infringing technical plan are neither same as nor
equivalent to those listed in the claims of the patent at issue
and thus the accused infringing technical plan does not fall
within the scope of patent protection of the patent at issue.
Therefore, the claims made by Corun were rejected by the
Court.
This case turned on the scope of application of the equivalence principle, where the patent itself specified limits on
vacuum pressure and the alleged infringers actions were substantially outside those limits. The equivalence principle is to
be strictly restricted in the case of patents of technical plans
according to this case.
Trademark Infringement by Weiji Soy Source and
Unfair Competition
Foshan Haitian Flavoring & Food Co., Ltd. ( Haitian)
is the owner of the registered trademark , which was
registered on 28th February 1994 for products such as soy
sauce. Foshan Gaoming Weiji Flavoring & Food Co., Ltd.
(Weiji) was established in 1998 and used Weiji as its
SP-1068
200
SL-1801
Standard Essential Patent Royalty Case

IDC
IDC
337
IDCFRAND
0.019%IDC
FRAND
FRAND
IDC
IDC
FRAND
IDC
,
IDC
IDC
IDC
337
IDC
FRAND
0.019%IDC
FRAND
IDC
IDC
FRAND
FRAND
2003321
1997514
2009831
81
brand, highlighting the word Weiji in its advertising and

labels. Weiji was found to use industrial brine for its soy sauce
production creating a scandal, the result of which Haitans sales
were badly influenced. Haitan alleged Weijis act infringed its
trademark and constituted unfair competition, commencing
a lawsuit in the Guangdong Foshan Intermediate Court.
The Intermediate Court held that Weijis use of the word
Weiji infringed Haitans exclusive right to use its registered
trademark. Weijis acts caused public confusion and impaired
Haitans reputation and was unfair competition. Weiji was
enjoined from using Weiji in its advertising labels and
company name and was required to make a formal apology in
the newspaper and compensate Haitan by payment of RMB
6.55 million.
Auction of Qian Zhongshus Letters and Manuscripts:
Preliminary Injunction
Qian Zhongshu (deceased) was the husband of Yang
Jikang, the Plaintiff. The family was friendly with Li Guoqiang.
Yang, his wife and children sent more than 100 private letters
to Li Guoqiang who kept the letters and in 2013 Sungari
International Auction Co., Ltd (Sungari) announced that
a public auction was to be held on June 21st 2013 that Qian
Zhongshus letters and manuscripts would be sold. The
Plaintiff Yang Jikang argued that these letters were entitled
to copyright protection, and though his wife and daughter
were deceased, he had inherited their copyright rights. Yang
Jikang further argued that the public auction by Sungari
would damage the copyright he owned by inheritance and
applied to the court to enjoin the auction proceedings. The
Court enjoined and the auction did not go forward. However,
subsequently Yang Jikangs sued Sungari and Li Guoqiang for
copyright infringement and breach of his right of privacy. The
Court rule of the Copyright Law protected the writer of the
letters. These rights were inherited by the Plaintiff holding
that their injunction will help facilitate protection of the
senders copyright and writers privacy.
Ultraman Copyright Dispute
On 30th September 2005, Sampote Saengduenchai
(Sampote) and Chaiyo Productions Co. Ltd (Chaiyo) sued
Tsuburaya Production Co. Ltd., Shanghai Tsuburaya Planning
Co. Ltd., Guangzhou Book Center Co. Ltd., and Shanghai
Audio-Video Publishing House for copyright infringement in
the Guangzhou Intermediate Court requesting various levels
of compensation for infringement. This case was based on
a contract executed on 4th March 1976 granting Sampote
permanent and exclusive rights to use the 9 Ultraman
exclusive word rights including Giang V. Jambo A, except
for Japan. This right was confirmed by the courts of Japan. The
Guangzhou Intermediate Court, the Court of First Instance,
82
held that the authenticity of the 1976 contract could not be

confirmed and rejected the claims of Sampote and Chaiyo,
the latter of whom appealed to the Guangdong High Court.
The court dismissed the legal impact of the decisions made by
the Japanese court and indeed in another case that was started
in the Thailand and sustained the contract and some of the
claims made by Sampote and Chaiyo. The Supreme Court
rejected any appeals from this judgment.
Infringement of Trade Secrets Dispute: Resin Patent
Related Information
SI Group and SI Group (Shanghai) Co. Ltd (SISL)
filed a lawsuit in Shanghai Second Intermediate Court
claiming that technical information of the product SP-1068,
includes its production flow, technique, and formula, all of
which were trade secrets of SISL. The Defendant Xu Jie, an
employee of SISL resigned from SISL and disclosed the trade
secrets to his new employer Sino Legend (Zhangjiagang)
Chemical Co. Ltd. (Sino Legend), the latter of whom
used this trade secret information to apply for an invention
patent named Improved Techniques for Production of Alkyl
Phenol Thermoplastic Resin SISL wanted an injunction to
prevent further use of its trade secrets and RMB 2 million in
compensation for its losses. The Shanghai Intermediate Court
held that the technical information used in the product SL1801 by Sino Legend, Xu Jies employer, was substantially
different from the technical information of the Plaintiffs
trade secrets. The Court rejected the claims. The Plaintiffs
appeal to the High Court sustained the original decision.
The Intermediate Court very strictly interpreted the facts and
ordered a professional examination by a specialist to assist in
this decision.
Standard Essential Patent Royalty Case
Huawei Technologies Co. Ltd. (Huawei), negotiated
with the IDC Company on the royalty rates for a certain
patent belonging to the IDC Company. In the course of these
negotiations IDC requested the US International Trade Center
to initiate a 337 investigation against Huaweis products.
Huawei in turn commenced a lawsuit in the Shenzhen
Intermediate Court asking the Court to order IDC to confirm
the patent royalty rate of its invention pursuant to the
FRAND principles (fair, reasonable and non-discriminatory).
The Shenzhen Intermediate Court held that the standard
patent royalty rate shall be 0.019% pursuant to FRAND.
IDC appealed this decision to the Guangdong High Court.
The High Court held that the principles of FRAND required
an obligation to grant licenses pursuant to the intellectual
Property policies of the European Telecommunications
Standards Institute and Telecommunications Industry
Association of America, plus relevant provisions of Chinese
13

200739
30
5936208
2013
14
20132014
11
1050
25
83
Law. Thus the holder of the patent cannot directly refuse to

patent a license to bona fide standard user who is willing to pay
reasonable royalties. Both Huawei and IDC are members of the
European Telecommunications Standards Institute, therefore
IDC was obliged to grant Huawei a license to implement
its patent and the royalty rate is determined by the FRAND
principles, which if the parties could not agree to would be
chosen by a court of law. This case was the first standard essential
patent royalty dispute in China, and applied the FRAND
principles for the first time. It is an important precedent.
Power DekorFamous Trademark Protection Case
Hebei Guang Tai Gypsum Mining Co. Ltd (Guang
Tai), had a trademark composed of the Chinese character
for Power Dekor and a realistic painting of a standing
elephant, registered on 21st March 2003 for products such
as gypsum, gypsum board, cement etc. Power Dekor Group
Co. Ltd (Power Dekor) is the owner of the mark power
Dekor and sketch, approved for registration on 14th May
1997 for floors. Power Dekor applied to the Trademark
Review and Adjudication Board for revocation of Guang
Tais trademark claiming it was a malicious imitation of this
famous trademark and the products involved had strong
relevance to the floor. The Power Dekor group is highly
popular and has great influence in the floor industry and uses
construction materials. There can be confusion about these
similar marks. On 31st August 2009 the Trademark Review
and Adjudication Board held there was insufficient evidence
to prove that the registration of the trademark in dispute was
a malicious registration act of Power Dekor. Power Dekor was
dissatisfied with this judgment and filed a lawsuit with the
Beijing First Intermediate Court. The Beijing Intermediate
Court overturned the decision of the Trademark Review
and Adjudication Board holding that the trademark Power
Dekor and sketch was well-known in China and pursuant to
the Trademark Law, Article 13 entitled to protection. Both
the Trademark Review and Adjudication Board and Gong
Tai were dissatisfied with the Beijing High Court decision,
claiming that the mark Power Dekor and sketch was not a
well-known mark. The Supreme Court held that considering
the awareness of Power Dekor Groups trademark, Power
Dekor and sketch to the public and its substantial marketing
activities, the mark had met the requirements of a well-known
mark and held the High Court ruling was incorrect.
They held the overall visions of the trademark in dispute
and referenced trademark in this case are basically the same.
Both marks concern construction materials. Guang Tai should
have known of public awareness of the referenced mark. The
Supreme Court set aside the judgment of the High Court and
upheld the judgment of the First Trial Court.
84
Jin Jun Mei Generic Name Trademark: Administrative

Dispute
On March 9th 2007, Fujian Wuyishan National Nature
Reserve Lapsang Tea Industry Co., Ltd., (Lapsang Tea)
applied to register a trademark, Jin Jun Mei in classification
30. This registration was opposed by Wuyishan Tong Mu Tea
Co. Ltd. (Tong Mu). The Trademark Office ruled after review
that the mark Jin Jun Mei was approved for registration. Tong
Mu, dissatisfied with this ruling applied to the Trademark
Review and Adjudication Board for a retrial, claiming Jin Jun
Mei was a generic name and thus in violation of Trademark
Law, Article 10(1)(viii) and Article 11(1)(i) and (ii). On 4th
January 2013 the Trademark Review and Adjudication Board
held that evidence provided was insufficient to prove that Jin
Jun Mei had become a generic name of a product, approving
the mark for registration. Tong Mu dissatisfied with the ruling,
applied to the Beijing First Intermediate Court, which in turn
held that the Trademark Review and Adjudication Board
handled the matter improperly and Tong Mus claims were
not sustained. However the High Court in Beijing held that
Jin Jun Mei had been recognized and treated by the public as
a king of product name, like Black Jade Tea and became the
eventually generic name of a certain kind of black tea. Thus
registration of Jin Jun Mei was denied and the matter was
referred to the Trademark Review and Adjudication Board for
a new ruling. This case defined issues relating to a situation
in which a trademark in dispute becomes a generic name.
However if the trademark in dispute is not a generic name,
but by applying for registration, it becomes a generic name by
the proof of registration, that becomes the problem.
Counterfeit Edible Oil Registered Trademark: Criminal Case

The Henan High Court held that Defendants Zhong
Liangui and Huang Li established a company for the purpose
of illegal activities and engaged in criminal activities. They had
established an oil company to sell counterfeit edible oil using
other persons registered trademarks Gold Arowana and
Lu Hua. The Court decided that Zong Liangui committed
the crime of counterfeiting registered trademarks and selling
goods that became illegal because of this counterfeiting.
Most defendants were sentenced to more than 11 years and
imprisonment and were fined RMB 10.5 million. Twenty five
other defendants in these companies were also sentenced to
other fixed prison terms.
This Henan case interestingly enough used a three in one
system, namely hearing a criminal case, civil case and administrative case and disposing of it in one trial.
85
Conclusion and Future Development

Adjudication of intellectual property disputes be it civil,
crime or administrative, while not necessarily growing in
numbers in China for various reasons are certainly growing in
importance. The Chinese government is highly aware of the
importance of innovation and the need to protect inventions
designs, trademarks, patents, copyright, trade secrets, and to
stifle unfair competition. Chinese laws of intellectual property
are largely of international standards. However, the institutions that enforce those laws, both administrative and judicial, have lagged far behind the development of substantive
law and qualified lawyers. Developments at the end of 2013
and in 2014 including the decision to establish Intellectual
Property Courts in Beijing, Shanghai and Guangzhou, the
latter in many respects for the whole province of Guangdong,
is one example of dramatic acts to protect IP. Furthermore,
the recent Plenary Meeting of the Communist Party devoted
to the rule of law has great potential for improving judicial
institutions, including the establishment of certain circuit
courts, freeing courts from their ties to local governments to
the same level, upgrading judicial personnel including possibly increasing remuneration of judges, and the emphasis on
the Constitution, all of which may be harbingers of substantial
developments of judicial reorganization. Certainly the courts
of China and many of the administrative tribunals need substantial upgrading. It is possible that new policies will do just
that, thereby doing a great deal to provide proper institutions
to protect intellectual property.
86
87
1.8 Suggestions
Continue with Reform Urgently
T IS NOW obvious to any China-watcher that the country

under President Xi Jinpings leadership is continuing its
ambitious reform program. The question most pundits are
pondering is, are these reforms going to be sufficient at this
time in order for President Xis administration to achieve its
stated goals by 2020, or, in view of the sharp slowing down of
Chinas economic engine, will it be a case of too little, too late?
As early as February 2012, the Wall Street Journal had
previewed China 2030, a report co-authored by the World
Bank and the Development Research Center (DRC)a
Chinese government think tank that reports to the State
Council and which counts among its members, Liu He,
a senior adviser to the Politburo Standing Committee, and
said that the report calls urgently for the implementation of
deep reforms, including scaling back its vast state-owned
enterprises and making them operate more like commercial
firms. The report also recommends that state-owned firms
be overseen by asset-management firms and urges China to
overhaul local government finances and promote competition
and entrepreneurship. The report also recommends a sharp
increase in the dividends that state companies pay to the
government, boosting government revenue and helping to
pay for new social programs. The report urges that Chinese
social expenditures be funded more by dividends from stateowned firms and by property, corporate and other taxes.
The report was quite adamant about pressing its case for the
urgency of reforms to be implemented, stating unequivocally
that if reforms are not carried out by 2030, China faces an
economic crisis, the Wall Street Journal said. In a statement to
announce the reports release, World Bank President Robert
Zoellick said, The report lays out recommendations for
a development growth path for the medium term, helping
China make the transition to become a high-income society.1
In a subsequent interview with the Wall Street Journal
following the release of China 2030, Tao Ran, a professor
with the Renmin University School of Economics, that the
reports proposals are well-intentioned but are doomed to
fail, because they dont strike at the underlying reason why
Chinas reforms will stall: opposition from local governments
and SOEs. Mr. Tao says that breaking up the monopoly
control by local governments and SOEs of key sectors of the
economy, should first be the keystone of reforms. Currently,
local government units and SOEs are the main beneficiaries
of Chinas investment and industry-driven growth model,
and Mr. Tao says, they pose the main barriers to reform.
88
1.8
Chinas reform, said Mr. Tao, should start by breaking up
the local governments monopoly of the land market and
allowing farmers to develop land on their own. That would
take local governments out of the real estate game and reduce
their incentive to support the status quo. He also proposed
that private players should be allowed a stake in monopoly
industries such as telecoms and utilities to encourage
competition. But the crucial point Mr. Tao makes is its
the monopoly power of local governments and SOEs that
gives them an effective veto on crucial economic reforms.
Breaking the monopolies breaks the power of the anti-reform
coalition. This, according to Mr. Tao, would pave the way
to other necessary reforms like market-based interest rates, a
floating yuan, higher dividend payments by SOEs, and more.2
Yes, there are incredible, painful challenges ahead in the
ongoing road to reform for Chinas leadership but we as
the writers of this paper are confident and believe, much
like Daniel Rosen, author of the 2014 Asia Society report
produced in collaboration with the Rhodium Group, that
China knows these reforms are for the benefit of its own national
interest and, therefore, must be achieved. Since it laid out its
reform agenda in the Decisions at the 2013 Third Plenum of
the Chinese Communist Party, we believe, along with Daniel
Rosen, that Chinas leadership is making real headway in
its bold program to overhaul and liberalize its economy and
that, if President Xis administration succeeds in carrying out
its tasks, China will be on track in maintaining a respectable
6% growth rate by 2020.3
In coming up with a 6% forecast - if all reforms are fully
implemented Mr. Rosens report focuses on nine clusters
of economic and political reform aimed broadly at reducing
centralized control over the Chinese economy and opening it
up to more market influence. In all, Mr. Rosens analysis finds
that quiet progress is being made in some politically sensitive
areas of reform. Much like Mr. Tao before him, Mr. Rosen
said the starting point for the reform agenda is a more fundamental overhaul of the fiscal relationship between the central
government and the provinces. The current arrangement has
allowed an imbalanced division of power and responsibility
between central and local authorities [which] has given rise to
pressing misallocations of resources and provincial resistance
to central reforms, Mr. Rosen wrote.3
On a more positive note, Mr. Rosen has added that
his report has identified a pattern in most regulatory areas
that evidence of follow-through was apparent in 2014. In
an interview with the Wall Street Journal, Mr. Rosen said
he viewed the anti-corruption campaign orchestrated by
2020
20122
2030
DRC
2030
(Robert
Zoellick)
1
2030
2014
Daniel
Rosen
2013
20206%
3
6%
2014
3
20132014
89
President Xi Jinping as a sign of a serious commitment to

shake up an inefficient and privileged bureaucracy. That
and the other political reforms set the stage for a more
comprehensive overhaul thats needed to shift the economy
from its current, unsustainable dependence on investment-led
growth to a more consumer-focused model, Mr. Rosen said.3
So, the Chinese Communist Party leadership has committed to economic reform at the Third Plenum in 2013 and to
legal reform at the Fourth Plenum in 2014. As Mr. Rosen
stipulates, the anti-corruption campaign and other political
reforms form the backdrop for the framework of overall reform and transformation of the economy. A critical question
confronts the leadership at this stage: Can President Xi Jinping and his administration continue to press forward in aggressively tackling corruption while also fiercely undertaking
economic reforms?
Our conclusion is, they must they have to and they
should.
President Xis anti-corruption drive has removed highranking figures such as Bo Xilai and Zhou Yongkang, the
former security chief, along with Liu Tienan, deputy head
of the National Development and Reform Commission,
the principal agency for setting and carrying out economic
policy. According to the Wall Street Journal, Mr. Liu had been
regarded by some foreign observers as one of the people
standing in the way of much-needed economic reforms.
The Chinese Communist Partys latest move is to place
permanent anti-graft investigators and embed them inside key
national government bodies like the cabinet and legislature.
Resident supervisors will, for the first time, be stationed
within the management office of the State Council cabinet
in the National Peoples Congress, in key central party offices,
and altogether in all 140 party and government offices,
according to Xinhua. 4
It remains to be seen whether these political changes will
help clear the way for the extensive and ambitious economic
reforms to which President Xis government has committed.
Li Chengyan, head of the Research Center for Clean
Governance at Peking University, sums it up best in the
Wall Street Journal: Comprehensively deepening reform
cannot move forward without adequately cracking down on
corruption.The two sides of the approach complement and
reinforce each other and cannot be separated.4
90
Works Cited
1
Bob Davis. New Push for Reform in China.Wall Street Journal.

February 2012. http://www.wsj.com/news/articles/SB10001
424052970204778604577238901231511224?mg=reno64wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2F
SB10001424052970204778604577238901231511224.html
Liyan Qi and Tom Orlik.Wall Street Journal.March 27, 2012.

http://blogs.wsj.com/chinarealtime/2012/03/27/economistworld-bank-suggestions-for-china-reform-garbage/
Michael Casey. China Economy on Track for Sweeping

Reform.Wall Street Journal.October 23, 2014. http://blogs.wsj.
com/chinarealtime/2014/10/23/china-economy-on-track-forsweeping-reform-asia-society-report-finds/
Stanley Lubman. Chinas Corruption Fight Inseparable from

Reform. Wall Street Journal. December 17, 2014. http://blogs.
wsj.com/chinarealtime/2014/12/17/chinas-corruption-fightinseparable-from-economic-reform/
140
4
91
Part II
Industry Overviews
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
92
Agriculture
Chemicals, Bio-chemicals and Energy
Machinery and Electrical Equipment
Transportation and Logistics
Products Classified by Materials
Construction
Manufactured Articles
Hospitality
Services
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
93
2.1 Agriculture
HINAS AGRICULTURAL INDUSTRY has a long

and varied history. According to the Ministry of Land
and Resources of the Peoples Republic of China, 14 percent
of the countrys total 9.6 million square kilometers of land
area is arable, which it further reports is less than half of the
world average in terms of area per capita.1
Despite the relatively small area, it generally supports the
roughly 20 percent of the worlds population who are Chinese
citizens. This fact, in addition to historical precedents,
continues to highlight the need for efficient use of the
limited space and of the constant interplay between ongoing
industrialization and the necessity of a strong fundamental
primary industry. It is estimated that the Chinese government
has, in the past several decades, spent hundreds of billions of
dollars to repair and revitalize agriculture.2
Since China joined the WTO in 2001, the Chinese government has steadily supported agricultural expenditure and
development. In 2006, a study by Xing Wen-Yan from the
Liaoning Academy of Social Sciences, stated that in 2006,
agricultural tax and tax on agricultural products were abolished throughout China, ending a 2,600-year history of paying taxes on the part of farmers. From 2007 to 2010, financial expenditure on agriculture rose with 100 billion yuan
every year. In 2009, the central government spent 725.49 billion yuan on agriculture, countryside and farmers, reaching a
record high, an increase of nearly 5 times of 123.154 billion
yuan in 2000.42
These efforts have paid off handsomely; the China Statistical Yearbook 2009 reported that gross output of the agricultural sector had grown from 139 billion yuan in 1978
(accounting for 38.3 percent of total GDP that year) to 5.8
trillion yuan in 2008 (19.2 percent of total GDP), calculated
at current prices.3
The PRC governments expenditures on agriculture have,
according to the U.S. Department of Agricultures statistics,
risen from 15 billion yuan in 1978 to 317 billion yuan as of
2006 (the last year for which these statistics are published).
Productivity in these terms of output per unit of expenditure
has improved greatly, roughly doubling between 1978 and
2006.4 Despite these improvements, the PRCs Ministry of
Agriculture observed in 2004 that the relatively gradual growth
of the sector is indicative of the low comparative returns on
agriculture, therefore validating the various subsidies (such
as transfer payment) that are important [measures] of most
countries to preserve food security.5
The report also noted that agricultural subsidies have been
gradually transferred from the distribution process to the pro-
94
2.1
duction process and direct subsidies have started to be offered
to farmers and agricultural production, detailing the adjustments made to honor WTO commitments.5 The Ministry
of Finance later reported that in 2011, Chinas grain growers
were to receive a total of 140.6 billion yuan in subsidies for
purchasing agricultural supplies and machinery as well as for
growing a more diverse selection of crops.6
The fruits of reformers labors are perhaps best summarized in the following passage from the same report: Chinas
everyday per capita calorie intake surpassed 2,750 kilocalories, protein more than 70 grams, fat 52 grams, which by and
large reached the world average level. In general, Chinas food
security has been effectively guaranteed, and its urban and rural dwellers are living a healthier and more nourishing life.5
A more recent report by the National Bureau of Statistics indicated that between 2002 and 2011, average rural incomes surged by 1.8 times compared with 2002 to 6,977 yuan
($1,090) in 2011. Simultaneously, the report announced
ongoing increases in several areas: grain production reached
571 million tons, an increase of 114 million tons from 2002,
an annual increase rate of 2.5 percent over the last decade,
rice yields in 2011 stood at 201 million tons, a 15.2 percent
increase from 2002, wheat production reached 117 billion
tons, up 30 percent and corn obtained a yield of 192 million tons, a 58.9 percent increase from a decade ago.7
Counteracting gains in self-sufficiency, in 2013 a combination of frost in the growing period and rain during the
harvest led to China challenging Egypts position as the largest importer of wheat in the world. Hard hit was the center of
Henan province, where some growers [had] seen their production slashed by 40 percent from year ago.8
China [had] also been snapping up corn shipments in recent weeks with imports forecast to climb to an all-time high
of 7 million metric tons over the course of 2013, according
to the USDA.8
Despite the growing robustness of domestic agriculture,
however, several issues remain major concerns moving forward.
For one, a study conducted this year by the Chinese Academy of Sciences found that the agricultural sector is a drag
on the development of Chinas modernization, with its technological level by the end of 2008 more than a century behind that of the United States. In terms of productivity, the
Academy found that Chinese agricultural efforts were only
one percent as productive as those in Western nations; furthermore, the report concluded that bringing productivity up
to international norms will necessitate the creation of jobs
for 280 million farmers, cutting the rural workforce popula-
960
14
1
20
2
2001
2006
2006
260020072010
2009
7254.90
20001231.54
42
20091978
139038.3%
20085.8
19.2%3
1978150
20062006
3170
19782006 4
2004
5 2011
14066
2750
7052
5
2011
69771090
20021.8
5.712002
1.142.5%
20112.012002
15.2%117030%
1.9258.9%7
2013
40%8
2013700
8
2008
100
402.8
3.10.31
9
2012
8
10
2003
9
95
tion from 310 million to 31 million over the next 40 years as

part of modernization efforts.9 In other words, the situation is
far from ideal in absolute terms regardless of impressive relative gains made in recent years.
Another issue seems to be enforcement of policies currently on the books. In August of 2012, a series of inspections
was announced which intended, according to NPC Standing Committee Chair Wu Bangguo, to find out the prominent issues that hamper Chinas rural reform and development and providing suggestions to promote the agricultural
modernization.10
At the time, China Daily reported that the new round
of inspectionsfocusing on the development of modern
agriculture, grain safety and the protection of farmland
were the eighth-such carried out since 2003.10 The fact that
the inspections were carried out by officials dispatched from
Beijing, combined with follow-up comments from another
NPC Standing Committee about the [promotion of ] better
implementation of the law as it provides firm legal safeguard
for the development of agriculture and the improvement of
living standards in rural areas10, suggests that the inspections
also aimed to curtail local-level corruption in rural areas.
Inspections aside, the same NPC Standing Committee
member also pointed out that China [is] facing a series
of challenges in rural development, including weak grain
productivity, lack of a long-term system for raising the farmers
income, and shortage of farmland and water resources9
somewhat tempering the optimistic National Bureau of
Statistics figures listed above and reported by China Daily the
very same day.
Another source of ongoing concern is Chinas now-notorious problems with food safety:
Since 2008, when six children died and 300,000
were sickened by melamine-tainted baby formula,
the Chinese government has enacted ever-more-strict
policies to ensure food safety, including a directive last
month from the Supreme Court calling for the death
penalty in cases where people die as a result of tainted
foods.
It hasnt helped. If anything, Chinas food scandals are
becoming increasingly frequent and bizarre.11
The source of the above quote focused on tainted pork

served at a wedding in Hunan province; another incident
only two months laterinvolved 11 deaths in Xinjiang from
poisonous vinegar. According to that report, those are just
the latest. They follow the meat that glowed in the dark; the
tainted buns; the exploding watermelons; the 40 tons of bean
sprouts containing antibiotics and carcinogens; the rice con-
96
taminated with heavy metals; the mushrooms imbued with

bleach; and the pork so dosed with banned stimulants that
athletes attending an international meet in Shanghai had to
be told which restaurants were safe to eat at.12
In examining the cause of pervasive food safety issues in
China, the Wall Street Journal quoted Beijing-based attorney
Lester Ross as suggesting that one of the biggest issues is the
drive to make a buck at any cost [ that] some companies
see that by using additives, they can cut overhead costs or
boost profit margins, and they merely arent thinking about
the affects the additives will have on consumers. Mr. Ross
furthermore attributes too many bureaucracies handling
food safety as an additional source of problems.13
The same report notes that sanitation and contamination
issues permeated the food manufacturing and processing in
the US in the late-19th century, observing that it was not
until the publication of The Jungle, a book that unveiled the
horrific standards of meat-packing plants of Chicago, that the
US began to wake up to its food safety problems.13
Regardless of cause and precedent, the at least one effect of
ongoing safety issues is thoroughly predictable:
:
2008
30
Its clear that the credibility of the system will suffer,
11
said Peter K. Ben Embarek, the World Health Organizations food safety official. The (Chinese) consumer
will continue to lose confidence in Chinese products
and consumers abroad will equally lose confidence in
Chinese products.14
A final challenge likely to play a greater role in the future

of the sector is consumer acceptance of genetically-modified
foodstuffs.
In the past 30 years, Chinas urban population has jumped
to about 700 million from under 200 million, driving up demand for meat and staples such as rice that scientists say only
GMO can satisfy.15
Winning acceptance for the more widespread use of
GMO, observes Reuters, may be a hard sell in a country
frequently in the grip of food scares.15 Nevertheless, the
State media are attempting exactly that. On a single day in
November 2013, Communist Party mouthpiece the Peoples
Daily rejected rumors that eating GMO food could alter
human DNA, and news agency Xinhua ran an investigation
last week debunking tales that GMO corn consumption had
reduced sperm counts.15
At least some stakeholders remain unimpressed by the public relations effort: Scientists have been at pains to show that
GMO is already part of the food chain: China is the worlds
top importer of GMO soybeans, used as feed, and also imports GMO corn from the United States and elsewhere, all
factors which may render the public debate moot.15
11
40
12
Lester Ross
[]
13
19
The Jungle
13
Peter.Ben Embarek
14
2
7
15
15
201311
15
15
2006458
20055.8%
2.4200518.9%16
2005
60
2006458
12200016
2050
97
Foreign investment in agriculture has historically (and

unsurprisingly) grown alongside reform in the sector. The
Ministry of Commerce (MOFCOM) reported that 2006 saw
458 foreign-invested projects (an increase of 5.8 percent over
2005) with a total utilized investment of $240 million (an
increase of 18.9 percent).16
Temperate eastern China has historically received the majority of foreign investment in agriculture (as of 2005, nearly
60 percent of the total since the opening up), although sustained efforts are being made to drive investment into central
and western China.
Interestingly, in 2006 only 12 of the total 458 foreigninvested projects involved investments of more than $20
million,16 suggesting that the dramatic economies of scale witnessed in secondary industry have yet to take hold in agriculturewhich, despite experimentation with communal farming in the 1950s, has historically been driven by individuals
or families working small parcels of land who have in the past
been (and currently are) largely self-sufficient.5
In 2007 549 foreign investment projects were initiated
in the sector, but in 2008 that number decreased to 470.
Of those set up in 2008, the majority (332) were in eastern
China, with 76 and 62 located in central and western China,
respectively. These projects accounted for a 40 percent yearon-year increase in utilized foreign capital (for a total of approximately $550 million), however.17
In 2009, 515 foreign investment projects had been realized in agriculture, up from 2008s figures; utilized foreign
capital similarly grew to reach $751 million (a 35 percent
year-on-year increase). Regional distribution of these projects
was generally similar to in years past, although the nations
central region attracted a greater share than it had in 200818
(consistent with, or perhaps a result of, the Central Governments efforts to drive investments inland).
According to a Regular Press Conference of the Ministry
of Commerce held in 2010, the number of newly established
foreign enterprises in the agriculture, forestry, animal husbandry and fishery industries was 929, up by 3.7 percent yearon-year, and the actual utilization of foreign capital amounted
to $1.91 billion, up by 33.8 percent year-on-year. These new
enterprises accounted for 3.4 percent of the national total of
newly-established foreign-invested enterprises and 1.8 percent
of total paid-in foreign capital, respectively.19
FDI in the agricultural industries has historically focused
on technical cooperation with local producers; the proportion
of foreign investment with an export focus is quite small.19
The trend in agricultural FDI is perceived to be upward,
however: overcapacity in the manufacturing sector will likely
drive more FDI to the agricultural and service sectors, Asian
Development Bank senior economist Zhuang Jian told China
Daily in 2009.20 In 2011, China Daily specified that the
98
resources of foreign investment will be allocated to advanced

agriculture.21
Finally, although the Ministry of Agriculture published
statistics indicating a 13.2 percent year-on-year growth in
agricultural exports between 2002 and 2010, the Chinese
Academy of Social Sciences is predicting that the import and
export of Chinas agricultural products will likely slow in the
medium- to long term.22
Another recent development is the proliferation of agricultural insurance. After a pilot program involving six provincial
regions, it was reported that agricultural insurance income
reached 10.54 billion yuan by November [of 2008], soaring
112 percent compared with the same period [in 2007], and
that a total of 4.2 billion yuan in compensation had been paid
out to more than 10 million households as a result.23
Additionally, a pilot pension program was launched
in 10 percent of the nations counties in 2009. By 2011,
Southwestern University of Finance and Economics Professor
Lin Yi told China Daily that 200 million individuals were
participating in the program. It is expected to cover the entire
nation by 2020.24
In addition to the subsidies and the new pension program,
improvements have been made to rural health insurance under the New Rural Cooperative Medical Scheme. The program, which reportedly covered 93 percent of the Mainlands
farmers in 2010, under which the government will raise its
subsidy to 200 yuan per person each year from 120 yuan in
2011 [while the individual] pays 30 yuan. The program will
furthermore increase reimbursement rates for basic and essential drugs and services from 60 to 70 percent and raise the
maximum reimbursement amount from 30,000 to 50,000
yuan.25
2010 saw an additional insurance scheme initiated: a
weather insurance pilot program in Fujian was announced
after a China Insurance Regulatory Commission (CIRC) report detailed a systemic inability to adequately compensate
for losses due to natural disasters: Insurers cover about 30
percent of losses from natural disasters in developed countries,
but that figure is below 5 percent in Chinaa country that is
frequently hit by a wide range of natural disasters.26
A 2010 CIRC report indicated that agricultural insurance
premiums over the course of 2009 totaled 13.39 billion yuan
in 2009.27
Despite its fast expansion following that original pilot
program, agricultural insurance is still somewhat underregulated and potentially problematic. According to an
unnamed State Council official speaking to China Daily,
issues include a lack of continued policy supports and unclear
responsibilities for relevant departments. Accordingly, the
State Councils Legislative Office issued a draft proposal
for agricultural insurance regulations in May of 2012. The
2007549
20084702008
332
7662
2008405.5
17
20095152008
7.51
35%
2008 18
2010
2010
9293.7%
19.133.8%
3.4%
1.8% 19
19
2009
202011
21
20022010
13.2%
22
6 16
200811105.4
200711242
23
200910%
2011
202024
201093%
120200
30
60%70%
300005000025
2010
30%
5%
26
2010
2009133.9
27
20125
28
201311
29
29
2012877000
18470030300
29
99
draft details how the government will support agricultural

insurance with favorable financing and taxation policies
and will specify the duties of relevant departments, in
addition to outlining the principles for insurance companies
handling agricultural insurance and the rules for operations in
accordance with risk analyses, business actions and business
results28
Notable Policy Activity
to be manifested in the following ways:

[Budget expenditure] should first support development
of the agriculture and rural area, and fixed-asset invest-
Ongoing Attempts to Close the Income Gap Between Urban

and Rural Workers
The first official announcement of 2010, the opinion titled
CPC Central Committee and State Council on the increasing intensity of urban and rural development (
), placed emphasis on
the reform and modernization of the rural economya large
part of which is unsurprisingly constituted by the agricultural
sector.
According to Xinhua, the document states that in addition
to attempting to stimulate consumption in rural areas, the
government will also continue boosting financial input into
the agriculture and rural areas, an increase in financial input
100
1. 1.
4.52030
29
2. 2.
ment first be channeled into agricultural-related infrastructure and projects in relation to rural livelihood.
More subsidies should be channeled to increase the
output of grain, potato, highland barley and peanut, as
well as the purchase of agricultural machinery, it said.
Better Land Use Rights for Farmers

New reforms announced in November 2013 allow rural
collectively-owned land, a legacy of the planned economy, to
be transferred, rented or pooled but will stop short of giving
commercial firms free rein to buy land and will focus instead
on creating bigger family farms, Reuters reports.29
Another condition of the purchase of collectively-owned
land is that firms are only allowed to do modern farming and
livestock breeding, not real estate or tourism.29
The move is reportedly part of the governments effort to
persuade families to stay in the countryside by raising incomes,
and the large-scale family farm has been identified as the most
effective method; each [of the countrys 877,000] familyowned farms earned 184,700 yuan ($30,300) in 2012, about
ten times higher than the average rural household income.29
The World Bank reports that despite massive off-farm
migration, rural population growth has meant that cultivated
land per agricultural laborer has remained fairly constant, increasing only from 0.35 hectares in 1978 to 0.41 in 2008.
Average Chinese farm holdings are well under 1 hectare, far
lower than the global average; the average farm in the United
States is 300 times bigger than in China. 41
Arguing against greater consolidation in the short-term,
researchers have said it was not suitable to develop farms on
the scale of those in the United States, given Chinas huge
population and the need to find work for 450 million farmers
still likely to live in the countryside by 2030.29
19780.35
20080.411
30041
The government would implement more policies for

purchasing and stockpiling major agricultural products, including corn, soybean and oilseeds, to stabilize
prices of major farm produce.
More efforts will be made to strengthen financial
2010
services including micro-credit loans and insurance

service in rural areas, according to the document.30
The policy release reportedly also proposes increased focus on addressing issues arising from a new generation of
migrant workers (those born in the 1980s and 1990s) and
methods by which to stimulate the construction or refurbishment of rural residential properties.30
Later in 2010, a Vice Minister of Agriculture noted that
development of rural tourism [for example farmstay programs in which comparatively-wealthy tourists temporarily
reside in rural settings] was a strategic move to balance urban
and rural development and play multiple roles. Such tourism
promotion, said Mr. Gao, not only help[s] to accelerate the
strategic restructuring of agricultural and rural areas and promote employment of farmers and increase of their income as
well as development of modern agriculture and a new countryside, but also play[s] important roles in strengthening the
interaction between urban and rural areas [and coordinates
the] development of rural and urban areas.31
For all these efforts, however, significant gains appear elusive. Su Hainan of the China Association for Labour Studies
(a government think-tank) notes that urban incomes remain
three- to four times higher than rural incomes.32Accordingly,
the 12th Five-Year Plan outlines three objectives concerning
narrowing the gap:
1. steadily increase grain output (grain production of
China should realize a capacity increase of 50 million
tons over the next five years, however, it will be a
formidable task);
2. implement deeper reform to provide equal public services
(services include infrastructure and maintenance, basic
social welfare, maintaining legal order, and providing
30
30
10
31
32
3. 3.
33
2013
8896
17.7%
16.8%14.2%
7.4%201326894
6332.4%
102843.6
260913.9%43
7% 34
2013911
2013
240280
75%2013
44
10
35
1994
1999
101
other services to meet educational and cultural needs)

for urban and rural residents; and
3. raise the income for farmers by the means of new
measures (supporting more professional farmers,
expanding their business scale and making them more
competitive in the global market).33
According to the Ministry of Agriculture, in 2013 per
capita net income of rural residents reached 8896 yuan.
Among the four elements in rural residents income, the fastest growing one is property income, with an increased of 17.7
% over the previous year, followed by wage income, an increase of 16.8 %, while transfer income increased by 14.2 %
, and family-run income, 7.4%.. The total number of Chinas
migrant workers in 2013 was 26,894 million with an increase
of 633 million compared with that of last year, increased by
2.4 percent, among which local migrant workers were 10,284
million, increased by 3.6 percent. The average income of
migrant workers was 2609 per month, with an increase of
13.9% over the previous year. 43
A stated, tangible goal of increasing net per capita income
in rural regions by seven percent in real terms over the next
five years has been articulated by the National Development
and Reform Commission.34
At the same time, the government is inching towards increased assistance for the welfare of rural families. On September 11, 2013, the National Family Planning Council released
an announcement on the work of New Rural Cooperative
Medical System, which stated that from 2013, the new rural
cooperative medical system subsidy from financial department at all levels should be increased from 240 per person
per year to 280 per person per year, and the reimbursement
rate for hospitalization expenses covered by related policies
should be increased to about 75%. In 2013, the new rural cooperative medical system was not confined to the local region
and the reimbursement can be made in different provinces.
Nine provinces and municipalities, including Beijing, Inner
Mongolia, Jilin and Jiangsu were the first ones that had crossprovince reimbursement. 44
Ongoing Land Reform
Rural land reform continues to be an issue of great importance to a great number of people in China. While urban
housing has been essentially privatized for more than a decade
(although land still officially belongs to the State), reform in
rural areasand particularly with regard to arable landhas
been slower.35
In response to overzealous appropriation of agricultural land
by localities, the Regulation on Protecting Basic Farmland
was enacted in 1994, with an amendment in 1999. The regulation stipulates, basically, that agricultural land (which is scarce
102
to begin with) is not to be reassigned to industrial or commercial purposes, and should neither be left idle or deserted.5
The Ministry of Agriculture additionally noted that in
2003, due to some tendency in some localities toward neglecting basic farmland protection in recent years, the Chinese Government issued the Circular on Further Measures to
Implement Strict Farmland Protection System, in an oblique
reference to the land appropriations by authorities looking to
resell the land for profit, a significant cause of social unrest in
rural areas. 5
The result of the circular was that efforts have been made
to rectify and straighten out various kinds of development
zones, and resolutely reverse any illegal establishment of development zones and expansion of the areas the development
zones occupy.5
Xinhua subsequently reported that More than 50,000
land dispute cases arose in 224 cities and counties across the
country from 2003 to March 2008.36
The State Council also got involved, having issued the
Circular of the State Council on Strengthening Land Control
(Guo Fa [2006] No. 31) in 2006, half-way through the period
of study reported by Xinhua.37
The Wall Street Journal suggests that reform efforts are still
necessary, citing a Chinese Academy of Social Sciences report
that 65 percent of the estimated 187,000 mass incidents
(demonstrations or protests) in 2010 were related to land
disputes.38
In 2011, the State Council promulgated further measures
to correct procedural errors in the rural land use reform,39
with China Daily reporting Premier Wen Jiabaos remarks that
regional authorities must protect farmers rights and that no
land should ever be taken against a farmers will.40
The World Bank also concurs that land reforms in China
are likely to have the largest growth impact. Land is of central importance to Chinas economic growth and social stability, but local implementation of land policies has led to
unintended consequences widely viewed as unsustainable
(Urban China (World Bank and DRC, 2014)). Rigid land
policies have effectively tied half the population to rural areas that produce only 10 percent of GDP. Rural land is held
in small parcels, making it difficult to assemble economically
sized farms, increase agricultural productivity, and raise rural
incomes. The 2008 global economic crisis and the subsequent
accommodative fiscal policy stance have had a dramatic effect
Chinas land-based economic growth model through accelerated land taking and conversion, bringing the inefficiencies
of current land tenure arrangements and the need for reform
into even clearer focus. 41
However, it also cautions that reforms to land, public finance and the hukou system require a carefully coordinated
approach. Reforms need to recalibrate the use of land, im-
2003
5
200320083
22450000
36
2006831
200631
37
2010
187000
65%38
2011
39
40
10%
2008
41
41
20126
2015
20002900
45
20126
45
2014
2009
103
prove land governance, and reduce the governments dependence on revenue from land conversions and land leases.
They could facilitate the transition from land asset sales to a
modern tax system aligned better with Chinas new economic
structure. They could also deepen land markets, clarify rural citizens in their property rights and land assets at home,
and boost their opportunities and entitlements for integrating
into cities. Thus to increase the efficiency of land use, it is
necessary to ensure the security of agricultural land tenure,
including introducing the transferability of land rights and
reforming land acquisition and compensation practices. This
action includes rolling out the recent policy decision to grant
indefinite land use rights to farmers, to expand land registration, and to strengthen rural land markets. 41
Legislating Towards Food Safety
Food safety remains an ongoing concern, so in yet another
attempt to legislate its way to food safety, China released a
new five-year plan to upgrade its food safety regulations in
June 2012. According to the official Xinhua News Agency, the
government will revamp outdated rules, review and abolish
contradicting or overlapping standards, and draft new codes
by 2015. There are currently more than 2,000 national food
regulations and 2,900 industry-based regulations on the
books, many of them overlapping or contradictory.45
According to the plan, 14 government departments, including the ministries of health, science and technology, and
agriculture, will work to revamp safety standards, with priority given to dairy products, infant food, meat, alcohol, vegetable oil, seasoning, health products, and food additives. It
is an onerous task for the government to ensure food safety,
because Chinas food industry still suffers from nonstandard
management and many hidden safety risks, said a statement released in June 2012 following a State Council executive meeting presided over by Premier Wen Jiabao. The State
Council vowed a vigorous crackdown on those who endanger food safety. The government should enhance supervision
by setting up an efficient mechanism that covers all links in
the food industry and a rigid food recall system for destroying
defective products, the statement said. Moreover, the government will make special efforts to establish standards for
testing contaminants, food additives, microorganisms, and
pesticide and animal drugs. 45
In 2014, the National Peoples Congress (NPC), released
a draft of the revised Food Safety Law (Draft FSL) for public comment. Formerly called the Food Hygiene Law and
re-named Food Safety Law in 2009, which was also when
the government altered most of its content. The Draft FSL
focuses on risk assessment and management. It requires increased attention to government monitoring of specific risks
(i.e., foodborne illnesses, illegal additives, and other forms
104
of contamination), assessment of those threats by a centralized government body, and the subsequent enactment of
standards or adoption of other mitigation measures that are
proportional to the size of the risk. At the same time, the
Draft FSL also requires greater responsibility on the part of
manufacturers and distributors of food. For example, the
draft requires self-audits by food manufacturers.The Draft
FSL imposes additional requirements on entities in various
segments of the food industry and in different parts of the
supply chain (manufacturing, distribution, retail) to ensure
safety. For example, it requires that infant formula manufacturers implement special good manufacturing practices and
that they self-audit and report on those audits to local food
and drug authorities. It also prohibits contract manufacturing
by infant formula manufacturers. 46
Among the most far reaching requirements are those related to penalties. The Draft FSL increases penalties and liabilities significantly. Specifically, the draft increases administrative fines by agencies for FSL violations, the potential
for civil compensatory and punitive damages in related litigation, and the potential for criminal prosecution. Perhaps
more ominous is the pledge to strengthen the link between
food safety regulation and criminal penalties. The Draft FSL
calls for prompt reporting of suspected food safety crimes
by CFDA and other administrative agencies to the Ministry
of Public Security (Chinas police force) for immediate investigation. China has already cracked down on violators of food
safety standards through the Criminal Code over the last several years. The draft law increases the trend toward criminal
prosecution in this area.46
46
46
105
Works Cited
Some Facts about the Land and Resources of China The
Ministry of Land and Resources of the Peoples Republic of
China. 19992007.http://www.mlr.gov.cn/mlrenglish/about/
facts/. Accessed January 9, 2009.
US investment guru sees future in China, despite hard times.

AFP. January 8, 2008. http://www.google.com/hostednews/
afp/article/ALeqM5jbO3p24mtjhU2uMVeIk1AT4TAXDg.
Accessed January 9, 2009.
Maryn McKenna. Food Safety in China, and the Risk to

the U.S.. Wired. August 23, 2011. http://www.wired.com/
wiredscience/2011/08/china-food-risk/. Accessed November 15,
2012.
13
Laurie Burkitt. Why China Struggles with Food Safety.

China Realtime Report. April 25, 2011. http://blogs.wsj.com/
chinarealtime/2011/04/25/why-china-struggles-with-foodsafety/. Accessed November 15, 2012.
14
Steven Jiang. China: Food safety violators to face death penalty.

CNN. May 30, 2011. http://articles.cnn.com/2011-05-30/
world/china.food.violations_1_food-safety-death-penaltymelamine. Accessed November 15, 2012.
15
David Stanway and Niu Shuping. Chinese state media kick

into high gear to ease GMO food fears. Reuters. November 13,
2013.
http://www.reuters.com/article/2013/11/14/us-chinagmo-idUSBRE9AC16720131114. Accessed February 1, 2014.
16
The Survey of Foreign Investment in Chinas Agriculture of 2006.

Foreign Investment Administration of the Ministry of Commerce
of the Peoples Republic of China. January 30, 2008. http://
www.fdi.gov.cn/pub/FDI_EN/Economy/Sectors/Agriculture/
Agriculture/t20080130_89294.htm. Accessed January 9, 2009.
The National Bureau of Statistics of China. China Statistical

Yearbook 2009. China Statistics Press. Beijing, Peoples Republic
of China. 2009.
China Agricultural and Economic Data: National Data Results.

The United States Department of Agriculture. July 1, 2009. http://
www.ers.usda.gov/Data/China/NationalResults.aspx?DataType=1
0&DataItem=202&StrDatatype=Government+expenditures+on
+agriculture&ReportType=1. Accessed November 28, 2010.
Report on the State of Chinas Food Security. The Ministry of

Agriculture of China. April, 2004.
Chinas rural pension program covers 199 million people.

Xinhua. July 25, 2011. http://news.xinhuanet.com/english2010/
china/2011-07/25/c_131008696.htm. Accessed October 27, 2011.
17
The Survey of Foreign Investment in Chinas Agriculture

Industry in 2008. Invest in China. November 9, 2009. http://
Agriculture/t20091109_114154.htm. Accessed February 2,
2010.
18
The Survey of Foreign Investment in Chinas Agriculture

Industry in 2009. Invest in China. October 13, 2010. http://
Agriculture/t20101013_127264.htm. Accessed November 28,
2010.
19
Regular Press Conference of the Ministry of Commerce on 18

January. Ministry of Commerce People Republic of China.
January
20, 2011. http://english.mofcom.gov.cn/aarticle/
newsrelease/press/201101/20110107377859.html.
Accessed
October 27, 2011.
20
Si Tingting. Global investors faith in China swells. China

Daily. September 18, 2009. http://www.chinadaily.com.cn/
china/2009-09/18/content_8705843.htm. Accessed February 3,
2010.
Agricultural industry makes progress. China Daily. August

27, 2012. http://www.chinadaily.com.cn/china/2012-08/27/
content_15710221.htm. Accessed November 15, 2012.
Niu Shuping and Naveen Thukral. Exclusive: China may

become top wheat importer after crops ruined. Reuters. July
16, 2013. http://www.reuters.com/article/2013/07/16/us-chinawheat-idUSBRE96F1F120130716. Accessed February 1, 2014.
Zhou Siyu. Agricultural modernization lagging. China Daily. May

10
11
106
12
China to check implementation of agriculture law. China

Daily. August 27, 2012. http://www.chinadaily.com.cn/
china/2012-08/27/content_15708158.htm. Accessed November
15, 2012.
Barbara Demick. China wrestles with food safety problems. Los
Angeles Times. June 26, 2011. http://articles.latimes.com/2011/
jun/26/world/la-fg-china-food-20110627. Accessed November
15, 2012.
107
21
Bao Chang. FDI continues to be strong. China Daily. March 16,

2011. http://www.chinadaily.com.cn/usa/business/2011-03/16/
content_12180308.htm. Accessed October 27, 2011.
22
Chinas agriculture sector faces rising costs in 2011: Think

Tank. Xinhua. April 19, 2011. http://news.xinhuanet.com/
english2010/china/2011-04/19/c_13836441.htm.
Accessed
October 27, 2011.
23
24
China extending pension program to countryside. China Daily

via Xinhua. September 16, 2011. http://www.chinadaily.com.
cn/bizchina/2011-09/16/content_13718620.htm.
Accessed
October 27, 2011.
25
Wealth gap-narrowing programs power up Chinas rural

market. Xinhua. April 14, 2011. http://news.xinhuanet.com/
english2010/china/2011-04/14/c_13828608.htm.Accessed
October 27, 2011.
Liang Baozhong. Development of Rural Tourism Is a Strategic Move

to Balance Urban and Rural Develop and Play Multiple Rolesment.
October 25, 2010. The Ministry of Agriculture of The Peoples
Republic of China. http://english.agri.gov.cn/ga/news/201010/
t20101025_2556.htm. Accessed November 28, 2010.
32
News Analysis: Big changes sweep rural China. China Daily. April
33
Dang Guoying. Better future for farmers. China Daily. March

23, 2011. http://www.chinadaily.com.cn/opinion/2011-03/23/
34
Zheng Lifei. Foreign Investment in China Climbs 15% on

Consumer Demand. BloombergBusinessweek. May 16, 2011.
http://www.businessweek.com/news/2011-05-16/foreigninvestment-in-china-climbs-15-on-consumer-demand.html.
Accessed October 27, 2011.
35
Still not to the tiller. The Economist. October 23, 2008.

http://www.economist.com/opinion/displaystory.cfm?story_
id=12471124. Accessed January 9, 2009.
26
Hu Yuanyuan China plans weather insurance to help farmers.

China Daily. July 20, 2010. http://www.chinadaily.com.
cn/bizchina/2010-07/20/content_11022571.htm.Accessed
November 28, 2010.
36
27
. 5.
21. September 30, 2010. http://finance.sina.
com.cn/stock/newstock/zxdt/20100930/00088727519.shtml.
Accessed February 2, 2011.
37
28
China to promote agricultural insurance. China Daily. May

4,2012.http://www.chinadaily.com.cn/china/2012-05/04/
29
30
108
Chinas agriculture insurance income exceeds 10 bln yuan

by November. Xinhua. December 27, 2008. http://news.
xinhuanet.com/english/2008-12/27/content_10567975.htm.
31
David Stanway and Niu Shuping. Chinas top farm official reins
in land reform expectations. Reuters. December 5, 2013. http://
www.reuters.com/article/2013/12/05/us-china-agriculture-landidUSBRE9B408G20131205. Accessed February 1, 2014.
China pledges new efforts to boost rural development. Xinhua.
January 31, 2010. http://news.xinhuanet.com/english2010/
china/2010-01/31/c_13157837.htm. Accessed February 2, 2010.
Chinas legislature eyes stability with law on rural land disputes

meditation. Xinhua. June 27, 2009. http://news.xinhuanet.
com/english/2009-06/27/content_11609910.htm.Accessed
February 3, 2010.
Circular of the State Council on Strengthening Land Control.
The State Council of the Peoples Republic of China. August
31,
2006.
http://www.fdi.gov.cn/pub/FDI_EN/Laws/
GeneralLawsandRegulations/AdministrativeRegulations/
P020070302595840935893.pdf. Accessed February 10, 2010.
38
Tim Hanstad. Anchoring Land Rights in China. The Wall Street

Journal. October 17, 2011. http://cn.wsj.com/gb/20111017/
opn075701_ENversion.shtml. Accessed October 28, 2011.
39

201047.
The Central Peoples Government of the Peoples Republic of
China. April 2, 2011. http://www.gov.cn/zwgk/2011-04/02/
40
Cang Wei. Premier Wen: Farmers rights a priority. China

Daily. April 5, 2011. http://www.chinadaily.com.cn/usa/
china/2011-04/05/content_12278426.htm. Accessed October
29, 2011.
109
110
41
China Economic Update - Special Topic: An Update of Chinas

Fiscal and Tax Reforms. World Bank. October 29, 2014. http://
www.worldbank.org/content/dam/Worldbank/document/EAP/
China/CEU_Oct29_en.pdf
42
Xing, Wen-Yan, The Impact of Chinas Fiscal Expenditure in

Agriculture on Farmers Income. Asian Agricultural Research
Volume 2, Issue 05, May 2010. http://purl.umn.edu/94264
43
2013 per capita net income of rural residents reached 8896

yuan. Ministry of Agriculture of the Peoples Republic of
China. January 22, 2014. http://www.moa.gov.cn/fwllm/qgxxlb/
xj/201401/t20140123_3746486.htm
44
Xu Wei. China Agriculture Information. January 7, 2014. http://

www.agri.gov.cn/V20/ZX/nyyw/201401/t20140107_3732704.htm
45
Ted Agres, Despite Regulatory Reform, Chinas Food Safety

Remains Problematic. Food Quality & Safety Magazine,
February/March 2013. http://www.foodquality.com/details/
article/4366181/Despite_Regulatory_Reform_Chinas_Food_
Safety_Remains_Problematic.html?tzcheck=1
46
John Balzano and Allan Topol. New Food Safety Law for China. Global Policy Watch, Covington & Burling LLP. July 23,
2014. http://www.globalpolicywatch.com/2014/07/new-foodsafety-law-for-china/
111
2.2 Chemicals, bio-chemicals and energy
2.2
70%
30% 1
HE MAJORITY OF power generation in the PRC

approximately 70 percentis via coal. According to
a former National Energy Administration official, this is
roughly 30 percent higher than the world average.1
Whereas persistent power shortages at the generation level
have historically been attributed to shortages in production,
as well as infrastructure unable to support the extensive
circulation necessary to keep plants running in areas lacking
local supplies2, the decrease in power consumption as factories
closed during the economic slowdown in 2008 actually led to
the encouragement of exporting coal.3
At that time, PRC National Development and Reform
Commission Vice Chairman Zhang Guobao observed that
the downward trend in the domestic consumer price index
and falling international prices for major staple energy commodities provide an opportunity and room to normalize the
pricing mechanism for coal used in power plants.3
Nonetheless, today coal demand outpaces domestic
production4 and coal exports have declined since 2008. In
January 2011 China Daily reported a 31 percent increase in
net coal imports over 2010 following a 29 percent increase in
2009 and a predicted increase of as much as 63 percent for
the remainder of that year. By comparison, coal exports were
reported to have declined by 15 percent in 2010.5
Domestic coal production is concentrated in thirteen large
coal production bases across the country, which produced
2.8 billion tons in 2010, accounting for 87.5 percent of the
countrys production. A fourteenth, in Xinjiang, is expected
to be completed within five years.6
Given an increase in net imports and continued efforts
to expand domestic production capacity, coal will likely continue to play a primary role in the nations power production
in the near futurea situation which will benefit from efforts
made since at least 2008 to upgrade power plants to become
more efficient, with approximately 60 percent of new plants
being built incorporating technologies that would allow them
to achieve higher energy conservation efficiency rates than the
most efficient plants in the United States (albeit only if actually used in daily operation).7
Similarly, Xinhua reports that many of the most inefficient
coal-fired plants have been closed.8 The net effect may be
minimal for the short term, however: one new coal burning
power plant goes under construction every week.9
In 2013 the government announced a new plan to address
widespread and sometimes severe pollution problems. Part of
that plan entails cutting total consumption of coal to below
65 percent of primary energy use by 2017.10
112
Green groups, writes Reuters, were expecting the action

plan to include detailed regional coal consumption cuts, but
those cuts appear to have been left to the provinces to settle
themselves.10
Such efforts may have repercussions far beyond Chinas
own borders, as well:
A choking smog across much of northern China
2
2008
3
[]
threatens not just the health of local residents, but

also of major coal projects globally that are still on the
drawing board.
[]
With Chinas coal demand the primary driver for a
slew of mine investments over the past decade, this
trend could derail a list of capital intensive coal projects from Australia toIndonesia and Mozambique.
Even without the environmental drive, new railways
see Chinas miners export some of their surplus output

at competitive prices, hitting regional miners and the
viability of new projects.
This is a major shift for a country that built an average
of two coal-fired power plants every week in the last
decade, went from net exporter in 2009 to the worlds
top importer just two years later, and burns nearly as
much coal as the rest of the world combined.
2008 4 20111
201031%
200929%201163%
201015% 5
With slower economic growth and a big push towards gas and renewables, the golden decade for coal
is over.11
As noted by Mr. Chen, a growing proportion of capacity

formerly served by coal may go to non-traditional sources.
In March 2011, non-fossil fuels were estimated to account
for 8 percent of the nations total energy consumption, with
the 12th Five-Year Plan setting the goal of increasing that figure to 11.4 percent by 2015.8The category of non-fossil fuels
is understood to include the energy sources of hydropower,
wind power, solar power, biogas, and nuclear.12
White Paper contributors Dezan Shira & Associates
201028
87.5%
6
2008
60%
China is kicking its coal addiction, said Chen Yafei, vice-director at the China Coal Research Institute.
from mines to ports, falling investment in coal-fired

generation and slowing power demand growth could
9
2013
2017
65%10
10
2009
11
20113
8%2015
11.4% 8
12
Dezan Shira & Associates
1.54
12
113
report that China will spend an estimated US$1.54 trillion

on clean energy projects in the next 15 years, and that it
expects merger and acquisition activity in the field to show
continuing growth12
Development of nuclear power is expected to proceed
but is unlikely to outstrip other sources in the clean energy
mix. Whereas in 2009 a State Nuclear Power Technology
Corp (CNPTC) analyst told China Daily that nuclear power
generation then accounted for less than 2 percent of the
nations overall capacity13, a reported government investment
of 600 billion yuan over 10 years14 may help to increase
nuclear generations role in satiating Chinas increasing energy
demands.
By January 2011, there were 15 nuclear power reactors
across four sites in the PRC, and 26 additional reactors under
construction;15 although historically nuclear sites have been built
in coastal regions, new plants are also planned for inland areas.16
According to Li Junfeng, Deputy Director-General of the
NDRCs Energy Research Institute, The move to further develop nuclear power is integral for China to achieve its goals
in and emission control17
Building more nuclear power stations is essential to Chinas
endeavor to cope with energy shortage and pollution, agreed
deputy director of the Science and Technology Committee
of the China National Nuclear Corporation (CNNC) Ye
Qizhen: Chinas installed capacity of nuclear power is
expected to reach 70 million kW by 2020, 200 million kW
by 2030 and 400 million kW by 2050, [ which means that]
nuclear power will account for 7 percent of Chinas overall
power capacity in 2020, 15 percent in 2030 and 22 percent
in 2050.18 The target for generation set in the 12th Five-Year
Plan is to reach a capacity of 40 million kW.16
Externalities may play a long-lasting role in the
development of the sector. In the aftermath of the 2011
Fukushima nuclear crisis in Japan, Beijing cut its 2020 nuclear
power capacity target to 58 gigawatt (GW) from 80-90 GW,
reports Reuters.19
Problematically, aggressive expansion of nuclear power it
is running into a major stumbling blocka breakdown of
trust, post-Fukushima, in official assurances of public safety.
In July of 2013, for example, a $6 billion uranium processing
plant in the southern province of Guangdong was canceled
[after] about a thousand people took to the streets demanding
the project was scrapped over public health and environmental fears.19
Industry insiders blamed the cancellation of the project
on poor communication and a lack of public education. They
say if things do not improve more protests could spring up
elsewhere, threatening those plans to build new reactors.19
Hydropower, a strong contributor to Chinas power production, especially in central and western provinces, was at-
114
tributed approximately 7.8 percent of the national installed

capacity in 2008, up from one percent in 1949.20
In 2010, the PRC owned the worlds largest installed hydropower capacity (213 gigawatts), the majority of which is
located in southern and western provinces.12
The May 12, 2008 earthquake in Sichuan, however, highlighted concerns about the stability of hydroelectric infrastructure. Minister of Water Resources Chen Lei announced
two days following the disaster that some 391 dams were believed to be badly damagedbut even before the earthquake
raised doubts about the structural integrity of the more than
87,000 dams in China, Deputy Minister of Water Resources
Jiao Yong went on record saying that roughly 37,000 dams
across the country are in a dangerous state.21
Despite these concerns, plans exist to expand installed hydropower capacity by an additional 140 million kilowatts by
2015 and 450 million kilowatts by 2030.22
Work on these plans has already begun; Dezan Shira reports
that Between the second half of 2010 and the first quarter
of 2011, 10 new major hydropower stations were approved,
with 50 gigawatts of total installed capacity and investments of
more than RMB200 billion, and that likely areas for foreign
investment include hydropower equipment manufacture, operational support services and technology upgrades.12
As of late 2013, hydropower capacity [was] targeted
to grow about 6 percent a year to reach 290 gigawatts by
2015,11
Solar power joins hydroelectric in being a green source of
power generation, and there has been emphasis on developing
solar power with similar enthusiasm. A China Daily report
in December 2009 trumpeted the official statistics showing
that China consumes more hydroelectric- and solar-generated
electricity than any other nation, although the report did
not provide a reference to the statistics themselves and does
not discuss per-capita consumption.20 A Xinhua article from
two months prior reported that more than 6,000 tonnes
of polycrystalline silicon (a key material in producing solar
power) and 2 million kw of solar photovoltaic cells were
produced in 2008.23
The Wall Street Journal cites an estimate that the PRC will
account for 13 percent of global demand for solar generation
equipment by 2015, up from a current 7 percent in 2011.24
A goal of 20 gigawatts of installed solar capacity by 2020
had been published in mid-2010;25 meanwhile, the 2015
target is 10 gigawatts.12 Reuters reports that by the end of 2010
there existed 900 megawatts of capacity in the country.26
To encourage the construction of more solar power plants,
the PRC government initiated a program called the Golden
Sun subsidy, which was announced in 2009 and includes a
50 percent subsidy of all grid-connected sola investments and
70 percent of off-grid photovoltaic investments.12 The nation
2009
CNPTC
213
6000
14
2011115
26 15
16
17
CNNC
2020
70002030220504
202020302050
7152218
16
2011
202080-9058
19
20137
60
19
19
2008
7.81949
20
2010
213012
2008512
391
87000
37000
21
2015
1.420304.5
22
20102011
5002000
12
20136%
201529011
200912
20
2008600
200
23
2015
20117%13% 24
20102020
200252015100
12 2010
26
2009
50%
70%12 2013
27
20
2020 28
200929
20111
5000
115
reportedly hopes to surpass Germany as the worlds largest

solar energy market by 2013.27
Inefficient transmission is said to be the biggest challenge
to fully exploiting the benefits of green power generation,
however20 One project to address this concern is the State
Grid Corporation of Chinas plan to build a network of ultrahigh-voltage (UHV) transmission lines by 2020.28 The first
part of this grid, an AC line linking Shanxi province to Jingmen city in Hubei province, was completed in 2009.29
A January 2011 Reuters report on the State Grid
Corporations plans for UHV transmission lines indicated that
the company was alone earmarking more than 500 billion
yuan ($76 billion) to build 40,000 km of lines by 2015;30 the
State Grid Corporation itself reports that it plans to complete
a total of 10 UHV projects by 2015 and 15 by 2020, with
a budgeted investment of approximately 1.6 trillion yuan
(significantly more than was earlier reported by Reuters).29
Green generation technology is also receiving
government support*, including the requirement that all
electricity generated by renewable methods must be purchased
by the (state-owned) grid companies, and that the purchase
of the same is to be supervised by the State Council Energy
Department and the State Power Regulatory Agency, with
the caveat that those parties, in addition to the State Council
Finance Department, are to determine the proportion of
renewable energy power generation to the overall generating
capacity for a certain period.20
Despite such regulatory benefits for renewable generation,
coal will likely continue to play the most important role in
power generation in the country: in 2009 Asian Development
Bank official Ashok Bhargava noted that no matter how
much renewable or nuclear is in the mix, coal will remain the
dominant power source.7
Coals dominance will likely continue for the coming 40 to
50 years, Ni Weidou of the Chinese Academy of Engineering
told China Daily a year later.31 Coal consumption, however, is
expected to draw from 70 percent of total energy consumption
in 2009 to 63 percent in 2015, according to the National
Energy Administration.32
Despite international fashion, Chinas use of biofuels can
be expected to be much more sparing than other nations, as
Chinas arable land and food supply demands leave little surplus toliterallyburn.
Chinese agricultural products will continue to increase
yields and efficiency, but the lack of water and arable land will
limit Chinas future in grain output, said Wang Xiaohui of
the China Grains and Oils Information Center, a government
think tank. With a rising population and increased standard
of living we must ask who will feed Chinese people in the

future.33
It is been noted that due to these pressures, Chinas adoption of biofuels will be contingent on so-called second generation products which are derived from non-grain sources
such as cellulose.33 Accordingly, the Ministry of Finance and
the State Administration of Taxation co-issued the Circular
to Clarify the Application Scope of Consumption Tax Exemption for Pure Biodiesel Made from Waste Animal and
Plant Oils (Caishui [2011] No. 46), which is expected to
both incentivize legitimate biodiesel production while also
preventing the illegal recycling of restaurant waste oil: in
2010 it was reported that two to three million tons of swillcooked dirty oil were returned to dining tables every year in
the PRC, seriously threatening the countrys food safety and
public health.34
Oils importance to Chinas development and the inevitable
increase in fuel consumption as more consumer purchase in
automobiles remains a far more immediate concern than
biofuels. According to Xinhua, the PRC ranked fifth among
oil producing nations as of 200835, and remains the worlds
second-largest oil consumer.36
As of December 2008, the building of the second phase
of Chinas strategic oil reserves (rumored to hold up to approximately 170 million barrels, but still dwarfed by the U.S.
Strategic Petroleum Reserve, with its capacity of 700 million
barrels of crude oil) was confirmed.37
The importance of this strategic reserve is highlighted
by the PRCs heavy reliance on imports for consumption: a
January 2010 article in China Daily noted that Imported
crude oil accounted for 52 percent of the countrys total oil
consumption last year, and that Importing more than 50
percent is a globally recognized energy security alert level.38
By May of that year, an article in the same publication
more casually reported Sinopec officials stating that The
country may have to rely on imports to meet as much as 70
percent of its crude oil needs in the next decade, although no
mention was made of energy security risks.39
Over the course of 2010, the nation reportedly consumed
440 million tons of oil, 200 million tons of which were imported.40
Some analysts expect China to overtake the United States
as the worlds biggest crude oil importer as soon as 2017.41
Similarly, it was reported that China bought 42.5 billion
cubic meters (bcm) of gas from overseas [in 2012]. That was
up more than 30 percent compared with 2011 and a nearly
10-fold increase from 2007.41
As part of an effort to blunt that reliance on foreign sourc-
* Support from the government may be too much: In December, 2010, U.S. filed a complaint to WTO against the Chinese goverments subsidizing trade in
so-called environmentally friendly technology. This and other kinds of WTO disputes were discussed in Part I.
116
760201540000
30
2015102020
151.6
29
20
Ashok Bhargava2009
31
2015200970%63% 32
33
33
[2010]46
2010
200-300
34
2008
35
36
200812
1.7
7
37
20101
52%50%
38
20105
70%
39
20104.42
40
2017
41
2012425
bcm201130%2007
41
2013800
130.7 41
2002190
2011673 41
40
20112.54
6%42
201012WTO
117
es and increase domestic capacity, the government announced

in September 2013 that it was set to have invested 80 billion yuan ($13.07 billion) in oil and gas exploration [over the
course of the year].41
Historically, total investment in the sector was reported by
Xinhua to have risen from 19 billion yuan in 2002 to 67.3
billion yuan in 2011.41
Li Shousheng, Vice-Chairman of the China Petroleum
and Chemical Industry Federation warns that Chinas strategic petroleum reserve is a key to addressing the issues of
the national economy and energy sufficiency during the 12th
Five-Year Plan period. There is a huge gap between the supply
and demand for energy. Energy shortage could become a very
prominent problem if an emergency occurs.40
More recently, China Petrochemical Corporation Chairman Fu Chengyu warned that China must embrace domestic resources besides oil, such as coal, in a bid to curtail rising
crude imports, which hit about 254 million tons in 2011, up
6% from a year earlier.42
According to Mr. Fu, China [will] require 600 million tons
of crude annually by 2020 if demand continues at its current
trajectory and China will really threaten the world.42
Unsurprisingly, however, oil continues to flow and the nations refining capability has grown apace. A Sinopec report
indicated that Plants in China may be able to refine 750 million metric tons of crude oil annually by the end of 2015,
compared with an estimated 507.5 million tons by the end
of [2010].39
Similarly, the report noted that The share of foreign participation in Chinas domestic refining capacity may rise to
31.5 million tons annually, or 4.2 percent of the nations total,
by 2015, from the current 10.5 million tons.39
The first foreign-Chinese petrochemical joint venture
went into operation in Fujian Province in November 2009.
It is half-owned by Sinopec and the Fujian provincial government, and half owned by Exxon Mobil and Saudi Aramco,
who hold 25 percent stakes each,43 and was praised by Lin
Boqiang, head of the Center of China Energy Economics Research at Xiamen University, as being a rather wise choice
to encourage oil-rich countries to make more investments in
China, which can help the PRC to secure (presumably strategic) oil reserves.43
One place to put those reserves may be an upcoming
200,000 cubic meter oil products storage facility in Tianjin,
the result of a joint venture between Royal Dutch Shells China-based business and the Tianjin State Farms Agribusiness
Group, noteworthy if only for a foreign companys involvement in the project. The $87 million facility is expected to
begin operation in June 2013. 44
More recently, another project involving Royal Dutch
Shellthis one a $13 billion refinery and petrochemical
118
complex led by PetroChina and also including Qatar Petroleumwas put on hold. The official reason cited for the delay
was difficulty finding a suitable site to construct the complex;
informally the need for a massive landfill project costing up
to $1.6 billion and resistance from local residents concerned
about worsening pollution were both flagged as influencing
the decision.45
The Zhejiang project, in which PetroChina is expected
to hold a 51 percent stake while Shell and Qatar Petroleum
would each hold 24.5 percent, began in 2012 and targeted a
refining capacity of 400,000 barrels per day in addition to annual ethylene output of 1.2 million tons.45
Another PetroChina partner found itself in a similar predicament toward the end of 2013: a $6.4 billion gas project
being built by Chevron and PetroChina was reported to have
been delayed on more than one occasion over disputes about
the technical methods to be used in developing tricky fields.
The project, Chevrons largest in China, was initially expected
by PetroChina to begin operations in 2010. Four years later, it
has yet to have had a first gas date announced.46
Common delays in project openings contrast with concerns
about overcapacity. In recent years China Daily had indicated
that such overcapacity in the petrochemical industry would
continue to cause difficulties, and noted that fluctuating oil
costs on the world market have led the government to adjust
domestic costs as fast as 4 percent over 22 consecutive days.47
Between the adoption of this pricing mechanism in 2009 and
October 2011, authorities adjusted fuel prices 16 times, with
10 of those adjustments being increases.48
An NDRC official also notes that the pricing adjustment
mechanism can be used to ease inflationary pressure; the same
official furthermore indicated that a more market-oriented
mechanism (to address the lack of transparency and other issues with the current system) is under study.48
At the time of writing, the NRDC had raised49 and lowered50 fuel prices four times each over the course of 2012, with
the last rate cut following two successive increases which were,
according to one analyst, intended to reduce refineries losses
and prevent fuel shortages, which is important to maintain
steady economic growth.49
Projections from the China Petroleum and Chemical Industry Federation projected a 5 percent slowing of apparent
oil consumption growth between 2011 and 2015 due to a
slowing of economic expansion and, to some degree, emission-reduction efforts.51
In 2011 year-on-year growth in oil consumption was reported to be at 6 percent.51
More recently, independently-owned (but not foreignowned) teapot refineriesso-called because of their small
overall capacityhave been feuding with major state-owned
petrochemical companies over responsibility for a recent
2020
642
2010
5.075
20157.539
2015
1050
31504.2% 39
200911
25
43
43
472009
2011101610
48
48
2012
43 44
49
20112015
5% 51
20116% 51
20
8700
2013644
130
16
45
2012
24.5%
51%40
12045
2013
64
2010
46
224%
52
52
52
2020
26053
201112
20
16
150
10054
119
shortage in diesel fuel. According to Reuters, State refiners

had said the teapots had reduced runs or shut down because
they were unwilling to put up with negative margins, while
Several independent refiners [] said the real problem was a
lack of feedstock. The fact that independents largely refine
fuel oil as feedstock because crude oil imports are tightly
controlled by the state-run refiners would seem to lend
credence to their complaints.52
Accordingly, it was reported that several independent refiners were forced to [sell] stakes to state refiners such as PetroChina and China National Offshore Oil Corp (CNOOC)
in exchange for crude oil supplies.52
This situation appears an entirely domestic one, and the
field is likely to remain a mostly locals-only game according to one foreign petro-executive: Nationalization is gaining
pace in many sectors in China, I doubt China is heading for a
liberalized oil market any time soon.52
Indeed, CNOOC aims to more than double its annual
output to 2.6 million barrels per day by 2020 under a strategy [Chairman Wang Yilin] dubs the companys New Leap
Forward.53
Indeed, in December 2011, new restrictions were issued
on foreign participation in refining, with the minimum capacity for crude oil distillation being raised to 200,000 barrels per day (up from 160,000 barrels per day), the minimum
threshold for investment in catalytic cracking capacity and
hydrocracking capacity both being set to 1.5 million tonnes
per year and that for continuous reforming capacity being set
to 1 million tonnes per year.54
Interestingly, the one improvement for foreign enterprises
in that round of market access adjustments was the result
of the government [encouraging] foreign investment in exploration and development of unconventional oil resources
including shale oil, oil sands and heavy oil, and unconventional gas resources including shale gas and seabed gas hydrate
through joint ventures or cooperation deals with domestic
companies.54
Nonetheless, in 2012 foreign enterprises were excluded
from the first shale gas tender that year, despite a need for
overseas technology to help exploit massive reserves of gas
trapped within shale rock formations in the worlds top energy
user.55 The Financial Times later reported that foreign-funded
joint ventures were permitted to bid in a second round later
that year.56
While energy-related chemicals saw a decline in production and consumption as a result of the global economic slowdown, it appeared to be non-energy related chemicals that
were hardest hit, and in the face of strong historical growth
and optimism about future progressit was noted in 2005
by the Royal Society of Chemistrys monthly journal that
demand for chemicals in China expected to double between
120
2002 and 2015.57

While the May 12, 2008 earthquake in Sichuan caused
massive disruption in transportation links as well as manufacturing operations (although the concentration of chemical manufacturers in affected areas was reportedly not as high
as in other regions)58, a larger concern for the sector turned
out to be downstream users of chemical productswhile the
brunt of the initial effects of the global economic slowdown
in China was borne primarily by exporters, many providers
of raw materials faced significant difficulties as production
slowed and customers stopped ordering. Often singled out,
for example, were producers of polyester.59
Exemplary of this difficulty was the case of Zhejiang Hualian Sunshine Petro-Chemical, which was deemed, much as
banks in the U.S. were, too big to fail. Accounting for nearly
half the fiscal revenue of its home municipality, the company
was the recipient of a virtually unprecedented offer of government money to a non-state firm totaling some 1.5 billion
yuan in order to resume operation.59
Regardless of relative slowdown during 2008 and 2009
things began to look up in 2010, with recovery noted in
downstream sectors.60 A KPMG survey showed similar downstream growth as a result of an increased focus on domestic
consumption.61 The report went on to identify four key issues it expects to influence the chemical industrys outlook in
coming years:
54
1. Chinese governments goal to shift the current

production model towards a more balanced and resilient
one, as set out in the 12th Five-Year Plan;
2. Both new and old mega-trends which include increased
internal demand in China, continuous urbanization,
shifts in value chains and environmental awareness;
3. Enhanced economic and financial volatility in global
markets; and
4. Market dynamics which can narrow the gap between
local Chinese manufacturers and multinational players.61
1559
In late 2012, chemical purveyor BASF not only

completed a $1.4 billion petrochemical joint-venture with
China Petroleum and Chemical Corporation (also known as
Sinopec) in Nanjing62, but also inaugurated an unsubtlynamed innovation campus in Shanghaithe companys
first such facility in Asia Pacific, according to China Daily.63
In addition to KPMGs positive outlook and foreign parties increased participation in the sector, here has also been an
increase in NIMBY, or Not In My Backyard protests by
ordinary Chinese citizens against industrial projects; in several cases, the source of locals ire has been a chemical facility
planned to produce paraxylene (PX).
In late 2012 protests against one such planned expansion by
55
56
2005
20152002
57
512
58
59
200820092010
60
61
1.
2.
3.
4.
61
2012BASF
14 62
63
NIMBY
PX
2012PX
64
PX
88
64
201220112007
64
65
2012
29%65
121
China [Sinopec] in Ningbo led to a spokesman for the Ningbo

government [saying] in a statement [] that there would be no
further work done on the massive project [] pending further
scientific debate.64 Sinopec is a publicly-traded subsidiary of
the state-owned China Petroleum Corporation.
Although the facilitys expansion would appear to have
been haltedat least temporarilyby the local citizenrys
discontent, Reuters reported that the $8.8 billion project
will likely proceed once the public furor dies down, and
that public concern might simply lead to the project being
renamed in order to downplay or disguise [it].64
Similar demonstrations in Qidong (near Shanghai), Dalian, Xiamen in 2012, 2011 and 2007, respectively, also delayed or deflected industrial projects due to concerns over
hazardous chemicals.64
Seemingly in response to these surprisingly effective campaigns by local citizenry, Environmental Protection Minister
Zhou Shengxian went on the record as saying that, The government will increase transparency and public involvement in
decisions regarding major projects with a potential environmental impact and that his ministry will make concerted
efforts with other government agencies to ensure that the
requirement [for all large projects to undergo stringent risk
assessments] is fully honored.65
Minister Zhous attention is unsurprising; China Society
for Environmental Sciences Yang Zhaofei indicated earlier in
2012 that the number of environmental mass protests [had]
been growing by 29 percent annually in recent years.65
Increased scrutiny from both the public as well as municipal authorities provincial- and central-level masters will
likely have positive effects for the environment. Whether this
scrutiny has any substantive effect on foreign investment or
the relative ease of completing large-scale chemical and energy
projects will be seen in coming years.

Fuel Tax Increases
Perhaps China Daily said it best: You pay as you fill up the
tank. In other words, the more you drive, the more it costs
you and the planet. This is a simple market rule but it has
taken nearly two decades for the government to pick a proper
time to implement it.66
The announcement of the reform of fuel taxation, and the
attendant price cuts, were a welcome change to the environment upon their announcement in late December of 2008.
While tax rates on gasoline, diesel, naphtha, solvents, lubricants and jet kerosene on January 1, 2009 increased by
nearly seven- to eight-times their former amounts, the changes were accompanied by price cuts of between 14 percent
122
(for gasoline) and 32 percent (for jet kerosene). Facilitated by

artificially-high prices (relative to the market) preceding the
announcement, the restructuringaimed to allow fuel prices
in China to fluctuate more in line with the going rate on the
global market and to discourage conspicuous consumption
aimed to result in better efficiency in the long term, more
organic control over consumption in general, and a more equitable distribution of tax burden among users.67
The historically tight control of fuel pricing was by many
parties attributed to a preference for maintaining social stability over wasteful consumption.68
The timing alluded to by China Daily above is often
attributed to the large discrepancy between extremely low
international crude oil prices at the end of 2008 and the
artificially-inflated rate for fuel paid by Chinese consumers,
which was, according to Reuters, roughly equivalent to
$83.50 crude.68
Over the course of 2009, six types of fees for road maintenance and management were abolished and revenue from fuel
consumption tax was reported to exceed 355 billion yuan.69
Resource Tax Pilot and Expansion
In July 2010, the NRDC indicated that it would expand
the resource tax pilot program introduced a month prior in
the Xinjiang Uighur autonomous region to all 12 of the
western provinces and autonomous regions.70 This program
was later reported to be planned to be put into effect nationwide by November 1, 2011.71
This tax, which will reportedly be based on price of commodities rather than their volume, will have a benchmark rate
of 5 percent and will vary by item (including oil, natural gas,
coal and water).
Furthermore, the list of taxable resources was widened from
its original scope to include rare earths, salts and metals.71
A China Daily-quoted analyst suggests that the new tax
was definitely [benefiting] the nations plans for sustainable
growth by discouraging the exploitation of resources, and
that it will also help to solve the developmental imbalances
in different regions by boosting local fiscal revenues.70
Another researcher later told Reuters that the new tax
system would shift profits from companies to governments
in poorer provinces.71
Cleaner Gasoline Production
In September 2013 it was reported that Sinopec would
begin producing cleaner gasoline ahead of the January 2014
regulatory deadline enforcing a new cleanliness standard
named National IV.72
The new standard, which was announced in 2011 and is
described as similar to Europes Euro IV, puts a 50 partsper-million upper limit on sulphur content in gasoline. Prior
70
66
71
200812
20139
201411
IV72
200911
14%32%
67
68
2008
83.50
68
20096
355069
20107
12 70
2011111
71
5%
71
IV2011
50mg/kgIV
150mg/kg72
V10mg/kg
72
20139
50mg/kg290370
10mg/kg
17016073
ICCT
20132013IV
2014IV2017
V
20111120132
73
73
123
to implementation, the ceiling had been at 150 parts-permillion.72

A National V standard mandating a maximum sulphur
content of 10 parts-per-million, is being rolled out in major cities and will likely be adopted nationally in the coming
years; these limits are all expected to help clear up the smoggy
air of Chinese cities.72
In September 2013, Chinas National Development and
Reform Commission (NDRC) announced a new pricing
policy for Chinas higher quality fuels. Per the NDRC, prices
of China IV gasoline and diesel (50ppm sulfur content) increased by 290 and 370 RMB/ton, respectively. The prices of
China V gasoline and diesel (10ppm) increased a further 170
and 160 RMB/ton, respectively.73
The International Council on Clean Transportation
(ICCT) noted that The new pricing changes were designed
to encourage and assist Chinas refineries to meet the fuel
quality improvement timeline announced by the State Council earlier this year. That timeline calls for nationwide supply
of China IV gasoline by the end of 2013, China IV diesel
by the end of 2014, and China V gasoline and diesel by the
end of 2017. The pricing changes, the ICCT observed, appear to be the first steps in implementing State Council calls
in October 2011 and February 2013 to use progressive fiscal
policy to encourage the supply of higher quality fuels.73
The ICCT stressed the significance of the NDRC announcement having included an entire paragraph on the
importance of and mechanisms for ensuring compliance and
enforcement of the fuel quality and noted that combined
with the price increases, this further underscores the Chinese
governments deep commitment to ensuring the fuel quality
timeline is met and commensurate air quality improvements
are achieved.73
124
Works Cited
1
Non-fossil fuels to take up 11.4 pct of Chinas energy use by

2015: former energy chief. Xinhua. March 4, 2011. http://news.
xinhuanet.com/english2010/china/2011-03/04/c_13761105.
htm. Accessed October 30, 2011.
China coal miner talks with power producers fail. The Associated
Press. December 30, 2008. http://www.google.com/hostednews/
ap/article/ALeqM5gQ-J2-ZbUUuHhmypPnefyNXGG_
kgD95C97S80. Accessed December 30, 2008.
Rujun Shen. China looks to exports as domestic coal demand

drops. Reuters. December 29, 2008. http://www.reuters.com/
article/rbssEnergyNews/idUSSHA29429520081229. Accessed
December 30, 2008.
David Winning. Chinas Coal Crisis. The Wall Street Journal.

Novermber 16, 2011. http://online.wsj.com/article/SB10001
424052748704312504575617810380509880.html. Accessed
Novermber 17, 2011.
Zhao Tingting. Chinas coal imports up 31% in 2010.

January 27, 2011. China Daily. http://www.chinadaily.com.
cn/usa/business/2011-01/27/content_11934931.htm. Accessed
February 2, 2011.
NEA to forge new coal production base in Xinjiang. January 26,

2011. China Daily. http://www.chinadaily.com.cn/cndy/201101/26/content_11916785.htm. Accessed February 2, 2011.
Keith Bradsher. China Outpaces U.S. in Cleaner Coal-Fired

Plants. The New York Times. May 10, 2009. http://www.
nytimes.com/2009/05/11/world/asia/11coal.html.
Accessed
Janaury 29, 2010.
China soon to issue full plan to reduce carbon intensity. Xinhua. July
29, 2011. http://news.xinhuanet.com/english2010/business/201107/29/c_131017373.htm. Accessed October 30, 2011.
James Melik. China leads world in green energy investment.

BBC. September 15, 2011. http://www.bbc.co.uk/news/
business-14201939. Accessed October 31, 2011.
10
David Stanway. China to cut coal use, shut polluters, in bid

to clear the air. Reuters. September 12, 2013. http://www.
reuters.com/article/2013/09/12/us-china-coal-pollutionidUSBRE98B01N20130912. Accessed February 2, 2014.
125
11
Fayen Wong. Chinas smog threatens health of global coal

projects. Reuters. November 14, 2013. http://www.reuters.com/
article/2013/11/14/us-china-coal-idUSBRE9AD19L20131114.
22
David Stanway. Analysis: Chinas push for more

hydropower tests limits. Reuters. July 12, 2011. http://
www.reuters.com/article/2011/07/12/us-china-hydropoweridUSTRE76B1LA20110712. Accessed Novermber 3, 2011.
12
An Overview of Chinas Renewable Energy Market. China

Briefing. June 16, 2011. http://www.china-briefing.com/
news/2011/06/16/an-overview-of-chinas-renewable-energymarket.html. Accessed Novermber 4, 2011.
23
Chinas new energy and renewable energy boom in recent

years China Daily via Xinhua. October 2, 2009. http://news.
xinhuanet.com/english/2009-10/02/content_12173550.htm.
13
Wan Zhihong. Power majors form nuclear alliance China

bizchina/2009-12/18/content_9197600.htm. Accessed January
29, 2010.
24
Liam Denning. China Storms into Wind and Solar Power.

China Realtime Report. August 22, 2011. http://blogs.wsj.com/
chinarealtime/2011/08/22/china-storms-into-wind-and-solarpower/. Accessed Novermber 3, 2011.
14
Song Jingli. Chinas demand for aluminum may grow slowly in

next 20 years. China Daily. November 6, 2010. http://www.
chinadaily.com.cn/business/2010-11/06/content_11511611.
htm. Accessed November 27, 2010.
25
Winnie Zhu. China Plans 13 Solar Power Plants in Western

Region. Bloomberg Businessweek. July 6, 2010. http://www.
businessweek.com/news/2010-07-06/china-plans-13-solarpower-plants-in-western-region.html. Accessed November 26,
2010.
15
World Nuclear Power Reactors & Uranium Requirements. The

World Nuclear Association. January 1, 2012. http://www.worldnuclear.org/info/reactors.html. Accessed January 12, 2011.
26
Solar Energy. The New York Times. September 14, 2011. http://
topics.nytimes.com/top/news/business/energy-environment/
solar-energy/index.html. Accessed Novermber 4, 2011.
27
Max Blythe. Chinas New Five-Year Plan and Solar Power.

Forbes. February 28. 2011. http://www.forbes.com/sites/
etfchannel/2011/02/28/chinas-new-five-year-plan-and-solarpower/. Accessed Novermber 4, 2011.
28
Wang Zhihong. State Grid unveils ultra-high-voltage power line

plans. China Daily. August 13, 2010. http://usa.chinadaily.com.
cn//2010-08/13/content_11150655.htm. Accessed November
26, 2010.
29
China to break ground on second ultra-high voltage power

transmission line. Gov.cn. October 14, 2011. http://www.
gov.cn/english/2011-10/14/content_1969728.htm.
Accessed
November 4, 2011.
30
Jim Bai and Aizhu Chen. China top grid firm says to futher
develop UHV tech. Reuters. January 28, 2011. http://af.reuters.
com/article/energyOilNews/idAFTOE70R04O20110128.
31
China expected to have worlds largest clean coal conversion

industry by 2020. Xinhua. September 18, 2010. http://news.
16
17
18
19
20
21
126
Matt Velker. Construction of Chinas 4G nuclear reactor to

start soon. China.org.cn. March 17, 2011.http://www.china.
org.cn/china/2011-03/17/content_22166536_2.htm. Accessed
Novermber 2, 2011.
Xiao Wan. Ten nuclear reactors to use top technology. China
Daily. July 6, 2010. http://www.chinadaily.com.cn/usa/201007/06/content_11020168.htm. Accessed November 27, 2010.
China to build inland nuclear power stations Xinhua. November
4, 2009. http://news.xinhuanet.com/english/2009-11/04/
content_12386584.htm. Accessed January 30, 2010.
Charlie Zhu. Public trust crisis threatens Chinas nuclear
power ambitions. Reuters. July 18, 2013. http://www.
reuters.com/article/2013/07/18/us-china-nuclear-protestsidUSBRE96H1BT20130718. Accessed February 2, 2014.
Grids pushed to tap clean power China Daily/Xinhua. December
28, 2009. http://www.chinadaily.com.cn/bizchina/2009-12/28/
Dexter Roberts. China quake batters energy industry.
Businessweek. May 19, 2008. http://www.businessweek.com/
globalbiz/content/may2008/gb20080519_901796.htm.
127
32
Chinas reliance on coal to drop 7% by 2015. China

Daily. July 21, 2010. http://www.chinadaily.com.cn/imqq/
bizchina/2010-07/21/content_11029141.htm.Accessed
November 25, 2010.
33
Travis Hochard. A World of Potential. Ethanol Producer

Magazine. January 2009. http://ethanolproducer.com/article.
jsp?article_id=5156&q=&page=all. Accessed December 30,
2008.
34
Brian Spegele. Sinopec Chairman: China Needs to Change

Energy Strategy. China Realtime Report. November 13, 2012.
http://blogs.wsj.com/chinarealtime/2012/11/13/sinopecchairman-china-needs-to-change-energy-strategy/.
Accessed
November 27, 2012.
43
Chinas 1st Sino-foreign refining, petrochemical JV goes into

operation. Xinhua. November 11, 2009. http://news.xinhuanet.
com/english/2009-11/11/content_12435807.htm.
Accessed
January 31, 2010.
44
Shells China venture to build Tianjin fuel storage

agency. Reuters. January 9, 2012. http://www.reuters.com/
article/2012/01/09/shell-idUSL3E8C95I520120109. Accessed
November 27, 2012.
35
China to produce 189 mln tones of crude oil this year.

Xinhua. December 28, 2008. http://news.xinhuanet.com/
english/2008-12/28/content_10569701.htm.Accessed
December 30, 2008.
45
Chen Aizhu. PetroChina, Shells $13 billion refinery stalls

on land issue: sources. Reuters. September 11, 2013. http://
www.reuters.com/article/2013/09/11/us-china-refineryidUSBRE98A0G220130911. Accessed February 2, 2014.
36
China Energy Data, Statistics and Analysis. Energy Information

Administration, The United States Department of Energy.
November 2010. http://www.eia.doe.gov/emeu/cabs/China/
Background.html. Accessed February 2, 2011.
46
Chen Aizhu. Chevrons $6.4 billion China gas project pushed

back again: sources. Reuters. December 6, 2013. http://
www.reuters.com/article/2013/12/06/us-chevron-cnpc-gasidUSBRE9B507520131206. Accessed February 2, 2014.
37
Jim Bai. China to boost oil stockpiling amid price slump.

Reuters. December 29, 2008. http://uk.reuters.com/article/
oilRpt/idUKPEK29764020081229. Accessed December 30,
2008.
47
Challenging conditions may continue, says Sinopec. China

Daily. December 25, 2009.http://www.chinadaily.com.cn/
31, 2010.
38
Wang Qian. Oil imports hit alarming level in China: Study.

China Daily. January 14, 2010. http://www.chinadaily.com.cn/
bizchina/2010-01/14/content_9317926.htm.Accessed February
2, 2011.
48
Lan Lan. Fuel-price drop good news. China Daily. October

9, 2011. http://www.chinadaily.com.cn/business/2011-10/09/
48
Du Juan. NDRC raises fuel prices. China Daily. September

50
China to cut fuel prices starting Friday. Xinhua. November

content_15934040.htm . Accessed November 27, 2012.
51
Zhou Yan. Growth in oil use to slow in tandem with economy.

China Daily. August 12, 2011. http://www.chinadaily.com.cn/
usa/business/2011-08/12/content_13099816.htm.Accessed
November 4, 2011.
39
40
41
128
China Clarifies Consumption Tax Exemption for Biodiesel

Production. China Briefing. July 4, 2011. http://www.chinabriefing.com/news/2011/07/04/china-clarifies-consumptiontax-exemption-for-biodiesel-production.html.Accessed
November 4, 2011.
42
Chinas refining capacity may rise 50%, Sinopec says.

China Daily. May 25, 2010. http://www.chinadaily.com.
November 25, 2010.
Wang Yu and Li Xiang. Construction of petroleum reserves
proceeding. China Daily. July 23, 2011. http://www.chinadaily.
com.cn/cndy/2011-07/23/content_12966801.htm.Accessed
November 4, 2011.
China to invest 80 billion yuan in oil and gas exploration
this year. Reuters. September 15, 2013. http://www.
reuters.com/article/2013/09/15/us-china-energyidUSBRE98E03S20130915. Accessed February 2, 2014.
129
52
Jim Bai and Chen Aizhu. Chinas teapot refiners say

able to ease diesel shortages. Reuters. November 25, 2011.
http://www.reuters.com/article/2011/11/25/china-oilidUSL4E7MO14920111125. Accessed November 27, 2012.
62
BASF completes $1.4b petrochemical site in China.

Xinhua. January 11, 2012. http://www.chinadaily.com.cn/
business/2012-01/11/content_14421688.htm.
Accessed
November 27, 2012.
53
Charlie Zhu and Bill Powell. Special report: the education of

Chinas oil company. October 6, 2013. http://www.reuters.
com/article/2013/10/07/us-cnooc-nexen-specialreportidUSBRE99600720131007. Accessed February 2, 2014.
63
Chen Qide. BASF unveils innovation campus in Shanghai.

China Daily. November 6, 2012. http://usa.chinadaily.com.
cn/business/2012-11/06/content_15882897.htm.
Accessed
November 27, 2012.
54
Jim Bai and Chen Aizhu. China revamps energy mkt

access for foreign investors. Reuters. December 29, 2011.
http://www.reuters.com/article/2011/12/29/china-energyidUSL3E7NT2RP20111229. Accessed November 27, 2012.
64
John Rutwich and David Stanway. China struggles for

solution to growing NIMBY movement. Reuters. November
1, 2012. http://www.reuters.com/article/2012/11/01/us-chinaenvironment-idUSBRE8A01L020121101. Accessed November
27, 2012.
55
Jim Bai and Ken Wills. China to exclude foreign firms

in shale gas tender. Reuters. May 18, 2012. http://www.
reuters.com/ar ticle/2012/05/18/china-shale-tenderidUSL4E8GI2RY20120518. Accessed November 27, 2012.
65
Zhao Huanxin. Projects face greater checks. China Daily.

November 13, 2012. http://www.chinadaily.com.cn/cndy/201211/13/content_15920200.htm. Accessed November 27, 2012.
Leslie Hook. China opens shale gas to foreign bidders.

Financial Times. September 10, 2012. http://www.ft.com/
cms/s/0/fe651540-fb35-11e1-87ae-00144feabdc0.html.
Accessed November 27, 2012.
66
Fu Jing. Fuel tax reform an energy milestone. China

Daily. December 29, 2008. http://www.chinadaily.com.
December 30, 2008.
57
Vikki Allen. Chinese chemical industry: friend or foe?. Chemistry

World. April, 2005. http://www.rsc.org/chemistryworld/
Issues/2005/April/Chinesechemicalindustry.asp.Accessed
December 30, 2008.
67
China unveils fuel tax hikes on more oil products.

english/2008-12/19/content_10529044.htm.Accessed
December 30, 2008.
58
Jia Hepeng. China quake hits chemical industry. Chemistry

World. May 16, 2008. http://www.rsc.org/chemistryworld/
News/2008/May/16050802.asp. Accessed December 30, 2008.
68
Eadie Chen and Tom Miles. China cuts fuel prices for first time
in two years. Reuters. December 19, 2008. http://uk.reuters.
com/article/latestCrisis/idUKSP380237. Accessed December
30, 2008.
59
Fang Yan. Pain of China export slump moves along supply

chain. Reuters. December 29, 2008. http://www.reuters.com/
article/reutersEdge/idUSTRE4BS0AC20081229.
Accessed
December 30, 2008.
69
China to continue oil product pricing reform Xinhua. December

24, 2009. http://cs.xinhuanet.com/english/finance/200912/
t20091224_2301415.htm. Accessed February 1, 2010.
56
130
60
Wan Zhihong. Bright prospects ahead for petrochemical firms.

China Daily. Janaury 29, 2010. http://www.chinadaily.com.cn/
cndy/2010-01/29/content_9395317.htm. Accessed January 31,
2010.
70
Wang Xiaotian. Resource tax to be expanded nationwide.

China Daily. January 26, 2011. http://www.chinadaily.com.cn/
cndy/2011-01/26/content_11916809.htm. Accessed February
3, 2011.
61
Peter Fung, Norbert Meyring and Miguel Montoya.

Chinas Chemical Industry: The new forces driving change.
KPMG. September 2011. http://www.kpmg.com/CN/en/
IssuesAndInsights/ArticlesPublications/Documents/ChinaChemical-Industry-201109.pdf. Accessed November 4, 2011.
71
Judy Hua and Chen Aizhu. RPT-UPDATE 2-China resource

tax goes national; adds coal, rare earths. Reuters. October
10,2011.http://www.reuters.com/article/2011/10/11/chinaresources-tax-idUSL3E7LB04620111011. Accessed November
4, 2011.
131
72
Chinas Sinopec to produce cleaner gasoline from

October. Reuters. September 6, 2013. http://www.
reuters.com/article/2013/09/06/us-sinopec-gasolineidUSBRE9850E820130906. Accessed February 2, 2014.
73
Vance Wagner. Contextualizing Chinas fuel pricing announcement. From The Blogs, The International Council on Clean
Transportation. September 30, 2013.
132
133
2.3 Machinery and Electrical Equipment
2.3
2001-2010
1.4414.38
25%2001
3400022010
107000101
2009
20081
14.8
2120106
2
INHUA REPORTS THAT between 2001 and

2010, the total output value of the machinery industry
increased from 1.44 trillion to 14.38 trillion yuan, a sustained
growth rate of 25 percent. In the same period, the number
of enterprises in the industry grew from 34,000 holding 2
trillion yuan in assets to 107,000 holding 10 trillion in assets
in 2010.1
According to the National Bureau of Statistics of
Chinas China Statistical Yearbook 2009, the manufacture
of machinery and electrical equipment* by state-owned
enterprises in 2008 resulted in an aggregate 14.8 trillion yuan
in revenue from principal business activities across 120,106
enterprises above a designated size,** including state-owned,
privately-held domestic and foreign-invested firms.2
The 59,244 Foreign-invested*** enterprises included in
the data alone accounted for 4 trillion of the sectors total
revenue while employing 7.1 million of the total labor force
of 26.0 million individuals (approximately 27 percent of the
total).2
In early 2008, the Vice Director of the China Machinery
Industry Federation (CMIF) described the strong growth of
the machinery industry, saying that, [We have] upgraded
our products and strengthened the overall manufacturing
industry,3 and offering energy-saving and pollution reduction
equipment, infrastructure equipment and digitally-controlled
machine tools as examples of areas in which the domestic
sector has made great technological progress.
By the end of that year, the PRCs export volume of
machinery and electrical equipment was the second-largest
in the world; a year later it was the largest.4 Foreign-invested
firms exports accounted for 69.4 percent of that years total
(which exports were worth approximately $494 billion). 5
While the machinery sector continued to grow, 2011 saw
expectations of a foreign trade deficit in the field attributed to
the rapid growth of machinery imports according to CMIF
as including rising input costs, difficulties in financing and
increased labor costs. Nevertheless, total sales were predicted
to expand by more than 10 percent.6
The same year, Chief Director Zhang Ji of the Ministry
of Commerces Department of Mechanical, Electronic and
Hi-Tech Industry noted that the proportion of high-tech

products in the countrys exports of machinery and electronic
products remains small, and that [The PRC] still relies on
imports of much high-end equipment.7
This perceived deficiency resulted in huge incentives for
innovation and R&D and the encouragement that as the
country expands infrastructure construction, machinery firms
should take the opportunity to upgrade their technology
and raise their competitiveness. It was also mentioned
that the government would be actively integrating research
organizations into the industrial product development cycle
and adjusting tax policy to encourage machinery exports and
imports of key technologies and machinery parts.8
Following up on these changes, Chairman of the National
Committee of the Chinese Peoples Political Consultative
Conference Jia Qinglin remarked that the machinery industry
ought to raise the quality and efficiency of the industry,
accelerate mergers and acquisitions to forge conglomerates,
and enhance the industrys ability to withstand risks.9
Over the course of 2012 the Machinery business in
Chinaboth in terms of production as well as consumption
saw further (relative) hardship as, according to analyst Zhang
Cheng with Changjiang Securities in Shanghai, The Chinese
machinery sector [was] experiencing a bottoming-out
period.10
That year, for example, Japanese excavator maker
Komatsu [] saw demand in China for construction and
mining equipment falling 40 per cent [over] three months,
while [Komatsus] Chinese rival Sany Heavy Industry []
reported a near-60 per cent slump in third quarter profits.10
Similarly, by October of that year Caterpillar had slashed
its 2012 forecast twice due to sales in China that had slowed
in the third quarter and had yet to improve.10
Hitachi Executive Vice President Toyoaki Nakamura
echoed seemingly worldwide pessimism about the near-term
market for machinery in China, opining that we are starting
to see quite a (negative) impact from China, quite suddenly
on our earnings, especially on construction machinery and
high functional materials, areas where the immediate market
conditions are quickly reflected on results.10
* The China Statistical Yearbook includes six industrial sectors which we group under the title machinery and electrical equipment: Manufacture of General Purpose Machinery, Manufacture of Special Purpose Machinery, Manufacture of Transport Equipment, Manufacture of Electrical Machinery and
Equipment, Manufacture of Communication Equipment, Computers and Other Electronic Equipment and Manufacture of Measuring Instruments
and Machinery for Cultural Activity and Office Work. Figures from the China Statistical Yearbook quoted hereafter are aggregates of values from those six
categories in the original publication.
**Here, above a designated size is qualified as enterprises with annual revenue from principal business of greater than 5 million yuan.
***This category includes enterprises funded from Hong Kong, Macau and Taiwan.
134
359244
42600
71027%2
2008
2008
2009
469.4%
49405
2011
10% 6
2012
10
40%
60%10
201210
2012
10
Toyoaki Nakamura
10
201210
2013
2013
2500
3
135
Still, there appeared widespread optimism about the Chinese governments willingness and ability to enact further economic stimulus to aid the countys sagging economy, and in
China stimulus is usually heavy on fixed assetsjust the thing
to improve the outlook of machinery manufacturers.
In October 2012 Sany Heavy Industrys president Xiang
Wenbo predicted a golden age of development in 2013,
while Caterpillar also predicted increased stimulus spending
in China over the course of the coming year and both Swiss
oil and gas infrastructure supplier ABB and French firm Schneider reported that orders from China for machinery had
stabilized in late 2012. Notably, however, Schnieders finance
chief cautioned that We do not know when it will come. Im
certainly not pointing to clear evidence that the recovery for
China is for the beginning of 2013.10
Roughly a week later, the National Development and Reform Commission announced approvals for projects that
analysts estimate total more than 1 trillion yuan ($157 billion), roughly a quarter of the total size of the massive stimulus package unleashed in response to the global financial crisis
in 2008.11
Perhaps significant was the timing of the announcement,
which was released just before a deluge of Chinese economic
data due [two days later] that could confirm investors worst
fears that a downswing in the worlds second-biggest economy
has stretched into a seventh straight quarter and scant weeks
before the official departure of Messrs. Hu and Wen that had
been scheduled for November.11
According to analysts speaking with Reuters, this likely
signified a more pro-active approach to the economy than
had previously been taken by Central government authorities
in the recent past.11
Whatever the cause, many of the same companies who had
suffered earlier in 2012 appeared to enjoy immediate gains
in stock price, with Shanghai-listed Sany Heavy Industry,
Shenzhen-listed Zoomlion and Taiyuan Heavy all surged 10
percent. Japanese construction equipment makers also got a
boost, with shares of Komatsu Ltd rising 6.6 percent in Tokyo and Hitachi Construction Machinery Co Ltd up 4.7
percent. Similarly Caterpillar Inc, the worlds largest heavy
equipment maker, rose 4.1 percent.11
Despite optimism riding on the back of the Central governments announcement, the sectors outlook is still somewhat less than bright.
According to Reuters, Foreign and local machinery
makers in China, the worlds largest construction market, are
struggling as the slowdown saps investment growth to 10-year
lows. Falling profits have spurred firms to cut production or
seek new clients.11
As a result, Caterpillar began to export Chinese-made machinery to the Middle East and Africa, Hitachi slashed pro-
136
duction at its excavator-making plant in eastern China and

Shares in China heavyweight Sany Heavy Industry, whose
second-quarter profit skidded 28 percent, are still down more
than 20 percent this year despite [the 10 percent surge following the stimulus announcement].11
In the words of GK Dragonomics managing director Arthur Kroeber, People had underestimated the impact of the
slowdown on certain sectors, particularly construction machinery [and that] if you are investing there it has been really
painful, the bottom has fallen out.11
Supplementing domestic stimulus as an engine for machinery production and imports, Chinese investment promotion authorities are also actively courting foreign investment
that carries with it technological capabilities; MOFCOM statistics indicated that there were 1675 new foreign investment
projects established over 2009.12
Mergers and Acquisitions are another potential source of
technology that can be used to cut national reliance on imports for critical machinery, and the Central Government is
said to be pushing forward such activities, presumably by
making the approval process or other regulatory requirements
more streamlined.13
Machinery manufacturing, and especially heavy- and
construction-related machinery manufacturing, appears to
be more geographically diversified in China than many other
industries, with major players in inland provinces, and as far
north as Harbincompared with the east-and-southerncoast-first development model that has guided the growth of
many other sectors.
Opposite heavy machinery, consumer electronics also
play an important role in Chinas economy. Acer CEO
Gianfranco Lanci was quoted by China Daily in December
2010 as predicting that the mainland market would become
the worlds largest within three years. The same article cited a
projection by research firm IDC that the market would grow
21 percent this year from last years 54 million units.14
This growth is not new. Laptop sales alone in China
reportedly increased by nearly 35 percent year-on-year in
2008.15 In 2009, as subsidies for PCs under the Appliances
to the Countryside program became active, rural sales of
personal computers (both desktop and portable models,
presumably) surpassed 792,000 units between January and
October16. Domestic manufacturers Lenovo, Haier, Founder
and Tsinghua Tongfang together were attributed 97.7 percent
of the total sales under the subsidy program,17 and according
to an article in China Daily an increase in the maximum price
for a product to be accepted into the program from 3,500 to
4,000 would further increase sales by giving the more affluent
farmers opportunities to purchase higher-end models while
still benefitting from the subsidy.16
Business-oriented technology companies such as Cisco,
ABB
2012
2013
10
11570
20082008
4
11
11
11
11
2012
10%
6.6%4.7%
4.1%11
11
11
2009
167512
13
201012
IDC
54002114
2008
35%152009
110
79200016
97.7 17
35004000
16
IBM
28%
2012
20%11
2013
James
McGregor
GK Drogonomics
Arthur Kroeber
137
Juniper and IBM continue to face challenges in China:

Beijing has long mistrusted foreign technology companies, and those concerns have been exacerbated
since [whistleblower Edward] Snowden first revealed
the existence of the NSAs clandestine data mining
program in June.
This is all about China using its own technology, and
China building leading technology companies, said
James McGregor, chairman for Greater China at consultancy APCO Worldwide.
Although Beijing has not prohibited state firms from
purchasing Western-made technology services and
equipment, the government has sent a clear message
to choose Chinese-made equipment first, China-based
executives say.18
Video game hardware, however, appear to be less controversial. In 2013 the Chinese government temporarily lifted
a 14-year-old ban on selling video game consoles, paving the
way for Sony Corp, Microsoft Corp and Nintendo Co Ltd to
enter the worlds third largest video game market in terms of
revenue. Under the new rules, video game consoles manufactured by foreign-invested enterprisesin Shanghais new
Free Trade Zone will be permitted to be sold on the Mainland
after inspection by cultural departments.19
Formerly the exclusive domain of grey-market importers,
game consoles are expected to face fierce competition in the
mainstream from PC-, phone- and tablet-based gamesall platforms with which Mainland consumers are already familiar.19
Mobile handsets also figure greatly into Chinas machinery
and electrical equipment manufacturing. It is reported that
560 million handsets were produced during 2007 (an increase
of nearly 17 percent on 2006s production)20 and with a domestic market of 523 million users as of 2007.21
There were reportedly 600 million handsets manufactured
in the PRC over the course of 2009, of which 168 million
were sold domestically.22 China Daily reported more than 106
million new domestic mobile phone subscribers that year,
increasing the total to 747 million.23 By September 2011, that
figure was reported as 939 million.24
Although Korean conglomerate Samsung is the biggest
smartphone vendor in China with sales reaching around 70
million units [in 2012], it faces stiff competition at the high
end of the market from Apple25and at more modest price
points from domestic manufacturers which are quickly gaining on international leaders in terms of execution and sophistication.
Xiaomi, one such firm, sold 18.7 million smartphones
138
in 2013 and has projected total sales exceeding 40 million

handsets in 2014. Xiaomis handsets, explains Reuters, sell
for between $130 and $410, much lower than the $740 price
tag for the least expensive iPhone 5C model or a Samsung
Galaxy Note II, which can retail for $570.26
In the summer of 2014, Xiaomi surpassed Samsung as
Chinas top smartphone vendor, according to Canalys, a market research company, as the Korean smartphone maker struggles continued in the third quarter, faced with tough competition from Xiaomi as well as the launch of Apples iPhone 6
and iPhone 6 Plus. 42 At the same time, tech pundits all over
the world have been raving about the debut of the One, a
low-budget Android smartphone from Shenzhen-based startup OnePlus, tipped to be a game-changer because, unlike
other Chinese domestic smartphone manufacturers, the One
is bent on conquering not just China but also, international
markets.43
Also notable is the ongoing implementation of the 3G
standard in China, following an initial announcement in December 2008 of a $40 billion investment in third-generation
infrastructure over two years. An update on the proliferation
of 3G capabilities came in April 2010, when the Ministry of
Industry and Information Technology reported that all cities above the prefecture level, most counties and towns, main
highways and tourist destinations would eventually offer 3G
connectivity following an investment in building more than
400,000 base stations totaling nearly $60 billion, up from the
previously-reported $40 billion. These investments aim to
achieve 150 million 3G subscribers by 2011.27
This target was not met (or at the very least is highly improbable to have been met, as final annual totals have not
been released at the time of writing); statistics released in September 2011 showed a total of 101.86 million 3G subscribers
nationally.24
In August 2012, the Ministry of Industry and Information
Technology reported 1.072 billion mobile subscriptions [of
which] 193 million were 3G network service subscribers, an
increase of 64 million 3G accounts which places the three
mobile operatorsChina Mobile, China Unicom and China
Telecomat 72.1, 63.7 and 56.4 million 3G subscribers, respectively.28
Particularly notable is the fact that despite China Mobile
has approximately twice as many overall subscribers as China
Unicom, 3G subscription numbers between the two are neckand-neck. Earlier this year a Forbes analysis admonished China
Mobile for apparent complacency in the face of increasing
competition for 3G users; the report also noted that the
fact that China Mobile runs its 3G network on a proprietary
homegrown TD-SCDMA standard has proved to be a big
deterrent for the carrier in securing smartphones compatible
with its network. Even the iPhone, which has already been
18
2013
19
19
2012
8500
2007
5.6200617% 202007
5.2321
20096
1.68 22
20091.06
7.472320119
9.3924
20127000
25
2013
18702014
4000
130410
iPhone5CGalaxy Note II
740570 26
Canalys
iPhone 6iPhone
6 Plus42
43
3G2008
124003G
20104
60040
400
3G
3G20113G1.527
201193G
1.018624
20128
10.721.933G
6400
3G7210
6370564028
3G
3G
3G
TD-SCDMA
iPhone29
2009
TD-SCDMA
2010
4G30
2013
2013830
25%
31
2010
4G-
139
launched on the other two carriers in China, hasnt made its

way to China Mobile yet.29
China Mobiles use of TD-SCDMA was mandated by the
Ministry of Industry and Information Technology in 2009,
presumably to ensure that Chinas indigenous standard would
succeed regardless of foreign competition.
In late 2010, China Mobile began a Ministry of Industry
and Information Technology-approved trial of its 4G network
in Beijing, Shanghai, Hangzhou, Nanjing, Guangzhou, Shenzhen and Xiamen.30
By 2013, 4G infrastructure was under construction. In
August of that year it was reported that Shenzhen-based
Huawei and crosstown rival ZTE have obtained about 25
percent each of China Mobiles estimated $3 billion effort
to upgrade its network. Foreign firms, meanwhile, accounted
for an additional third of the overall value of the contracts
awarded.31
The first wave of 4G investments that began in 2010 in
Japan and Korea favored Ericsson and NSN, while the second
in the United States went largely to Ericsson and AlcatelLucent. Huawei won a chunk of Europes 4G contracts [in
2012], writes Reuters.31
The infrastructure upgrade was suggested by some to be
a precondition for China Mobile to offer Apples popular iPhone handsets to its customers;31 Less than six months later
Chinese regulators awarded 4G wireless licenses to China
Mobile Ltd, China Unicom Hong Kong Ltd and China Telecom Corp Ltd, removing the final stumbling block to a deal
that industry observers had long expected.32
According to market research firm Forrester, China Mobile could gain 17 million new iPhone activations in 2014
alone, while it is also expected to be a much-needed boost
for Apple in a country where its trailing rivals, even though
China is its second-largest market after the U.S.32 The deal
could reportedly generate as much as $3 billion in revenue
[for Apple] in 2014.26
Meanwhile, China Telecom [picked] Alcatel-Lucent to
supply its next-generation 4G technology for a nationwide
trial of high-speed mobile broadband.33
In March 2014, according to Wei Zaisheng, the finance
director for ZTE, the Chinese state-owned equipment maker,
as told to the Financial Times, that from 300,000 4G base
stations, China is slated to have as many as 1 million by the
end of the year.44
The Appliances to the Countryside program subsidizes
appliance and consumer electronics manufacturers to sell
goods worth a projected 920 billion yuan to customers in 14
rural provinces at discount over four years. The program began
with the sales of televisions, refrigerators, washing machines
and mobile phones receiving subsidies valued at 13 percent
of the purchase price,34 and later expanded to include per-
140
sonal computers, electric bicycles, gas stoves, pressure cookers,

DVD players and more.35
As of September 2011, a total of 189 million home
appliances were reported to have been sold with an estimated
value of 429.9 billion yuan.36Roughly a year later, those figures
were reported by Xinhua as reaching 283 million units of
home appliances worth 681.1 billion yuan.37
Another effort to increase domestic consumption, a tradein program offering 10 percent subsidies for individuals and
companies recycling old goods (many of the same items covered by the appliances to the countryside program) and purchasing replacements, was initiated in June 2009 as a trial in
nine municipalities and provinces (Beijing, Shanghai, Tianjin, Fuzhou, Changsha, Jiangsu, Zhejiang, Shandong and
Guangdong)38 and was expanded to 28 cities and provinces in
June 2010.39 Less than a month after the trial began in 2009,
the program was amended to allow individual consumers a
maximum of 5 such appliances with subsidy, while companies
were limited to 50.40 In total, this program is expected to generate an additional 150 billion yuan (approximately $22 billion) in domestic spending between participating individual
consumers and companies.38 A Ministry of Commerce report
in March 2011indicated that the program had stimulated 152
billion yuan in sales of 40.27 million items, with an additional 41.72 million units having been traded in.39

Import Tariffs on Electronic Goods
Ten years after the PRCs accession into the WTO, import
tariffs on some electronic products (including personal
computers and digital cameras) were cut by the Ministry of
Finance from 20 percent to 10 percent.41
The change will permit distributors and dealers to make
their prices similar to those overseas, removing an incentive
for consumers to buy their digital devices elsewhere, a China
Daily-quoted analyst observed at the time, referring to the
common practice of affluent Mainland consumers traveling
to Hong Kong or other nations to purchase such goodsin
particular personal computers and mobile phones such as the
now-ubiquitous iPad.41
Potential Policy Gains

Continued Adoption of and Participation in International
Standards
While domestic innovation and strong support for the
fruits thereof make sense in many contexts, straying from
internationally-developed and -adopted standards can be a
significant cost to companies who have to redesign technical
-
2012
4G 31
iPhone31
4G
4G
32
Forrester
2014iPhone
1700
32
2014
3026
-
4G 33
1500220
3820113
15204027
417239
20%10% 41
iPad41
20143ZTE
4G
3010044
14
9200
1321
DVD3420119
1.89
429935
20119
1.89429936
2.83681137
10%
200969
382010
628 39 2009
5
50 40
141
aspects of products for each market, in addition to standard

localization efforts.
In areas which are not considered of importance to national or strategic security, conformity to standards will not
only help international companies in China, but also Chinese firms, as the costs of development, implementation and
troubleshooting will undoubtedly decrease when companies
are able to rely upon a (hopefully) global body of existing
knowledge.
Similarly, as Chinese design and manufacturing becomes
more sophisticated, domestic industry players can benefit
from global discourse on the topic through their own participationlegislative or otherwise artificial manipulation is not
likely to improve innovation or productivity.
142
Works Cited
1
Production of Chinas Machinery Industry Up 26.42% in

First 8 Months. National Population and Family Planning
Commission of China. September 26, 2011. http://www.
npfpc.gov.cn/en/detail.aspx?articleid=111010171232421897.

of China. 2009.
Zheng Chenguang. Chinas Machinery Industry Sees

Strengthened Self-innovative Capability. CRI News. January
22, 2008. http://english.cri.cn/4026/2008/01/22/167@316541.
htm. Accessed December 29, 2008.
Chinas machinery, electronic exports rank 1st worldwide.

China Daily. September 28, 2010. http://www.chinadaily.com.
cn/m/hubei/2010-09/28/content_11360909.htm.Accessed
November 24, 2010.
Nearly 70% of exported machinery, electronic products

done by foreign-funded firms. China Daily. February 17,
2010.
http://www.chinadaily.com.cn/business/2010-02/17/
Chinas machinery industry posts slower output, sales growth

in H1. Xinhua. July 22, 2011. http://news.xinhuanet.com/
November 5, 2011.
China should increase high tech exports. China Daily. September

China unveils plans to spur key industries. Xinhua. February

5,2009.http://news.xinhuanet.com/english/2009-02/05/
content_10767784.htm. Accessed February 2, 2010.
Chinas top political advisor urges efforts to boost development

of machinery industry. Xinhua. March 29, 2011. http://news.
10
Yoko Kubota and Wan Xu. Global machinery makers bank on

China rebound in 2013. Reuters. October 30, 2012. http://
www.reuters.com/article/2012/10/30/machinery-earningsidUSL3E8LU3B320121030. Accessed November 29, 2012.
143
11
Pete Sweeney and Langi Chiang. WRAPUP 3-China approves

$157-billion infrastructure spending. Reuters. September
7,2012.http://www.reuters.com/article/2012/09/07/chinaeconomy-idUSL6E8K7JBJ20120907. Accessed November 29,
2012.
21
Dan Nystedt. China Mobile testing 3G Windows Mobile

handset. InfoWorld. November 26, 2007. http://www.
infoworld.com/article/07/11/26/China-Mobile-tests-3GWindows-Mobile-handset_1.html. Accessed December 29,
2008.
12
The Survey of Foreign Investment in Chinas Machinery Industry

in 2009. Invest in China. October 28, 2010. http://www.fdi.gov.
cn/pub/FDI_EN/Economy/Sectors/Manufacturing/Machinery/
22
Steve Shen China market: Handset production reaches 600

million units in 2009, says paper. Digitimes Telecom. 7 January
2010. http://www.digitimes.com/news/a20100107PB201.html.
13
Yu Hongyan. China to push M&As from key industries.

November 23, 2010.
23
Chinas telecom sector reports 4% rise in main business revenue

in 2009. China Daily. January 22, 2010. http://www.chinadaily.
com.cn/enmobile/2010-01/22/content_9361823.htm. Accessed
January 28, 2010.
14
Acer says China to be worlds largest computer market. China

Daily. December 1, 2010. http://europe.chinadaily.com.
cn/business/2010-12/01/content_11638408.htm.Accessed
February 3, 2011.
24
Christina Lo. Vinu, Pilakkott, ed. Chinas mobile subscribers

rise 1.3 percent in Sept. Reuters. October 28, 2011. http://
www.reuters.com/article/2011/10/28/us-china-mobileidUSTRE79R11M20111028. Accessed November 7, 2011.
15
Zhu Shenshen. Laptops surge in computer market. Shanghai

Daily. December 23, 2008. http://www.shanghaidaily.com/sp/
article/2008/200812/20081223/article_385525.htm. Accessed
December 29, 2008.
25
Miyoung Kim. Samsung Electronics braces for weakest year

of smartphone growth. Reuters. January 6, 2014. http://www.
reuters.com/article/2014/01/06/us-samsung-smartphone-appleidUSBREA0510E20140106. Accessed February 2, 2014.
16
Wang Xing. Removal of subsidy caps to boost sales, say

PC makers. China Daily. December 8, 2009. http://www.
chinadaily.com.cn/cndy/2009-12/08/content_9134774.htm.
26
Chinas Xiaomi says to more than double smartphone

sales in 2014. Reuters. January 2, 2014. http://www.
reuters.com/article/2014/01/02/us-china-xiaomiidUSBREA010B920140102. Accessed February 2, 2014.
17
Domestic computer producers win out in rural sales

promotion. Xinhua. July 31, 2009. http://news.xinhuanet.com/
english/2009-07/31/content_11804792.htm.Accessed February
2, 2010.
27
China targets 150m 3G users by 2011. China Daily. April

28
Shen Jingting. China 3G subscribers to reach 200m soon.

November 29, 2012.
29
Trefis Team. China Mobile Needs To Wake Up As 3G Growth

Slows. Forbes. August 29, 2012. http://www.forbes.com/sites/
greatspeculations/2012/08/29/china-mobile-needs-to-wake-upas-3g-growth-slows/. Accessed November 29, 2012.
30
Edmond Lococo. China Mobile profit rises. China Daily.

March 17, 2011. http://www.chinadaily.com.cn/cndy/201103/17/content_12183571.htm. Accessed November 7, 2011.
18
19
20
144
Mathew Miller. Spy scandal weighs on U.S. tech firms

in China, Cisco takes hit. Reuters. November 14, 2013.
http://www.reuters.com/article/2013/11/15/us-china-ciscoidUSBRE9AD0J420131115. Accessed February 2, 2014.
Paul Carsten. China suspends ban on video game consoles
after more than a decade. Reuters. January 7, 2014. http://
www.reuters.com/article/2014/01/07/us-china-gamesconsolesidUSBREA0606C20140107. Accessed February 2, 2014.
Florin Troaca. 560 million handsets from China in 2007.
Softpedia News. May 24, 2007. http://news.softpedia.com/
news/560-Million-Handsets-From-China-in-2007-55532.
shtml. Accessed December 29, 2008.
145
31
Lee Chyen Yee. Huawei, ZTE win bulk of China Mobiles $3

billion 4G bonanza: sources. Reuters. August 23, 2013. http://
www.reuters.com/article/2013/08/23/us-chinamobile-4gidUSBRE97M02020130823. Accessed February 2, 2014.
32
Ryan Vlastelica and Paul Carsten. Apple, China Mobile sign

long-awaited deal to sell iPhones. Reuters. December 23, 2014.
http://www.reuters.com/article/2013/12/23/us-apple-chinamobile-idUSBRE9BL0E320131223. Accessed February 2, 2014
42
Jungah Lee. Samsung Poised for Ugly Quarter as iPhones

Get Bigger. Bloomberg News. October 6, 2014. http://www.
bloomberg.com/news/2014-10-05/samsung-poised-for-uglyquarter-as-iphones-get-bigger.html?hootPostID=ea2076796ff8e
8c260eb68ada547f987.
43
Farhad Manjoo. Low Price, High Hopes for OnePlus Phone.

New York Times. October 8, 2014. http://www.nytimes.
com/2014/10/09/technology/personaltech/oneplus-one-reviewhigh-hopes-for-low-price-phone.html?_r=0
44
Daniel Thomas. China Speeds Past Europe on 4G Mobile

Rollout. Financial Times. March 2, 2014. http://www.
ft.com/cms/s/0/6c82e78a-a082-11e3-a72c-00144feab7de.
html#axzz3JswgPeDx
.
33
146
Alcatel-Lucent wins second major China deal. Reuters. December

12,2013.http://www.reuters.com/article/2013/12/12/us-alcatelchina-idUSBRE9BB0TQ20131212. Accessed February 2, 2014.
34
Staff. China to subsidize computer, appliance sale to farmers.

China Stakes Blog. December 2, 2008. http://www.chinastakes.
com/story.aspx?id=879. Accessed December 29, 2008.
35
Rural home appliance subsidy boosts sales 5 folds. China Daily.

May28,2010. http://www.chinadaily.com.cn/business/2010-05/08/
content_9825428.htm.Accessed November 22, 2010.
36
Home appliance sales in rural China jump 67 pct via subsidies

in Sept.. Xinhua. October 10, 2011. http://www.chinadaily.
com.cn/bizchina/2011-10/11/content_13868333.htm.Accessed
November 6, 2011.
37
Chinas home appliance sales pick up. Xinhua. November

19, 2012.http://www.chinadaily.com.cn/business/2012-11/19/
38
China to expand home appliance replacement scheme.

China Daily. June 3, 2010. http://www.chinadaily.com.cn/m/
fujian/fuzhou/2010-06/03/content_9935863.htm.
Accessed
November 22, 2010.
39
Li Woke. Dishwashers to be the next big home appliance

must-have?. China Daily. October 10, 2011. http://www.
chinadaily.com.cn/bizchina/2011-10/10/content_13859018.
40
China sets caps on purchases of subsidized home appliances.

Xinhua. June 24, 2010. http://news.xinhuanet.com/english2010/
china/2010-06/24/c_13366958.htm. Accessed November 22,
2010.
41
Tuo Yannan. Import tariffs halved on electronics. China

Daily. January 28, 2011. http://www.chinadaily.com.cn/
February 3, 2011.
147
2.4 Transportation and Logistics
2.4
1978
2005
RANSPORTATION AND LOGISTICS have been

intimately related to the export-oriented manufacturing
that has served as a major driver of Chinas economic growth
since 1978. Since the official opening of the sector to
foreign investment in 2005 as a part of Chinas WTO-entry
obligations, foreign, in addition to domestic, companies have
also held a stake in the sectors growth and have benefited
from the gradual improvement of related infrastructure.
In February 2007 it was estimated by the China
International Freight Forwarders Association that there were
20,000 freight forwarding companies operating in China.1
According to government figures, the total output and added
value of the logistics industry in 2008 reached 89.9 and 2 trillion
yuanan annual increase of 23 and 1.9 percent, contributed
16.5 percent of the aggregate added value throughout the
service sector and 6.6 percent of the nations GDP.2
It was reported in December of 2009 that the logistics
sectors combined output value rose 4 percent year-on-year
to 1.47 trillion yuan in the three quarters of 2009,3 with
Ma Zeng Rong, Vice-Chief of the exhibition division of the
China Federation of Logistics and Purchasing having told
reporters that Chinas logistics industry has weathered the
financial crisis approximately two months earlier.4
In 2010, Xinhua reported that the industrys value-add
component had seen a net increase of 700 billion yuan from
2008 levels.5
In slightly different terms, a 2012 statement from the China Federation of Logistics and Purchasing indicated that the
total value of goods carried by the industry in China grew by
9.6 percent year-on-year to reach 146.4 trillion yuan ($23.27
trillion) in the first 10 months [of that year]. At the same
time, however, the Federation warned that Logistics expenses
in the first 10 months surged 11.5 percent year-on-year to 7.2
trillion yuan, up 0.2 percentage point from September and
1.9 percentage points from a year earlier underscoring the
lingering inefficiencies which have been targeted by the governments modernization efforts for several years already.6
These modernization efforts, in fact, were explicitly singled
out in the 11th Five-year Plan (viz. the vigorous development
of [a] modern logistics industry).2 Since that time, the government invested an estimated 4.7 trillion yuan in the sector.7
In addition to this government investment, in recent years
local logistics firms are said to have also benefitted from measures such as the adoption of modern management methods,
process reengineering, service outsourcing and diversification in the market.2
Nonetheless, a 2011 KPMG report identifies several ongo-
148
ing issues with the sector, including inefficient operations and

inadequate transportation capacity.8 Other concerns about the
industry have included a lack of broad competencies by domestic firms, a shortage of professional talent and generally
disorganized macro-level planning.9
A 2010 report by consulting firm A.T. Kearney had
previously singled out fragmentation and competition for
homogenous and non-diversified services as indicators of
the sectors need for development, in addition to the issues
above,10and even China Daily joined in the criticism, calling
for the PRC government to decrease administrative burdens
on companies serving both the domestic and international
markets.11
Nevertheless, a 2010 report by PriceWaterhouse Coopers is more optimistic, stating that the transportation and
logistics market will continue to increasein the future and
consider on-going growth rates of more than 20% as realistic. The rapid development of electronic commerce has laid
a solid foundation for the industry. Approximately 10% of
Chinas 420 million internet users have already purchased
products through the internet and thus created demand for
CEP services. 42
Foreign players such as DHL, FedEx, TNT or UPS all
have significant presence in the Chinese logistics market, experiencing 20 to 40% growth annually. Despite such growth
rates, it is still the small private domestic courier companies
that dominate the majority of the Chinese CEP market. 42This
may change in future. The same report adds that according to
the China International Freight Forwarders Association, as
the Chinese middle class continue to gain in affluence, labour cost advantages of small courier companies will decline
over the next five to ten years. Future customers will place a
much stronger emphasis on reliable delivery rather than price,
an area where multinational logistics services have a strong
advantage over small domestic courier companies.42
In March 2009, State Council released the logistics
reconstruction and revitalization plan, of which efforts were
designed to encourage reconstruction and acceleration of M&A
activity in order to (roughly) cultivate a number of agglomerative
and modernized logistics enterprises able to provide a high level
of service and compete in the international market.12
This plan, however, was said to lag behind the industrys
actual needs and as a result hindered long-term development
rather than helping it, according to China Federation of Logistics and Purchasing Chairman He Liming.13
Additional regulatory guidelines were released in August
2011 (Guobanfa [2011] No.38). In addition to adjusting tax
20072
21
2008
89.92
23%1.9%16.5%
GDP6.6% 2
2009122009
4
1.47 3
4
2010
200870005
201210
2012
9.6%146.4
23.27
11.5%7.2
92%1.9%
2
4.7
7
2
2011
2010
10
11
2010
20%
4.2
10%
CEP42
DHLFedEx
TNTUPS
20%-40%
CEP
42
42
20093
12
13
20118
[2011]38
13
920
10
149
burdens, the guidelines also allow for more favorable land-use

policies, the integration of resources and the strengthening of
coordination between government departments.13
Chinas State Council has given first priority to more than
20 cities in nine regions for an infrastructure upgrade in the
next two years... [which upgrades] have already improved operational efficiencies in Chinas transportation and logistics,
observed the above-cited A. T. Kearney report, which continued that Other recent infrastructure improvements that have
helped the industry include a wave of new regional logistics
distribution centers, logistics parks, modern warehouses and
improved distribution facilities.10
Improvement efforts continue; the PRC government is expected to invest in excess of 1.5 trillion yuan in the aviation
sector alone during the 12th Five-year Plan period, increasing
the number of airports from 175 to 220 and the number of
aircraft from 2,600 to 4,500.8
Following up on investment funding earmarked for
aviation, China Daily reported in November 2012 that
several months prior the State Council issued a document
to encourage the development of Chinas civil aviation
industry and that In the same month, the Civil Aviation
Administration of China said that the country plans to build
82 new airports and expand 101 existing ones across the
country from 2011 to 201514the same period covered by
the 12th Five-year Plan.
Central authorities are furthermore putting their money
where their mouth is, with the NDRC having approved 24
projects to build new airports and expand existing airports,
with an estimated investment of around 100 billion yuan
($15.9 billion), over the course of 2012.14
Provincial authorities, the article continues, have wasted
no time in jumping aboard the initiative:
[In October], Hunan province said it planned to build
21 general aviation airports* in the next 18 years.
Earlier, neighboring Hubei province also said it would
build seven commercial airports and two general aviation airports in the next 18 years.14
Although government officials seem keen to expand the

nations network of airportscurrently fewer than 300, including general aviation airports14others are more cautious
about expansion for expansions sake. Civil Aviation Management Institute of China professor Zou Jianjun warns, Air-
port design projects do need certain forward-looking characteristics. But local governments should also be realistic about
the airports prospects [] unfortunately, most local officials
prefer large-scale projects, its like they are ashamed to build
a small airport.14
By 2013 it was reported that profits remain elusive. Of
Chinas 183 airports, 143 are loss making, [a fact which suggests] that more than 60 of the 80 new airports envisioned in
Chinas economic master plan for 2011-2015 will end up in
the red.15
Developing an aviation hub is more than simply building
an airport, says one consultant. It first of all requires minimum annual passenger flows of 10 million and cargo volume
of 200,000 tons, she said. Only Beijing, Shanghai, Guangzhou, Chengdu, Shenzhen and Kunming met that criteria at
the end of 2012.15
More broadly, KPMG observed in 2011 that improvements in the domestic industrys IT infrastructure, in better
management practices and more sophisticated, integrated
solutions would help to eliminate some of the existing inefficiencies in addition toor perhaps instead ofdirect government action.8
A trend toward consolidation of discrete services within
the transport and logistics industry has also been observed,
but as a result of more segments of the supply chain, including transportation, warehousing, logistics and management of
the supply chain itself, being outsourced to specialized service
providers rather than as part of consolidation efforts by the
PRCs Government16 (which, it was reported, had required
Air China, China Eastern and China Southern to strengthen
their cooperation in the cargo industry in order to order to
gain the upper hand in the domestic cargo market from foreign carriers).17
Another interesting development among local players is
domestic giant SF Express reportedly negotiating with Siemens over green mobility products.18
In the United States, trade with Chinaand the logistical
requirements that accompany ithave been hugely beneficial
for west coast port communities such as Los Angeles. As
reported in the New York Times in 2007, Processing and
distributing millions of freight-laden containers through the
region and out to the rest of the United States have become
the largest source of jobs in the region.19
Fuel costs, however, remain a persistent concern for the
industry as a whole. It was reported in September 2008 that as a
result of the 18 percent increase in diesel and gasoline prices in
1.5
1752202600
45008
201211
2011-201582201
14
201224
1000
15914
150
15
17
18
2007
19
112012-2030
21
18
972
14
300 14
14
2013
183143
8060 15
100020
2012
15
2011
* General aviation airports, as China Daily helpfully explains, are designed to handle four to 10-seat aircraft, as well as planes used for agricultural, industrial
and rescue purposes.14
20089 8
18%40%
20
2009
20022008
148
25821
20104.7%
201174.7
14% 22
200918023
2011
1014
151
August of that year, fuel spending accounted for 40 percent of

total transportation costs. Domestic Chinese courier companies,
already operating on extremely thin margins due to competition
with tens of thousands of local competitors offering increasingly
lower charges have reportedly suffered greatly.20
Despite fuel cost fluctuations, capital cost hikes, and
potential setbacks contained in the 2009 revision of the Postal
Law (see below), many participants in the sector remain
optimistic about growth, and with good reason: according
to the National Bureau of Statistics, between 2002 and 2008
(the last year for which data was available) total freight volume
has increased from 14.8 billion to 25.8 billion tons annually.21
Xinhua reported that the total value of goods shipped over
the first half of 2011 rose by nearly 14 percent year-on-year
to reach 74.7 trillion yuan, despite having decreased by 4.7
percent in the same period of 2010.22
Increasingly, e-commerce is a driver for logistics industry
development; booming Internet retail sales, combined with
the above-mentioned policy initiatives, reportedly achieved
sector-wide revenue in excess of 18 billion yuan in 2009.23
E-commerce may, in fact, be growing too fast for the
domestic cargo network to keep up: China Daily reported
leading up to the Spring Festival in February 2011 that major
[domestic] private delivery companies, such as Yuantong and
Shentong, decided last week to stop accepting new packages in
some cities to ensure parcels in the already-full warehouses are
delivered before the Spring Festival, and that The phenomena
underscored the fact that Chinas logistics sector is lagging far
behind the countrys booming e-commerce market, which has
witnessed explosive growth in recent years.24
More recently, Walmart Asia president and CEO Scott
Price also fingered Chinas inefficient logistics infrastructure
as the biggest challenge to e-commerce in the nation, first and
foremost stemming from the lack of efficient and reliable
last-mile delivery.25
On top of that, the State Post Bureau reportedly enforced
its first-ever fine for parcel mishandling against domestic
carrier Shentong Express after a video was posted online of
workers furiously distributing goods, kicking parcels and
throwing items to the ground. The fine was for 10,000 yuan
(approximately $1,500).26
More severe punishments have since been handed out:
[In November 2012], the China Air Transport Association,
or CATA, announced it was putting four domestic logistics
firms on its no-fly list because of security flaws, after a fire
started in a storage bin of a flight that eventually landed at
Dalian Zhoushuizi Airport in October.27
The four firms, Shanghai YTO, Yunda Express, and the
Huixing and Qihao courier firms were forced to suspend
their air freight services until their business procedures improved. According to the association, Shanghai YTO was
152
blamed for its incorrect classification of lithium batteries,

while the other firms were punished for transporting the prohibited article vesuvian, which caused the fire.27
The punishments take place as domestic courier services
are having to invest to compete in the air freight market, in
some cases buying their own aircraft.27
Some firms arent waiting for domestic delivery services to
increase capacity. With more Chinese shoppers going online,
writes The Wall Street Journal, demand for warehouses and
parcel delivery services is [...], far outpacing the development
of the countrys logistics infrastructure.28
E-commerce giant Alibaba, itself solely responsible for a
large slice of daily parcel deliveries, was reported in 2012 to
be in talks with a few Chinese logistics firmsincluding a
warehouse operator and a parcel-delivery companyto invest
a total of $100 million in them by the end of [that] year.28
Separately, the company also invested billions of dollars
to build a network of warehouses across China and by September 2012 had already purchased parcels of land in Tianjin, Shanghai and Guangzhou upon which to build huge
warehouse complexes.28
Foreign participation in the sectorwhere permitted by
lawis robust. In February 2009, FedEx opened its $150
million Asia Pacific hub in Guangzhou,29 which is expected to
contribute a value upwards of $63 billion to Chinas economy
by 2020.30
Competitor UPS similarly opened an Asia Pacific hub in
Shenzhen, reportedly costing $180 million.29
In 2008, UPS officials reported that China, Hong Kong,
Japan, South Korea and Taiwan accounted for more than half
of the companys total intra-Asia volume that year, and are anticipated to grow in terms of overall volume in the future.31
Roughly four years later, the company also announced the
opening of three new healthcare distribution facilities in the
Asia-Pacific region, two of which are to be located in China,
in Hangzhou and Shanghai, [bringing its] healthcare distribution facilities around the globe to 36.32
DHLs $175 million North Asia hub in Shanghai is due
for completion in 2012,33 and the company now owns a total investment in the nation worth $30 million, spanning 39
branches and 26 sales offices across the country. It targets 90
branches and sales offices by 2015.34
Marie-Christine Lombard, CEO of TNT, predicted that
by 2020 the PRCs delivery market would be equivalent to
the current market size in the United Statesvalued at approximately $85.7 billion.35
Although foreign delivery services may face substantial operating challenges and fierce local competition, foreign investors are increasingly optimistic about the sector.
In September 2013, Carlyle Group said it was collaborating with real-estate investment manager Townsend Group,
24
Scott Price
25
1
150026
201110
201211
27
27
27
28
2012
1
28
20129
28
200921.5
292020
63030
UPS1.8
29
UPS2008UPS
31
UPS
3632
DHL1.75
2012 33
30003926
201590
34
TNTMarieChristine Lombard2020
85735
20139
174
36
20138
1960
36
36
153
as well as warehouse developer and operator Shanghai Yupei

Group, to invest a total of $400 million in 17 warehouses in
China that will be leased to firms including retailers and ecommerce companies.36
In August [2013] Cathay Capital Private Equity and
the Sino-French fund it manages invested $19.6 million in
Shanghai Zhengming Modern Logistics Co., which operates
refrigerated trucks in China that transport food for businesses
including McDonalds Corp., China Mengniu Dairy Co and
Haagen-Dazs.36
Successful Chinese logistics firms have strong supplychain management so it makes sense for private-equity
firms to back the local players, said one private equity managing director.36
Notable Policy Activity*

Postal Law Reform
Reform of the Postal Law began in 1998, and finally
concluded 11 years later, in 2009.
In 2005, China Daily noted that, Although in its sixth
draft, the postal law amendment is still moving slowly, with
many non-postal service providers accusing the authority
of favoritism towards the postal system,37 referring to the
fact that the body tasked with developing the revisions was,
essentially, China Post itself.
While the China Post Group Corp was established in
January of 2007 as part of the effort to divorce the business
functions from the regulatory functions of the entity,
sentiment reflects uncertainty about the lack of bias in the
process. China Dailys coverage of the launch went on to discuss
the ongoing reform of the law, stating that, The conflict of
interest between non-postal service providers, such as express
delivery and logistics companies, and the postal system is
clearly affecting the law revision process, and that Under
the current legislation mechanism, departmental interests are
hard, if not impossible, to remove from legislation.38
It has also been commented by industry players that both
domestic and international companies in the sector essentially
have to compete with [their] regulator.39
In April 2009 Chinese legislators released the final version
of the new Postal Law, which became effective on October
1, 2009. Under the new regime, intra-city delivery of items
weighing less than 50 grams, and the inter-city delivery of
* Although it is no longer current, this section has been left intact to provide
historical context to the discussion above.
154
items weighing less than 100 grams will be handled exclusively by the state-owned monopoly, China Post.40 Foreign
participants in the industry are furthermore prohibited from
delivering letters in the mainland at all, although they are still
permitted to deliver parcels domestically and both parcels and
express letters internationally.41
This overt protection of the state monopoly is unsurprising (if disappointing) given that domestic express delivery is a
major source of revenue for the State Post Bureau, which operates the China Post monopolyreportedly accounting for
96 billion yuan, or 43 percent of its total revenue in 2008.41
199811
2009
2005
37
20071
38
39
20094
10150
100 40
41
960
20084341
155
Works Cited
China Offers New Incentives to Logistics Industry. China

Briefing. August 24, 2011. http://www.china-briefing.com/
news/2011/08/24/china-offers-new-incentives-to-logisticsindustry.html. Accessed November 8, 2011.
14
Zheng Yangpeng. Chinas airport construction takes off.

December 3, 2012.
15
Flurry of Chinese plans to build aviation hubs raises

concern. Reuters. September 15, 2013. http://www.reuters.
com/article/2013/09/15/us-china-economy-airportsidUSBRE98E0GJ20130915. Accessed February 3, 2014.
16
Transport Newsletter, No. 40 Third Quarter 2008. UNCTAD.

2008. http://www.unctad.org/Templates/Download.asp?docid=1
0775&lang=1&intItemID=1397. Accessed December 25, 2008.
Jiang Xufeng. Chinas logistics sector on track of revival:

experts. Xinhua. December 4, 2009. http://news.xinhuanet.
com/english/2009-12/04/content_12584928.htm.
Accessed
February 12, 2010.
Xin Yi. Worst of storm over. China Daily. October 26,

2009.http://www.chinadaily.com.cn/cndy/2009-10/26/
China issues guidelines to promote development of logistics

industry. Xinhua. August 19, 2011. http://news.xinhuanet.com/
english2010/china/2011-08/19/c_131062080.htm. Accessed
November 8, 2011.
17
Wang Ying. China Southern to join SkyTeam. China Daily. June

18
Yao Jing. Green Logistics faces rapid development in China.

China Daily. April 16, 2011. http://usa.chinadaily.com.
November 11, 2011.
19
James Flanigan. Ports and distribution industry surge together.

The New York Times. September 20, 2007. http://www.nytimes.
com/2007/09/20/business/smallbusiness/20edge.html. Accessed
December 24, 2008.
20
Chinas logistics industry has new demand. China Daily.

September 9, 2008. http://tradeinservices.mofcom.gov.cn/en/
i/2008-09-09/55427.shtml. Accessed December 26, 2008.
21

Yearbook 2009. China Statistics Press. Beijing, Peoples Republic of China. 2009.
22
Chinas H1 logistical expenses up 18.5% year-on-year .

Xinhua. July 27, 2011. http://news.xinhuanet.com/english2010/
2011.
Chinas logistics industry sees steady growth. Xinhua. November

China to invest 6.2 trillion yuan in transportation sector over
next five years. Xinhua. May 26, 2011. http://news.xinhuanet.
com/english2010/china/2011-05/26/c_13895508.htm.
Jeffrey Wong. Chinas 12th Five Year Plan: Transportation and

Logistics. KPMG China. April, 2011. http://www.kpmg.com/
CN/en/IssuesAndInsights/ArticlesPublications/Documents/
China-12th-Five-Year-Plan-Transportation-Logistics-201104.
pdf. Accessed November 10, 2011.
Cai Jin. China Business Guide 2009 The Logistic Industry. The
China Council for the Promotion of International Trade. 2009.
10
11
156
13
. The Central Peoples Government of the

Peoples Republic of China. March 13, 2009. http://www.gov.
cn/zwgk/2009-03/13/content_1259194.htm. Accessed January
30, 2010.
China announces stimulus plans for nonferrous metals,

logistics. Xinhua. February 25, 2009. http://news.xinhuanet.
com/english/2009-02/25/content_10894891.htm.Accessed
February 2, 2010.
Chinas logistics industry booms CRI. February 5,

2007.http://en.ce.cn/Industries/Transport/200702/05/
t20070205_10325551.shtml. Accessed December 26, 2008.
12
China 2015: Transportation and Logistics Strategies. A. T.

Kearney. 2010. http://www.atkearney.com/images/global/pdf/
China_2015.pdf. Accessed November 21, 2010.
Yang Ning. DHL urges greater efficiency for sector. China
Daily. November 11, 2010. http://www.chinadaily.com.cn/
cndy/2010-11/11/content_11531458.htm. Accessed November
22, 2010.
157
23
(20102015). A. T. Kearney Forum. 2010. http://forum.atkearney.cn/

download.php?id=PDF100726163116001. Accessed February 7,
2011.
33
Lan Lan. DHL Express set to beef up Chinese presence.

November 20, 2010.
24
Chinas e-commerce bumps on logistics shortfall. China

Daily. January 25, 2011. http://europe.chinadaily.com.cn/
business/2011-01/25/content_11918536.htm.Accessed
February 3, 2011.
34
Wang Ying. DHL expands service in west, central China.

November 11, 2011.
25
Chinas e-commerce market faces logistical challenge.

Xinhua. November 11, 2012. http://www.chinadaily.com.
December 3, 2012.
35
Wang Ying. TNT looks to make inroads. China Daily. July

8, 2011. http://europe.chinadaily.com.cn/europe/2011-07/08/
36
Chao Deng. Private-Equity Firms Bet on Chinas Logistics Sector

as Consumption Booms. The Wall Street Journal. September
3, 2013.http://blogs.wsj.com/moneybeat/2013/09/03/privateequity-firms-bet-on-chinas-logistics-sector-as-consumptionbooms/. Accessed February 3, 2014.
37
Zong He. Encourage public views of laws. China Daily. August

18, 2005. http://www.chinadaily.com.cn/english/doc/200508/18/content_470113.htm. Accessed December 28, 2008.
26
Li Xinzhu. Post Bureau hands down first fine for poor parcel
handling. China Daily. January 31, 2011. http://www.
htm. Accessed February 3, 2011.
27
He Wei. Courier firms eye air cargo expansion. China

Daily. November 28, 2012. http://usa.chinadaily.com.
cn/epaper/2012-11/28/content_15967286.htm.Accessed
December 3, 2012.
28
29
30
31
32
158
Juro Osawa. Alibaba Targets Logistics Investment. The Wall

Street Journal. September 9, 2012. http://blogs.wsj.com/
chinarealtime/2012/09/09/alibaba-targets-logistics-investment/.
38
Allow postal competition. China Daily. January 30, 2007. http://

www.chinadaily.com.cn/bizchina/2007-01/30/content_796255.
htm. Accessed December 28, 2008.
39
Tom Mitchell. Concerns over Chinese postal law. Financial

Times. August 5, 2007. http://www.ft.com/cms/s/0/e74e8bb4438b-11dc-a065-0000779fd2ac.html. Accessed December 28,
2008.
40
Postal delivery reform welcome. China Daily. September

17, 2009. http://www.chinadaily.com.cn/cndy/2009-09/17/
41
Zhu Zhe. Controversial postal law gets green light. China Daily.
April 25, 2009. http://www.chinadaily.com.cn/cndy/200904/25/content_7715591.htm. Accessed February 13, 2010.
42
Pricewaterhouse Coopers and EBS Business School, Supply

Chain Management Institute. Transportation and Logistics
2030 Series: Emerging Markets. 2010. https://www.pwc.com/
en_GX/gx/transportation-logistics/tl2030/emerging-markets/
pdf/tl2030_vol3_final.pdf
Chen LiMin UPS sees strong pickup in Asian business. China

Daily. May 19, 2010. http://www.chinadaily.com.cn/usa/201005/19/content_11018938.htm. Accessed November 20, 2010.
FDX New FedEx Asia Pacific hub to start service in 09.
Sinocast via COMTEX. December 18, 2008. http://www.tradingmarkets.com/.site/news/Stock%20News/2090700/. Accessed
December 26, 2008.
UPS to move Asian hub from Philippines to China. DPA. May
21, 2008. http://www.thaindian.com/newsportal/world-news/
ups-to-move-asian-hub-from-philippines-to-china_10051230.
html. Accessed December 26, 2008.
UPS expands healthcare logistics network. China Daily. October
159
2.5 Products Classified by Materials
2.5
200713
11985
2006550
230
2
HINAS RAPID, CONTINUING growth has

indisputably fueled domestic demand for both raw and
processed materials. While relative domestic scarcity of some
materials has led to import-driven markets, China continues
to be self-sufficient in many categories. For example, in
2007 China produced an estimated 1.3 billion tons of
cement domestically1approximately half of the worlds
total productionand has been the worlds largest producer
of cement since 1985. In contrast, China has been a netimporter of rubber products, with the total consumption of
5.5 million tons in 2006 outstripping domestic production
of only 2.3 million tons, with Thailand ranking as the top
exporter to China.2
Through the global economic slowdown, domestic
consumption (and production) of cement remained mostly
insulated from global trends due to continuing demand for
construction in China.
In the coming years, the best use of resources for cement
production will likely be achieved by continuing efficiencyrelated reforms; it is estimated that in 2006 cement production
accounted for total energy consumption equaling 131 million
tons of coal3approximately 6.6 percent of an estimated
2.1 billion tons consumed in total4. Historically, inefficient
operations, small-scale production and procedural issues have
led to low energy efficiency in domestic production, although
new guidelines and regulations such as those promulgated in
20073 detailing new, higher standards for technology- and
process-related energy efficiency will improve the yield of
cement produced per energy unit. These adjustments, detailed
as far back as 2002, indicate that the replacement of plants
producing #325 cement with more efficient varieties would
alone save approximately 15 million tons of coal per year.5
Despite cement exports from China declining by nearly
13 percent in 20086, actual output reportedly grew by 5.2
percent to top 1.38 billion tons in 2008 and consumption
was forecasted to grow by 6.3 percent in 2009.7 Later reports
indicated that production had surpassed 1.65 billion tons that
year the largest volume of any nation in the world.8
In 2010, the PRC governments [accelerated] phasing
out of energy-wasting and outdated production capacity
(including the mandated closure of 700 polluting and energy-
intensive plants) was reported to lower overall production by

some 107 million tons; nevertheless, research cited by China
Daily suggested that overall volume would reach 1.85 billion*
tons by 2011.9
This projection appears to have been met a year early, with
the China Cement Association reporting total production
of 1.88 billion in 2010more than half the worlds total
output.10 The governments increased investment in fixed
assets is cited as the major reason for the industrys growth
despite slowing export demands and the rising costs of both
labor and materials.11
Overcapacity in cement production, however, remains
a serious concern. Despite the fact that only two-thirds of
Chinas cement production capacity was utilized in 2008,
investment in the sector grew by a staggering 67 percent in
the first half of 2009, following a 60 percent year-on-year
increase to 105 billion yuan in 2008.12 This reportedly led the
Ministry of Industry and Information Technology to release
a draft regulation on the access threshold for the cement
industry in August last year stipulating that the Ministry
will not approve new cement production lines in provinces
where clinker output capacity exceeds 1,000 kg per capita
during 2011 to 2015 and that it will lift requirements [for]
cement producer[s] equity capital in new projects and raise
the bottom line for daily production capacity.12 All this took
place after the NDRC had set out to eliminate 50 million tons
of outdated capacity each year between 2007 and 2010; a new
announcement in 2009 indicated that another such program
would be implemented to eliminate an additional 600 million
tons of small vertical kiln capacity over three years between
2010 and 2012.13 It was not immediately clear how much of
this additional capacity was genuinely additional overcapacity
and how much was the same targeted by the previous
program but unsuccessfully eliminated. Figures reported by
Xinhua indicated that 74.16 million and 91.55 million tons
of inefficient production capacity were eliminated in 2009
and the first three quarters of 2010, respectively.14 In 2011
further cuts to inefficient production capacity ordered by the
Ministry of Industry and Information Technology amounted
to 133 million tons.15
In 2010 an additional 300 million tons of obsolete
* We suspect there to have been a conversion error in the original China Daily article; although the original sentence reads the sentence reads The countrys
cement production was 163 million tons in 2009 and will stand at 185 million tons this year with Chinas fixed assets investment and property market
cooling down, according to the research, these figures are strikingly small compared to other sources reports of PRC cement production (another source, for
example, reported 1.38 billion tons produced in 2008). This, combined with the fact that this sort of conversion error from the 10,000-based used when
articulating large numbers in Chinese to the English format of counting by thousands is not uncommon, has led us to choose the value of 1.85 billion as most
likely to be correct.]
160
2006
1.31321
6.6% 6
2007 3
2002
#325
15005
200813 6
5.213.8
20096.37
200916.5
8
2010
700
1.07
2011
18.59
201018.8
10
11
2008
200967
601050 12
20112015
1000
12 2007
20105000
200920102012
6 13
20097416
20109155142011
1.3315
20103
2015
90%161.33
20109
17
182015
28%45%
2011
201233
119
20091.63
20101.85
200813.8
18.5
161
capacity were targeted for elimination in favor of dry process

production by 2015, which is hoped to account for 90
percent of production at that time, 16 presumably putting a
133-million-ton dent in that goal.
Presumably to assist in the planned consolidation of the
industry as smaller, more inefficient operations close, the
State Council issued guidelines in September 2010 aimed
at promoting mergers and acquisitions within the cement
industry,17 and furthermore encouraged foreign investors to
participate in the process.18 The Central Government set the
target to raise the total market share of the top-10 cement
producers to more than 45 percent by 2015 from 28 percent
currently.
In early 2011, three of the largest producers nationally
(China National Building Materials, Anhui Conch and Sino
Materials) announced their intent to expand their production
capacities to 300 million, 300 million and 100 million metric
tons by 2012, respectively.19
Consolidation and the elimination of excess, inefficient
capacity continues; a 2012 report from the NDRC indicated
that in 2011 an additional 155 million tons of clinker and
mill cement production capacity were eliminated, helping to
curtail CO2 emissions.20
By the middle of 2012 total output growth was down to
5 percent from a year priora decrease of fully 14.3 percent
year-on-year. According to Xinhua, The sharp decrease came
as economic slumps both at home and abroad have dampened
market demands. The building material sector has been
particularly weighed down due to the government keeping
real estate controls in place.21
In October 2013, the State Council issued a new plan to
tackle chronic overcapacity problems in sectors such as steel
and cement by blocking approvals for new projects and by
making better use of the market, the latest in the governments
long line of measures to address the surprisingly-persistent
problem.22 Reuters explains:
The long-awaited plan, published by Chinas cabinet,
said it would focus on establishing and perfecting
market mechanisms, marking a change of approach
after years spent trying to strong-arm the sectors into
submission.
It would also set higher environmental and quality
standards for industries and encourage the private
sector to play a role in restructuring oversized firms.
As well as blocking new approvals, the new plan will
seek to absorb overcapacity by stimulating domestic
demand, and will also offer tax incentives to encourage
firms to relocate plants overseas.
162
The previous approach sought to encourage giant stateowned firms to merge or swallow up smaller competitors
but it was not successful, with industry experts
complaining that the focus on strengthening SOEs had
20122011
1.55
20
,25
2012
14.3%5%
21
2009121
2008114
1817% 26
served to raise capacity, rather than reduce it.22
A separate effort by the nations environmental ministry

to raise standards for the production of cement, batteries,
leather and heavy metals [in order to] to cut air, water and soil
pollution was launched two months later and stands to make
the lives of Chinese cement producers more interesting still
should it be effectively enforced.23
Paper products are another area where Chinas growth
places it among the top producers in the world. According to
some analysts, in fact, it is the largest producer of paper in the
world, although their claim that the industry has unlimited
potential for growth does invite some skepticism.24
Nonetheless, the China Paper Association reported
that Chinas production of paper products fully doubled
between 1995 and 2005; furthermore, this growth has been
attributed to the use of high-tech manufacturing equipment
and techniques rather than the liberal use of cheap labor and
energy resources associated with other industries. While much
of the financing of these projects has been domestic, foreign
joint ventures and foreign technology has played a large role
in the high efficiency and productivity, as has the widespread
reuse of waste paper products.25
According to Ministry of Commerce statistics, in 2009
there were 121 new foreign-invested projects in the paper
making industry (compared to 114 in 2008), with total
utilized foreign capital reaching $1.8 billion (an increase of
17 percent year-on-year).26
Similar to actions taken in the cement industry, 500,000
tons of production capacity was eliminated with the closure of
inefficient operations.27
In May 2011, the Ministry of Industry and Information
Technology announced its intent for the industry to further
eliminate outdated production capacity amounting to nearly
7.5 million tons (roughly 7.4 percent of the nations total
production capacity) by the end of that year.28
Meanwhile, a Deloitte report shows that local producers
are actively pursuing mergers and acquisitions in order to
expand their operations; the industry is so fragmented that the
ten largest producers have a cumulative market share of only
10 percent, compared to 60-70 percent in North America.29
Finally, plastics continue to be both an important and
fast-growing sector, as well as one with relatively high
participation by foreign-invested enterprises. The average
growth of the engineering plastic sector between 2000 and
2005, for example was reported as 30 percent30triple the
growth of Chinas GDP. Furthermore, as China continues to
201310
22
5027
20115
2011
7507.4%28
10%60-70% 29
20002005
30%30GDP
31
22
23
24
2005
1995
2009 32
201020%
4480 33
210023%34
1127% 35
Nova Institute
PLA20072011
PLA36
PLA20074400
200923720102011
PLA20071200
163
develop its high-tech and higher-value-added industries, the

use of plastics, molds and sophisticated manufacturing will
certainly play an important role.
The financial slowdown did not spare this resilient industry,
although prompt attention from the government in the form
of the Opinion of Central Committee and State Council on
the steady agriculture development and continuously increase
the yield for farmer, the Light industry restructuring
and revitalization plan, VAT reform and export tax rebate
adjustments all helped shield Chinese producers from the
brunt of the crisis, according to the China National Light
Industry Council (CNLIC).31
It was later reported by the Ministry of Industry and
Information Technology that the plastics industry grew by
double-digits on average in 2009,32 and in the first half of
2010 total output of plastic products grew by 20 percent yearon-year to reach 44.8 million tons.33 Meanwhile, output of
plastics and synthetic resins arrived at 21 million tons after
growing 23 percent in the same period,34 and investment in
the sector grew by nearly 27 percent to reach 1.1 billion yuan
in roughly the same period.35
Even if the industry grew in total, research conducted by
Thailands National Innovation Agency and Nova Institute
GmbH found that Chinese PLA resin production volumes
collapsed between 2007 and 2011, as companies there had
problems with the quality of their lactic acid, a key building
block of PLA.36
Accordingly, Chinese exports of PLA dropped from
4,400 metric tons in 2007 to 237 metric tons in 2009, and
remained at those low levels in 2010 and 2011. That has
boosted Chinese imports of PLA from about 1,200 metric
tons in 2007 to 4,000 metric tons [in 2011].36
The plastics industry has also turned to modified plastics
in an attempt to become more sustainable. Current estimates
place 75 percent of the Chinese market for modified plastics
with foreign-invested enterprises. Domestic demand for such
materials exceeded 5 million tons in 2010 and is forecasted to
reach 10.4 million tons by 2015.37
Finally, the emergence of shale gas resources in both the
United States as well as China have buoyed the outlook for
plastics manufacturers in both nations. According to a Plastics
News-quoted analyst based in Houston, Texas, China is likely
to move quickly in capitalizing on newly-discovered shale gas
reserves because [the Chinese] need new energy sources very
fast.38
Although new investments valued at more than $16 billion
are expected in the U.S. aimed at exploiting local shale gas
deposits, Chinese investment is not likely to be immediate,
in part due to the fact that Chinas most-studied shale gas
fields are generally also located in the far northwest of the
country, where it is costly to bring it to sizable markets either
164
within China or internationally.38

Beyond energy applications, the gas use as a plastic
manufacturing feedstock looks to be gaining popularity in the
United States and is expected to see similar gains in China as
investments and production capacity increase.38
2011400036
75%2010
5002015104037

Guidance on Cement Production
Published by the Ministry of Construction of the PRC
on November 14, 2007 and effective May 1, 2008, Energysaving Standards for Cement Manufacturing Plant (National
Standard No. GB50443-2007) outlines many guidelines for
energy-saving steps in the manufacturing of cement, some of
which are compulsory.
Chinas cement production capacity has historically been
concentrated in small plants using older technologies and, as
a result, being relatively inefficient energy consumers in terms
of overall output. The use of more efficient technologies,
combined with the closure of smaller, older plants in favor
of higher-volume operations, utilizing better technology will
likely contribute to energy savings and the reduction of overall
environmental impact while maintaining or increasing overall
production. This is consistent both with the overall targets
in the 11th 5-year Plan to improve energy efficiency by 20
percent over a five year timeline and also the intended move
away from highly energy-intensive manufacturing.
This guidance likely led to the following item, new entry
requirements for companies looking to produce cement.
New Entry Criteria for the Cement Industry
In November 2010, the Ministry of Industry and
Information Technology (MIIT) announced revisions to the
entry criteria for the cement industry, which became effective
on January 1, 2011.
The revisions stipulated that:
1. Production lines of cement clinker shall adopt a new
dry process method;
2. Production scale of cement clinker shall reach 4,000
tons per line each day. For underdeveloped areas where
transport facilities and market capacities are limited,
scale requirement shall be minimum 2,000 tons per
line per day;
3. Self-possessed fund shall account for minimum 35
percent of the total investment in the building,
rebuilding, expanding and moving of cement clinker;
4. Projects that fail to meet these standards shall not be
approved by authorities.39
38
160
38
38
201111
1.
2. 4000
2000
3.
35%
4.
39
20105
40
2006
200811
40
20071114
GB50443-2007
200851
20%
2010715406
1%
41
PET
201010PET
PET
PET42
142
PET
201011
165
Rising Power Tariff Surcharges for Energy-inefficient

Production
In May 2010, an NDRC plan to raise power tariff
surcharges for energy-inefficient industry went into effect,
whereby Local governments must cancel any favorable power
prices to energy-intensive firms, including preferential rates in
the name of direct trade between power generators and power
users.40
This plan was actually first put into practice in 2006,
according to Xinhua, but that in order to stimulate their
struggling economy at the height of the global financial
crisis, some provincial governments, mainly in west China,
started to find ways to subsidize energy-intensive enterprises
in November 2008.40
Further Tax Rebate Changes
Beginning July 15, 2010, exports of 406 items (including
some plastic products) would no longer receive export
tax refunds, in a move to discourage the export of highlypolluting and energy-inefficient goods. According to the
Ministry of Commerce, this change was not expected to
substantially affect overall export volume as the goods in
question accounted for roughly one percent of the total.41
Rules for Importing Whole PET bottles
In October 2010, the Chinese government issued new
regulations regarding the import of whole polyethylene
terephthalate (PET) bottles (such as those used for soft
drinks). Previously, such imports were required to have been
processed in some way and the import of whole bottles was
forbidden.42
The new rules require that importers have existing
facilities and a current license to import recycled plastic, that
they be located in a district designated for recycling and have
imported at least 10,000 metric tons of material in each of the
last three years.42
Plastics News observes that The issue has been closely
watched for its potential impact on recycling streams
worldwide, and for its potential to increase Chinas already
significant imports of PET. The country, for example, has
taken more than half of the recycled PET bottles collected in
the United States for each of the last four years.42
Plan for Expanded Ban on Free Plastic Bags
Since the implementation of the ban on complimentary
plastic bags at retail locations in 2008, plastic bag usage has
reportedly dropped by two-thirds. To further reduce the use
of plastic bags, the Ministry of Commerce has published a
new regulation for public feedback that would extend the ban
to include restaurants, hospitals and book stores.43
166
Increased Regulatory Supervision of Plastic Recyclers

A round of new attention from environmental regulators
on the plastic recycling trade has led the Ministry of
Environmental Protection to issue the Imported Waste
Plastics Environmental Protection Regulation.44
According to Plastics News, The new regulation will set a
market entry barrier, which is 4,000 square meters of site area
and 5,000 metric tons of annual processing capacity. The
regulation also divides the 1,600 or so companies [operating
in the industry] into four categories and raises certain
requirements for each category.44
Like many industries in China, a certain degree of
fragmentation and reliance on low-tech production methods
has led to a proliferation of small, inefficient facilities which
may have little or no environmental oversight. According to
one plastic recycling executive, Many of the recycling plants
are operated by farmers, using simple technology, and are not
safe places to work. and that 99 percent of Chinas scrap
plastics companies do not have equipment to properly clean
the water they use in their factories.45
Major goals of the new regulation appears to be the
consolidation of recycling operations into campuses which
will feature more sophisticated waste treatment facilities and
management to limit the process negative environmental
impact. Such consolidation would carry with it the additional
benefit of easier regulation and oversight of the trade.44
A 2014 report by the Tokyo Foundation outlines China
plans for the recycling and urban mining sector and how these
developments could be key drivers for economic growth in its
interior provinces. According to the report, in May 2010,
Chinas National Development and Reform Commission
and the Ministry of Finance announced a plan to develop
pilot urban mining facilities in 30 cities within five years
with financial assistance being provided by the central and
regional governmentsto obtain reusable resources from
junked electrical and electronic appliances. Seven newly
developed industrial parks were identified as the first group
of such facilities: Tianying Recycling Economic Park in
Jieshou, Anhui; Ziya Circular Economy Industrial Park in
Tianjin; Jintian Industrial Park in Ningbo, Zhejiang; Miluo
Industrial Park in Hunan; Huaqing Circular Economy Park
in Qingyan, Guangdong; Jinmai Industrial Park in Qingdao;
and the Southwest Resource Recycling Industrial Park in
Sichuan. The target is for the seven to recycle 1.9 million tons
of copper, 800,000 tons of aluminum, 350,000 tons of lead,
and 1.8 million tons of plastic by 2015. Another 15 sites have
already been earmarked for phase two of the urban mining
initiative.
On September 22, 2008, the report says, the Neijiang
municipal government in southwestern China and
PET42
2015190
8035180
15
2008
43
44
4000
5000
44
99%
45
44
2014
20105
30
2008922
CRD
1114
343.3
53.3
26.7
2015539.12
26.55.15
25320
1989
185200
5100
2192
20132
46
167
China Recycling Development Co., the largest resource

recycling company in the country, reached agreement on
the construction of the Southwest Recycling base, and on
November 14 they signed a contract calling for an initial
investment of 3.4 billion yuan to develop a recycling park
spanning 3.3 square kilometers to function as the core
facility for the recycling base.The base is a colossal project
that will make it the largest recycling center in the southwest,
comprising a market covering some 53.3 km2 and another
area for the deep processing of recycled resources covering
26.7 km2. The core recycling park is being built in three
phases over five years and is scheduled for completion in
2015. The first phase focused on an area covering 53 hectares
and investment of 912 million yuan to develop facilities for
retrieving and sorting scrap materials, trading, processing,
distribution and shipping, anti-pollution measures, waste
management training, scientific and technological research
and development, and public services. Phase two involved the
construction of a 26.5 ha deep processing area at a cost of 515
million yuan. And phase three, covering 253 ha and costing
2 billion yuan, will expand the parks resource-retrieval and
deep-processing capabilities.
China Recycling Development, Chinas top recycling
company, was founded with State Council backing in
May 1989. In addition to Neijiang, the report says,
the company has bases all over the country, including
Qingyuan, Guangdong Province; Luoyang, Henan Province;
Changzhou, Jiangsu Province; Linyi, Shandong Province;
Lingwu, Yinchuan in the Ningxia Hui Autonomous Region;
Tangshan, Hebei Province; Xian, Shaanxi Province; and
facilities in Heilongjiang and Jiangxi Provinces.
The report points out that recycling permits in China
are difficult to obtain, issued only in limited numbers on a
provincial basis, which accounts for the pseudo-monopoly of
CRD and fragmentation of smaller players. That CRD has
national coverage, says the report, is proof that it has full
state approval.
According to the report, Neijiang no doubt hoped
to formalize the sector by inviting one of Chinas leading
companies to the city. Plans call for the recycling park in
Niupengzi to recycle 1.85 million tons of resources a year
from 2 million electrical and electronic devices and 50,000
scrapped automobiles. This, it is hoped, should generate sales
of 10 billion yuan and profits of 200 million yuan, creating
1.9 billion yuan in tax revenue and jobs for 20,000 people.
Enforcement of the new policy, dubbed Operation Green

Fence, reportedly led to the rejection of 800,000 tons of
recyclables or scrap in its first seven months. During that
time, customs officials [conducted] rigorous checks have
suspended the import licenses of 247 companies.46
The revocation of those licenses is expected to force
smaller outfits out of business, making environmental
regulation easier for the government.46
Whereas Chinas demand for low-cost recycled raw
materials has meant waste shipments from Europe, the US,
Japan and Hong Kong arrived thick and fast, with scrap
becoming the top US export to China by value ($11.3bn) in
2011,46 the new policy appears to have motivated American
and European industry players to explore more extensive
recycling operations on their home turfs. As a result, say some
executives, China may have sparked a new wave of innovation
in the industry47
80
247
46
46
2011
11346
47
Chinas Green Fence

China sent shock waves through the global recycling
market [in February 2013] when it announced it would
no longer be accepting poorly sorted or dirty shipments of
recyclable waste from foreign exporters.46
168
169
Works Cited
U.S. Geological Survey Mineral Commodity Summaries,
January 2008. U.S. Geological Survey. http://minerals.usgs.
gov/minerals/pubs/commodity/cement/mcs-2008-cemen.pdf.
Accessed October 31, 2008.
Chinas rubber consumption to grow over 10 percent this year.

Peoples Daily. January 6, 2006 http://english.peopledaily.com.
cn/200601/06/eng20060106_233283.html. Accessed October
31,2008.
Wan Zhihong. Industry gets new guidelines. China Daily.
November
15,
2007.
http://www.chinadaily.com.cn/
bizchina/2007-11/15/content_6256056.htm. Accessed October
31,2008.
Coal supply sufficient for 2006 demand. Xinhua.

November 30, 2005. http://sg2.mofcom.gov.cn/aarticle/
chinanews/200511/20051100920034.html. Accessed October
31, 2008.
Mason H. Soule, Jeffrey S. Logan, and Todd A. Stewart. Trends,

Challenges, and Opportunities in Chinas Cement Industry.
March 2002. The World Business Council for Sustainable
Development.
170
Tong Hao. Chinas cement exports down 12.91% in 2008.

China Daily. April 1, 2009. http://www.chinadaily.com.cn/
30, 2010.
Zheng Lifeng. Chinas cement consumption expected to grow
6.3% in 2009. China Daily. March 2, 2009. http://www.
htm. Accessed January 30, 2010.
11
China Cement Output Up 19.6% in H1. Xinhua. August

3, 2011.http://news.xinhuanet.com/english2010/china/201108/03/c_131027337.htm . Accessed November 15, 2011.
12
China to rein in cement overcapacity. China Cement. August

26,2009.http://www.cementchina.net/news/shownews.
asp?id=6051. Accessed January 31, 2010.
13
China to phase out 600 mln tonnes backward cement

capacity in 3 yrs. China Cement. November 2, 2009. http://
www.cementchina.net/news/shownews.asp?id=6373. Accessed
January 31, 2009.
14
China promises to exhaust all means to meet emission reduction

goal. Xinhua. September 14, 2010. http://news.xinhuanet.com/
November 19, 2010
15
China sets 2011 targets for elimination of outdated industrial

facilities: MIIT. Xinhua. May 10, 2011.http://news.xinhuanet.
com/english2010/business/2011-05/10/c_13868306.htm.
16
China to eliminate 300 mln tons of cement capacity in 3 years.

China Cement. April 9, 2010. http://www.cementchina.net/
news/shownews.asp?id=7011. Accessed November 18, 2010.
17
Chinese auto sector gears up. China Daily. November 2, 2010.

http://www.chinadaily.com.cn/m/hangzhou/e/2010-11/02/
content_11495272. htm. Accessed November19, 2010.
18
Chinese cement sector gets integration boost. China Cement.

April 16, 2010. http://www.cementchina.net/news/shownews.
asp?id=7050. Accessed November 18, 2010.
19
Banny Lam. Top cement makers to gain from consolidation.

China Daily. February 8, 2011. http://www.chinadaily.com.
cn/hkedition/2011-02/08/content_11963397.htm.
Accessed
November 16, 2011.
20
China curbs CO2 emissions through industrial restructuring.

Xinhua. November 22, 2012. http://usa.chinadaily.com.
cn/business/2012-11/22/content_15951473.htm.
Accessed
December 3, 2012.
21
Chinas cement output growth drops sharply. Xinhua. June

Eliminate outdated capacity, a tough fight in cement industry.

Cement Tech.
http://www.cementtech.org/en/shownews.
asp?id=185. Accessed November 19, 2010.
Liu Yiyu Large cement companies set to cash in. China Daily.
August 10, 2010. http://www.chinadaily.com.cn/usa/201008/10/content_11130318.htm. Accessed November 19, 2010.
10
Meng Jing. Anhui Conch is going global to boost output.

China Daily. November 3, 2011. http://www.chinadaily.com.
November 15, 2011.
171
22
23
China targets cement, batteries, metals in anti-pollution

push. Reuters. December 27, 2013. http://www.
reuters.com/ar ticle/2013/12/27/us-china-pollutionidUSBRE9BQ09420131227. Accessed February 3, 2014.
24
2010-2015.
OCN.http://www.ocn.com.cn/reports/2006080zaozhi.htm.
25
Chinas Pulp and Paper Industry: What Low-cost Labor

Advantage?. Presented by Robert Flynn, Wood Resources
International. January 18-20, 2006.
26
The Survey of Foreign Investment in Chinas Papermaking

Industry in 2009. Invest in China. October 28, 2010. http://www.
fdi.gov.cn/pub/FDI_EN/Economy/Sectors/Manufacturing/
Papermaking/t20101028_127769.htm. Accessed February 3,
2011.
33
China Plastic Products and Modified Plastics Market Report,

2009. Research in China. http://www.researchinchina.com/
Htmls/Report/2010/5846.html. Accessed November 17, 2010.
34
China Plastic and Plastic Products Industry Statistics, 20092010. Research in China. http://www.researchinchina.com/
Htmls/Report/2010/5946.html. Accessed November 17, 2010.
35
Investment in Fixed Assets by Industry (2010.01-08). Invest

in China. October 11, 2010. http://www.fdi.gov.cn/pub/
FDI_EN/Economy/Investment%20Environment/Macroeconomic%20Indices/Population%20&%20GDP/Other/
36
Steve Toloken. Asia to top PLA capacity by 2020. Plastics

News. October 23, 2012. http://www.plasticsnews.com/china/
english/business/headlines-arc2.html?id=1350873755. Accessed
December 3, 2012.
37
Laura Wood. Research and Markets: China Plastic Products and

Modified Plastics Market Report, 2011. June 8, 2011. http://
www.reuters.com/article/2011/06/08/idUS83732+08-Jun2011+BW20110608. Accessed November 17, 2011.
27
Full Text: Report on Chinas national economic, social

development plan. Xinhua. March 16, 2010. http://news.
xinhuanet.com/english2010/china/2010-03/16/c_13212790_4.
38
Steve Toloken. China plastics sector poised to capitalize on

shale gas. Plastics News. October 23, 2012. http://www.
plasticsnews.com/china/english/business/headlines-arc2.
html?id=1350791961. Accessed December 3, 2012.
28
Ben Yue. Paper making industry to close 7% output in 2011.

Accessed
November 16, 2011.
39
New entry criteria for cement industry.

.
December 3,2011.http://www.cementchina.net/news/
shownews.asp?id=8163. Accessed November 17, 2011.
40
China scraps preferential power rates for energy-intensive

firms. Xinhua. August 6, 2010. http://news.xinhuanet.com/
November 17, 2010.
41
Removal of tax rebates not expected to cause export slump.

Xinhua. June 224, 2010. http://news.xinhuanet.com/
english2010/china/2010-06/24/c_13367664.htm.
Accessed
November 17, 2010.
42
Steve Toloken. China issues rules for importing whole PET

scrap bottles. Plastics News. November 8, 2010. http://
www.plasticsnews.com/headlines2.html?id=20262.
Accessed
Novemver 17, 2010.
43
Zheng Jingran.Ban on free plastic bags paying off. China Daily.

May 28, 2011. http://www.chinadaily.com.cn/china/2011-05/28/
29
30
172
David Stanway. China to ban new projects, strengthen market

in new overcapacity plan. Reuters. October 15, 2013. http://
www.reuters.com/article/2013/10/15/us-china-overcapacityidUSBRE99E05620131015. Accessed February 3, 2014.
Compass 2011- Global forest, paper, and packaging sector

outlook. Deloitte. 2011. http://www.deloitte.com/assets/
Dcom-Global/Local%20Assets/Documents/Manufacturing/
dttl_%202011%20Forest%20Paper%20Packaging%20
Outlook_1_27_11.pdf. Accessed November 16, 2011.
Dai Zhongrao. Status Quo and Development Trend of
China Plastic Industry. The China Plastic Machine Industry
Association. 2006.
31
2009.
CLII. July 8, 2009. http://plastic.clii.com.cn/news/show.
asp?showid=266645. Accessed January 31, 2010.
32
2009. The
Ministry of Industry and Information Technology of the Peoples
Republic of China. January 25, 2010.
173
174
44
Nina Ying Sun. Industry players respond to Chinas new

recycling policy. Plastics News. September 25, 2012. http://
www.plasticsnews.com/china/english/business/headlines-arc2.
45
Steve Toloken. Waste plastic imports drop in Guangdong as

China gets tough with recyclers. Plastics News. November 13,
2012. http://www.plasticsnews.com/china/english/headlines2.
46
Katharine Earley. Could Chinas green fence prompt a global

recycling innovation? The Guardian. August 27, 2013. http://
www.theguardian.com/sustainable-business/china-green-fenceglobal-recycling-innovation. Accessed February 3, 2014.
47
Gwynn Guilford. A lot of US plastic isnt actually being recycled

since China put up its Green Fence. Quartz. September 16,
2013.http://qz.com/122003/plastic-recycling-china-greenfence/. Accessed February 3, 2014.
48
Kenji Someno. Recycling and Economic Growth in Chinas

Interior. Views on China, The Tokyo Foundation. July 31, 2014.
http://www.tokyofoundation.org/en/articles/2014/recycling-inchina-interior
175
2.6 Construction
OR THE PURPOSES of this discussion, construction

encompasses the various processes involved in raising
structuresarchitecture, hardware, contracting, building
materials and development.
Interestingly, the construction industry was not officially
recognized as a discrete sector contributing to GDP until
1983, following Deng Xiaopings making the case that the
construction industry could be a profit-making sector on its
own and should be treated accordingly.1
Under the jurisdiction of the Ministry of Housing and
Urban and Rural Construction, the industry in China has
continuously performed well, with total gross output value
reported as 6.75 billion yuan in 1985 growing to 3.75 trillion
yuan (growing year-on-year by approximately 33 percent) by
the end of the third quarter in 2008; similarly, in the first
three quarters of 2008 the total income of the construction
industry increased year-on-year by nearly 25 percent to
3.43 trillion yuan and the total profit grew year-on-year by
26.8 percent to 83.5 billion yuan.2 In 2009, output value of
national construction was reported to have risen 22 percent
year-on-year to reach 7.59 trillion yuan3 (no doubt helped
a great deal by the economic stimulus efforts of the PRC
government against the global economic slowdown) and
in 2010 the figure was reported by the National Bureau of
Statistics to have reached 9.52 trillion yuan.4 Total investment
in the sector over 2010 was reported to be in excess of 52.2
trillion yuan.4
More recently, an analyst writing for BBC News observed
that, Construction has come to dominate Chinas economy,
accounting for roughly 25 percent of all activity and about
15 percent of all jobs, while also cautioning that No one
knows exactly how much over-building has taken place. But
Beijing alone is said to have nearly four million apartments
standing empty.5
If over-building is really so widespread, it hasnt had
much of an effect on housing prices. Despite a slight dip
during the early days of the financial crisis (during the weeklong national holiday in October 2008, sales of residential
properties in Beijing alone were 72 percent lower than during
the same period in 2007),6 as a whole property sales in China
have remained relatively robust. It was estimated that in 2007
new and resold apartments in 70 cities across China were
selling for 12 to 15 percent more than in 2006,7 and China
Daily reported in February 2010 that housing prices rose
9.5 percent in January [2010] from a year earlier in Chinas
70 large and medium-sized cities [] 1.7 percentage points
higher than December [2008]s housing price rise, or the
176
2.6
highest increase in 21 months.8
While those figures were encouraging during the economic
slowdown, the Financial Times beyondbrics blog notes that
House price-to-income ratios in large cities such as Beijing,
Shanghai and particularly Shenzhen have been rising steadily
over the past two years, with the qualification that these
cities make up less than 5 percent of new home sales in
China But the fact that Chinas overall price-to-income
ratio continues to fall even as it rises in these cities suggests
that this share is not large enough to inflict serious damage on
the property market.9
The growth in home prices does appear to have slowed
since reaching an apparent peak in April 2010. In January
of this year, the State Council further ordered cities to
better manage the supply of land, raise tax rates on the sale
of apartments or houses held for less than five years and set
price control goals for new homes, in an additional effort
to contain future growth.10 A Businessweek report on surging
property prices in December 2009 noted that such increases
were driven by low interest rates, official encouragement of
bank lending, and then Beijings half-trillion-dollar stimulus
plan [which] all made funds readily available.11
Despite government efforts to contain housing prices, the
situation has not substantially changed; in February 2011
Reuters noted that with one-year deposit rates at 2.75 percent
and consumer prices seen jumping to an annual pace of 5.3
percent in January, inflation-adjusted deposit rates are set
to fall to negative 2.55 percent, and that raising rates by
350 basis points, the amount needed to make them clearly
positive in real terms, would wreak havoc on the economy
and possibly fuel social unrest, a major concern for the ruling
Communist Party.12
Although experimental property taxes were announced for
Chongqing and Shanghai in January 2011, the taxes, which
apply only to new purchases of relatively expensive housing,
mainly for investment purposes, are drawing a skeptical
response.13
The upward trend continued, and its effects drove the
State Council to continue to implement tightening policies
on the property market as well as expanding restrictions on
home purchases to second- and third-tier cities.14
Other measures taken to control the property market
have included purchase limits, higher down payments,
the introduction of a property tax in some cities and the
construction of subsidized housing projects.15
These actions have had at least some effect: a National Bureau
of Statistics report from November 2011 showed that 59 out of
1983
1985
67.52008
3.7533%
2008
25%3.43
26.8%83522009
22%7.593
2010
9.5242010
52.24
BBC
25%
15%
(2008
200772%)6
2007
702006
12%15% 7
2010170
9.52008121.7
218
beyondbrics
5%
9
20104
20111
5
10200912
5000
11
20112
2.75%20111
5.3%
2.55%
350
12
20111
13
14
15
2011
1170
598
4015
2011
2007
140%16
177
70 major cities in their sample saw property price increases slow,

up from only 40 cities in August of the same year.15
There still remains substantial correction to be made,
however; China Daily reported in late 2011 that the
unrelenting real estate boom has driven housing prices up
by 140 percent nationwide since 2007, and by an eightfold
increase in Beijing over the past eight years.16
Although efforts to adjust real estate prices are ongoing,
prices have fallen enough that there were reported at least
five street demonstrations in Shanghai since October 2011,
with early buyers protesting discounts offered to later buyers
by, among other things, breaking into sales showrooms and
smashing scale models. Brokers too have suffered, laying off
thousands of workers and closing hundreds of offices.17
In the face of this unrest, Premier Wen Jiabao indicated
that the government would continue its tightening measures.18
In July of the following year, Central government
authorities reportedly dispatched 16 inspection teams to
major real estate markets around the country after gauging
the scale of the recent property price upturn as a result of
lax implementation of government policy.18 In other words,
the Beijing authorities best efforts to control property prices
may have been undermined by the very officials entrusted to
execute on the plans.
The move coincided with prices in some major cities,
including Shanghai, Guangzhou and Beijing, showing early
sign[s] of a sharp U turn.19
Following the inspections, the central government
[reportedly gave] warnings to some local authorities who were
found not to be following the original guidelines, with the
aim of maximizing revenue from land sales.19
Although by that time Land authorities [had] already
started to cut land supplies in an effort to adjust the housing
market, lowering land supply from 172,600 hectares planned
at the beginning of this year to 159,300 hectares,19 the
Central government is widely seen to be stuck between a rock
and a hard place. On one hand there is a clear requirement to
get housing prices under control not only for the disastrous
effect a real estate bubble popping on the Mainland might
have but also in terms of maintaining social stability as home
ownership in major cities becomes increasingly out of reach
for ordinary citizens. Meanwhile, authorities are also hesitant
to counter the efforts of maintaining growth19presumably
doubly-so in such proximity to the Communist Partys onceevery-ten-years leadership changeover.
On the whole, the governments measures to stabilize
residential property prices seem to have succeeded despite their
poor implementation in some localities, with Xinhua reporting
that Housing prices have remained at roughly the same level
[since 2010], while average per capita income has increased by
more than 10 percent year-on-year, [indicating] that housing
178
prices [] lowered in comparison to the average income.20

By August 2013, authorities efforts to cool the market
had begun to have some effect, with real estate investment
and sales growth slowing in that month. According to the
National Bureau of Statistics, investment in the sector, which
affects more than 40 other sectors from cement and steel to
furniture, rose 19.3 percent in the first eight months from the
same period a year ago, slower than the 20.5 percent rise in
the first seven months.21
Consequently, Chinas biggest property developers
[sitting] on $25 billion in cash as they prepare for a possible
credit crunch and another round of crackdowns on real estate
speculation.22
With land prices hitting record highs and authorities
renewing their push to rein in house prices, the developers
cash hoards may well prove crucial in a sector where margins
are coming under pressure.22
Cash-starved smaller developers are proving tempting
targets for some of these cash-rich larger players, it continues.
According to Thomson Reuters data, some $14.9 billion in
mergers and acquisitions have been announced this year,
already topping 2012s entire tally of $14.7 billion.22
In July of 2013 the government ordered a five-year
suspension of the construction of new official buildings, its
latest effort to crack down on extravagance and pervasive
corruption.23
Nevertheless, by December it was reported that the ban
was not being effectively enforced, leading the government to
order a new crackdown to ensure promises are kept to rein in
extravagance and pervasive corruption.24
An efficient, long-term solution to a superheated property
market remains elusive. Chinas soaring house prices reveal
an uncomfortable truth, observes Reuters. Government
is one of the biggest obstacles to the success of taming the
market.. State income is so entwined in the need for rising
land prices that policy efforts to try to curb the house market
create an inherent conflict of interest.25
Foreign investment in the property market is growing, as
well: the State Administration of Foreign Exchange reported
in 2010 that 23 percent of foreign investment in the PRC
went into the real estate sector.26
Due to tight restrictions on residential property, most
foreign investors enter into the nations commercial property
marketespecially so in first-tier cities where there are quota
restrictions on foreign investment scale.27
Major foreign investors in the Mainland property market
are mostly from private equity,27 with large investments being
made in development enterprises.28
As the Central Governments tightening efforts have made
it more difficult to secure financing for developers, they are
increasingly turning to private equity to fund their projects.
201110
17
18
7
16
18
19
19
2012172600
15930019
19
2010
10%20
20138
2013
1-819.3%
1-720.5%
21
250
22
22
[9]2013
1492012147
22
20137
23
12
24
25
201023%
26
27
27
28
2010
Blackstone
GTCHSBC
2010
40%240
22.7% 28
179
White Paper contributors Dezan Shira note that In 2010

alone, overseas PE funds including the U.S.-based Blackstone,
Netherlands-based GTC Real Estate, and some foreign
capital-based PE funds of the HSBC Bank have established
partnerships with domestic property developers. and that
As a major channel for foreign funds to enter the Chinese
property market, foreign direct investment into the field in
2010 saw an impressive 40 percent year-on-year increase,
reaching US$24 billion and contributing 22.7 percent to the
total actual foreign capital that went to non-financial areas.28

Investigation Into Corruption and Illegal Activity in the
Construction Industry
Jointly issued on July 9, 2009 by the general office of the
Central Committee of the CCP and the State Council, the
Zhong Banfa Document No. 27 noted that there were
some systemic problems in the construction industry that had
hurt the industry as a whole and betrayed the public trust.
These issues were reported by law firm Jones Day as being
identified as:
Money-for-power deals and commercial bribery,
whereby some officials abuse their power to acquire
personal gain.
Some local governments operate approval and lease
procedures illegally, and change the use categorization
of land and increase the utilization rate of construction
without approval.
Some contractors illegally subcontract construction
work.
Some tendering agencies operate illegally.
Some local governments waste taxpayers money by
constructing lavish buildings.
Some contractors violate safety and quality regulations.
Some local governments requisition land illegally
during the construction process.29
The document also reportedly stipulated that officials at
all levels of government will be ordered to start inspecting all
construction projects for which they are responsible, to ensure
that these problems are not repeated.29
In August 2009 (a month after the proclamation) it was
noted that during the last three months, there [had] been
high-profile residential building collapses in Shanghai,
Chengdu, Zhejiang, Jiangsu, and Shijiazhuang).29
It appears that there is work yet to be done on this
issue: in November 2010, a 4-hour fire that consumed an
apartment building in Shanghai was reportedly caused by
180
unlicensed welders.30
While the issue lingers, some sectors are at least making
efforts at compliance. The South China Morning Post last
year reported that when state-run Sinopec was granted
approval for a refinery expansion (a project reportedly worth
US$ 900 million) in Fujian province in March 2012, the
company issued a strict warning to its project team specifically
about accepting bribes, stating that project engineering
and construction has been a main area for corruption at
Sinopec. The warning underscores - the SCMP reports
what experts say is the greatest challenge facing President Xi
Jinping and his drive to tackle corruption rampant graft in
engineering, procurement and construction contracts. 37
New Regulation of Irregular Contracting
A draft regulation on the construction sector was published
on the State Council Legislative Affairs Offices website in late
November 2012 for public comment. As originally published,
the draft bans one construction project from having more
than one general contractor, in addition to [stipulating]
that only the general contractor can outsource the project
to subcontractors, that subcontractors are banned from
outsourcing again and that the developer is banned from
interfering, among other stipulations.31
Offering context for the additional regulation of
construction, Xinhua notes that:
Malpractice in the contracting of construction projects
has become a major cause of poor-quality housing
and infrastructure projects in China. Some projects
have been outsourced again and again among many
contractors and subcontractors, making it difficult
to check the qualifications of builders and supervise
construction quality.
In a number of cases, irregular contracting has also
resulted in defaulted payments to construction
workers. 31
Regulatory Attempts to Contain Housing Prices

In addition to macroeconomic adjustments, increased
down payment requirements and the new property tax, the
Ministry of Land Resources has added additional regulatory
pressure on developers to assist with the Central Governments
property price control efforts.
A September 2010 release from the Ministry stipulated
that, among other things, Chinese property developers
and their controlling shareholders will be banned from
participating in land auctions if they are found guilty of
illegal activities, that Developers who have failed to start
200979
27
Jones Day
31

29
29
20098
29
2010
11
30
9
20123
37
201211
31
20109
70%
32
2010
2010114
33
20101122
181
developing land a year after acquiring a plot at auction would

be barred from bidding for additional land until they rectify
their irregularities in order to address the issue of landhoarding and that local governments failing to allocate at least
70 percent of land offered at auction to affordable housing, or
small and medium-sized apartments will be prohibited from
selling land for luxury housing.32
Tightening Control over Foreign Investment in Real Estate
Since 2010, several measures have been taken to restrict
foreign investment in the Mainlands property markets:
On November 4, 2010, the State Administration of Foreign
Exchange and the Ministry of Housing and Urban-Rural
Development clarified a four-year old regulation restricting
foreign individuals to the purchase of one residential property
only for personal use and foreign-invested enterprises with
branches or representative offices to one non-residential
house for business useand only in the city where the office
is registered.33
On November 22, 2010, the Ministry of Commerce
further released its Circular on Strengthening the Reviews
on the Approval of Foreign Investment into Real Estate
Field, which aimed to retain speculative and roundtripping investments. The circular gave provincial authorities
the mandate to review the integrity of the related land-use
documents, prohibited foreign-invested real estate enterprises
from buying or selling properties that are completed or under
construction in the PRC for arbitrage as well as prohibiting
them from entering into property development or operations
businesses, among attempting to close several loopholes
relating to mergers, acquisitions and equity exchanges.34
Finally, in April 2011 foreign investment in the
construction and operation of villas was moved from the
restricted category in the Foreign Investment Catalogue to
the prohibited one.35
Meantime, as the housing market continues to cool down
with more constrained mortgage availability and tighter
credit, the Chinese government is indicating that different
housing policy regulations could be applied to different types
of cities. Bloomberg reports that in March 2014, Premier Li
Keqiang said that the government will regulate the housing
market differently in different cities to take into account local
conditions. This was echoed by a spokesman from Chinas
Statistics Bureau, who said that relevant departments will
closely follow the changes in the property market and improve
property macro-control policies accordingly.38
program in the country and may expand the program when

time is appropriate.36The property tax program, begun in
2011 as an attempt to moderate excessive growth in residential
real estate prices and transaction volume, initially only
applied in Chongqing and Shanghai. The above was echoed
in a statement from the State Administration of Taxation in
September 2012.39
However, in an almost about-face, according to a report by
the Official China Securities Journal, China would postpone
the expansion of the pilot property tax program. 39. According
to China Daily, while the State Council , in February 2013,
had pledged to strictly implement and improve tightening
measures on the housing market in light of faster-thanexpected price rises in some cities and that One of the
control directions it named was the expansion of experimental
property tax reforms and while the Economic Information
Daily had stated that Wuhan, Hangzhou and Xiangtan
possess the basic prerequisites for the launching of such pilots,
including a tax evaluation system, the same media report
said, the final expansion list is still subject to decisions from
the State Council and other related authorities. 40
Most recently, in March 2014, The Wall Street Journal
states, Vice Finance Minister Liu Kun declared that while
existing pilots in Shanghai and Chonqqing will continue,
there would be no plans to expand the program to other cities.
Instead, the focus would be on drafting a new property tax
law. The same media states that Premier Li Keqiang, in his
monthly report, said that the government wants to accelerate
the introduction of a property tax law. No timetable,
however, was indicated.41
34
20114
35
20143
38
36 2011
2011
20129
39
39
20132
40
20143
41
Possible Expansion of Property Tax Program

According to Housing and Urban-Rural Development
Minister Jiang Weixin, The Chinese government is actively
studying an expansion of the experimental property tax
182
183
Works Cited
1
Koh Gui Qing and Samuel Shen. China to be a rates

tortoise in Year of the Rabbit. Reuters. February 3, 2011.
http://www.reuters.com/article/2011/02/03/idINIndia54621020110203?pageNumber=1. Accessed February 4, 2011.
13
Elaine Kurtenbach. China Property Taxes a Stab at Dousing

Inflation. The Associated Press. February 4, 2011. http://
abcnews.go.com/Business/wireStory?id=12838053&page=1.
14
China to Expand Real Estate Restrictions to Second and

Third-tier Cities. China Briefing. July 18, 2011. http://www.
china-briefing.com/news/2011/07/18/china-to-expand-realestate-restrictions-to-second-and-third-tier-cities.html. Accessed
November 18, 2011.
15
Tang Danlu. Chinese housing market sees turning point soon?.

Xinhua. November 7, 2011. http://www.chinadaily.com.cn/
usa/business/2011-11/07/content_14051329.htm.Accessed
November 18, 2011.
Lu You-Jie & Paul W. Fox. The Construction Industry in China:

Its Image, Employment Prospects and Skill Requirements. The
International Labor Office. October 2001. Geneva.
The Gross Output Value of Construction of the Country Rose

in the First Three Quarters. The National Bureau of Statistics of
China. October 31, 2008.
Main Statistical Data in 2009. The National Bureau of Statistics

of The Peoples Republic of China. January 21, 2010. http://
www.stats.gov.cn/was40/gjtjj_en_detail.jsp?searchword=2009&
channelid=9528&record=29. Accessed February 4, 2011.
Ma Jiantang. National Economy Showed Good Momentum of

Development in 2010. The National Bureau of Statistics of the
Peoples Republic of China. January 20, 2011. http://www.stats.
gov.cn/english/newsandcomingevents/t20110120_402699463.
htm Accessed February 4, 2011.
Viewpoints: Is Chinas economy heading for a crash? BBC News.

July 13, 2012. http://www.bbc.co.uk/news/business-18808758.
16
House prices, pain and gain. China Daily. November 8,

2011. http://www.chinadaily.com.cn/usa/business/2011-11/08/
What goes up. The Economist. October 23, 2010. http://www.

economist.com/displaystory.cfm?story_id=12470459. Accessed
November 9, 2008.
17
Jonathan Ansfield. Beijings housing market bubbles. The

International Herald Tribune. September 27, 2007. http://www.
iht.com/articles/2007/09/26/properties/rebeijing.php?page=1.
Keith Bradsher. Government Policies Cool Chinas Real Estate

Boom. The New York Times. November 10, 2011. http://www.
nytimes.com/2011/11/11/business/global/government-policiescool-china-real-estate-boom.html?pagewanted=all.Accessed
November 18, 2011.
18
.TheWall
Street Journal. November 14, 2011. http://cn.wsj.com/
gb/20111114/bch115819.asp. Accessed November 18, 2011.
19
Wu Yiyao. Further property curbs expected. China Daily. August

content_15672575_2.htm. Accessed December 3, 2012.
184
12
Zhao Tingting. Chinas housing prices up 9.5% in Jan. China

Daily. February 11, 2010. http://www.chinadaily.com.cn/
bizchina/2010-02/11/content_9462315.htm.Accessed February
13, 2010.
Ranjit Lall. Chinese property bubble: a myth?. beyondbrics.

February 3, 2011. http://blogs.ft.com/beyond-brics/2011/02/03/
chinese-property-bubble-a-myth/. Accessed February 4, 2011.
20
Chinas property market to cool down: experts. Xinhua. August

10
David Barboza. Beijing Intensifies Effort to Curb Rising

Home Prices. The New York Times. January 26, 2011. http://
www.nytimes.com/2011/01/27/business/global/27yuan.html.
21
Growth in China property investment and sales slows in

August. Reuters. September 10, 2013. http://www.reuters.
com/article/2013/09/10/us-china-economy-propertyidUSBRE98909T20130910. Accessed February 1, 2014.
11
Dexter Roberts. Mania on the Mainland. Businessweek.

December 30, 2009. http://www.businessweek.com/magazine/
content/10_02/b4162030091917.htm. Accessed February 4, 2011.
22
Umesh Desai and Yimou Lee. China property developers

pull down shutters, hoard cash. Reuters. September 18, 2013.
http://www.reuters.com/article/2013/09/19/us-china-propertyidUSBRE98I02420130919. Accessed February 1, 2014.
185
23
China cracks down on building projects in anti-graft move. Reuters.

July 23, 2013. http://www.reuters.com/article/2013/07/23/uschina-graft-idUSBRE96M0CE20130723. Accessed February 1,
2014.
24
China complains government building ban being flouted. Reuters.

December 5, 2013. http://www.reuters.com/article/2013/12/06/
us-china-graft-building-idUSBRE9B504D20131206. Accessed
February 1, 2014.
25
26
27
28
29
30
31
32
186
Xiaoyi Shao and Koh Gui Qing. The uncomfortable truth in

Chinas property market. Reuters. November 6, 2013. http://
www.reuters.com/article/2013/11/06/us-china-propertyidUSBRE9A509X20131106. Accessed February 1, 2014.
3 pct of foreign investment in China went into real estate in
2010. Xinhua. June 16, 2011. http://news.xinhuanet.com/
November 18, 2011.
33
China Tightens Restrictions on Real Estate Purchases by

Foreigners. China Briefing. November 19, 2010. http://
www.china-briefing.com/news/2010/11/19/china-tightensrestrictions-on-real-estate-purchases-by-foreigners.html.
34
Ministry of Commerce Calls for Stricter Reviews on Approval of

Foreign Invested Real Estate Projects. China Briefing. December
27, 2010. http://www.china-briefing.com/news/2010/12/27/
ministry-of-commerce-calls-for-stricter-reviews-on-approval-offoreign-invested-real-estate-projects.html. Accessed November
19, 2011.
35
China Revises Foreign Investment Catalog. China Briefing. April

27, 2011. http://www.china-briefing.com/news/2011/04/27/
china-revises-foreign-investment-catalog.html.Accessed
November 19, 2011.
36
Chinese govt studying property tax expansion. Xinhua.

November
13,
2012.
http://www.chinadaily.com.cn/
December 3, 2012.
37
Engineering and construction hotbed of corruption. South

China Morning Post. September 28, 2013. http://www.scmp.
com/business/china-business/article/1319008/corruption-rifeprocurement-chinese-state-companies
38
China March New Home Price Increases Ease on Tighter

Credit. Bloomberg. April 18, 2014. http://www.bloomberg.com/
news/2014-04-18/china-s-march-new-home-price-increasesease-on-tighter-credit.html
39
China to postpone widening of property tax pilot

program:report. Reuters. February 1, 2013. http://www.
reuters.com/article/2013/02/01/us-china-property-taxidUSBRE91004020130201
40
More Chinese cities ready for property tax pilots. China

business/2013-02/27/content_16260972.htm
41
China Not Planning to Expand Pilot Property-Tax Program.

The Wall Street Journal. March 19, 2014. http://online.wsj.com/
articles/SB10001424052702303802104579448513811488016
Wang Ying. Commercial property on the up. China Daily. May

30, 2011. http://www.chinadaily.com.cn/cndy/2011-05/30/
Foreign Participation Surges in Chinas Property Development.
China Briefing. March 29, 2011. http://www.china-briefing.
com/news/2011/03/29/foreign-participation-surges-inchina%E2%80%99s-property-development.html.Accessed
November 18, 2011.
Chinas Construction Industry Comes Under the Microscope.
Jones Day. August, 2009. http://www.jonesday.com/
newsknowledge/publicationdetail.aspx?publication=6565.
Farah Master and Anita Li. Eight detained after Shanghai
apartment fire kills 53. Reuters. November 16, 2010. http://
www.reuters.com/article/2010/11/16/us-china-fire-shanghaiidUSTRE6AE43620101116. Accessed February 4, 2011.
China regulates contracting to improve construction quality.
Xinhua. November 23, 2012. http://www.chinadaily.com.
December 3, 2012.
China steps up pressure on property firms to develop land. gov.

cn. September 27, 2010. http://www.gov.cn/english/2010-09/27/
187
2.7 Manufactured Articles
2.7
802006
,9160
95% 1
ANUFACTURED ARTICLES HAVE, by all

accounts, played a major role in Chinas rise to the
status of economic superpower. Beginning in the early 1980s,
Chinas manufacture of goods, ranging from textiles, footwear
and simple consumer goods to the more recent televisions,
medical equipment and appliances, accounted for $916
billion in revenue in 2006fully 95 percent of the total value
of exports.1
According to one London-based analysts op-ed in China
Daily:
There are three secrets to Chinas export success.
First, by engaging in regional production chains,
Chinese enterprises have been able step by step to
absorb advanced technology and upgrade their skills.
According to the World Bank, more than a quarter of
Chinas manufactured exports are hi-tech, one of the
highest proportions in the world. As a result, workers
these days are far more productive than they were a
few years ago, with their increased output helping
make up for the higher wages they are paid.
Second, the sheer size of Chinas manufacturing
workforce plus a focus on investment in factories and
the infrastructure that surrounds them allows Chinese
enterprises to respond quickly to shifts in demand and
ship their goods to market faster and at lower cost
than their overseas rivals.
Third, many enterprises benefit from generous
government support in the form of cheap loans and
a supportive currency policy. Opinion is now divided
on whether the renminbi is close to fair value. But
exporters in China have the luxury of knowing that
the Peoples Bank of China will intervene if needed to
prevent a sharp appreciation in the Chinese currency.2
The issue of the yuans value has been a persistent one; in

the recent U.S. Presidential Election, Republican candidate
Romney vowed to label the PRC a currency manipulator on
his first day in office, thus triggering trade sanctions against
Chinese exports. Following the re-election of President Obama,
the U.S. Department of the Treasurywhich department is
actually responsible for making the determination of currency
manipulation, not the Presidents officereported that the
PRCs control of the yuan did not meet the legal requirements
for it to be labeled a currency manipulator, although the same
188
report called the yuan significantly undervalued. 3

Chinas manufacturing sector has also played a large role in
providing jobs for an estimated 27.2 percent of the employed
population (some 211 million individuals) as of 2008.4
Now, due to rising costs in the more developed coastal
regions, manufacturers that remain in the PRC are moving
inland to more rural areasas a result, we may see a second
period of significant development as the nations undeveloped
inland becomes more industrialized.5
In February 2010, China Daily reported that secondary
industry as a whole accounted for 46.8 percent of Chinas
2009 general domestic income (likely meaning gross
domestic income, or GDI),6 and contributed 49.3 percent to
the nations annual economic growth in 2010.
According to the National Bureau of Statistics, in 2010 the
PRCs manufactured goods accounted for 19.8 percent of the
worlds total in 2010, which allowed the country to overtake
the United States to become the worlds top manufacturer in
terms of output.7
In January 2011 the Ministry of Industry and Information
Technology predicted slowdown in the growth of the nations
industrial output within that year due to the risk of falling
exports as pressure for the yuans appreciation grew and
global demand growth remained weak, as well as inflation,
the financial problems of small and medium-sized enterprises
(SMEs), and environmental restrictions.8
Having been a major engine for growth during the past
twenty years of economic prosperity, the manufacture of
goods also saw some of the most prominent negative effects
from the economic slowdown that became apparent in
2008: according to the Guangdong Provincial Department
of Foreign Trade and Economic Cooperation, more than
1,300 companies closed, suspended operations or relocated
out of the Pearl River Delta between January and September
2008. This figure is particularly relevant due to Guangdong
and the Pearl River Deltas status as one of the most heavilyinvested areas in light industrial manufacturing, as well as
being one of the most affluent. It was additionally reported
that approximately 30 percent of foreign-invested enterprises
in Guangdong reported losses in that period.9
With signs of the global economic slowdown turning
more apparent, the Central Government became extremely
proactive at attempting to cushion companies from the
ill-effects of the global issues, including the 4 trillion yuan
stimulus package, which included adjustments to VAT,
consumption and business tax regulations.10
Furthermore, the promising notion of increased domestic
5
20102
2009
GDI46.8%62010
49.3%
2010
19.8%
7
20111
SME
2011
8
202008
20081-9
1300
30%20081-99
3
2008
27.2%2.11
4
10
2006
200646%
2007
51% 200857.5%200972.5%2010
75%
189
consumption was seen to offer a graceful solution to the

issue of diminishing export opportunities; the move toward
non export-oriented manufacturing among foreign invested
enterprises has been tracked by AmCham South Chinas
annual State of Business study since 2006 (the 2013 results
of which are reproduced in Part IV): in 2006, 46 percent
of companies participating in the study reported focusing
primarily on selling goods to the domestic Chinese market.
This figure reached 51 percent in 2007, 57.5 percent in 2008,
72.5 percent in 2009 and 75 percent by 2010.
Encouraging domestic consumption has become
increasingly critical for the Chinese government as
overall exportsa large chunk of which are constituted
by manufactured articlescontinue to slow amid tepid
economic growth in the west and the PRCs worryingly chilly
diplomatic relations with several of its neighbors in Asia.
China Daily reports that according to statistics released
by the China Chamber of Commerce for Import and Export
of Light Industrial Products and Arts-Crafts, the total
transaction volume for light industrial products declined
by 7.67 percent [between November 2011 and November
2012], while those for other products, such as machinery
and electric products, textiles and apparel, also declined.11
The Ministry of Commerce reported 287 new foreign
investment projects in light industry over the course of 2009,
utilizing $1.69 billion.12 By 2010 that amount had reportedly
jumped to $49.6 billion in FDI over the course of the year
and $28.5 billion over the first half of 2011.13
Despite the rapid growth and all the benefits it carried
with it, however, the majority of Chinese manufacturing
has historically (since the opening up) added relatively
small amounts of value and has been highly labor- and
environmentally-intensive. Although progress has been and
continues to be made, there remain significant portions
of the manufacturing industry (and Chinas economy as a
whole) that, while creating jobs and contributing to GDP,
also have side-effects such as high and inefficient energy
consumption, environmental damage and, due at least in
part to the governments own macro-level development
strategy, noticeable regional imbalances in development
and prosperity. The Go West plan to drive labor-, energyand environmentally-intensive activities to poorer inland
provinces and regions and the increasing emphasis on
indigenous innovation and domestic consumption can be
considered strategies to address these issues.
Another method by which to address these issues has turned
out to be the 2009 stimulus effort itself; the plan associated
with the manufacturing industry, however, explicitly included
the goal of generating 3 million jobs in light industry over
three years, in addition to structural adjustment and
industrial upgrading.14
190
The plan also entailed the closure of highly-polluting and

inefficient manufacturing operations, tax incentives for the
export of machinery, the import of technology not domestically
available and domestic research and development15 as well as
special financial support for SMEs.16
By 2011, this financial support was claimed to have had
a strong positive effect by CITIC Securities Chief Economist
Zhu Jianfang (see below).17
In line with these goals, PRC Vice President Xi Jinping
told attendees of the 2010 World Investment Forum in
Xiamen that the government would encourage more foreign
investment in high-end manufacturing industries, high-tech
industries, modern services industries, new energy, energysaving and environmental protection industries. We will
encourage foreign investors to move to and increase investment
in the central and western regions, and develop labor-intensive
industries meeting environmental requirements in the central
and western regions.18
Unsurprisingly, Vice President Xis points later reappeared
in the 12th Five-Year Plan.19
Modernization efforts, in fact, are not exactly new. The
National Bureau of Statistics reported in 2012 that the total
value of the high-tech manufacturing industry hit 8.8 trillion
yuan in 2011, 5.9 times its value in 2002.7
One emerging aspect of high-tech manufacturing on
the Mainland is the increased use of robotics. China Daily
reports that:
7.67%201111-201211
11
The average labor cost in China has nearly doubled
1516
in the past five years, going to more than 40,000

yuan ($6,400, 4,900 euros) a year in 2011 from less
2009
287
16.912 2010
4962011285
13
But according to a report this year by the International
from 2010.20
While the up-and-down seems to have potential

as a humorous infographic, the phenomenon itself is
both noteworthy and likely to increase in prevalence
as the Mainland continues attempts to modernize its
manufacturing sector.

Continuing Changes to Tax Policy
A new round of tax refunds were eliminated on July 15,
2010, covering 406 products mostly considered to be high
2007
250002011
4000064004900
201174300
201042%20
2009
30014
2011
17
Federation of Robotics, there were 74,300 operational

robots in China at the end of 2011, up 42 percent
GDP
than 25,000 yuan a year in the beginning of 2007,

according to global consulting firm Ernst & Young.
2010
18
19
2012
8.8
20025.97
2010715
406
2007
2122
22
2014630
2016
191
polluting, high energy consumption or domestically sourced

goods that are scarce, according to Deloitte, who further
noted that compared to the 2007 reduction in the export
VAT refund, this round of changes is relatively prudent;21
nevertheless, a span of 22 days between first publication and
the new rule becoming effective is rather slimmer than we
suspect most companies involved in the trade would prefer.
Meanwhile, tariffs on certain imports of high-tech
goods including, according to Xinhua, core electronics,
high-end universal chips, basic software, integrated circuitmanufacturing equipment, new generation wireless mobile
communication networks, and new drugs for prevention
and treatment of some infectious diseases such as AIDS and
hepatitis, were removed on the same day that the refund
elimination occurred in order to encourage research and
development in the nation s major strategic products, core
technologies and major projects.22
On June 30, 2014, Chinas top leaders endorsed a program
of reform to the nations tax system, budgeting practices and
fiscal relations. While details have not yet been disclosed, it
was stated, the World Bank reports, that broad objectives
for fiscal and tax reforms in the Third Plenum decisions are:
Public finance is the foundation and a critical pillar for state
governance. A scientifically designed fiscal and tax regime is the
institution that guarantees resource allocation optimization,
market unification, social equality, and long-lasting security
and peace for a nation. In the same World Bank report,
Minister of Finance Lou Jiwei states that the deadline for
major reform tasks concerning the fiscal and tax system will
be completed by 2016, and that China aims to have a fully
developed modern fiscal system by 2020. The World Bank is
of the opinion that this will not be minor amendments to
current policies; but rather will involve systemic restructuring
and institutional innovation. The Finance Minister has stated
that the years 2014 and 2015 will be vital in pushing forward
the reforms.25
A Growth Plan for SMEs in the 12th Five-Year Plan
On September 22, 2011, a national Growth Plan
for SMEs was released to bolster a criticaland yet
underprivilegedpart of the Mainlands economy.
According to Xinhua, SMEs contribute to 60 percent
of Chinas industrial output and create 80 percent of the
countrys jobs and yet have historically had fewer options for
support from the government than state-owned enterprises.
The report then somewhat obliquely enumerates five points
from the 12th Five-Year Plan which aim to improve the
position of these small- and medium-sized enterprises:
2. Optimizing the structure of SMEs;

3. Boosting development of the new, distinctive,
specialized and sophisticated industries and the
industrial conglomerates;
4. Upgrading enterprise management level;
5. Refining the service system of SMEs.23
2020
2014201525
Tax Cuts for Small Businesses

Less than two weeks after that report, Xinhua cited the
Ministry of Finance as announcing a series of tax relief policies
to benefit the nations crisis-hit small and micro-sized firms
including street vendorsand also help curb inflation,
including raising the threshold for VAT and business taxes to
5,000 through 20,000 yuan as well as abolishing the stamp tax
on loans from financial institutions until October 31, 2014.24
Small to medium size businesses benefited further from
preferential tax policies issued later by the government.
According to a China Briefing report by Dezan Shira &
Associates, on April 8, the Ministry of Finance (MOF)
and the State Administration of Taxation (SAT) issued an
Announcement on Preferential Income Tax Policies for Small
and Low-Profit Enterprises. Based on the Announcement,
small and low-profit enterprises with a taxable income not
exceeding RMB100,000 (US$16,130) should pay corporate
income tax at the rate of 20 percent on only 50 percent of
their taxable income. The preferential policy is effective from
January 1, 2014 to December 31, 2016.26
2011922
60%80%
1.
2.
3.
4.
5. 23
5000-2000020141031
24
418
20141120161231
1016130
50%20%
26
1. Improving the capacity of establishing business and

create jobs;
192
193
Works Cited
The Survey of Foreign Investment in Chinas Light Industry in

2009. Invest in China. October 28, 2010. http://www.fdi.gov.
cn/pub/FDI_EN/Economy/Sectors/Manufacturing/Light%20
Industry/t20101028_127766.htm. Accessed November 13,
2010.

of China. 2007.
Mark Williams. Exporters adjusting to rising wages. China

Daily. November 21, 2012. http://www.chinadaily.com.cn/
cndy/2012-11/21/content_15946477.htm. Accessed December
4, 2012.
13
Zhou Yisu. China attractive FDI destination. China

Daily. August 23, 2011. http://www.chinadaily.com.cn/
November 20, 2011.
US says China not a currency manipulator. BBC News. November

27, 2012. http://www.bbc.co.uk/news/business-20518490.
14
China to release stimulus plan for light industry soon. Alibaba

News. February 12, 2009. http://news.alibaba.com/article/
detail/business-in-china/100050949-1-china-release-smulusplan-light.html. Accessed January 18, 2010.
Statistical Communiqu on Labor and Social Security

Development in 2008. The National Bureau of Statistics
of China. May 22, 2009. http://www.stats.gov.cn/english/
newsandcomingevents/t20090522_402560900.htm. Accessed
November 13, 2010.
15
China unveils plans to spur key industries. Xinhua. February

5,2009.http://news.xinhuanet.com/english/2009-02/05/
content_10767784.htm. Accessed 18 January, 2010.
16
China to create 3 mln jobs in light industry. Xinhua. May

18, 2009. http://news.xinhuanet.com/english/2009-05/18/
Martin Ravallion and Shaohua Chen. Learning From Success.

Finance & Development. 2004.
Lan Lan No intention of capping emissions. China

china/2010-02/25/content_9499066.htm. Accessed November
13, 2010.
17
Kevin Yao. China flash PMI rebounds to ease hard-landing

fears. Reuters. October 24, 2011. http://www.reuters.
com/article/2011/10/24/us-china-economy-hsbc-pmiidUSTRE79N0IC20111024. Accessed November 20, 2011.
Development of Chinas industrial economy in past decade.

Xinhua. September 4, 2012. http://europe.chinadaily.com.
December 4, 2012.
18
Full text of Chinese Vice President Xi Jinpings speech at

World Investment Forum 2010. Xinhua September 7,
2010.
http://news.xinhuanet.com/english2010/china/201009/07/c_13483118_4.htm. Accessed November 12, 2010.
Chinas 2011 industrial output growth may slow to 11%.

Xinhua. February 24, 2011. http://news.xinhuanet.com/
November 21, 2011.
19
Thomas Stanley and Vivian Xu. Chinas 12th Five-Year Plan:

Overview. KPMG China. http://www.kpmg.com/CN/en/
IssuesAndInsights/ArticlesPublications/Publicationseries/5y e a r s - p l a n / Do c u m e n t s / C h i n a - 1 2 t h - Fi v e - Ye a r - P l a n Overview-201104.pdf. Accessed November 20, 2011.
Liang Qiwen. Delta region bears brunt of slowdown. China

Daily. November 11, 2008. http://www.chinadaily.com.
November 11, 2008.
20
Zhong Nan and Zhao Yanrong. The rise of the robots.

China Daily. October 5, 2012. http://usa.chinadaily.com.
cn/weekly/2012-10/05/content_15797110.htm.Accessed
December 4, 2012.
21
Sarah Chin and Gao Li Qun. Deloitte Tax Analysis: PRC

Tax. Deloitte. June 20, 2010. http://www.deloitte.com/assets/
Dcom-China/Local%20Assets/Documents/Services/Tax/
TaxNewsletterEN2010/cn_tax_tap1102010eng_300610.pdf
10
11
194
12
China reduces tax burden on firms. China Daily. November

bjreview.com.cn. Dawn of Chinas foreign trade recovery.
December 4, 2012.
195
196
22
China removes tariffs, value-added tax on imports for civilian

high-tech projects. Xinhua. August 3, 2010. http://news.
23
China issues growth plan for SMEs. Xinhua. September 26,

2011.
http://news.xinhuanet.com/english2010/china/201109/26/c_131160303.htm. Accessed November 21, 2011.
24
China implements tax cuts to boost cash-strapped small

businesses. Xinhua. November 1, 2011. http://news.xinhuanet.
com/english2010/china/2011-11/01/c_131224402.htm.
25
China Economic Update- Special Topic: An Update of Chinas

Fiscal and Tax Reforms. World Bank. October 29, 2014. http://
www.worldbank.org/content/dam/Worldbank/document/EAP/
China/CEU_Oct29_en.pdf
26
China Announces Preferential Tax Income Policies for Small

Businesses. China Briefing, Dezan Shira & Associates. April 11,
2014. http://www.china-briefing.com/news/2014/04/11/chinaannounces-preferential-income-tax-policies-small-businesses.html
197
2.8 Hospitality
IN 2009, THE State Council added tourism as another

pillar industry in the 12th Five-Year Plan, Xinhua
reports. [Tourism] is widely believed to be the major factor
that propels the countrys hotel industry.1 What is today a
competitive and lucrative industry on the Mainland comes
from humble beginnings, however: prior to the opening-up
of China in 1978, the hospitality industry consisted primarily
of government-run guest houses and associated services. After
the decision to provisionally open Chinas economy to outside
participation in 1978, the government administration at the
time responsible for tourism arranged eight joint venture
hotels in Beijing, Shanghai and Guangzhou.2
While the official title of first hotel in China is
apparently contested, the White Swan Hotel in Guangzhou
and the JianGuo Hotel in Beijing are the earliest-established
joint venture hotels in the country. Notably, the White
Swan Hotel is credited as running a profit in its first year of
operation, 1983.2
Significantly, foreign management companies have held
a role in the industry since the beginningHong Kong
Peninsula Hotels was contracted to manage the JianGuo
Hotel from its opening, after which Sheraton Hotels & Resorts
was brought in to manage what became the Sheraton Great
Wall Hotel (also in Beijing) after two years of unsuccessful
operation under its former management.2
Beginning in the 1980s, construction of hotels beyond
the original government-run guest houses began in earnest.
Between 1980 and 1990, 1,784 new hotels were built, and in
the decade following 8,494 more were opened for a reported
total of 10,481 tourist hotels with nearly 950,000 rooms in
2000.2 In 2001 a nomenclature change from tourist hotels to
Star-rated hotels saw the total number of reported facilities
shift to only 7,358 in 2001, growing to 13,583 in 2007.3
Between 2004 and 2007, mean growth in the number
of Overseas Visitor Arrivals (including residents of Hong
Kong and Macau Special Administrative Regions and Taiwan)
was approximately 11 percent (although year-on-year growth
declined from approximately 10 percent in 2005 to only 5
percent in 2007).3 From 2007 to 2008, however, the total
number of foreign fell by approximately one percenta
somewhat surprising result considering that the Summer
Olympics were held in Beijing that year.3
That year there were a reported 130 million recorded
Overseas Visitor Arrivals in the PRC, of which 26.1 million
were foreign passport holders (excluding Hong Kong and
Macau residents). 101.3 million were Chinese Compatriots
From Hong Kong and Macao, 4.4 million from Taiwan and
198
2.8
an additional approximately 53 million Overnight Tourists
were apparently not included in the 130 million total.3
This large number of Hong Kong- and Macau-related
entries may account for the disproportionately high number
of visitors to Guangdong (being adjacent to both Hong Kong
and Macau)in 2008, Guangdong received nearly five times
as many overall visitors as Shanghai and more than five times
the number of visitors to Beijing. Guangdongs total number
of 25.6 million visitors dwarfs Shanghais total of 5.2 million
and Beijings 3.7 million.3
More recent visitor statistics from the National Tourism
Administration indicated that entries had again declined in
2009, with a total of 126.5 million in that year, with the
largest adjustment being a 9.82 percent growth rate in the
foreigners category.4
The first three months of 2010 appeared to show a recovery
from this downward trend, with the largest gain, an increase of
21 percent, again being in the foreigners category.5Statistics
from the National Tourism Administration reported a
number of 134 million international visitors attracted to
mainland China in 2010, which is expected to reach 153
million by 2015.6 A 0.93 percent increase was recorded for
overall visitors between January and September in 2011.7
In December 2008, China Daily reported a Ministry of
Commerce release stating that accommodation and catering
retail sales between January and November 2008 had risen
24.9 percent year-on-year to 1.39 trillion yuan, and that there
were 591 new foreign-invested companies in the sector31.4
percent fewer than the same period in 2007and the actually
utilized foreign funds slipped 11.9 percent to $840 million.8
The following year, the Ministry reported even fewer
new foreign-invested projects in the accommodation
and catering industries (41 and 90 fewer than 2008,
respectively); utilized foreign capital in the accommodation
sector predictably declined (by 20.6 percent, in this case),
although utilized capital in the catering sector actually
increased by 7.2 percent.9,10
It is possible some part of this decrease in foreign investment
is related to the 2007 revision to the Catalog for the Guidance
of Foreign Invested Enterprises, which beginning December
1, 2007, prohibited foreign direct investment in hotels. While
the majority of western name brands primarily manage
properties for local developers, the revision also affected
non-Chinese Asian developers, who have been more directly
invested in development.11
Another factor to consider is the already-high saturation of
major international Hotel brands, particularly in the high end
2009
[]
1
1978
1978
1983
2
2
20
19801990
178484942000
104819522001
73582007135833
20042007
11%2005
10%2007532007
2008
3
1.3
26101.01
4405300
2008
2560
520370
3
2009
1.265
-9.82% 4
2010
21
52010
1.3420151.53
6201119
0.93% 7
200812
2008111
24.9%1.392008
591200731.4%
8.411.98
2009
2008
4190
20.6%
7.2% 910
2007
2007121
11
2007
[2006]37
60502
15969433731
12
13
2008
2007100
1000 14
20091
199
of the market; it was reported in 2007 by trade publication

China Hospitality News, for example, that by the end of
[2006], 37 international hotel management companies had
entered Chinese market with 60 brands of 502 hotels. The top
five that have opened the most hotels in China are Wyndham
with 159, InterContinental with 69, Accor with 43, Starwood
with 37 and Marriott with 31,12 and the leading international
brands are, collectively, expanding not only in tier 1 cities but
also into tier 2 and tier 3 cities as well.13
Budget hotels, however, seem to be proliferating faster
and further than luxury brands. China Daily reported in mid2008 an estimation that by the end of 2007 there were more
than 100 budget hotel brands operating approximately 1,000
locations across the nation,14 whereas one industry report
more recently published figures indicating that the number of
locations had grown to 2,800 nationwide by January 2009.15*
Of the reportedly 1,200 hotels that were under construction
in Asia Pacific as of July 2010, 802 were said by a China Daily
source to be on the Mainland, and a quarter of those reported
to be in the lower price category.16
U.S.-based budget chain Days Inn, for example, is
planning to open 500 new properties over the coming five to
seven years according to the Chinese franchises co-owner;13
meanwhile, a tourism expert from the Shanghai Academy of
Social Sciences predicts that more than 1,500 new hotels over
all categories will open on the Mainland every year from 2010
to 20151
Despite impressive growth, some challenges remain in the
China Market, including a mismatch in China between
what was needed in the market and the desire of often public
sector investors to build statement five star hotels, (which we
read as government vanity projects) and, according to China
Daily, the poor level of staff training.16
Another issue attached to the conspicuous production
of high-end hotels is that, according to one analyst, they are
often built to drive up the prices of attached offices, residential
apartments and retail spaces.13
Employee acquisition and retention continues to be
problematic. According to experts quoted by China Daily,
compared with other countries, employee turnover at hotels
in China is very high.17
Furthermore, as the industry as a whole expands the talent
pool is not growing apace, leading to a situation in which
many hotels urgently need professional staff members, but
are finding it even more difficult to recruit excellent employees
as the demand for hotel professionals increases.17
As the market continues to develop, however, international

brands are increasingly looking to cater their experiences to
Chinese guests both in China and abroad. At the 21st Century
Hotel Industry Summit held in 2012, Tourism Management
director He Jianmin from the Shanghai University of Finance
and Economics told China Daily that some international
brandsincluding Accor, InterContinental Hotels Group
and MGM Hospitalityhave already created localized brands
specifically for the Chinese market.17
The appeal of launching local-styled brands is not limited
to the Mainland, either; it was reported that there will be 88
million Chinese travelers overseas by 2015; other Summit
attendees sagely agreed that a custom hotel brand designed
for China is also an effective way to gain Chinese customers
who travel abroad.17
Still, it would seem that at least in the top segment of
the market existing international brands are faring quite well
already: a China Tourism Academy report found that by the
end of 2010 nearly 70 international hospitality brands from
41 countries and regions were managing about 20 percent
of the countrys top-end hotels and taking 80 percent of the
profits.18
One culprit for the spectacularly poor competition from
Mainland hotel companies in terms of profitability is the
lingering presence of non-hospitality-oriented state-owned
enterprises in the sector: despite Minister Li Rongrong of
the State-owned Assets Supervision and Administration
Commission ordering SOEs to divest of non-core hotel
assets in 2003, nearly a decade later some 2,000 hotels
valued at trillions of yuan remain under SOE ownership19
Although this brazen disobedience to a ministerial-level
official is somewhat surprising, China Daily reports several
reasons why SOEs may not want to divest so quickly of their
hotel assets: first, some SOEs own the property managed by
internationally known hotel brands, which have many times
brought faster returns than their core businesses. Secondly,
inefficient operations at many SOE-run hotels [makes]
potential buyers wary and thirdly, questions surrounding
existing hotel staff and tax liabilities are other hurdles to
potential sales.19 In other words, while an SOE-owned hotel
may be able to bend regulations and get away with poor
efficiency, similar performance would be untenable for a
private enterprise competing in the market.
Following President Xi Jinpings public push for
government austerity, hoteliers are taking steps to make their
properties look a little less fabulous up to and including
*Admittedly, this figure comes from the abstract of a report, since its full contents are almost certainly beyond the scope of this White Paper and furthermore
cost in excess of 1,000 Euros.
200
2800 15
201071200
802201
16
500
13
20102015
15001
16
13
17
17
201221
MGM
17
20158800
17
2010
4170
20%80%18
2003
2000
19
19
20
2013
7005
50%
11%19%20
20
50 21
2014114
1888
22
21
1000
201
attempting to remove stars from their 5-star ratings in a bid

to win back business from politicians.20
Among the about 700 five-star hotels in China, writes The
Wall Street Journal, average occupancy sagged five percentage
points in the year to mid-2013, to 50 percent, according to
government figures cited in China Tourism News. The figures
show room revenue off 11 percent in the period, while dining
receipts plunged nearly 19 percent.20
Somewhat stiflingly, the China Tourist Hotel Association
the government agency that hands out the starssays that,
Theres no such thing as downgrading stars. If five-star
properties choose to change their ratings, says the association,
they will be considered unrated instead.20
Beijings new-found austerity has not threatened more
tourism-oriented projects, however. After a brief delay, the $5
billion Chimelong Hengqin Bay resort and theme park21 was
scheduled to open on January 14, 2014. Located near Macau,
the project features a roller coaster, a whale shark tank and a
lavish 1,888-room hotel.22
While some extravagant infrastructure projects in China
have turned into white elephants, explains Reuters, the odds
are on Hengqins side largely due to the support of the Beijing
government and the islands proximity to the millions of
tourists who throng to Macau every year.21
Cruise tourism, introduced to China fewer than 10 years
ago, has seen rapid growth. In that time, five terminals have
been built at an estimated cost of more than 4.5 billion yuan
($735 million), with three [more] under construction and
another six [in] the pipeline.23
Despite expanding capacity and nearly 10 percent growth
in port calls by international cruise lines, China Cruise &
Yacht Industry Association vice president Zheng Wei-hang
told Reuters that rapid construction had eliminated profits
and that all five established cruise terminals have suffered
losses mainly as a result of excessive investment by municipal
authorities in building landmark structures that have yielded
insufficient returns.23
The other end of the hospitality spectrum, catering, has
(and will likely continue to) see strong growth as well. Yum!,
the management group primarily known on the Mainland for
its Pizza Hut and KFC franchises, in 2009 stated its intent
to open 500 new restaurants that yearone-third of its total
worldwide openings.24 Similarly positive, Yum!s second quarter
2010 earnings were up 33 percent in China, compared to 10
percent in the United States.25 More recently, the company
opened 92 additional restaurants in the first quarter of 2011
and saw its adjusted operating profits grow 18 percent.26
Despite same-store sales in China [dropping] 4% in the
fourth quarter [of 2012], compared with a jump of 21 percent
the same period a year earlier, Yum!s intent to open 700
stores over the course of 2013 was reported by the Wall Street
202
Journal in December 2012.27

Competitors McDonalds is reportedly aiming to reach
2,000 outlets across the nation by 2013, having increased
investment in 2010 by 25 percent and planning a further 40
percent increase in investment over 2011.28 In August of that
year, the company announced its first developmental licensee,
Kunming North Star Group, what will help the brand expand
on the Mainland.29
McDonalds, like Yum!, also reported lower China samestore sales in 2012 but only for October.27
More recently, Reuters reported that the growth of
McDonalds, Yum! and others had been hit as Chinese
consumers are increasingly opting for healthier alternatives in
food and drink.30
Yums sales also fell after CCTV ran a report accusing
some of the firms poultry suppliers of misusing antibiotics
as well as the April 2013 outbreak of bird flu. Significantly,
The Shanghai Food and Drug Administration investigated
the chicken contamination incident. It did not bring a case
against Yum China and did not assess a finesee below
for on CCTVs apparent editorial campaign against foreign
enterprises in China.31
Sugared beverage manufacturer PepsiCo is also investing
heavily in the PRC, but in infrastructure and R&D. A total of
$2.5 billion amount is reported to be going toward building
additional production capacity in four provinces by 2012, in
addition to a research and development center tasked with
developing new products for the Asian market, agricultural
production and spending on branding.32
In late November 2011, China Daily reported the
companys plans to open 10 to 12 new manufacturing plants
across a greater number of Mainland provinces over the
coming three to five years.33
Meanwhile, The Coca-Cola Company opened three
bottling plants in 2010 (in Inner Mongolia, Henan and
Guangdong), which brought the total number to 42 in the
PRC alone,34 and in September 2011 announced a planned
investment of $4 billion before 2014, most of which
will be spent on improving its bottling and distribution
infrastructure.35
Following up on its 2011-2014 investment plan, in late
2013 Coca-Cola announced its intent to an additional $4
billion to build more manufacturing plants in China between
2015 and 2017.30
A Coca-Cola spokeswoman noted that the company is
also open to deals with local firms.30
The beverage market is quite competitive right now and
Coke is going to have to do a lot more acquisitions rather than
growing through organic growth, commented a Shanghaibased analyst. Nevertheless, market data indicates that CocaCola is still the leading drinks maker in China [and] held 16
457.35
23
10
23
2009
50024
2010
33
10252011
92
18% 26
2012
4%21%
201212
201370027
2013
20002010
25%201140%282010
8
29
201210
27
30
25
32
201111
35
10-1233
2010
423420119
201440
35
2011-20142013
2015-2017
4030
30
201216% 30
60%
36
Euromonitor
20134510
740530
36
20134
31
18
37
2012
203
percent market share by total volume in 2012.30

Danish brewer Carlsberg, meanwhile made headlines by
expanding its ownership of the domestic Chongqing Brewery
for a total stake of 60 percent. As majority shareholder it
will be easier for Carlsberg to implement efficiency programs
to increase profitability, and integrate the business with its
existing breweries in China, Reuters observed.36
The Chinese beer market is estimated to be worth around
451 billion yuan ($74 billion) in 2013 with a volume of 53
billion liters, analysis agency Euromonitor said.36
Finally, international coffee behemoth Starbucks was
attacked on apparently political grounds in a high-profile
CCTV broadcast accusing the company of unfair pricing.
The 18-minute Starbucks report, which appeared to use
hidden cameras, showed CCTV reporters in Beijing, Chicago
and Mumbai asking people on the street what they thought
about the price and value of Starbucks coffee, writes Reuters. It
criticized the Seattle-based company for charging higher prices
than in others markets, which it said helped Starbucks earn fat
profit margins given its costs in China were not very high.37
The piece was reportedly instigated by a non-editorial
executive and appeared to be part of a series of attacks on
foreign brands which also included attacks on Apple,
Samsung Electronics, Yum! Brands KFC restaurants and
GlaxoSmithKline in addition to carmakers Audi, Subaru and
Jaguar Land Rover.37
It was quickly criticized for its unprofessionalism. Internet
users chided the network for tackling a minor issue compared
to Chinas many challenges. Economists said CCTV had
failed to grasp the concept of supply and demand, noting it
was normal for a company to charge different prices for its
products in different countries.37
Chinese government bodies and state-owned firms are
usually too sensitive to investigate, putting foreign companies
in the firing line for hard-hitting corporate stories, experts
told Reuters.37
While foreign investment by major multinational corporations
looks to remain strong, vagaries in franchising law may provide
a hurdle to small- and medium-sized enterprises looking to
enter China, even as growth in consumer spending ability and a
projected 150 million new urban consumers by 201538 reinforce
Chinas importance as a strategic location globally.

2007 Revision of the Catalog for the Guidance of Foreign
Invested Enterprises
Note: This section has been left intact from the 2008 edition
to supplement the discussion of declining foreign investment in
the hospitality industry above
As always, while it is clearly the prerogative of the Chinese
204
state to adjust regulatory policy to best guide the domestic

economy according to development goals, the issue at hand
for foreign investors is not the policy itself but the way in
which it is implemented. In this case, the revisions to the
Catalog for the Guidance of Foreign Invested Enterprises
were released to the public (in Chinese) on November
7, 2007, and effective December 1, 2007, placed foreign
participation in Construction and operation of high-ranking
hotels, villas, high-class office buildings and international
exhibition centers under the Restricted category. The 23
days between first notice and the new rules becoming effective
is an extremely short period of time for companies to asses and
react to the new environment. While this particular change
may not affect the many foreign companies managing locallyowned properties, this method may continue to undermine
investor confidence in otherencouragedsectors.
Regulations on Travel Agencies
In March of 2009 Peoples Daily reported that according
to new regulations that were to take effect on May 1, 2009,
foreign investors would be permitted to own and operate
travel agencies within China. The paper reported that:
According to promises China made for entry into the
WTO, the new regulation stipulates that in addition
to Chinese-foreign equity and contractual joint
ventures, foreign investors can also set up foreign
37
37
37
2015
1.5
38
2007
39
39
20109
120
40
20128
41
100
41
2008
2007117
2007121
23
travel agencies. An official from the National Tourism

Administration said foreign travel agencies will be
entitled to national treatment in the three major
tourism marketsinbound, outbound and domestic
tours.39
Of note, however, is that foreign enterprises will not,

at first, be permitted to operate outbound toursa clear
competitive advantage in their favor due to their experience
and expertise outside of Chinauntil they have operated for
two years without receiving administrative punishment for
infringing on tourists legal rights and interests.39
In September 2010 these regulations were revised to allow
foreign-domestic joint-ventures to organize outbound tours
for Mainland citizens, with the requirement that a deposit of
1.2 million yuan must be paid in order to obtain a license for
the activity, among others. Wholly-foreign owned enterprises
apparently remain prohibited from organizing outbound
tours for Mainland citizens, as no changes for that category
are articulated in the release.40
41
200932009
51
Draft Law to Combat Sharp Practices by Travel Agents

As of August 2012, the National Peoples Congress was
reviewing a draft law that would clearly [state] the rights
41
2012125
205
of travelers which, if passed, would become the first-ever

legislation in the PRC to cover the tourism industry.41
Interestingly, President Dai Bin of the China Tourism
Academy claims that A motion for legislation was raised
more than three decades ago, but the process was slow, partly
because the tourism industry is supervised by more than
100 government organizationsand administrated by both
central and local authorities.41
The gist of the draft is, again courtesy of China Daily:
Works Cited
1
Yang Yijun. Number of hotel rooms set to soar. China Daily.

2011.http://www.chinadaily.com.cn/cndy/2011-11/08/
Ding Qingfen. Hospitality industry goes along with trends.

November 12, 2008.

of China. 2009.
2009112. The
National Tourism Administration of the Peoples Republic of
China. January 19, 2010. http://www.cnta.gov.cn/html/20101/2010-1-19-10-48-20174.html. Accessed November 10, 2010.
20101-9. The
National Tourism Administration of the Peoples Republic of
China. November 2, 2010. http://www.cnta.gov.cn/html/201011/2010-11-2-10-35-68881.html. Accessed November 10,
2010.http://www.cnta.gov.cn/html/2010-11/2010-11-2-10-3568881.html. Accessed November 10, 2010.
Wang Wen. China set for massive rise in hotel numbers.

China Daily. August 11, 2011. http://europe.chinadaily.com.
November 23, 2011.
201119. The
National Tourism Administration of China. http://www.cnta.
gov.cn/html/2011-10/2011-10-24-23-59-43532.html. Accessed
November 23, 2011.
Lodgings, catering retail sales drop amid financial crisis.

China Daily. December 20, 2008. http://chinadaily.com.
December 21, 2008.
The Survey of Foreign Investment in Chinas Catering Industry

in 2009. Invest in China. http://www.fdi.gov.cn/pub/FDI_EN/
Economy/Sectors/Service/Catering/t20101109_128105.htm.
Accessed 1November 10, 2010.
10
The Survey of Foreign Investment in Chinas Accommodation

Industry in 2009. Invest in China. November 9, 2010. http://
www.fdi.gov.cn/pub/FDI_EN/Economy/Sectors/Service/
Hotels/t20101109_128108.htm.Accessed November 10, 2010.
20133
2013-2020
42
The draft law sets operating standards for travel

businesses and scenic areas, and prohibits travel
agencies from forcing tourists to purchase goods.
Tipping will be at the discretion of the tourist, it states.
The draft targets agencies offering so-called free tours,
or even incentive tours, where the traveler is given a
small amount of cash or a gift.
These tours operate on a kickback system. Tourists are
taken to shops at pre-determined sites where goods
are often sold at inflated prices, and the agency gets
a kickback.41
Other stipulations include that Ticket prices should

follow government pricing and any change in price should be
announced to the public six months before implementation
and also that Scenic spots should control the maximum
number of tourists, to ensure safety, especially on public
holidays.41
As of December 5, 2012, no mention of the law beyond
the original reports of its draft form being read by the National
Peoples Congress could be found, either on China Dailys
website or in a broader Google query for china tourism law.
New Direction in National Tourism Strategy
In March 2013, China embarked on a new direction in
its national tourism strategy when The Outline for National
Tourism and Leisure (2013-2020, which had been long
advocated by the China National Tourism Administration,
was issued by the State Council. In a report, the United
Nations World Tourism Organization (UNWTO) hailed the
document as a landmark will see the complete redefinition
of tourism development and management in the country,
spark an increase in Chinese outbound tourism and promote
a greater distribution of the economic, socio-cultural and
environmental benefits of tourism. The document also
presents a roadmap for restructuring the current paid leave
system across China.42
206
207
11
12
13
14
15
16
17
18
19
20
208
Andy Scott. New guidelines for FDI creating confusion,

uncertainty in real estate sector. China Briefing. November 15,
2007. http://www.china-briefing.com/news/2007/11/15/newguidelines-for-fdi-creating-confusion-uncertainty-in-real-estatesector.html. Accessed December 21, 2008.
21
Farah Master. China gambles on theme park, whale sharks to

lure punters from Macau casinos. Reuters. October 5, 2013.
http://www.reuters.com/article/2013/10/05/us-china-hengqinidUSBRE9940CQ20131005. Accessed February 1, 2014.
22
Hengqin: Chimelong Ocean Kingdom to open before

CNY. Macau Daily Times. January 13, 2014. http://www.
macaudailytimes.com.mo/macau/49841-hengqin-chimelongocean-kingdom-to-open-before-cny.html. Accessed February 1,
2014.
23
Brian Yap. Rough seas forecast for Chinas fast-growing

cruise industry. Reuters. August 15, 2013. http://
www.reuters.com/article/2013/08/15/us-china-cruiseidUSBRE97E05820130815. Accessed February 1 2014.
24
Lisa Baertlein. Yum can reach 15-20 profit growth in China:

CFO. Reuters. December 10, 2008. http://www.reuters.com/
article/businessNews/idUSTRE4B96VW20081210?rpc=77.
25
Ben Rooney China: The new fast food nation. CNN. July 14,
2010.
http://money.cnn.com/2010/07/13/news/companies/
Yum_Brands/index.htm. Accessed November 8, 2010.
26
Yum Brands profit rises on China growth. China Daily. April

21, 2011. http://www.chinadaily.com.cn/usa/us/2011-04/21/
27
Laurie Burkitt. KFC Owner Hits Snag in China. The Wall

Street Journal. December 2, 2012. http://online.wsj.com/article/
SB10001424127887323401904578154543575535784.html.
28
Michael Wei and Margaret Conley. Getting Into Harvard Easier

Than McDonalds University in China. Bloomberg. January 26,
2011. http://www.bloomberg.com/news/2011-01-26/gettinginto-harvard-easier-than-mcdonald-s-hamburger-university-inchina.html. Accessed February 5, 2011.
29
Li Woke. McDonalds licensed for expansion. China Daily.

September 26, 2011. http://www.chinadaily.com.cn/cndy/201109/26/content_13789094.htm. Accessed November 23, 2011.
30
Coca-Cola says to invest over $4 billion in China in

2015-2017. Reuters. November 7, 2013. http://www.
re u t e r s . c o m / a r t i c l e / 2 0 1 3 / 1 1 / 0 8 / u s - c o c a c o l a - c h i n a idUSBRE9A704H20131108. Accessed February 1, 2014.
CNTA Releases China Hospitality Industry Development

Report. China Hospitality News. May 15, 2007. http://www.
chinahospitalitynews.com/en/2007/05/15/3654-cnta-releaseschina-hospitality-industry-development-report/.Accessed
January 15, 2010.
Hotel industry experiences building boom. China Daily.
May 30, 2011. http://www.chinadaily.com.cn/m/hebei/
travel/2011-05/30/content_12607655.htm. Accessed November
24, 2011.
Ding Qingfen. Hospitality industry goes along with trends.
China Daily. May 19, 2008. http://www.chinadaily.com.cn/
bizchina/2008-05/19/content_6695367_3.htm.
Accessed
January 16, 2010.
China Budget Hotel Market Report 2008-2009. Friedlnet.
January 16, 2009. http://www.friedlnet.com/product_info.
php?products_id=5387&cPath=29_36&osCsid=aa. Accessed
January 16, 2010.
Andrew Moody. Hotel industry looks for a break. China
Daily. July 5, 2010. http://www.chinadaily.com.cn/
November 9, 2010.
Lu Wei. Hospitality Special: Hotel summit: Competition fierce,
trained staff crucial. China Daily. July 12, 2012. http://www.
chinadaily.com.cn/cndy/2012-07/12/content_15571904.htm.
Wang Zhuoqiang. Long-term view fuels Hyatts success.
China Daily. June 28, 2012. http://www.chinadaily.com.cn/
5, 2012.
Yang Cheng and Li Yang. Restructuring of SOE hotels lagging.
China Daily. July 4, 2012. http://www.chinadaily.com.cn/
5, 2012.
James T. Arredy and Fanfan Wong. Chinese Hotels Drop Stars to
Score Political Points. The Wall Street Journal. January 23, 2014.
http://blogs.wsj.com/chinarealtime/2014/01/23/chinese-hotelsdrop-stars-to-score-political-points/. Accessed February 1, 2014.
209
210
31
Lisa Baertlein and Adam Jourdan. Diners say not biting on

KFCs China revival campaign. Reuters. December 4, 2013.
http://www.reuters.com/article/2013/12/04/us-yum-chinasafety-idUSBRE9B30HX20131204. Accessed February 1, 2014.
41
Tan Zhongyang. Draft law to ensure tourists get a better deal.

China Daily. August 28, 2012. http://www.chinadaily.com.cn/
china/2012-08/28/content_15710450.htm. Accessed December
5, 2012.
32
PepsiCo to Invest $2.5 Billion in China Over Next Three Years.

PepsiCo. May 25, 2010. http://www.pepsico.com/PressRelease/
PepsiCo-to-Invest-25-Billion-in-China-Over-Next-ThreeYears05212010.html. Accessed November 7, 2010.
42
33
Li Woke. PepsiCo plans to expand with provincial project.

November 10, 2011. http://www.chinadaily.com.cn/cndy/201111/10/content_14068822.htm. Accessed November 23, 2011.
Chinas New Landmark Tourism Strategy: The Outline for

National Tourism and Leisure (2013-2020). United Nations
World Tourism Organization, Regional Programme for Asia
and the Pacific. March 2013. http://asiapacific.unwto.org/en/
news/2013-03-21/china-s-new-landmark-tourism-strategyoutline-national-tourism-and-leisure-2013-2020
34
Ding Qingfen Coca-Cola Co sees fizz in China. China Daily.

November 8, 2010. http://www.chinadaily.com.cn/usa/201011/08/content_11515742.htm. Accessed November 8, 2010.
35
Michael Wei. Coca-Cola to spur per capita sales in China.

cn/usa/us/2011-09/06/content_13626599.htm.Accessed
November 23, 2011.
36
Teis Jensen and Adam Jourdan. Carlsberg buys controlling

stake in Chinas Chongqing Brewery. Reuters. December
5,
2013.
http://www.reuters.com/article/2013/12/05/uschongqingbrewery-carlsberg-idUSBRE9B416520131205.
37
Megha Rajagopalan. Insight: China CCTV Starbucks report set

off storm inside network. Reuters. December 12, 2013. http://
www.reuters.com/article/2013/12/12/us-china-cctv-insightidUSBRE9BB17A20131212. Accessed February 1, 2014.
38
Alan Beebe. Winning in Chinas Mass Markets. IBM with the

Economist Intelligence Unit. 2007.
39
Foreign investors allowed to set-up foreign travel agencies

in China. Peoples Daily. March 19, 2009. http://english.
peopledaily.com.cn/90001/90776/6617855.html.Accessed
January 17, 2010.
40
33:
. The National Tourism
Administration of the Peoples Republic of China. September
6, 2010. http://www.cnta.gov.cn/html/2010-9/2010-9-6-11-732955.html. Accessed February 5, 2011.
211
2.9 Services
HE SERVICE SECTOR, often denoted as tertiary

industry and involving the trade of non-tangible
goods such as accountancy, advertising, financial, legal and
information technology services, is enjoying greater emphasis
from both the government and the private sector as China
moves gradually away from the manufacturing that has
characterized its first 30 years since opening up.
Vice Premier Wang Qishan was explicit in this emphasis in
his welcome remarks to the International Investment Forum
2008 at the China International Fair for Investment and
Trade (CIFIT), held annually in Xiamen between September
8 and 11, offering that FDI will be encouraged to flow into
high-tech industry, modern agriculture, energy-saving and
environmental-friendly industry, modern services and service
outsourcing businesses.1
Vice Premier Wangs remarks echoed the 2007 Opinions
of the State Council concerning Accelerating the Development
of the Service Sector, which cited the 11th Five-year Plans
target that the ratio of the added value of the service sector to
the GDP should have exceeded 50 percent by 2020, among
other metrics for the sectors growth.2
The importance of the service industries to Chinas
continuing economic growth is often noted by officials. In
addressing the inaugural meeting of Chinas Service Trade
Association in January of 2008, Vice Minister of Commerce
Yi Xiaozhun noted that although the service trade is an
important part of global trade there is a great gap between
service trade and the service industry in China, and there is
great potential for development.3
More recently, the broad official emphasis on the
transformation of the mode of development continues to
emphasize this shift in priorities. In mid-2010 it was estimated
that tertiary industry accounted for 43 percent of the nations
GDP (compared to its 77 percent share of the United States
economy).4
By 2012, this figure hadnt budged: a Reuters analysis
pegged services in China as [accounting] for just 43 percent
of output, compared with well over 70 percent in Western
countries.5
2013s figures saw a modest gain of 2 percent to reach 45
percent of output; services moreover overtook manufacturing
as the countrys biggest employer in 2011 and weathered the
global slowdown much better than the factory sector.6
This lack of movement on a critical metric suggests only
limited success for an earlier strategy of tax increases for
manufacturing enterprises being offset with tax breaks for
the service industry in order to further promote a shift in the
212
2.9
Mainland economys composition.4
A stated goal for the 12th Five-Year Plan period is to
increase the contribution of the Mainlands service sector to
overall GDP from 43 to 47 percent.7
Reuters observes that One caveat to development is the
need for a liberalized financial sector, making it easier for nonstate firms and more small- and medium-enterprises to raise
funds via bank loans or the financial markets.8
According to Chinas National Bureau of Statistics (NBS),
the total added-value achieved by the nations service sector in
2009 surpassed 13 trillion yuan. This estimate was, in fact, a
revision of earlier reports placing the total at approximately
12 trillion yuan.9
Illustrative of the service sectors continuing progress is the
recent history of accountancy in China. As related by Vice
Minister of Finance Jun Wang in 2006 to the 17th World
Congress of Accountants, To meet the demand of reform and
opening up, China recovered its certified public accountant
(CPA) system in the early 1980s. In the early 1990s, China
opened its accounting market. And in the new century, the
country is actively promoting international convergence of
accounting and auditing standards in accordance with the
development trend of global economy and international
standards.10
The Vice Minister further reported that the number of
accounting professionals has constantly increased. By the end
of 2005, over 10 million people have got the Accounting
Qualification Certificate, more than 140,000 people have had
CPA qualification, and around 5,700 accounting firms have
been established in China. The service provided by CPAs in
China has been extended from foreign-invested companies
at the beginning of reform and opening-up period to all the
areas at present including SOEs and listed companies.10
More recently, it was reported that by 2009 there were
in excess of 15 million holders of Accounting Qualification
certificates11 and 155,000 CPAs.12
A more recent account of CPA numbers on the
Mainland provided by China Daily shows 80,000 working
for accounting firms and an additional 80,000 working in
government agencies.13
Further steps are being taken to bring the Chinese
Accounting Standards (CAS), released in early 2006, more in
line with International Financial Reporting Standards (IFRS).
The Chinese standards, which became effective January 1,
2007, for companies listed on exchanges, are encouraged for
private firms also, according to Director General Liu Yuting
of the Accounting Regulatory Department of the Ministry
9811
2008
1
2007
2020
50% 2
20081
2010
43%77%4
2012
43%70%5
20132012
45%2011
43%47%7
NBS2009
13
129
2006
2080CPA
90
10
20051000
145700
10
2009
1500 11
15.512
80000
8000013
2006
CASs
IFRSs
200711
14
15
16
213
of Finance, and ongoing efforts are being made to achieve

greater equivalence between the CASs and United States and
European Union standard practices.14
Nevertheless, some inconsistencies remain, and in an
environment in which mergers and acquisitions are becoming
more strategically lucrative, foreign investors are generally
advised that Chinese financial statements (especially for private
companies) usually do not provide as much information as
[investors] might be used to receiving and so it is therefore
important that buyers perform their own financial and tax
due diligence review before acquiring a Chinese target.15
Illustrating the need for due diligence, there have been
several recent cases of Mainland IPOs on foreign exchanges
being delisted and in some cases investigated by exchange
regulators for fraudulent accounting, in addition to seeing
auditor resignations.16
By 2012, those investigations had led to 50 Chinabased companies [being] delisted from U.S. exchanges, with
The SEC [filing] fraud allegations against 40 individuals or
companies.17
Moreover, in December 2012 the U.S. Securities and
Exchange Commission filed a lawsuit against five Chinaincorporated accounting firms, which lawsuit U.S.-based
National Public Radio summarized:
Caught in the middle are the auditing firms, which

are all affiliates of major U.S. accounting firms, like
KPMG and Deloitte. One of the firms, which is tied
201250
40 17
to Ernst and Young, issued a statement [] saying

it wanted to comply with the rules and hoped the
dispute is resolved soon.18
The Wall Street Journals China Real Time blog offered

further context:
201212
NPR
9
Hours after its high-profile attack on the Chinese
arms of five major accounting firms Monday, the U.S.
Securities and Exchange Commission laid into Chinese

regulators for their alleged lack of cooperation.
by the Securities and Exchange Commission, says

U.S. officials want to investigate nine unnamed
Chinese companies for unspecified reasons. Officials
say that because these companies trade on U.S.
stock exchanges, they have to turn over their audit
documents to American regulators.
But China insists that doing so would violate its
own rules about corporate secrecy and has steadfastly
refused to do so. The dispute has dragged on for several
years with no resolution, says James Feltman, senior
managing director of Mesirow Financial Services.
JAMES FELTMAN: It doesnt appear as though this
is going to get resolved anytime soon. And ultimately,
if Chinese listed companies in the U.S. cant meet the
requirements, then theyre not going to be able to
continue to be listed on U.S. exchanges.
ZARROLI: But the U.S. isnt ready to lower the boom
yet and Feltman called yesterdays suit a measured
response by the SECan attempt to ratchet up the
pressure on China.
20141122
20
1979
21
In court papers filed late Monday, the SEC said
Mesirow
that since 2009 it had sent its Chinese counterpart,
James Feltman
the China Securities Regulatory Commission, 21
1995
19200611
2001
22
separate requests for assistance in connection with 16

different investigations and hadnt received any of the
requested audit papers or any meaningful assistance.
Additionally, the agency said that long-running
negotiations with the CSRC to establish a framework

for information sharing had gone nowhere.19
JIM ZARROLI, BYLINE: The suit, which was filed
Given the circumstances, it is likely that the biggest

casualties in this apparent proxy-war between U.S. and
Chinese regulators will the accounting firms themselves
and Chinese firms looking to go global and list on U.S.
exchanges.
As of January 2014, this dispute is ongoing. On the 22nd
of that month, a Securities and Exchange Commission
administrative law judge to suspend the Big Fours Chinabased affiliates from auditing U.S.-traded companies for
six months. This decision, writes The Wall Street Journal,
moves China and the U.S. closer to a confrontation over
the underlying issue of how much oversight U.S. regulators
should have over companies inside China [which are listed on
U.S. exchanges].20
Advertising is another relatively young industry in China,
having returned to the Peoples Republic of China in 1979.21
The Advertising Law of 1995 officially legitimated the
agency system that is the international norm,19 and beginning
January 1, 2006, wholly foreign-funded advertising companies
were permitted access to the market in line with Chinas WTO
entry commitments made in 2001.22
The interplay between state-owned media, a quicklychanging media regulatory environment and overlap in
regulatory jurisdiction is often cited as a major source of
interestingness, as illustrated by changes to tax law in 2000 by
18
2000
21
2006
15022
1015
200815
441023
2009
13.5% 2420102009
20%25442026
2015578026
2009
21
16
2008
52%140 27
iRerearch Consulting Group
20102009
60%50
201026028
19
200911
29
214
215
the National Bureau of Taxation capping corporate advertising

expenditure to at 2 percent of gross annual revenue, leading
to protests from the State Administration of Industry and
Commerce, which is officially tasked with oversight of the
advertising industry.21
Despite certain hiccoughs, the advertising sector is
without a doubt promising. In 2006 statistics indicated
that the overall output value of the industry was nearly
$15 billion.22Furthermore, despite reported cutbacks in
global advertising spending by between 10 and 15 percent
(advertising budgets are often the first against the wall when
cash flow becomes an issue), a study cited by China Daily
indicated that advertising expenditures in fact grew by 15
percent in China during 2008, reaching a total of 441 billion
yuan.23
Despite the global economic slowdown, advertising
spending reportedly grew by 13.5 percent in 200924 and 2010
expenditure was reported to grow by nearly 20 percent over
2009 values25 to reach $442 billion.26 PwC forecasts this value
to increase to $578 billion by 2015.26
The online segment is of particular interest to many,
having grown 52 percent year-on-year in 2008 to account
for $1.4 billion of spending on its own.27 A later report from
Shanghai-based iResearch Consulting Group indicated that
the online advertising market had grown by nearly 60 percent
in 2010 to account for more approximately $5 billion in
revenue (albeit less than a fifth of the estimated $26 billion
in online advertising revenue recorded in the United States
the same year).28
2009 marked the first time Recommended Usage
Standards for online advertising had been compiled by the
China Advertising Association. The standards came into
trial operation on January 1, 2009 pending a review for
amendments a year later.29
By the first quarter of 2012, The market size of Chinas
online advertising reached 14.03 billion yuan ($2.22 billion)
[ representing a] 56.2 percent year-on-year increase [but a]
5.6 percent decrease compared to the last quarter of 2011.30
A 2012 report by PriceWaterhouseCoopers predicted that
Investment in Chinas Internet advertising [would] grow by
32.1 percent annually over the next five years.31
In contrast, other platforms like newspapers, magazines,
TV and outdoor appeared to have far dimmer futures on
the Mainland: advertising expenditure in traditional media,
including newspapers, magazines, TV, radio and outdoor,
increased just 1.4 percent in the first quarter, the lowest in
nearly five years, according to a market research service cited
by China Daily.32
In 2005, there were reportedly 40.4 billion copies of
newspapers, 2.75 billion magazines and 6.4 billion books
published nationwide, and the 2003 Administrative
216
Measures on Foreign-Invested Book, Newspaper and

Periodical Distribution Enterprises opened retail (in 2003)
and wholesale (in 2004) operation in China for foreigninvested enterprises, although administrative approval by the
General Administration of Press and Publication on a case-bycase basis was coupled to the relaxation of the regulations.33
More recent figures provided by Financial Times indicated
that by 2010 newspaper circulation had surpassed 50 billion
in 2010.34
Television spending is apparently also declining, rounding
out the trend observed in other traditional media:
China Central Television, the countrys biggest
2012
140.322.2
56.2%20115.6%30
2012
32.1%31
2012
1.4%32
television network, sat quietly Monday on the sidelines

of its annual advertising auction, a fanfare event
typically seen as a barometer for the economy and
a muscle show for the state broadcaster. It broke 20
years of tradition by declining to disclose the auctions
final total sales figures, inviting only a handful of state
reporters to the event and downplaying what it has
hyped every year before.
Marketing experts say CCTV is silent because it has
little to cheer about. Some key advertisers are pulling
200540427.5
64
2003
20032004
33
2010
50034
back amid a government-led austerity campaign that

began last year. Companiesonce willing to pay
premium rates for mass marketing to CCTVs big
audiencesare also taking their money to the Web,
following their viewers.
35
Unrelated regulatory pressure on infomercials may also

play a factor in media buyers decisions; regardless, the world
wide web is clearly becoming a dominant platform upon
which brands reach out to Chinese consumers.
In 2011, the Chinese government announced a new law
that would prohibit outdoor advertisements that promote
hedonistic or high-end lifestyles. The Jing Daily reported:
The Beijing Administration for Industry and Commerce said
in a recent statement that businesses were given an April 15
deadline to rectify such ads, along with any that excessively
promote foreign things. It gave no details on which foreign
things were deemed objectionable. Such promotions help
create a politically unhealthy climate, it said. Newly
forbidden words include supreme, royal, luxury or high
class.72
The banking industry was fully opened to foreign
participation in December 2006, and international financial
institutions were not slow to enter the market: the China
Banking Regulatory Commission reported that by the end
of that year, 74 foreign banks had set up branches, and 186
others had established representative offices.37 By the end of
36
415
72
200612
2006
74
186372008
46196237
382575116
39
2009626
302010
2010737
41
4042
2010
[]
[]
43
43
35
42
201453%
42
36
2011
1.83% 42
2011
201024%
217
2008, these figures were reported to have grown to 196 banks

from 46 countries having established 237 representative
offices38 and 75 banks from 25 countries having opened 116
branches.39
By June 2009, 26 foreign banks had fully incorporated
in China;30 A 2010 KPMG study indicated that 37 foreign
banks had incorporated on the Mainland by the end of July
that year.41 A study released one year later by PwC saw the
number of foreign banks incorporated rise to 40.42
Despite growth in the number of incorporations, however,
several challenges remain that are unique to foreign banks. An
earlier PwC study in 2010 had concluded that While [foreign
banks] have continued to be proactive in seeking out new
opportunities, they remain challenged by policy constraints
that dictate the pace, scope and direction of their market
penetration Meanwhile, the domestic banks continue to
add to their service offerings as they steadily evolve towards
more broadly based multi-service institutions In contrast,
the foreign banks are required to navigate a much narrower
space Reasons for [foreign banks] lack of growth in market
share included an un-level playing field, economic factors and
a limited product offering.43
Nevertheless, Against this challenging operating
environment, the participants continue to believe strongly
in the future opportunities of the Chinese financial services
market.43
PwCs follow up study reported that the 42 interviewed
foreign banks collectively intended to expand their workforce
in China by 53 percent by 2014, and that both further reform
and the future transition to a convertible Renminbi were
causes for optimism in the Chinese financial services markets
future potential.42
As of 2011, the foreign banks collectively held 1.83 percent
of the Mainland banking market.42
Although In 2010, combined profit for the foreign
banks rose 24 percent, slower than Chinas major local banks
[and in] 2009, most foreign banks saw their profits slide, a
KPMG report showed that the tables had turned only a year
later: combined net profit at the China operations of 33
foreign banks more than doubled in 2011 from a year earlier,
outstripping the pace of profit growth at local banks.44
Nevertheless, foreign banks are still niche players,
accounting for less than 2 percent of the banking sectors total
assets []in part because foreign banks have been allowed to
serve individual Chinese savers only since 2007, an opening
that launched a wave of investment by the banks in branches
and personnel.44
Furthermore, the strong profit growth may be difficult to
maintain since banks [2011] benefited from Chinas efforts to
tighten lending to curb inflation and surging property prices.
With loans harder to get, banks were able to charge more. This
218
year, banks have posted declines in their net interest margins

as authorities have cut benchmark interest rates, funding costs
have risen and demand for credit has cooled.44
In early 2006 a personal credit rating system was first
established to be used as a standard assessment for consumer
credit risk.
Chinas consumers were reported to represent
approximately $2.5 trillion worth of household deposits in
2008.40 The total assets of the banking industry furthermore
grew by more than 17 percent between 2003 and 2007 to
reach $7.6 trillion.45 Profits by the industry were reported as
$41 billion in 2007.46 In 2009, total banking assets on the
mainland were reported to reach 78 trillion yuan (roughly
$11.9 trillion),41although the proportion of those held by
overseas lenders reportedly shrank from 1.84 to 1.71 percent
even as their total assets grew.47
Having surveyed the challenges and opportunities, foreign
banks have predominately decided that their future is bright
in China, according to an Ernst & Young survey of 38
overseas lenders. Gradual and successive financial reforms
are fingered as an expected source of modest improvement
over the next three years.48
Foreign lenders see a loosening of controls on interest rates
as the key to rebalancing Chinas economy, even as the move
may have a short-term effect on their profitability, the survey
showed, writes BloombergBusinessweek. The Communist
Party, which pledged in November to give markets a decisive
role in the economy, in July eliminated a floor on lending
rates. It has yet to remove a ceiling on deposit rates.48
The insurance industry remains one of Chinas leastpenetrated by foreign firms, a fact which is by some (but
not all) attributed to particularly long approval processes
for activities including opening new branches and offering
specialty products.49 By December 2009, 52 foreign insurers
had established operations in China.47
Similar to the banking sector, foreign insurers are
reportedly struggling due to a joint-venture requirement
on life insurance, unequal treatment, and stricter regulations
and solvency rules following the financial crisis, issues which
reportedly led to only three out of 24 foreign life insurers
[making] a profit in 2008.47
The discrepancy between insurance penetration and density
in China and in other industrialized markets is illustrative of
the strong growth potential for the Chinese insurance market.
It was reported in 2007 that Chinas insurance penetration
was 2.9 percent with a density of $70.50 In comparison, the
average penetration in industrialized markets is reported at
9.2 percent with an average density of $3,642.51
Reportedly, foreign firms market share in life and property
insurance amounts to 5.652 and 1 percent53, respectively.
A 2009 PriceWaterhouseCoopers study noted that no new
201133
44
2%
2007
44
2011
44
2006
20082.5
4020032007
17%7.6452007
410462009
7811.9 41
1.84%1.71% 47
38
48
2013117
48
3.47
20072.9
70 50
9.2364251
5.6%521% 53
2009200810
2009
54
20092
2009101
55
20105
20108
20107
8
56
830
4.55
2009
201157
AIG1919
2012
AIG
IPO5
58
4920091252
47
Dezan Shira &

Associates
59
200824
2011
219
insurance licenses had been granted since October 2008, although

a relaxation in that situation was anticipated in late 2009.54
This relaxation may have consisted of the February 2009
announcement by the Standing Committee of the NPC that
amendments to the Insurance Law would become effective
on October 1, 2009. Among these amendments were
reportedly the abolishment of a restriction on reinsurance
and adjustments to the qualification requirements for major
shareholders, among others.55
In May 2010, the China Insurance Regulatory
Commission (CIRC) issued a new Administration Provision
on Reinsurance Business (CIRC Decree [2010] No. 8),
which became effective in July of the same year. According
to a KPMG brief on the new provision, Decree 8 aims to
reinforce the supervision of the reinsurance business and
promote the sustainable and healthy development of the
industry as a whole.56
It would appear that Decree 8 was a response to the
then-undisclosed 3 billion yuan fraud (approximately $455
million) committed by the two largest insurers in China
(China Life Insurance (Group) Company and Peoples
Insurance Company (Group) of China, both state-owned) in
2009, which was revealed to the public in early 2011.57
American International Groupa company which was
actually founded in Shanghai in 1919, several decades before
the Peoples Republic was proclaimedmade news in 2012
as a signatory to a non-binding agreement to purchase $500
million-worth of shares in a Hong Kong IPO planned by the
Peoples Insurance Company of China. The agreement also
included a planned joint venture between the two companies
to sell life insurance within the Mainland.58
Historically, foreign insurance companies have been
permitted to sell optional auto insurance in China but have
been barred from offering Mandatory Third-party Liability
(MTPL) coverage. White Paper contributors Dezan Shira &
Associates note that Since most drivers tend to choose the
same insurer for both optional and compulsory coverage,
Chinas restriction has effectively blocked foreign firms.59
In 2011 then-Vice Premier Wang Qishan, at a session of
the U.S.-China Strategic & Economic Dialogue, indicated
that foreign insurers may in the future be allowed to offer
MTPL coverage, [in the hope that] experienced Western
players will bring better pricing and underwriting practices to
the countrys young, fast-growing market.59
Foreign retailers Mainland experiences have been mixed
in recent years.
Home Depot, purveyors of home improvement supplies,
closed seven stores in China over the course of 2012, incurring
an 11-cent charge to its earnings per share.60
Meanwhile, Wal-Mart said store traffic in China declined
again [in Q3 2012].61
220
Wal-Mart, the worlds largest retailer by sales revenue,

entered China in 1996, Nine years later [] had more than
70 stores and as of mid-2012 [had] more than 376 outlets
and more than 95,000 employees in China.57
Carrefour and Tesco, the worlds second- and third-largest
retailers by revenue, had 206 and 111 stores in Mainland
China, respectively.57
Foreign supermarkets, especially, have seen difficulties
arising from pricing, misrepresentation and employee
disputes.
In January 2011, the NDRC fined 11 Carrefour stores
in six cities 500,000 yuan ($78,440) each for overcharging
customers at the same time that some Wal-Mart stores were
also caught using illegal pricing methods.57
Issues persisted, however. In October 2012, Wal-Mart
closed more than a dozen stores in Chongqing following
allegations that it had labeled regular pork as organic pork in
some stores. Two employees were arrested, another 35 were
detained, and the company was fined 2.69 million yuan.62
At roughly the same time, more than 100 Tesco employees
went on strike in eastern China. The employees blockaded
and prevented shoppers from entering a Tesco store due to a
labor dispute.62
One question that remains unaddressed in many Mainland
reports of foreign supermarkets troubles is that of culpability;
determining if wrongdoing has had the tacit support of more
senior executives or has rather been the work of greedy rogue
actors at the individual store level seems to be left as an
exercise for the reader.
Still, Wal-Marts Foreign Corrupt Practices Act violations in
Mexicoand the ensuing investigations which may unearth
further violations in Chinawould seem to suggest that at
the very least these companies might benefit from investment
in more extensive corporate ethics training worldwide.63
The situation has not lately improved for the embattled
retailers.
By 2013 Tesco had begun to shut Chinese outlets and
open new ones more slowly two years after announcing plans
to double stores and build more 400,000-square-foot malls,
writes BloombergBusinessweek. Hindered by the countrys
slowest economic growth since the 2009 financial crisis and
competition from local markets and regional chains, the
Cheshunt, England-based retailers China same-store sales
declined 1 percent in the second quarter.64
Tescos China pullback reflects the hurdles global big
box retail chains face in Asia, the article continues, where
the realities of complex local markets and slowing economies
are damping dreams of easy expansion. The worlds largest
retailer, Wal-Mart, is also adding outlets more gradually than
it had planned in Chinas 3.5 trillion yuan ($560 billion)
grocery industry.64
59
402013
2009
1% 64
Home
Depot
20127
1160
2012
61
19969
702012
376
9500057
20611157
20111
11
5078440
57
201210
2
352690
62
100
62
2011
3.5
560064
2013302014
2016110
112400
65
2006
182008
201130% 6520111-7
15.7%
1509598
152029.6% 66
672010
8000078
69
63
2011311
2011
20104706000
71
221
Whether more or less gradually, Wal-Mart recently

announced plans to open up to 110 facilities in China
between 2014 and 2016, in addition to the 30 it has already
opened [2013]. The company also plans to profit from
Chinas changing retail landscape by embracing e-commerce.
A major component of that strategy is likely to be its subsidiary
Yihaodian, which claims 24 million registered users and
provides same-day delivery services to customers.65
Chinas information technology sector continues to
develop. The total value of exported software and services was
estimated at $1.8 billion in 2006. In 2008, this figure was
projected to grow by more than 30 percent through 2011.65
January to July of 2011 saw a year-on-year growth rate of 15.7
percent in exports, accounting for in excess of $15 billion.
Revenues in the sector were reported to have grown by 29.6
percent to reach 958.8 billion yuan (approximately $152
billion) in the same period.66
According to the U.S. Foreign Commercial Service, the
software industry is a major focus of the central government
but remains diverse and highly fragmented,67 with the PRC,
with the National Copyright Administration reporting an
estimated 80,000 registered software products as of 2010.78
Finally, Chinas telecommunications sector is of continuing
interest for both foreign and domestic firms, although foreign
firms remain barred from offering telecommunications
services to consumers, effectively limiting foreign participation
to selling handsets and accessories to the Chinese market.69

The 12th Five-Year Plan and Ongoing Attempts to
Accelerate the Development of the Service Sector
Notes released by the State Council on March 11, 2011
cover several measurements for the Central Governments
ongoing campaign to bolster the nations service economy: by
2011, the ratio of value added by the service sector to the
GDP should have grown by four percent over 2010s value70
and the total amount of imports and exports in services
should have reached $600 billion.71
shadow banking regulatory responsibilities among four samelevel government bodies the Peoples Bank of China (PBOC),
China Banking Regulatory Commission (CBRC), China
Securities Regulatory Commission (CSRC) and Insurance
Regulatory Commission (IRC). Besides regulation at the
national level, the Circular also stated that local governments
are responsible for regulating relevant shadow banking.
The new Circular also pinpoints ambiguity of responsibility
arising from unclearly written contracts, requiring financial
institutions to clearly state who bears the risks in shadow
banking business contracts. The new Circular further requires
the separation of wealth management funds for clients from
the banks own funds and forbids the use of clients money to
buy the banks own loans.73
Reforms in Retail
In April 2014, China embarked on a major overhaul of
its consumer protection law. According to China Briefing by
Dezan Shira & Associates, the new law introduces a number
of important reforms to the Chinese retail environment: In
allegations of counterfeiting, the onus of proof is now on the
retailer to prove their innocence for the first 6 months after
the sale, rather than the consumer to prove wrongdoing all the
time, as previously; Penalties for fraud and false advertising
have been increased; Class-action lawsuits against retailer
malfeasance have been made easier to file (though limited
to state Consumer Associations and their local branches);
Retailers are now required to accept goods for return within
7 days of purchase unless agreed otherwise; For online and
other types of delivery purchases, consumers are not required
to provide a reason for returns; and Greater restrictions now
apply to retailers collection and use of consumer data. 74
201312107
20141CCT
(PBOC)
(CBRC)
(CSRC)(IRC)
73
20144
74
New Shadow Banking Regulations

In December 2013, the State Council issued Circular
107, laying out new intended regulations for shadow
banking, outlining changes for corporates dealing with nonbank lenders and new regulatory responsibilities by relevant
government authorities. The new regulation gained special
relevance when in January 2014, China Credit Trust (CCT),
a wealth management fund which sold investments via the
Industrial and Commercial Bank of China (ICBC) had to be
bailed out. The new Circular specifically outlined national
222
223
Works Cited
1
Wang Qishan. Remarks at the International Investment Forum

2008. September 10, 2008. http://english.mofcom.gov.cn/
aarticle/speech/200809/20080905773688.html.Accessed
January 7, 2009.
Chinas service trade and service industry have great

potential for development. Peoples Daily Online. February
6 , 2 0 0 8 . h t t p : / / v a n c o u v e r 2 . m o f c o m . g ov. c n / a a r t i c l e /
headnews/200802/20080205374575.html. Accessed January 7,
2009.
Michelle Phillips China eyes services sector of economy.

Washington Times. July 7, 2010. http://www.washingtontimes.
com/news/2010/jul/7/china-eyes-services-sector-of-economy/.
GLOBAL ECONOMY-US, Chinese service sectors

lose steam in Oct. Reuters. November 5, 2012. http://
www.reuters.com/article/2012/11/05/global-economyidUSL1E8M52AS20121105. Accessed December 5, 2012.
10
224
Opinions of the State Council concerning Accelerating the

Development of the Service Sector. (No.7 [2007] of the State
Council). March 17, 2007.
China services industry growth steady in November:

HSBC PMI. Reuters. December 3, 2013. http://www.
reuters.com/article/2013/12/04/us-china-economy-pmiidUSBRE9B304420131204. Accessed February 1, 2014.
Chinas 12th Five-Year Plan: Overview. KPMG China. March
2011.http://www.kpmg.com/CN/en/IssuesAndInsights/
ArticlesPublications/Publicationseries/5-years-plan/Documents/
China-12th-Five-Year-Plan-Overview-201104.pdf.Accessed
November 26, 2011.
Cement Tan. Investors eye China services as the next big
thing. Reuters. March 21, 2012. http://www.reuters.com/
article/2012/03/21/china-services-idUSL4E8EE10T20120321.
Chinas service sector totaled 13.134 trln yuan in 2008.
english/2009-12/25/content_12703221.htm. Accessed January
11, 2010.
11
.
edu.ce.cn. November 20, 2009. http://edu.ce.cn/exams/
kj/200911/20/t20091120_20466543.shtml. Accessed January
6, 2010.
12
15.530.
gov.cn. October 3, 2009. http://www.gov.cn/jrzg/2009-10/03/
13
Karen Yip. Number of accountants needs to rise. China Daily.

April 25, 2011. http://www.chinadaily.com.cn/cndy/201104/25/content_12383996.htm. Accessed November 26, 2011.
14
Liu Yuting. The development, convergence, implementation and

equivalence of Chinese Accounting Standards. The Ministry of
Finance of the Peoples Republic of China. October 11, 2008.
15
Mary Swire. Investors In Chinese Real Estate Continue To

Face Tax And Accounting Challenges. Tax-News.com. August
2, 2007. http://www.tax-news.com/archive/story/Investors_
In_Chinese_Real_Estate_Continue_To_Face_Tax_And_
Accounting_Challenges_xxxx28034.html. Accessed January 7,
2009.
16
Rachel Armstrong. China accounting scandals put Big

Four auditors on red alert. Reuters. June 24, 2011. http://
www.reuters.com/article/2011/06/24/us-china-accountingidUSTRE75N19J20110624. Accessed November 26, 2011.
17
Kara Scannell and Shannon Bond. Audit firms face SEC China
crackdown. Financial Times. December 3, 2012. http://www.
ft.com/intl/cms/s/0/6ee44ace-3d6d-11e2-9f35-00144feabdc0.
18
Jim Zarroli. Feds sue Chinese audit firms. National

Public Radio. December 4, 2012. http://www.npr.
org/2012/12/04/166464844/sec-sues-chinese-audit-firms.
19
SEC Details Friction with Chinese Counterpart Over Audits.

China Realtime Report. December 5, 2012. http://blogs.wsj.com/
chinarealtime/2012/12/05/sec-details-friction-with-chinesecounterpart-over-audits/. Accessed December 5, 2012.
20
Michael Rapoport. Whats Next For Big Four Audit Firms In

China? The Wall Street Journal. January 24, 2014. http://blogs.
wsj.com/chinarealtime/2014/01/24/whats-next-for-big-fouraudit-firms-in-china/. Accessed January 31, 2014.
Jun Wang. Speech By Mr. Jun Wang, Vice Minister of MOF,

PRC. at the 17th World Congress of Accountants. November
14, 2006. http://www.cicpa.org.cn/english/news_alert/200804/
t20080428_4796.htm. Accessed January 7, 2009.
225
21
Wang Jing. Framing Chinese Advertising: Some Industry

Perspectives on the Production of Culture. Journal of Media
and Cultural Studies 17.3. 2003.
22
Li Jingrong. Chinas advertising industry braces for overhaul.

China.org.cn. September 17, 2006. http://www.china.org.cn/
archive/2006-09/17/content_1181402.htm. Accessed January
7, 2009.
23
24
Yu Tianyu. Advertising industry optimistic about 2010. China

5, 2010.
UK trade body looks to aid Chinese brands. October 12, 2011.

Peoples Daily Online via China Daily. http://english.peopledaily.
com.cn/90778/7622851.html . Accessed November 26, 2011.
26
Yang Ning. Showbiz market expected to grow to $96b. China

Daily. June 15, 2011. http://www.chinadaily.com.cn/cndy/201106/15/content_12697977.htm. Accessed November 27, 2011.
27
Michael Learmonth. Want ad growth? Try Beijing. Silicon Alley

Insider. August 2, 2008. http://www.alleyinsider.com/2008/8/
want-ad-growth-try-beijing-. Accessed January 7, 2009.
29
30
Meng Fangbin. Advertising spending sees sluggish growth.

December 6, 2012.
33
China in Brief: Publishing. China.org.cn. December

27,
2006.
http://www.china.org.cn/archive/2006-12/27/
34
Jamil Anderlini China: newspaper sales flourish. Financial Times.

January 7, 2011. http://www.ftchinese.com/story/001036382/
en. Accessed January 23, 2011.
35
Laurie Burkitt and Fanfan Wang. CCTV Explains Its Silence

at Ad Auction. The Wall Street Journal. November 21, 2013.
http://blogs.wsj.com/chinarealtime/2013/11/21/cctv-explainsits-silence-at-ad-auction/. Accessed January 31, 2014.
36
Christina Larson. China Needs a War on Infomercials.

BloombergBusinessweek. November 1, 2013. http://www.
businessweek.com/articles/2013-11-01/china-needs-a-war-oninfomercials. Accessed January 31, 2014.
37
Luo Jun. HSBC Starts Private Banking Operations in China.

Bloomberg. March 31, 2008. http://www.bloomberg.com/apps/
news?pid=20601102&sid=aPVKvcvMd6t4. Accessed January 7,
2009.
38
Assets of foreign banks in China up 7.37% in 2008.

China.org.cn. March 14, 2009. http://www.china.org.cn/
business/2009-03/14/content_17443998.htm. Accessed January
6, 2010.
39
Chinese banks absorbed $32.78 bln foreign capital.

Xinhua. August 26, 2009. http://news.xinhuanet.com/
english/2009-08/26/content_11950109.htm. Accessed January
11 2010.
40
Mervyn Jacob, Raymond Yung, and Jimmy Leung.

Marketing and Capital Market: Foreign Banks in China.
PriceWaterhouseCoopers. June, 2009. http://www.pwchk.com/
home/eng/fs_foreign_banks_china_jun2009.html.
Accessed
January 11, 2010.
Hu Yuanyuan. Ad spending rises 13.5% in 2009. China

Daily. January 30, 2010. http://www.chinadaily.com.cn/
13, 2012.
25
28
32
Jonathan Shieber. Chinas Booming Online Ad Market Spurs

VC Deals. The Wall Street Journal. June 13, 2011. http://blogs.
wsj.com/venturecapital/2011/06/13/chinas-booming-onlinead-market-spurs-vc-deals/. Accessed November 27, 2011.
Chinas First Internet Advertising Industry Standard Begins.
China Tech News. January 5, 2009. http://www.chinatechnews.
com/2009/01/05/8409-chinas-first-internet-advertisingindustry-standard-begins/. Accessed January 7, 2009.
Chinas Internet ad reaches 14b yuan in Q1. Xinhua. April
Mainland China Banking Survey 2010. KPMG. http://www.

kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/
Documents/China-banking-survey-201008.pdf.Accessed
November 3, 2010.
41
31
226
China online advertising spending to surge. Xinhua. June

13, 2012.http://www.chinadaily.com.cn/business/2012-06/13/
227
42
Mervyn Jacob, Raymond Yung and Peter Li. Foreign Banks in

China 2011. PricewaterhouseCoopers. June, 2011. http://www.
pwccn.com/webmedia/doc/634442705425169010_fs_foreign_
banks_china_jun2011.pdf Accessed January 13, 2012.
51
Insurance in emerging markets: overview and prospects for

Islamic insurance. Swiss Re. Sigma No. 5. 2008. http://www.
swissre.com/pws/research%20publications/sigma%20ins.%20
research/sigma_no_5_2008.html. Accessed February 6, 2009.
43
Mervyn Jacob., Raymond Yung, and Jimmy Leung. Foreign

Banks in China. PricewaterhouseCoopers. May, 2010. http://
www.pwccn.com/webmedia/doc/634082194595490480_fs_
foreign_banks_china_may2010.pdf. Accessed November 2,
2010.
52
Song Jingli. Foreign life insurers seek niche market share.

China Daily. April 8, 2011. http://www.chinadaily.com.cn/
business/2011-04/08/content_12293264.htm.
Accessed
November 27, 2011.
53
Zhan Hao. Think again before going to China China

Law Vision. February 9, 2011. http://www.chinalawvision.
com/2011/02/articles/insurance-law-of-the-peoples-r/thinkagain-before-going-to-china/. Accessed November 27, 2011.
54
Peter Whalley, Shu-Yen Liu, and Tom Ling. Insurance: Foreign

Insurance Company in China. PriceWaterhouseCoopers.
September, 2009. http://www.pwchk.com/home/eng/foreign_
insurance_cn_sep2009.html. Accessed January 8, 2009.
55
Newly Amended Insurance Law in China. China Law Insight.

April 15, 2009. http://www.chinalawinsight.com/2009/04/
articles/corporate/insurance/newly-amended-insurance-law-inchina/. Accessed January 6, 2010.
44
Dinny McMahon. Foreign Banks in China Rev Profits. The

Wall Street Journal. September 26, 2012. http://online.wsj.com/
article/SB10000872396390444083304578017730089494090.
The Total Assets of Chinas Banking Sector Reached RMB 52.6
Trillion. Business Wire. June 5, 2008. http://www.bloomberg.
com/apps/news?pid=conewsstory&refer=conews&tkr=601398:
CH&sid=aDLlrZS_Li.0. Accessed January 7, 2009.
45
46
47
Chinas banking industry posts US$41 bln in profits in 2007.

AsiaPulse News. January 18, 2008. http://www.accessmylibrary.
com/coms2/summary_0286-33722439_ITM. Accessed January
7, 2009.
Foreign Banks Are Optimistic on China Reform, Ernst &

Young Says. BloombergBusinessweek. January 6, 2014. http://
www.businessweek.com/news/2014-01-06/foreign-banks-areoptimistic-on-china-reform-ernst-and-young-says.Accessed
January 31, 2014.
50
228
Tracy Zhang and Fenglin Qin. China Insurance Regulatory

Commission issues new Administrative Provisions on
Reinsurance Businesses KPMG July, 2010. http://www.
kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/
Newsletters/ChinaAlerts/Documents/china-alert-1007-09.pdf.
57
Yan Jie. Leading insurers guilty of 3 billion yuan fraud. China

Daily. February 1, 2011. http://europe.chinadaily.com.cn/
china/2011-02/01/content_11952585.htm. Accessed February
7, 2011.
58
Elzio Barreto and Denny Thomas. AIG, PICC Group ink joint
venture to sell life insurance in China. Reuters. November 22,
2012. http://www.reuters.com/article/2012/11/22/us-aig-piccidUSBRE8AL02220121122. Accessed December 6, 2012.
59
Vivian Ni. China to Further Open Auto Insurance Market to

Foreign Investors. China Briefing. February 20, 2012. http://
www.china-briefing.com/news/2012/02/20/china-to-furtheropen-auto-insurance-market-to-foreign-investors.html. Accessed
December 6, 2012.
China Said to Mull Insurance Market Easing for Foreign

Firms. Bloomberg. August 5, 2010. http://www.bloomberg.
com/news/2010-08-04/china-said-to-consider-openingauto-insurance-market-to-foreign-companies.html.
Accessed
November 4, 2010.
48
49
56
China: Financial Services: Banking, Insurance & Securities.

U.S. Foreign Commercial Service. 20012009. http://www.
buyusa.gov/china/en/financial_services.html. Accessed January
7, 2009.
World insurance in 2007: emerging markets leading the way.
Swiss Re. Sigma No. 3. 2008. http://www.swissre.com/pws/
research%20publications/sigma%20ins.%20research/sigma_
no_3_2008_rev.html. Accessed February 6, 2009.
229
60
61
62
63
230
Martinne Geller. Home Depot view up as housing heals;

Sandy lift looms. Reuters. November 13, 2012. http://
www.reuters.com/article/2012/11/13/us-homedepot-resultsidUSBRE8AC0FF20121113. Accessed December 5, 2012.
Caroline Valetkevitch. Analysis: US consumer stocks cheer
investors ahead of holidays. Reuters. November 18, 2012.
http://www.reuters.com/article/2012/11/18/us-usa-earningsconsumer-idUSBRE8AH0A320121118. Accessed December 5,
2012.
Li Woke. Foreign retailers feel the pinch of rapid expansion.
China Daily. July 20, 2012. http://europe.chinadaily.com.
December 5, 2012.
Richard L. Cassin. Wal-Marts whopping FCPA tab -- $300
million and climbing. The FCPA Blog. August 16, 2013. http://
www.fcpablog.com/blog/2013/8/16/wal-marts-whopping-fcpatab-300-million-and-climbing.html. Accessed February 3, 2014.
64
Tesco Stumbles With Wal-Mart as China Shoppers Buy

Local. BloombergBusinessweek. October 19, 2012. http://www.
bloomberg.com/news/2012-10-18/tesco-stumbles-with-walmart-as-china-shoppers-buy-local.html. Accessed January 31,
2014.
65
Matthew Miller. Wal-Mart to open up to 110 new

China stores by 2016. Reuters. October 24, 2013. http://
www.reuters.com/article/2013/10/24/us-walmart-chinaidUSBRE99N04S20131024. Accessed February 1, 2014.
66
Chinas software industry revenue up 31.4% in July. Xinhua.

August 24, 2011. http://news.xinhuanet.com/english2010/
2011.
67
China: Information & Communication Technology. U.S.

Foreign Commercial Service. 20012009. http://www.buyusa.
gov/china/en/ict.html. Accessed January 7, 2009.
68
Chinas software industry output hits 1.3t yuan in 2010. China

Daily via Xinhua. August 5, 2011. http://www.chinadaily.com.
Accessed
November 27, 2011.
69
David Barboza. China plans to license 3 wireless standards.

The New York Times. December 31, 2008. http://www.nytimes.
com/2009/01/01/technology/01wireless.html. Accessed January
7, 2009.
70
().
Gov.cn. November 27, 2011. http://www.gov.cn/2011lh/
content_1825838_5.htm. Accessed November 28, 2011.
71
.
Peoples Daily. November 28, 2011. http://finance.people.com.
cn/GB/70846/16422067.html. Accessed November 29, 2011.
72
Why Beijings Anti-Luxury Advertising Campaign Wont Help

the Wealth Gap. Jing Daily. March 22, 2011. http://jingdaily.
com/will-beijings-latest-luxury-market-policies-actually-helplessen-the-wealth-gap/8242/
73
Emma Bi. Corporate Treasurer Breaks Chinas New Shadow

Banking Regulations. Corporate Treasurer. February 17, 2014.
http://www.thecorporatetreasurer.com/News/372592,ct-breakschina8217s-new-shadow-banking-regulations.aspx
74
China Introduces New Consumer Protection Law. China

Briefing. Dezan Shira & Associates. http://www.china-briefing.
com/news/2014/04/08/china-introduces-new-consumerprotection-law.html
231
Part III
Regional Overviews
3.1
3.2
3.3
3.4
3.5
3.6
3.7
Introduction to South China

Guangdong Province
Fujian Province
Guangxi Zhuang Antonomous Region
Hainan Province
Hong Kong Special Administration Region
Macau Special Administration Region
3.1
3.2
3.3
3.4
3.5
3.6
3.7
Courtesy of Dezan Shira & Associates
232
233
3.1 Introduction to South China

Region
The term South China immediately brings to mind

the Pearl River Delta (PRD) - Chinas manufacturing center
and beating economic heart. Broadly defined as including
nine cities in southeast Guangdong province (Guangzhou,
Shenzhen, Dongguan, Foshan, Huizhou, Jiangmen,
Zhaoqing, Zhongshan and Zhuhai), the PRDs true centers
are to be found in Guangzhou (the provincial capital) and
Shenzhen (Chinas first and most successful special economic
zone).
To think of the PRD only in terms of these cities, however,
would be to ignore the instrumental role in economic
development played by the special administrative regions
(SARs) of Hong Kong and (to a lesser extent) Macau, with
which the cities of Guangdong have long leveraged their
proximity. The Closer Economic Partnership Arrangements
(CEPA) concluded in 2003 between Mainland China and
Hong Kong and Macau, respectively, have phased out tariffs
and trade barriers, liberalized trade in services and boosted
trade and investment in Guangdong. As such, the term
Greater PRD was coined to refer to the PRD, Hong Kong
and Macau as a group.
The more remote, less developed (and often more
mountainous) towns of Guangdong province and
neighboring provinces of Fujian, Hainan and the Guangxi
Zhuang Autonomous Region are the final pieces of the South
China puzzle. A series of economic and infrastructure-focused
government policies have been designed to better connect
the Greater PRD and to improve its links to these adjoining
regions.
The PRD Today

The PRD has long been considered the heart of hightech China, with Shenzhen, Guangzhou and Dongguan (as
well as Zhuhai and Huizhou) considered as centers for the
manufacture of consumer electronics and other high-tech
products. The PRD hosts direct and indirect production
arrangements for a wide variety of goods sold worldwide,
offering both original equipment manufacturing (OEM) and
branded goods. The Shenzhen Stock Exchange is the national
leader for high-tech enterprises; Chinas leading technology
enterprises, including Huawei, Tencent and ZTE, were all
founded in Shenzhen.
Yet the PRD is a region in transition. In recent years, low
labor costs (once the major attraction of the region) have been
increasing rapidly. Minimum labor costs are one measure of
this, with Shenzhen as a particularly illuminating example.
234
Shenzhen
3.1
2014 Minimum
2014 Minimum
Monthly Wage
Hourly Wage
RMB1,808
RMB16.5
Guangzhou
RMB1,550
RMB15
Zhuhai *
RMB1,380
RMB13.2
Dongguan
RMB1,310
RMB12.5
Foshan
RMB1,310
RMB12.5
Zhongshan
RMB1,310
RMB12.5
Jiangmen
RMB1,130
RMB11.1
Huizhou
RMB1,130
RMB11.1
Zhaoqing
RMB1,130
RMB11.1
*Zhuhai independently sets minimum wages
The city raised its minimum monthly wage by RMB 208 in

February 2014, to RMB 1808, making it the second highest
nationwide (after Shanghai). Many other PRD cities raised
their minimum wages in 2014 as well.
Increasing labor costs stand in contrast to the regions
substantial but nevertheless decreasing productivity growth.
This has been a major driver behind the flight of laborintensive industries from China in recent years to lower-cost
alternatives such as Vietnam. Other factors pulling investment
away from the region include Chinas increasing emphasis on
the service sector over manufacturing, as well as decreasing
industrial land availability in the PRD.
Despite this, and spurred by on-going processes of
industrialization, urbanization and marketization, the PRD
remains home to a vibrant economy, which the government
(at all levels) is doing its best to reshape. To accomplish this,
some local governments are implementing stricter industry
approval measures, ranging from increased minimum
registered capital thresholds (some raised as much as tenfold)
to more stringent criteria for total investment or output value
per square meter invested. As well, local governments in more
heavily-invested areas are increasingly refusing to approve
investment from enterprises in non-capital-intensive, low
value-added or environmentally harmful industries, forcing
such enterprises to locate elsewhere in the PRD or further
inland. Lastly, research and development, with government
support, is also increasing in the region. Taken together, these
trends can be seen as indicative of a maturing economy.
Future Outlook
The Outline of the Plan for the Reform and Development
of the Pearl River Delta (2008-2020), put forward by the
National Development and Reform Commission (NDRC),
2003
CEPA
OEM
20142208
1808
2014
2014
2014
1,808
16.5
1,550
15
1,380
13.2
1,310
13.2
1,310
13.2
1,310
12.5
1,130
11.1
1,130
11.1
1,130
11.1
2008-2020
235
describes the PRD region as an experimental area for scientific

development and calls for the creation of three supermetropolitan areas, respectively, Guangzhou and Foshan,
Hong Kong and Shenzhen, and Macao and Zhuhai. Provided
with greater autonomy, the PRD is expected to be at the
forefront of new economic patterns and achieve balanced
economic development between its urban and rural areas.
Economic Development Goals for the PRD

(2009, 2012, 2020)
2009
2012
2020
GDP per capita
RMB60,000 RMB80,000 RMB135,000
GDP from service sector
50%
53%
60%
Urbanization
76%
80%
85%
Source: Outline of NDRC Development Plan for the PRD (2008)
Major ongoing infrastructure developments include:
The Plan also includes the following key goals:

Establish financial centers in Guangzhou and
Shenzhen, as shown by projects such as the second
board at the Shenzhen Securities Exchange and
construction of the Guangdong Financial and Hightech Services Zone.
Improve infrastructure, and promote Guangdong as a
world-class logistics center through the construction
of several hub-type modern logistics parks, including
those at Baiyun Airport, Baoan Airport, Guangzhou
Port and Shenzhen Port.
Implement an outward strategy, by establishing 10
native multinational corporations with annual sales
revenue of over US$ 20 billion by 2020.
Develop a series of specialized conventions and
exhibitions, including the Guangzhou Export
Commodities Fair, Shenzhen High-tech Fair, Zhuhai
International Aviation and Aerospace Exhibition,
Guangzhou Small and Medium-Sized Enterprise Fair
and Shenzhen International Cultural Industries Fair.
Foster creative industry business clusters, including
the construction of a national base for the software
and cartoon industries.
Increase the innovative capacity of the region to realize
the transformation from Made in Guangdong to
Created by Guangdong by 2020.
Establish internationally influential brands in Foshan
for home appliances and building materials, in
Dongguan for garments, in Zhongshan for lighting
and in Jiangmen for papermaking.
Zhongshan-Shenzhen passage across the Pearl River

estuary
Hong Kong-Zhuhai-Macao Bridge (scheduled for
completion by 2016)
Eastern passage between Shenzhen and Hong Kong
Express railway from Guangzhou via Shenzhen to
Hong Kong
Guizhou-Guangzhou coastal railway and NanningGuangzhou railway
Urban rail transit systems in Guangzhou, Shenzhen,
Foshan and Dongguan
Improvement to the modern functions of ports in
Guangzhou, Shenzhen and Zhuhai
Expansion of Baiyun Airport in Guangzhou
Joined by Hong Kong and Macau, the PRD aims to become

a globally competitive area for the advanced manufacturing
and modern service industries by 2020, and the most
vigorous economic zone in the entire Asia-Pacific region. In
the following, we break the region down by provinces/cities.
202010
200
2020
GDP
GDP
(2009, 2012, 2020)

2009
2012
60,000
80,000
50%
53%
76%
80%
2020
135,000
60%
85%
2008
67201097.5
--2016
2020
To reach these goals in the increasingly overcrowded

PRD region, the Guangdong provincial government recently
earmarked more than 672 billion yuan (US$109.75 billion)
to develop rural areas in the province over the next five years.
The funds are to specifically focus on infrastructure projects,
including a number of new links planned to better connect
the greater PRD and integrate it with the pan-PRD area.
236
237
3.2 Guangdong Province
3.2
Heart of the PRD
Guangdong has the largest regional GDP of Chinas

provinces and is the countrys biggest exporter, accounting
for more than one-third of Chinas total foreign trade. The
provincial capital, Guangzhou, is the heart of Cantonese
culture. Guangdong is also home to three out of four of
Chinas original special economic zones - Shenzhen, Zhuhai
and Shantou.
In terms of commerce, the cities of Guangdong lead not
only the PRD but in many cases the country as a whole, with
Guangzhou ranking number one in Forbes Chinas Best
Cities for Business 2013. The city is actively supporting the
development of micro, small and medium-sized enterprises,
such as via tax incentives introduced in a November 2012
circular.
Economy
Guangdongs economy is estimated to have grown by 8.5
percent in 2013 and reached a GDP output of more than
US$1 trillion last year according to Xinhua News Agency.
If Guangdong were a separate country, it would rank as the
worlds sixteenth largest economy, behind Mexico and South
Korea, and ahead of Indonesia and Turkey. Guangdong is
also taking action to shift its focus onto services rather than
manufacturing. With average wages among the highest in the
country there is a growing potential to reorient the provincial
economy toward domestic consumption rather than exports
and cheap labor.
The Pearl River Delta contributed 85 percent of
Guangdongs economic growth in 2013 through the following
leading industrial outputs:
Communications equipment, computers and other
electronic equipment
2. Electrical machinery & equipment
3. Smelting and processing of metals
4. Raw chemical materials and chemical products
5. Automobiles
6. Plastics
7. Petroleum refining and nuclear fuel processing
8. Garments and footwear
9. General purpose machinery
10. Textiles
Furthermore, the provincial government is also taking

steps to advance the financial industry, setting a goal for this
to be among the provinces key industries by 2015. In 2012,
the provinces Financial Department released its Overall
Plan of Guangdong Province in Establishing an Integrated
Experimental Area for Financial Reform and Innovation.
The Plan suggests that added value in the financial industry
will account for more than 8 percent of provincial GDP by
2015, and this is further estimated to reach more than 10
percent by 2020.
Spotlight on Guangzhous Changing Identity
Traditionally considered only a manufacturing base,
Guangzhou is increasingly being recognized for its growing
amount of domestic consumption. From 2012, total retail
sales in the city increased by 15.2 percent and reached RMB
688.285 billion. This enabled Guangzhou to take the top
spot on Forbes Chinas Best Cities for Business in 2013.
Growth in retail sales is largely being fueled by Guangzhous
large population and high wages, as well as its efficient
infrastructure.
Guangzhou is a city of 14 million people and the

nations third-largest metropolitan economy.
In 2013, regional GDP totaled RMB1.542 trillion,
ranking third in the country, trailing Shanghai and
Beijing.
Among the highest in the country, average monthly
wages in Guangzhou grew to RMB 6647 in 2013.
Guangzhous monthly minimum wage rose by 19.2
percent from RMB 1,300 to RMB 1,550 in 2014
the second highest in the province behind Shenzhen.
Meanwhile, the citys minimum hourly wage
increased from RMB10.5 to RMB15.
2013
201211
20138.5%
1
16
2013
85%
20152012
2015
8%202010%
2012
6882.85
15.2%2013
2013
1.
2.
3.
4.
1.
238
Guangdongs strength in foreign trade is evident in the

following figures (from Guangdong Statistical Yearbook 2013):
5.
6.
Total exports and imports rose to US$636.4 billion

and US$455.2 billion, respectively, by 10.9 and 11
percent year-over-year.
Although exports had to face a 0.8% decrease in
the first ten months of 2014, Guangdong Chinas
biggest export region realized an export value of
US& 515.7 billion. From January to October 2014,
imports decreased 7.6% year on year to US% 349.2
billion.
1400
20131.542
20136647
2013
1300155019.2%
10.515
10.9%6364
11%4552
20140.8%
51572014110
3492
7.6%
7.
8.
9.
10.
2011-2015
2015
48%
239
Nevertheless, Guangdong province was still ranked

tops for both export and import values nation wide.
In particular, trade between Guangdong and newly

emerging markets including Latin America, the Middle East
and Africa has increased greatly in recent years.
The Outline of Guangdongs 12th Five Year Plan, current
2011-2015, includes the following goals:
240
Optimize the industry structure of the province

such that the service industry occupies 48 percent
of all industries by 2015. In addition, the Plan aims
to increase the ratio of the value added by modern
service industries to 60 percent of value added for
the entire service industry. The key modern service
industries to be promoted are finance and insurance,
modern logistics, information service, science
and technology service, business exhibition and
headquarters economy, among others. In addition,
newly emerging service industries such as creative
industries, service outsourcing, human resources
services and high technology services will be actively
promoted.
Significantly improve innovative capacity, and
become an important innovation center in the
Asia-Pacific region by 2015. In this regard, the
Plan aims to introduce a great number of high-level
technological innovative talents from abroad.
Transform the PRD into a domestic as well as
international consumer service center with a
great number of trend-setting products and with
strengthened supervision of both quality and
prices of the products in order to better protect
consumers interests.
Promote integration of PRDs economy
and
improve
its
competitiveness.
This
includes integrating the transportation systems,
infrastructures, urban and rural planning, industry
layout, environmental protection and public services
of the region.
Strengthen
environmental
protection
by
strengthening water pollution control, improving
air quality and improving the standard of safe
disposal and treatment of solid wastes.
Promote low-carbon development in the province
and improve the system and mechanism for
controlling emission of greenhouse gases.
Optimize high-efficiency information network
system. The Plan aims to achieve the standards
of a mid-level developed country in terms of the
information levels of the entire province by 2015.
This includes reaching an internet penetration rate of

70 percent by 2015.
Adjust income inequality by expanding the ratio
of people with mid-level incomes and raising the
minimum wages in the various cities in the PRD
to above 40 percent of the local average salaries by
2015.
Improve the social insurance system and medical
service standards in the province.
Improve internationalization of education by
introducing several internationally well-known
schools to Guangzhou, Shenzhen, Zhuhai,
Dongguan, Foshan and other cities to jointly
establish higher education institutions.
Deepen cooperation with Hong Kong and Macau
under the CEPA. In finance, efforts involve building
a financial cooperation hub with Hong Kong in the
lead and PRD cities providing support with their own
financial resources and services. To further enhance
services industry cooperation and growth between
Hong Kong and Mainland China, the Chinese
central government and the Hong Kong Special
Administrative Region government signed the Tenth
Supplement to the Mainland and Hong Kong Closer
Economic Partnership Arrangement (CEPA) on
August 29 and will take effect in January 2014.
Internationalize the provinces economy and
optimize the structure of FDI utilization. Foreign
investment is encouraged in high-end manufacturing
industries, high- and new-technology industries,
modern service industries, new energy and energysaving and environmental protection industries.
The key focus will be on attracting investment
from Global Fortune 500 companies and leading
enterprises in various industries, and strengthening
cooperation with developed countries such as the
U.S., Japan and European countries in the areas of
economy, trading, technology and culture. Foreign
investors are also encouraged to establish venture
capital enterprises, private equity investment funds
and invest in enterprises within the province.
Establish proper commercial dispute resolution
mechanisms and improve legal systems to create a
fair and orderly market competition environment
conducive to the internationalization of the
economy.
Spotlight on Shenzhen Government Innovation

Shenzhens government has taken the lead on a number of
new initiatives to become the national leader in innovation
and private enterprise growth. The city has experienced
60%
2015
2015
201570%
2015
40%
CEPA
2013
829<
>2014
1
500
45
PEDF
PEDF
20099
2009
150
20126
201446470
4500
202020
1500
241
rapid private economic growth, spawning about 450,000

private companies, including international behemoths such
as Huawei Technologies Co Ltd, Tencent Holdings Ltd,
China Vanke Co Ltd and BYD. Available incentives include a
recent VAT and business tax exemption policy for small and
micro-sized enterprises. The government has also adopted
specific measures in terms of equity investment incentives,
e-commerce promotion and the introduction of electric
vehicles. Lastly, as part of a pilot program to curb emissions of
key pollutants and clean up the environment, foreign investors
are now permitted to trade carbon permits in Shenzhen.
Equity Investment Incentives

Private equity (PE) investment has emerged as one of the
most important capital-raising avenues for small and mediumsized enterprises. Recognizing this, the Shenzhen government
has become one of several coastal city administrations to offer
further incentives to equity investment enterprises. The city
has established a PE Development Fund (PEDF) and clarified
operation procedures for PE funds that intend to apply for
financial support from the PEDF. Incentives offered to PE
funds include: rewards for local financial contributions, office
purchase and rental subsidies, one-time settlement rewards,
and one-time rewards for investment withdrawal.
E-Commerce Promotion
In September 2009, Shenzhen was approved by Chinas
NDRC and Ministry of Commerce (MOFCOM) to become
Chinas first e-commerce model city. In addition to
streamlining registration processes for e-commerce companies,
the city has made other efforts to promote the development
of e-commerce. One example is the building of dedicated
industrial parks, such as Futian International E-commerce
Industrial Park, which opened in 2009 and houses more than
150 internet and e-commerce companies.
One state-level project being developed in Shenzhen is the
Qianhai Shenzhen-Hong Kong Modern Services Cooperation
Zone, approved by the State Council in June 2012. By the end
of April 2014, a total of 6,470 companies with a combined
registered capital of RMB 450 billion had already registered in
the zone. A joint venture between Hong Kong and Mainland
China, and supported by the State Council, the Qianhai
Zone is designed as an experimental business zone for better
interaction between the two jurisdictions financial, logistics,
and IT services sectors. It covers slightly less than 20 square
kilometers on the western side of Shenzhen, and is expected
to achieve a GDP of RMB150 billion by 2020.
Among its many goals, the Qianhai Zone will serve as a
pilot area for the liberalization of Chinas financial sector as a
whole, including preferential policies such as:
242
Allowing the Qianhai area to explore the expansion

of offshore RMB fund flow-back channels, and
establish an innovative experimental zone for crossborder RMB business;
Supporting the granting of RMB loans for offshore
projects by banking institutions established in
Qianhai;
Under the CEPA framework, conducting studies on
the granting of RMB loans by Hong Kong-based
banking institutions for enterprises and projects
established in Qianhai;
Supporting qualified enterprises and financial
institutions registered in Qianhai to issue RMB
bonds in Hong Kong within the quotas approved
by the State Council to support the development of
Qianhai;
Supporting the innovative development of foreigninvested equity investment funds, and actively
exploring new modes of foreign exchange settlement of
capital funds, investment and fund management; and
Supporting the establishment of international or
national management headquarters or business
operation headquarters by Hong Kong and other
onshore and offshore financial institutions.
Qualifying enterprises will be entitled to a reduced

corporate income tax rate of 15 percent and, to increase
investor confidence in the area, the government has stated
plans to explore the establishment of branches of Hong Kong
arbitration institutions in Qianhai. To attract foreign talent,
especially financial sector employees from Hong Kong, the
zone offers a special 15 percent salary tax rate for foreign
nationals living or working in Qianhai. In April 2013 the
municipal government announced four industriesfinance,
modern logistics, information services, and related industries
operating within the zonethat are eligible for special funds.
Identified as an area for spearheading industrial
restructuring in the Pearl River Delta region, the Qianhai
Zone provides incentives that are likely to be extended to
the other areas in Guangdong Province in the near future.
This is designed to extract the next wave of FDI in areas
such as Hengqing Island near Zhuhai and Nansha Port near
Guangzhou, and if successful may eventually be instituted
nationwide.
Spotlight on Value-added Tax Reform
Guangdong Province launched its value-added tax reform
pilot program in November 2012, following the pilot program
launch in Shanghai and Beijing. Here, two lower rates of 11
percentand 6 percentwere added on to the standard rates of
17 percent and 13 percent under the previous value-added
CEPA
6%3%
20121031
15%
15%20134
201211
17%
13%11%6%
17%
11%
243
tax regime. The tax rate of 17 percentapplies to the leasing of

tangible movable property while that of 11 percentapplies to
the transportation industry.
Industries included in the pilot include:
Land transportation service

Water transportation service
Air transportation service
Pipeline transportation service
R&D and technology service
Information technology service
Cultural and creative service
Logistics auxiliary service
Authentication and consulting service
The tax rate of 6 percent shall apply to other modern

service industries and that of 3 percent shall apply to
small-scale taxpayers providing taxable services. Taxable
services subjected to a zero percent tax rate shall be carried
out as prescribed by the Ministry of Finance and the State
Administration of Taxation.
Pilot taxpayers engaged in specified taxable services shall,
as required by the relevant state tax authorities, undergo the
formalities for tax registration, tax type identification, invoice
type verification, general taxpayer recognition, tax-control
system application, invoice purchasing and collection, tax
preference application, and tax-exemption registration for
export refund before October 31, 2012.
244
245
3.3 Fujian Province

Cross-Strait Trade Hub
Directly facing Taiwan, Fujians coastline provides it easy
access to cross-strait trade and business. The province used to
be the sole hub for all air and sea transportation to Taiwan, but
several years ago the government began permitting direct links
with other parts of the country, following which Guangdong
and Jiangsu surpassed Fujian in terms of attracting investment
from Taiwan. Nonetheless, Fujian stands to gain the most
from the continuing improvement of cross-strait relations,
both economically and in terms of its importance to the
state government. The main economic engines in Fujian are
Xiamen, Fuzhou, Quanzhou, Zhangzhou and Putian. There
are also a number of less well-known economic gems hidden
throughout the province.
Economy
The economies of Fujian and Taiwan are closely related and
complementary with the pillar industries of both regions
consisting of electronics, petrochemicals and machinery. If
this favorable economic factor can be properly utilized, gains
from theincreased trade between the two regions could benefit
both sides amid the ongoing global economic downturn. In
May 2013, the capital city of the province Fuzhou set up
an administration office to handle the certification of origin
for goods made in Taiwan.
In June 2012,Chinas State Administration of Industry and
Commerce issued 16 new policies to promote the development
of the region and strengthen its bond with Taiwan. The new
policies empowered local offices to directly handle registration
applications and other business-related licenses for enterprises
funded with overseas capital, rather than going through the
Beijing office, and thereby making it more convenient for
Taiwanese enterprises to gain market access. Additionally,
the new policies newly allowed Taiwan-funded enterprises to
use traditional Chinese characters on outdoor advertisements
and register company names with Taiwanese idioms. All
these measures were aimed to reduce the commercial costs
to Taiwan-funded enterprises and help to attract more largescale companies and projects to Pingtan.
Historically, Fujians key industries have been agriculture,
footwear and clothing, but in recent years the area has
increasingly focused on high-tech and electronic goods.
Fujians industrial clusters have become stronger in electronic
information, equipment manufacturing and petrochemicals,
with these industries accounting for more than 60 percent of
246
3.3
Fujians Major Industrial Products
National Rank (total 30 provinces/municipalities)
Product
Chemical Fiber
Televisions
Cloth
Paper
Hydropower
Microcomputer Equipment
Mobile Telephone
Beer
National Rank
3
4
6
7
8
9
30/
Spotlight on Xiamen
While Fuzhou is the capital of Fujian province, the more
southern Xiamen is one of Chinas four original special
economic zones (along with Guangzhou provinces Shenzhen,
Zhuhai and Shantou) and a key trade hub its port and
airport are both the third busiest in the region, behind
Guangzhou and Shenzhen.
The import and export volume connected to trade conducted
by foreign-invested enterprises takes up more than half of the
total volume in Xiamen, which in turn occupies more than half
of the total import and export volume of the entire province.
These provide opportunities for service outsourcing enterprises
in Xiamen to open up their overseas markets.
3
4
6
7
8
9
2013
Source: China Statistical Yearbook, 2013
total industrial output value.

A prime example of an equipment manufacturer
headquartered in Fujian is Lonking Holdings, one of the
largest construction machinery manufacturers in China
(making and distributing loaders, road rollers, excavators and
forklifts). In late 2011, the company invested RMB3.5 billion
in an excavator manufacturing line in the Longyan Economic
Development Zone. The project is estimated to produce
15,000 excavators annually.
To fuel such industry, Fujian province has taken measures
to promote energy production. For example, a household
waste-fuelled power plant in Fuqing city was completed and
entered operation in 2011.
The provincial government focuses on attracting
foreign investment in 13 industries, namely electronics and
information technology, machinery, petrochemicals, steel
and non-ferrous metals, shipbuilding, new energy, biopharmaceuticals (traditional Chinese medicine), logistics,
new materials, construction materials and textiles. Other key
industries in the province include aquaculture and fisheries.
20135
2012616
60%
2011
35
1.5
2011
13
2015
3000
12%
247
Xiamens more prominent service outsourcing businesses

include information technology service outsourcing targeted
towards the Japanese market, logistics and supply chain
outsourcing, as well as integrated circuit design, animated
games and call center service outsourcing businesses targeted
towards Taiwan.
The Fujian provincial government has a standing policy to
promote the development of emerging industries, including
next-generation information technology, biotechnology and
new medicine, new materials, new energy, energy-saving
technology, high-end equipment manufacturing, and the
marine high-tech industry. By 2015, the provincial government
aims to increase the value of emerging industries to RMB300
billion, accounting for 12 percent of Fujians GDP.
The province is now vigorously promoting the marine
economy as its new growth engine. Fujian initiated related pilot
projects in 2013, targeting a total output value of the industry
of RMB730 billion by 2015. If achieved, this would contribute
more than 28 percent of total regional product and turn the
province into a marine economic powerhouse by 2020. The
province is also set to improve the organization of its ports and
optimize resource allocation. The provinces coastal resources
for building deep water berths of 10,000 tons to 30,000 tons
rank first in the country; this is planned as the basis for an
ambitious move to turn Fujian an internationally competitive
shipping center. To this end, the provincial government has
plans to establish a special fund of RMB1 billion for the
development of marine economy.
Fujians 12th Five-Year Plan encourages foreign investment
in newly emerging strategic industries, modern services,
energy conservation and environmental protection, and other
key industries. The Plan also aims to:
248
Increase cooperation with large international

corporations through technological cooperation and
asset M&As;
Optimize the structure of exported products by
encouraging the export of high-tech, electrical and
mechanical products with independent IPR, as well
as high added-value labor-intensive products;
Promote the accelerated transformation and
upgrading of the processing trade, and encourage
domestic and foreign enterprises to cooperate in
the expansion from simple assembly and processing
to the inclusion of R&D, design, core component
manufacturing, and logistics;
Restrict the export of high-energy consumption,
high-pollution and resource-intensive products;
Encourage the import of advanced equipment and
technologies, important resources, key component
parts and goods for daily consumption that are
necessary for economic development so as to optimize

the provinces import structure;
Strengthen the certification of enterprises and
products entering the global market; and
Expand cooperation with Hong Kong and encourage
Hong Kong financial institutions to set up branches
in Fujian.
Much of the Plans focus is placed on cooperation

with Taiwan, for example in modern services such as the
legal, intermediary, medical and health, cultural, service
outsourcing, commercial exhibition, shipping and logistics
and R&D industries. The Plan encourages the introduction
of Taiwanese hospitals, rehabilitation centers and retirement
homes to Fujian, and Taiwanese residents are encouraged to
start businesses and participate in politics in Fujian.
Fujians import/export value grew by 8.6 percent to
US$169.35 billion in 2013. Exports exceeded US$100 billion
for the first time, while imports reached US$62.85 billion (an
increase of 8.2 percent). For 2014, trade volume is expected to
grow by 7 percent, and foreign investment by 5 percent.
2013
2015
730028%
2020
10
Spotlight on Development Zones

Fujians development zones received great attention under
Chinas 11th Five Year Plan, in which the State Council
approved free trade port zones both in Xiamen and Fuzhou
and upgraded three provincial development zones - China
Merchants Zhangzhou Development Zone, Quanzhou
Economic and Technological Development Zone, Quanzhou
High-tech Industrial Development Zone - to state level status.
Fujians development zones are also representative of the
provinces economy as a whole. For example, the provinces
development zones include three state-level investment zones
specifically aimed at Taiwanese businesses, located in Fuzhou,
Quanzhou and Zhangzhou. Auto-parts are a major product
in Fujian province and this is no more clearly seen than in
Huaan Economic Development Zone, which is home to the
aluminum wheel production project. According to Fujian
government plans, this zone will develop an auto spare parts
industrial cluster that produces car wheels, car bearings, tires
as well as auto glass products, among others. In addition,
several new-energy vehicles and fork-lift trucks manufacturers
will also be housed in the area.
The West Coast Economic Zone (also known as the Western
Taiwan Straits Economic Zone) covers the entirety of Fujian
province, as well as several cities in the Zhejiang, Guangdong,
and Jiangxi provinces. The Zone, described in Chinas 12th
Five Year Plan, was proposed by the Fujian government and
Chinese central government with the purpose of facilitating
political and economic relationships across the Taiwan Straits
and accelerating economic development along the coastal
cities in Fujian province.
20131693.5
8.6%1000
628.58.2%2014
7%5%
2010
249
3.4 Guangxi Zhuang Autonomous Region
3.4
Link to South Asia
As the only province of China with both land and water

connections to Southeast Asia, Guangxis position was
significantly enhanced by the inauguration of the ChinaASEAN Free Trade Area in early 2010. The province borders
Vietnam to the west and is connected to Hong Kong and
Macau by the Xi River. Cross-border, small-value trade with
Vietnam accounted for around 40 percent of Guangxis total
exports in 2013.
The provincial capital of Nanning in particular plays a key
role in China-ASEAN relations. The city is the permanent
home of the annual China-ASEAN Expo and the ChinaASEAN Economic Park, a provincial-level park based in the
Nanning Overseas Chinese Investment Zone, which aims to
enhance cooperation between the region and the ASEAN
countries.
Economy
Guangxi is home to many ethnic minority groups and
its economy is based on agriculture and tourism (especially
the city of Guilin, known for its proximity to the Lijiang
River and Karst Peaks). Key agricultural products include
sugarcane, of which Guangxi is the leading producer in
China, and silk-worm products. Major grain crops include
rice, maize, wheat and sweet potatoes. Leading commercial
crops include peanuts, sesame, ramie, tobacco, tea, cotton,
and indigo. Guangxi is also a major producer of fruit: most
notably pomelos, tangerines, mandarin oranges, lemons,
lychee, pears, papayas, bananas and pineapples. The regions
timber (sandalwood and cork) and fishing industries are both
important contributors to the local economy.
The province is also known for its wide variety of minerals
and metals, and its aluminum processing industry. In 2011,
Guangxi launched a new materials research and development
center, investing RMB30 million in R&D for new metallic
materials, the comprehensive utilization of low-quality iron
resources, and laterite-nickel ore.
Food processing, auto manufacturing, petrochemicals,
power generation, nonferrous metals, metallurgy and
machinery are the seven key industries of Guangxi. In addition,
building materials, pharmaceutics, textiles and garments,
shipbuilding, as well as the marine equipment manufacturing
industries have grown rapidly in recent years. Pine resin is
notable as an export-oriented commodity produced in the
250
city of Wuzhou. The provinces heavy industries include iron,

cement- and steelworks in Liuzhou, as well as machinery
production in Nanning and Wuzhou. Pinyang produces
ceramics, fans, felt caps, copperware, combs, brushes and
straw bonnets.
In January 2012, Sinopec opened a renovated refinery in
the coastal city of Beihai. The new facility can refine 100,000
barrels per day, and is integrated with a 200,000 ton-per-year
polypropylene unit for producing plastics.
Spotlight on Development Zones
Guangxi is also home to new high-tech development zones
aimed at attracting investors in the logistics, bio-engineering,
IT, electronic components and shipping industries. The
Nanning-Guizhou-Kunming Economic Belt and the Beibu
Gulf Economic Zone are being constructed and efforts are
being taken to enhance the cooperation with Taiwan and
other areas in and outside of Guangxi. At present, over 3,000
companies have settled into Guangxis 37 industrial parks,
including China Petroleum, SDIC Power Holdings, Sinar
Mas Group of Indonesia, Noble Group of Singapore, China
National Cereals, Oils and Foodstuffs Corporation (COFCO)
and Coca Cola.
The High-Tech Industrial Development Zones of
Nanning, Liuzhou, Qinzhou, Guilin, and Yuchai all created
an industrial output value over RMB10 billion in 2011. In
addition to industrial output value, the development zones
are a key source of jobs in the province. The provinces
industrial zones have been developing their industrial cluster
according to the area characteristics. For example, the coastal
areas of Qinzhou, Beihai and Fangcheng are now focused on
petrochemicals, power plants, manganese steel, sugar, and
high-tech products.
Efforts have been made by the local government to increase
both foreign- and domestic investment in the region. Global
companies like Toyota, General Motors, NEC and IBM have
all made investments in Guangxi. Many large enterprises
have established regional headquarters in the city since July
2010 (when incentives were introduced to encourage doing
so), including the brewer, Tsingtao, and household appliance
maker, Haier.
As part of the China-ASEAN framework, the Pan-Beibu
Gulf Economic Cooperation Zone comprises the Guangxi
Zhuang autonomous region, Guangdong and Hainan
provinces, Vietnam, Malaysia, Singapore, Indonesia, the
Philippines and Brunei.
2010-
2013
40%
-
-
-
-
2011
3000
--
300037
2011100
NEC
IBM
20107
20121
10
20
2011-20153000
251
Infrastructure
Air
Guangxis airports include Nanning Wuwei, Guilin
Lianghe, Beihai Fucheng, Liuzhou Baihe, and the much
smaller Baise Tianyang and Quzhou Cheung Chau Island.
Rail
Guangxis railway network, which has long lagged behind that
of neighboring provinces, is currently undergoing development
and expansion. The province plans to spend RMB300 billion
on railway construction between 2011 and 2015.
This project is integrally connected to Guangxis
development of trade with ASEAN. The province plans
to accelerate the construction of a high-speed railway from
Nanning to Singapore via Vietnam as the groundwork for the
Nanning-Singapore Economic Corridor.
The first step of this is a railway segment between Nanning
and Pingxiang, a city near Chinas border with Vietnam. The
larger Corridor is planned to encompass Hanoi in Vietnam,
Vientiane in Laos, Phnom Penh in Cambodia, Bangkok in
Thailand, Kuala Lumpur in Malaysia, and Singapore.
-
-
1.19
2015
3.32011
Ports and Waterways

Guangxis main port is at Beibuwan (Gulf of Tonkin),
which lies just off the coast of northeastern Vietnam and has
an annual goods throughput approximately equal to that of
Guangdongs Zhanjiang and Fujians Xiamen combined (119
million tons). The province plans to raise the capacity of the
port to over 330 million tons by the end of 2015, according to
Guangxis Development Plan and Xinhua News Agency. In
2011, it invested heavily in terminal and navigation channel
projects with the goal of turning the port into a hub for
ASEAN trade.
252
253
3.5 Hainan Province

An Island of Tourism and Agriculture
Hainan province includes over two hundred islands off of
Chinas southern coast in the South China Sea, with Hainan
Island (30 miles off the coast of Guangdong) accounting
for 97 percent of the provinces land area. Chinas smallest
province and largest special economic zone, Hainan is at the
same latitude as Hawaii, Bali and Phuket and has developed
into one of Chinas prime resort areas, the oriental Hawaii.
Although the service industry accounted for 46.9 percent
of GDP `in 2012, Hainan also has the largest primary sector of
all of Chinas provinces, through the important contribution
of its fisheries and tropical cash crops like coconuts, pepper,
coffee, tea and rubber.
Economy
While many of the tourists who travel to Hainan are
Chinese, the government is attempting to change this; the
State Council has announced a strategic plan to make Hainan
a world-class international tourist destination by 2020. The
central government has approved a further 15 resorts and
63 five-star hotels as part of the islands existing Five-Year
Plan. Tourists may visit the island without a visa as long as
they are part of a tour group organized by a state-approved
international travel agency.
The most valuable government policies issued in
connection with promoting Hainan as an international
tourist destination are the islands duty-free policies, postdeparture tax refunds, and visa exemptions for tourists from
26 countries and regions.
Since April 2011, tourists have been able to purchase
duty-free commodities at duty-free stores in the province
and leave the island by air, greatly increasing tourism and
high-end consumption. Having recognized the tremendous
benefits brought to the local economy by the policy, the
Chinese central government loosened previous restrictions in
October 2012. The minimum age for purchasing duty-free
commodities was lowered to 16, while the upper value limit
for duty-free commodities was increased from RMB5,000
to RMB8,000. Moreover, three additional categories of
commodities have been added to the duty-free list, namely,
beauty and health care products, tableware and kitchen
appliances, and toys - expanding the scope of duty-free
commodities to 21 categories.
In an effort to bring the huge potential of the duty-free
policy into full play, construction of the worlds largest duty-
254
3.5
Hainans Major Industrial Products
National Rank (total 30 provinces/municipalities)
Product
Refined Sugar
Natural Gas
Crude Oil
Cars
Chemical Fiber
National Rank
5
15
19
19
Source: China Statistical Yearbook, 2013
free shopping center has begun in the resort city of Sanya.

With an investment of RMB3.45 billion, the Haitang Bay
International Shopping Center has attracted a vast number
of top-end and flagship stores to its 125,000 square meter
complex after opening in September 2014.
The accumulative value of the duty-free goods purchased
per one-time visitor departing from Hainan Island is limited
to RMB8,000 and the allowable quantity of each individual
type of good is as shown in the Annex below. As long as the
import duty of the goods has been paid, each visitor may also
purchase one product priced over RMB8,000.
Hainan Island occupies 42.5 percent of the nations
total tropical landmass used for agriculture, forestry, animal
husbandry and fishery. Major agricultural industries include
natural rubber, coffee, tobacco, tropical flowers and tropical
fruits such as coconuts, watermelons and bananas. Hainan is
also developing aromatic vegetables into a major industry.
The province is home to 70 percent of Chinas
titanium reserves and is a major salt production center.
Main exports include aquatic products, furniture and
wood, electrical and electronic products, and iron
and steel. Hainans main import and export trading
partners are the E.U., ASEAN, the U.S. and Japan.
Hainans territory covers an enormous amount of seabed - a
radius of about 200 miles around the island area - and the local
government is keen to exploit this in terms of aquaculture
and offshore oil and gas production in the South China Sea.
Since 1996, Hainan has been supplying Hong Kong with
natural gas through a 770-kilometer pipeline. Large oil and
gas reserves have been discovered in the South China Sea, a
major source of conflict between China and its neighboring
countries in recent times.
The 12th Five-Year Plan of Hainan aims to promote the
modern service industries, including tourism, commercial
exhibitions, modern logistics, and sports and leisure. It also
aims to greatly increase investment into the new energy, new
30
97%
2012
46.9%
2020
1563
26
20114
201210
16
50008000
21
34.512.52014
9
30/
5
15
19
19
2013
8000
18000
42.5%
70%
200
1996770
2015100
255
materials and biomedical industries, such that they become the

provinces main pillars of economic growth. The Plan hopes to
form five industry groups in the automobile, food & beverage
and agricultural product processing, photovoltaic, medical
and pharmaceutical, cultural and creativity, and leisure and
entertainment industries, with output of over RMB10 billion
by 2015. It also plans to accelerate the development of the golf
and yacht industries by introducing a series of internationally
influential golf tournaments, developing golf training and
associated industries, and establishing yacht trading venues
and yacht clubs. The Plan also encourages the creation of a
base for manufacturing travel equipment including for yachts,
residential vehicles, outdoor sports, scuba diving, and golf.
In addition, the Plan aims to cultivate three to five medical,
health and convalescence institutions meeting international
advanced standards and providing services such as Chinese
medicine, hot springs and dietary therapy.
In terms of raising innovative capability, the Plan
encourages enterprises with the necessary conditions to
establish state, provincial and municipal-level key laboratories
and state and provincial-level key engineering technology
R&D centers, and aims to cultivate a group of high- and newtechnology enterprises, innovative enterprises, and state and
provincial-level IPR pilot enterprises.
Well-known domestic and foreign schools are encouraged
to establish branch schools in the province and large enterprises
to establish training bases in Haikou, the provincial capital.
Local schools are encouraged to establish mutual recognition
of courses and accreditation with foreign schools. In addition,
the development of accounting, legal, economic appraisal
and consulting services are encouraged, with the Plan aiming
to cultivate a group of internationally renown intermediary
service enterprises.
In terms of the environment, the Plan hopes to achieve a
100 percent urban waste treatment and disposal rate and a
90 percent urban waste water treatment rate, and prohibits
the development of high energy consumption, high water
consumption, high emission and overcapacity industries.
The Plan also aims to achieve a 95 percent utilization rate
of clean energy by 2015, and for all key projects and largescale public facilities to comprehensively implement contract
energy management.
The Plan aims to actively promote Haikous economic
exchange and cooperation with the pan-PRD region and
with international sister cities, as well as expand economic
cooperation and trading with the 10+1 ASEAN nations. In
addition, it hopes to adjust and optimize the provinces export
goods structure and encourages and supports expanding the
export of photovoltaics, marine products, food and beverages,
and electrical and mechanical products. In addition, it hopes
to adjust and optimize the structure of FDI utilization by
256
increasing efforts to attract investment in the high- and newtechnology industries, modern service industries, and public
infrastructure.
Infrastructure
Air
Hainans airports include Sanya Fenghuang and Haikou
Meilan, which handle the major inflow of visitors to the
province.
Rail
Hainans east ring intercity rail connects its major cities
of Haikou and Sanya. An additional high-speed railway is
planned for the west coast of Hainan, and a ferry link connects
Hainans railroad to the mainland.
Ports and Waterways
Hainans largest harbors are located at Haikou, Sanya,
Basuo and Yangpu.
3-5
100%90%
201595%
10+1
257
3.6 Hong Kong Special Administrative Region
3.6
East Asias Logistics and Financial Hub
Situated at the southeastern tip of China, Hong Kong

is at the center of East Asia. Since its return to the Chinese
Mainland in 1997, the special administrative region has been
a model for the success of the One Country, Two Systems
policy. Hong Kong is the worlds 10th largest trading
economy, 6th biggest foreign exchange market and, with its
service sector accounting for more than 90 percent of GDP,
the worlds most service-oriented economy, according to the
Hong Kong Development and Trade Council.
Hong Kong encompasses Hong Kong Island, the Kowloon
Peninsula and the New Territories. Parts of the region consist
of the most densely populated places in the world, while
others are quite rural. Approximately 88 percent of the
population speaks Cantonese as their first language, rather
than the mainlands official language of Mandarin Chinese.
Economy
Major economic sectors of Hong Kong include: trade and
logistics, tourism, financial services, professional services and
other producer services. Mainland China is Hong Kongs
largest trading partner and the largest source of external
direct investment into Hong Kong. Its relationship covers
a wide range of activities ranging from traditional areas
such as imports/exports, wholesale and retail, banking and
transport and warehousing, to newer areas such as real estate,
hotels, financial services, manufacturing and infrastructure
development.
Spotlight on CEPAs Tenth Supplement
In December 2001, after Chinas accession to the WTO,
Hong Kong proposed an arrangement with mainland China
similar to a free trade agreement. By 2002, the official
term, Closer Economic Partnership Arrangement (CEPA),
was confirmed. CEPA promotes closer integration and
development of the PRD through trade in goods and services,
investment facilitation and tourism.
The basic objectives of CEPA are to phase out tariffs and
non-tariff barriers on trade in commodities, liberalize trade in
services and reduce and eliminate all discriminatory measures
to boost trade and investment in the Greater PRD.For
manufacturing industries, CEPA allows the vast majority of
manufactured goods that meet Hong Kongrule of origin and
CEPA specifications into the Chinese mainland duty-free.
In the service sector, CEPA gives Hong Kong companies in
258
specified sectors preferential access to markets.

To enhance cooperation between Hong Kong and
Mainland China in the services sector, the Chinese central
government and the government of the Hong Kong Special
Administrative Region signed the Tenth Supplement to the
Mainland and Hong Kong Closer Economic Partnership
Arrangement (CEPA) on August 29, 2013, which is
scheduled to take effect on January 1, 2014.
The Tenth Supplement further relaxes the market access
conditions in 28 existing sectors, namely:
Legal
Construction
Computer and related services
Real estate
Market research
Technical testing & analysis
services
Placement and supply services
of personnel
Building-cleaning
Photographic
Printing
Convention and exhibition
Translation and interpretation
services
Telecommunications
Audiovisual
Distribution
Environment
Banking
Securities
Hospital services
Social services
Tourism
Cultural
Sporting
Maritime transport
Air transport
Road transport
Freight forwarding
agency
Trademark agency
Furthermore, under the Circular, service providers of

Hong Kong and Macao are permitted to establish whollyinvested entertainment places in the pilot areas of Qianhai,
Shenzhen and Hengqin, Zhuhai.
Hong Kongs savvy global business environment has paired
well with the PRDs competitive manufacturing base. According
to China Customs statistics, Hong Kong is the countrys
second largest trading partner after the United States. In 2012,
mainland imports from Hong Kong amounted to US$18
billion, while exports to Hong Kong were US$323.5 billion.
Hong Kong overtook London and New York to claim
the top spot in the 2011 World Economic Forum Financial
Development Index, marking 2011 as the first year an Asian
city has topped the rankings. The World Economic Forum
is based on several financial indicators, including financial
access, business environment, banking and financial services,
transparency, institutional environment, non-banking
financial services and financial markets. Hong Kong is
1997
90%
88%
CEPA
200112
2002
CEPACEPA
CEPA
CEPACEPA
CEPA
2013829<
CEPA>
201411
CEPA28
CEPA
2012
1803235
2011
2011
20118
20124
674
259
consecutively ranked as the worlds freest economy by the

Wall Street Journal and Heritage Foundation.
The Chinese central government plans to develop Hong
Kong as an offshore RMB market and an increasingly
prominent cross-border RMB trade channel. These measures
will support Hong Kong enterprises in making RMBdenominated direct investments into the mainland, according
to statements by Chinese Vice Premier Keqiang Li in August
2011. Li also stated that the central government will support
the development of offshore RMB financial products in Hong
Kong and that cross-border trade settlements in RMB should
be extended to cover the whole country.
As of the end of April 2012, Hong Kong held the worlds
largest pool of offshore RMB funds with total deposits of
RMB67.4 billion. To further increase the citys competitiveness
against foreign rivals such as London and Singapore, last year
the central government allowed foreign investors to invest
in RMB-denominated exchange trade funds in Hong Kong.
Additionally, the government will support third parties using
Hong Kong as a venue to settle trade and investments in
RMB, and further enrich offshore RMB products in Hong
Kong, according to Xinhua.
In terms of infrastructure development, the Hong KongZhuhai-Macau Bridge (construction slated for 2009-2016) is
expected to reduce travel time between Hong Kong and each
city from 4.5 hours to approximately 40 minutes.The SAR
is currently undergoing an ambitious transport infrastructure
program, and has allocated a budget of HK$15.5 billion to be
spent on major road and railway projects.The entirety of this
program is expected to be completed in 2020.
Hong Kong follows a free trade policy and hence maintains
basically no barriers to trade: there are no customs tariffs on
goods imported into or exported from Hong Kong. Import
and export licensing are kept to a minimum. Most products
do not need licenses to enter or leave Hong Kong and where
licenses or notifications are required, they are only intended
to fulfill obligations under various international agreements,
or to maintain public health, safety or security.
Spotlight on Hong Kong Taxes
Corporate Income Tax
Hong Kongs simple and business-friendly tax system is a
major attraction for foreign investors. Corporate income tax
rates may differ slightly from year to year in Hong Kong. For
2010/11, the tax rate for corporations is 16.5 percent, and the
profit tax rate for partnerships and sole traders is 15 percent.
Hong Kong adopts a territorial source principle of
taxation, which means that only profits sourced in Hong
Kong are taxable in Hong Kong. There is no distinction
made between residents and non-residents, which means that
residents can derive profits from abroad without being taxed,
260
while non-residents may be taxed on profits arising in Hong

Kong. Hong Kong regulations also allow companies to claim
offshore status, allowing them total tax exemption on profits
sourced outside of Hong Kong.
All expenditures incurred in the generation of assessable
profits, including most interest costs, rent for office and
factory premises, bad debts, and salaries and payments to
approved pension schemes, are deductible from gross income.
Sums paid out on capital expenditures are not tax deductible.
Losses can be carried forward without any limits.
VAT and Withholding Tax
Value-added tax (VAT) is non-existent in Hong Kong.
There is also no withholding tax in Hong Kong for profit
repatriated back to the overseas parent company.
Salary Tax
There are two ways of calculating salary tax in Hong Kong
for the individual taxpayers who have assessable income from
employment:
1.
2.
Progressive rate. Taken on a sliding scale (2-17

percent) against the taxpayers annual net chargeable
income (i.e. less allowable deduction and personal
allowances); and
Standard rate. 15 percent, based on the annual net
income (i.e. less allowable deductions only). The
final payable income tax is the lower of the two tax
liabilities. The maximum average tax rate in Hong
Kong is thus 15 percent for the current tax year.
Dividends received from any corporation enjoy a tax
exemption.
Infrastructure
The city is currently undergoing an ambitious transport
infrastructure program, and has a recent annual budget
of HK$15.5 billion to be spent on major road and railway
projects.The entirety of this program is expected to be
completed in 2020.
Air
The Hong Kong International Airport at Chek Lap Kok
is the busiest airport in the world for international cargo. In
2013, HKIA handled 59.9 million passengers, 4.12 million
tons of cargo and over 350,000 flight movements. By 2040,
efforts to expand the airport will increase its capacity to handle
up to 87 million passengers and nine million tons of cargo per
year. The airports marine cargo terminal is linked with 18
ports in the Pearl River Delta.
2. 15%
15%
2009-2016
4.540
155
2020
2010-2011
16.5%15%
155
2020
20135990
412350000
20408700
900
18
35%200
31%39%KCR
7.4
--86
75%
-
800
1.
2%-17%
261
Rail
Recently, five new rail projects expanded Hong Kongs
network by 35 percent to over 200 kilometers, with an increase
in public transit service from 31 percent to 39 percent. The
citys major rail projects include the 7.4 kilometer extension
of the Kowloon-Canton Railway (KCR) from SheungShui
to Lok Ma Chau Spur Line and the Guangzhou-ShenzhenHong Kong Express Rail Link worth US$8.6 billion.
Ports and Waterways
The Hong Kong port handles about 3/4s of Hong Kongs
total cargo throughput and is among the worlds busiest
container ports by cargo throughput. There are nine container
terminals in Kwai Chung-Tsing Yi basin under the operation
of five different operators, namely, the Modern Terminals,
Hong Kong International Terminals Ltd, COSCO-HIT, DP
World and Asia Container Terminals Ltd. There are some
800 shipping-related companies in Hong Kong that provide
comprehensive maritime services including ship registration,
legal and dispute resolution services, ship financing and marine
insurance, and ship-ownership and vessel management.
262
263
3.7 Macau Special Administrative Region
3.7
The Orients Las Vegas
A former Portuguese colony situated at the entrance to the

Pearl River Delta only forty miles from Hong Kong, Macau is
the smaller of Chinas two special administrative regions at
only 1/40th the size of Hong Kong, with approximately half
a million residents (not many more than Luxembourg) and a
total of 33 casinos.
Spotlight on Macau over Time
Under British rule and with the deep port of Victoria
Harbor, Hong Kong quickly gained importance as a major
trade center, overshadowing the commercial importance of
Portuguese-ruled Macau. The key exception to Hong Kongs
commercial superiority over Macau was during World War
II when Macau experienced brief economic prosperity as the
only neutral port in South China, after the Japanese occupied
Canton and Hong Kong. From 1943 to August 1945, Japan
created a virtual protectorate over Macau, assuming control
of its affairs.
In 1974, the Portuguese government granted independence
to all overseas colonies and recognized Macau as part of
Chinas territory. The Chinese government did not take over
administration of the territory until February 8, 1979, when
China acknowledged Macau as a Chinese territory under
Portuguese administration.
On April 13, 1987, The Joint Declaration on the Question
of Macau was signed between China and Portugal to agree
that Macau would revert to Chinese rule on December 20,
1999 also under the One Country, Two Systems policy. As
per the Hong Kong SAR, the Chinese government promised
that the Macau SAR will enjoy a high degree of autonomy in
all matters except foreign and defense affairs for 50 years.
Economy
As a free port (where goods are received and shipped free of
customs duties), Macau is best known for its gambling industry
and is the only place in China where gambling is legal. The
majority of the population speaks Cantonese, but Portuguese
remains an official language and English is widely used in trade,
tourism and commerce. Since the liberalization of its gaming
sector in 2002, Macaus economy has expanded rapidly with
significant investment in new hotels, casinos and convention
facilities by developers from Hong Kong, Australia, and the
United States.
The city now represents the worlds largest gaming capital,
264
having surpassed Las Vegas in 2006. Macaus gambling

revenues grew by an average of 29 percent a year between 2008
and 2012. Casino revenue increased 31.7% in October yearon-year to 36.48 billion patacas ($4.6 billion), more than six
times the revenue of the Las Vegas Strip. However, thisoverreliance on the gaming industry has made the Chinese central
government prioritize diversification of the regions economy.
The regions top trade partners are mainland China, Hong
Kong, Japan, the E.U., Taiwan and the United States. The regions
exports include clothing, textiles, footwear, toys, electronics,
machinery and parts; while imports include raw materials
and semi-manufactured goods, consumer goods (foodstuffs,
beverages, tobacco), capital goods, mineral fuels and oils.
Due to Macaus increasing operational costs, it is no longer
suited for labor-intensive industries, and accordingly, textile
and garment exports are likely to shrink further in years
to come. Yet the region continues to develop as one of the
top gambling and tourist destinations in the world. Growth
areas include finance, insurance, construction, real estate and
manufacturing. Macaus gambling industry still accounts for
an estimated 40 percent of its GDP.
Macaus currency, the pataca, is closely tied to the Hong
Kong dollar, which is freely accepted in Macau. Hong
Kongs links with Macaus gambling industry are extensive,
especially through three of the six companies with gaming
licenses in Macau: STDM, Galaxy, and Melco. STDMs
gaming subsidiary, SJM, and Galaxy are listed on the Hong
Kong Stock Exchange, as are two other license holders, Wynn
Macau and Las Vegas Sands Macau operations.
Having surpassed Las Vegas in gambling revenue, the city is
now looking to broaden its economic base by keeping tourists
in town for longer periods of time. While casino earnings
constitute nearly all of Macaus earnings, in Las Vegas they
make up only about 40 percent of tourist-related revenue,
suggesting that tourists in Macau tend to stay for only a day
or two, gambling and quickly leaving. The region is hoping to
change that by cashing in on the lucrative convention trade
with new exhibition centers and significant growth in the
number of hotel rooms available.
The first exhibition to take advantage of the added space
was Mega Macau, the first-ever trade exhibition of its kind in
the SAR. Running between the two phases of the Canton Fair
in Guangzhou, the event was held in the Venetian Convention
and Exhibition Center (part of the Venetian Macau mega
resort complex and featuring 100,000 square meters of
conference and exhibition space, 70,000 square meters of
which is dedicated to exhibitions and can accommodate up to
33
1943-1945
1974
197928
1987413
19991220
201210
27742
10268.5
2002
2006
20082012
29%201310
31.7%364.8
46
40%
STDM
STDMSJM
2006
40%
Mega Macao
CEPA20031017200411
265
5,000 booths at a time).

Macaus Closer Economic Partnership Arrangement
(CEPA) with Mainland China was signed on October 17,
2003 and came into effect on January 1, 2004. The agreement
offers Macau-made products tariff-free access to the mainland.
Macau Economic Services issued 1,612 CEPA certificates of
origin, with a total product export value of MOP201,714,946,
from January 2004 to the end of June 2011. With respect
to trade in services, Macau Economic Services has approved
411 Macau Service Supplier certificates, for companies
primarily engaged in transport and logistics; conventions
and exhibitions; management consulting; construction;
distribution; telecommunications; legal, advertising, sales and
marketing services for air transport; real estate; audiovisual
services, travel agencies, medical and dental services, job
referral agency services, air transport services as well as
trademark agencies, and more.
Spotlight on Hengqin Island
A plan to upgrade the status of Hengqin Island in Zhuhai
(connected to Macau by bridge) from Special Economic
Zone to a Free Trade Zone was approved by the central
government in August 2011. The new policies will aim for
discriminative customs management on the 106.5-square
kilometer island. Overseas goods shipped to the island
except for goods that cannot enjoy free duties according to
related regulations will enjoy import duty exemption, and
will still be subject to tariffs if they are destined for other parts
of Mainland China. In addition to import duty exemption,
commodity trading among enterprises based on Hengqin
Island is also exempt from value-added tax and consumption
tax payment. It is hoped that some eligible local enterprises
will be allowed to pay corporate income tax at a lower rate of
15 percent.
The Hengqin Project was first brought to the table in
January 2009 by then-Chinese Vice President Xi Jinping, who
is convinced that the development of Hengqin Island will
provide new areas for development and diversification within
Macaus economy. This view is echoed by the present chief
executive of Macau, who highlighted that making use of the
Hengqin Development Zone and expanding cooperation with
neighboring regions can help to diversify the local economy.
As Macau is quite small in size, the government is
thinking about ways to expand the scope of attraction
outside its current domain. As Chinas southern door to the
world, Hengqin triples Macau in size, providing the city
with the necessary space to build facilities that are essential
for leisure tourism, such as wetland parks and theme parks,
as well as new resorts and hotels closer to nature. Hengqin
will also offer many precious opportunities to small and
medium-sized enterprises, especially in the areas of medical
266
science and innovative industries. A formal document titled

the Administrative Measures on Registration of Hengqin
Zhuhai Special Commercial and Economic Zone has been
promulgated to create a better business environment by
simplifying registration formalities.
Infrastructure
Air
Macau is accessible by air from most major cities in Asia
plus a number of domestic destinations. All passengers using
the modern Macau International Airport are subject to an
airport tax and passenger tax.
Road
Macau consists of a peninsula and the two islands of Taipa
and Coloane. Three bridges, the Nobre de Carvalho Bridge,
Friendship Bridge (Ponte da Amizade) and Sai Van Bridge,
link the peninsula to Taipa. As well, the two islands are
linked by the six-lane 2.2 kilometer Taipa-Coloane Causeway.
Construction of the Hong-Kong-Zhuhai Macau Bridge
began at the end of 2009 and is due to be completed by the
end of 2016.
Ports and waterways
Macau Port includes an outer harbor for passenger vessels
to/from Hong Kong, as well as an inner port for cargo. The
Ka-Ho Harbor includes a fuel oil terminal and companyexclusive piers. There are regular ferries and helicopters
providing 24-hour service to Hong Kong. Ferries also connect
with the Shekou Port in Shenzhen.
2004120116
1612CEPA201714946
411
2.2
-2009-2016
20118
106.5
15%
20091
267
Part IV
The 2015 Special Report on the State of Business in South China
4.1
4.2
4.3
4.4
4.5
268
Demographics
Revenue and Profitability
South China
Investment Trends
The Business Environment in South China
2015
4.1
4.2
4.3
4.4
4.5
269
4.1 Demographics
Q: Where is your companys headquarters or

main office located in South China?
Dongguan (6%)
Other
(8%)
Foshan (9%)
Guangzhou
(52%)
Xiamen (2%)
Zhuhai (2%)
Shenzhen
(20% )
2015
Other
(9%)
Over the past four years we have observed a gradual

decline in the proportion of companies based in Guangzhou,
from 59.6 percent in 2011 down to 52.4 percent this year.
Nevertheless, the Guangzhou constituency remains the
largest among all study participants. The proportion of study
participants based in Shenzhen, meanwhile, rose slightly from
last years historical low to 19.9 percent, still down from a
high of 32.1 percent in 2008. The difference has been made
up by a noticeable rise in Foshan-based companies, which this
year accounted for 9 percent of study participants, up from
3.3 percent in 2013.
4.1
(9%)
(52%)
(2%)
(2%)
(20% )
Australia or New Zealand (2%)

Canada (2%) Southeast Asia (2%)
Japan (2%)
Other (6%)
Zhuhai (2%)
Shenzhen
(19% )
United States
(40%)
(7%)
(5%)
(2%)
(2%) (2%)
(2%)
(2%)
(2%)
(56%)
(6%)
(19% )
European
Union (EU)
(8%)
(EU)
(8%)
(40%)
2014
2014
(27%)
Chinese Mainland
(27%)
Other
(8%)
Guangzhou
(57%)
2011
59.6%52.4%
19.9%
200832.1%
20133.3%
9%
2015
(9%)
Xiamen (2%)
Guangzhou
(56%)
(6%)
(8%)
Dongguan (7%)
Foshan (5%)
Sanya (1%)
Haikou (1%)
Fuzhou (1%)
Zhongshan (1%)
Dongguan (2%)
Foshan (3%)
Nanning (<1%)
Chongqing (1%)
Xiamen (2%)
Zhuhai (2%)
Hong
Kong
SAR
(12%)
2015
(8%)

Canada (1%) Southeast Asia (1%)
Japan (1%)
Other (4%)
Shenzhen
(20% )
European
Union (EU)
(9%)
(57%)
(1%)
(1%)
(1%)
(1%)
(2%)
(3%)
(<1%)
(1%)
(2%)
(2%)
Q: Where is your parent or holding

company located?
Up from 37 percent in 2013 but down from 42.4 percent
last year, the share of U.S.-headquartered participants was
39.5 percent this year. The proportion of Chinese Mainlandbased companies similarly decreased this year, down to 26.7
percent from its historical high of 28.4 percent. Canada and
Hong Kong were this year slightly better represented than in
years past.
Chinese Mainland
(28%)
Hong Kong
SAR
(10%)
2014
Canada (1%)
South Korea (1%)
Southeast Asia (2%)
Taiwan (1%)
Japan (1%)
Other
(8%)
United States
(37%)
European
Union (EU)
(9%)
Chinese Mainland
(23%)
2015
(2%)
(1%) (1%)
(1%)
(4%)
(20% )
United States
(42%)
2013
(12%)
2013
(EU)
(9%)
(42%)
(28%)
39.5%201337%42.4%
28.4%26.7%
(10%)
2014
(1%)
(1%)
(2%)
(2%)
(1%)
(1%)
(8%)
(23%)
(15%)
Hong Kong SAR

(15%)
2013
270
(EU)
(9%)
(37%)
2013
271
Q: What is the form of your companys legal entity?

Other
(6%)
Other
(5%)
Wholly-Owned
Foreign Enterprise
(46%)
Local Chinese
Company
(27%)
Wholly-Owned
Foreign Enterprise
(50%)
Joint
Venture
(13%)
RepresentativeOffice
(9%)
2015
Local Chinese
Company
(25%)
(46%)
2013
Representative
Office
(18%)
2015
Offices nearly double to reach 8.6 percent, up from 4.5

percent last year.
Q: Does your company or group have offices in other parts of China? If so, where?
80%
No
(29%)
Yes
(68%)
2015
No
(27%)
Yes
(71%)
2014
Yes
(73%)
2013
Over the history of this study, the proportion of

participating companies with offices in other parts of China
has consistently been around 70 percent; this years results are
no different. Also similar to prior years, most participants with
other offices in China reported a presence in the Yangtze River
Delta with successively smaller population reporting offices
in Northern China and Western China. Interestingly, while
the ranking of the three regions has remained consistent, the
(5%)
(14%)
2014
50%
Western China
40%
Other
30%
(29%)
(68%)
(71%)
2014
(27%)
(73%)
2013
10%
0%
(14%)
2013
4.5%8.6%
80%
(32%)
2015
20%
(10%)
(18%)
Northern China
70%
60%
50%
40%
30%
20%
2015
2014
2013
proportion of participants with offices in the Yangtze River

Delta once again declined by roughly four percentage points,
as did the proportion of participants with offices in the
northern part of China.
50%
70%
From 10 to 20 years
40%
From 6 to 9 years
30%
From 2 to 5 years
20%
10%
0%
2015
2014
2013
4%
50%
More than 20 years
Less than 2 years
684%20
34%
2
3.6%5.8%
20
10-20
40%
6-9
30%
2-5
2
20%
10%
10%
0%
0%
2015
272
(45%)
Yangtze River Delta
60%
(21%)
(50%)
70%
Q: How long has your company been engaged in business in China?

Continuing a long-standing trend, older companies are
more represented in this study than in any previous iteration.
This year just under 84 percent of participants have been in
China for 6 or more years; moreover, an historical high of
34 percent of participants report having engaged in business
in China for 20 or more years. Meanwhile, the percentage
of participants reporting having been doing business in
China for two or fewer years has grown slightly, reaching 5.8
percentdown from last years historical low of 3.6 percent.
(9%)
(6%)
(25%)
(27%)
Joint Venture
(10%)
2014
No
(32%)
(6%)
Local Chinese
Company
(21%)
Wholly-Owned
Foreign Enterprise
(45%)
Joint
Venture
(14%)
Representative
Office
(5%)
This year the proportion of Wholly-owned Foreign

Enterprises shrank slightly, while that of Mainland Chinabased companies grew by a similar amount. This year also
saw the proportion of participants operating Representation
(5%)
Other
(6%)
2014
2013
2015
2014
2013
273
Q: Which category best describes the primary focus of your business

activities in China?
79.3%
20.7%
Providing goods or services

to the Chinese market
79.3%
20.7%
Manufacturing primarily for export

Last years responses to this question interrupted a trend
that dated back to 2009, in which each year a progressively
larger proportion of participating companies reported that
their primary business focus was providing goods or services
to the Chinese market. This years results see a return to
that upward climb, with 79.3 percent of study participants
reporting a primary focus on the Chinese market, up from
72.9 percent last year.
Furthermore, this years results find the proportion of
participants involved in the trade of goods at parity with those
involved in service industries. Early iterations of this study had
found a small majority of companies doing manufacturing or
trading, whereas in recent years that majority had belonged to

the group of companies offering services to the market.
Participants involved in the manufacture or trade of goods
were this year most likely to be in the Other, Electronic
equipment, household appliances and components or
Chemicals categories.
Participants in service industries, meanwhile, were most
likely to be in the Professional services, Other or Business
services categories.
Q: How many people does your company currently employ in China?

30%
More than 5,000

25%
Between 1,000 and 5,000
20%
Between 500 and 1,000
15%
Between 250 and 500
10%
Between 50 and 250

Less than 50
5%
0%
2015
274
2014
2013
This years results saw a decline in

participants employing between 50
and 250 or more than 5,000 employees
being offset by growth in the number
of participants employing between 250
and 500 or between 1,000 and 5,000
individuals.
20092013
72.9%79.3%
30%
5000
25%
10005000
20%
5001000
15%
250500
10%
50250
502505000
25050010005000
50
5%
0%
2015
2014
2013
275
Q: Out of your total number of employees, how many are expatriates and/or foreign
passport holders?
60%
60%
Greater than 50
50%
Between 21 and 50
40%
Between 11 and 20
30%
Between 5 and 10
20%
Less than 5
As in prior years, approximately half of

participants report employing fewer than
5 foreign passport holders and around
another 30 percent reporting either 5 to
10 or more than 50 expatriates. Slightly
fewer reported employing between 11
and 20 expatriates, while nearly twice the
number of participants this year reported
employing between 21 and 50 expatriates
than had last year.
10%
50%
2150
40%
1120
30%
510
20%
10%
0%
0%
2015
2014
2015
2013
Q: Has your company taken advantage of the current labor market by hiring new
employees?
No
(16%)
No
(19%)
Yes
(84%)
Between 1,000 and 5,000

Between 500 and 1,000
Between 250 and 500
Between 50 and 250
Less than 50
2013
Based on this years distribution of numbers hired and the

chambers current size of 2,300 members, we can estimate that
over the course of 2014 AmCham South China companies
hired 534,000 new employees in China.
(21%)
(81%)
2015
(79%)
2014
2013
60%
More than 5,000
2014
(19%)
(84%)
2013
60%
2013
(16%)
Yes
(79%)
2014
Continuing a gradual rise from a historic

50%
low of 69.5 percent in 2012, the number
of participants who reported having taken
40%
advantage of the current labor market by
hiring new employees grew once more this
30%
year to reach 83.5 percent.
Out of companies which reported
20%
hiring new employees over the course
of 2014, we find a somewhat similar
10%
distribution to prior years in terms of the
number of new hires, with the exception
0%
of a notable decrease in the proportion of
2015
participants reporting hiring more than
5,000 new employees. This tracks with
the decline in the number of companies reporting that many
employees overall, suggesting that this years participants
are less focused on labor-intensive (and likely low-margin)
activities in favor of more highly-skilled work and workers.
2014
No
(21%)
Yes
(81%)
2015
276
5
50%510
50
30%11
20
2150
50
5000
50%
201269.5%
83.5%
10005000
40%
5001000
30%
250500
20%
50250
10%
0%
2015
5000
50
2014
2013
2300
201453.4
277
4.2 Revenue and Profitability
4.2
Q: What is your company/groups approximate annual worldwide revenue?
/
40%
40%
Greater than $500 million
35%
Between $101 million and $500 million
30%
35%
30%
25%
5
1.015
11001
25%
20%
20%
1001000
15%
15%
Less than $1 million
10%
10%
5%
5%
0%
0%
2015
2014
2013
As in prior years, participants tended to have large

worldwide annual revenues. We see approximately one third
of participants having more than $500 million in revenue, a
2015
feature which tracks with common sense as larger companies

are more likely to expand beyond their home market.
Also similar to previous years, around two-thirds of
participants report worldwide revenues of greater than $11
millionthis year 68 percent of the total.
Q: What is your company/groups approximate annual China revenue?
2014
2013
1100
68%
25%
25%
N/A
20%
20%
50002.5
15%
11005000

10%
5%
10%
1001000
5%

0%
2015
2014
2015
2014
2013
2013
This years participants were comparatively more likely to

see revenue in China of between $11 and $50 million over
smaller or larger amounts than in any prior year of the study
except for 2006. This year also saw growth in the proportion
278
2.5
15%
0%
of study participants reporting zero revenue as a result of legal

status (i.e. representation offices), with that figure rising to 9
percent from 5.5 percent last year.
1100-5000
2006
0
5.5%9%
279
Q: When does your company expect to be profitable in China?

100%
100%
Other
80%
In between 3 to 5 years
80%
3-5
Within 2 years
60%
60%
This year
40%
40%
Already profitable
20%
20%
0%
2015
2014
2013
Q: If your company is already profitable,

to what extent?
This year fully 94.4 percent of participating companies
reported that they were already profitable or would be within
the next two years. This is among the strongest majorities in
the studys history.
Continuing a trend observed since 2012, however, we find
that fewer and fewer companies are profitable and meeting
or exceeding budget expectations. Since the historic high for
this measure in 2012, each year we have seen the proportion
of participants in this category fall to a historic low of 53.1
percent this year.
Profitable and significantly exceeding

budget expectations (4%)
Profitable
and meeting
budget
expectations
(49%)
Profitable but
not meeting
budget
expectations
(47%)
(4%)
2015
2014
2013
94.4%
2015

Profitable
and meeting
budget
expectations
(51%)
0%
Profitable but
not meeting
budget
expectations
(43%)
2012
53.1%
(49%)
(47%)
2015
(6%)
(51%)
(43%)
2014
2014

Profitable
and meeting
budget
expectations
(56%)
Profitable but
not meeting
budget
expectations
(40%)
(4%)
(56%)
(40%)
2013
2013
280
281
4.3 South China
4.3
Q: What are your companys goals in South China?
1. Produce goods or services in South China for the China

market
2. Produce goods or services in South China for markets
other than the U.S. and China
3. Produce goods or services in South China for the U.S.
market
4. Establish or expand a regional base
5. Export from China to countries other than the U.S.
Continuing the long-established trend, Produce goods

or services in South China for the China market remains
participants top goal in the region; the two other productionoriented resultsProduce goods or services in South China
for markets other than the U.S. and China and Produce
goods or services in South China for the U.S. marketalso
remain in the top five priorities for participating companies.
This years results, in fact, are identical to those recorded last
year. In 2014 Benefit from lower labor costs in China was
displaced in the top five ranking by Export from China to
countries other than the U.S.
Q: What are the major reasons for your company to set up operations in South China
instead of other China locations?
1. Opportunities in South Chinas domestic market
2. Proximity to Hong Kong
3. Better infrastructure than other places in South China
4. Greater openness than other places in China
5. Availability of highly qualified managers and specialists
Opportunities in South Chinas domestic market remains

a top consideration for companies setting up operations in
South China, as do Proximity to Hong Kong and Better
infrastructure than other places in China. This year more
companies prioritized Greater openness than other places
in China over Availability of highly qualified managers and
specialists.
Q: How do you expect your companys operations to change in the following areas over
the coming 3 years?
1. Services provided in China
2. Overall China business activities
3. Competition from P.R.C. firms
4. Overall China business activities
5. Profits
282
1.
2.
3.
4.
5.
1.
2.
3.
4.
5.
1.
Responses to this question are similar to those recorded

last year, although Overall China business activities replaced
Competition from PRC firms in the ranking, suggesting
that businesses are anticipating stronger growth and less fierce
competition.
2014
2.
3.
4.
5.
283
4.4 Investment Trends
4.4
Q: For 2014, what was your companys realized investment volume in China?
2014
35%
35%
2.5
30%
30%
50002.5

25%
25%
20%
10005000
20%

15%
1001000
15%

10%
No investments made
5%
0%
100
10%
5%
2015
2014
0%
2013
Results this year showed smaller overall investments, but

also fewer participants making no investments at all. Whereas
in 2014,12 percent of participants reported having invested
greater than $250 million, only 6.4 percent of this years
study participants report the same; similarly, 9.7 percent of
last years participants reported having made no investments
whatsoever, this year that figure has declined to 5.9 percent.

Picking up the slack is notable growth in the Less than
$1 million, Between $10 million and $50 million and
Between $50 million and $250 million categories.
Q: For 2015, what is your companys budgeted investment in China?

35%
N/A
30%
25%
2015
2014
2013
12%
2.5
6.4%20149.7%
2015
35%
30%
2.5
25%

20%
50002.5
20%

15%
10005000
15%

10%
100
5%
2015
2014
0%
2013
We see the same across-the-board shift in projected 2015

investment budgets that we saw in actual 2014 resultsfewer
284
1001000
10%
5%
0%
5.9%100
1000500050002.5
companies planning large investments and fewer companies

planning no investments at all.
2015
2014
2013
20152014
285
2014
10
2.
50
00
00
-5
-2
00
.5
0
00
-1
50
$2
an
th
Gr
ea
te
r
5%
illi
m
m
50
$2
d
an
on
illi
m
0
$5
n
tw
ee
10%
2014
2.5
8.4%
5.9%
Be
Normalized reinvestment figures
Estimated reinvestment volumes
(Response distribution applied to 100 companies by

percentage share)
(Normalized, scaled by a factor representing chamber

membership)
Projected 2015: $3,030,100,000 (-9.3%)

Projected 2014: $3,343,500,000 (+30.10%)
Projected 2013: $2,569,950,000 (+1.90%)
Projected 2012: $2,521,958,000 (+16.20%)
Projected 2011: $2,170,370,000
Estimated 2015: $12,029,504,000 (-9.3%)

Estimated 2014: $13,273,703,000 (+30.10%)
Estimated 2013: $10,202,708,000 (+1.90%)
Estimated 2012: $10,012,180,000 (+16.20%)
Estimated 2011: $ 8,616,900,000
Projected 2015-17: $2,988,100,000 (-16.9%)

Projected 2014-16: $3,599,200,000 (+1.30%)
Projected 2013-15: $3,552,850,000 (+40.88%)
Projected 2012-14: $2,943,304,000 (+21.40%)
Projected 2011-13: $2,424,338,000
Estimated 2015-17: $13,844,682,000 (-16.9%)

Estimated 2014-16: $16,676,076,000 (+1.30%)
Estimated 2013-15: $16,461,324,000 (+40.88%)
Estimated 2012-14: $11,684,920,000 (+21.40%)
Estimated 2011-13: $9,624,660,000
To accommodate fluctuating sample sizes, for the past five

years we have reported investment figures normalized to 100
companies as a primary year-on-year comparison. This figure
is calculated as the product of the mean of each category
range and the percentage of total participants indicating that
category, except in the case of the largest ($250 million or
more) category, for which the minimum value is used.
286
N/
on
on
illi
on
illi
m
0
$5
d
an
on
illi
m
0
n
tw
ee
Be
Be
tw
ee
$1
$1
illi
Le
s
on
st
an
ha
$1
$1
illi
illi
on
on
5%
15%
10%
20%
10
15%
25%
20%
2014
30%
25%
2014
2014 Actual
30%
35%
10
2014 Budgeted
Comparing reinvestment budgets

for 2014 reported last year against
realized reinvestment volumes for
the same period reported this year,
we can make several interesting
observations. First, only one-third
as many companies did not make
investments than had originally
planned, suggesting (relatively)
spontaneous investments made to
capture opportunities rather than as
part of organized expansion plans.
Second, more companies invested
at every level than had originally
budgeted to do so except for in
the Greater than $250 million
category, which saw a net decline
from 8.4 percent having budgeted
to do so against only 5.9 percent
actually securing investments with
that value.
35%
2014 Budgeted vs. Actualized Reinvestment
Whereas in 2013 we saw a large increase in 3-year

investment budgets and a tiny one in 1-year budgets and an
opposite result in 2014, this year we see a modest decline
in 1-year investment budgets and a more substantive one
in 3-year budgets, suggesting increased uncertainty in the
medium term.
100
2015
2014
2013
2012
2011
2015$12,029,504,000 (-9.3%)
2014$13,273,703,000 (+30.10%)
2013$10,202,708,000 (+1.90%)
2012$10,012,180,000 (+16.20%)
2011$ 8,616,900,000
$3,030,100,000
$3,343,500,000
$2,569,950,000
$2,521,958,000
$2,170,370,000
(-9.3%)
(+30.10%)
(+1.90%)
(+16.20%)
2015-17$2,988,100,000
2014-16$3,599,200,000
2013-15$3,552,850,000
2012-14$2,943,304,000
2011-13: $2,424,338,000
(-16.9%)
(+1.30%)
(+40.88%)
(+21.40%)
100
2.52.5
2015-17$13,844,682,000 (-16.9%)
2014-16$16,676,076,000 (+1.30%)
2013-15$16,461,324,000 (+40.88%)
2012-14$11,684,920,000 (+21.40%)
2011-13$ 9,624,660,000
2013
2014
287
Q: For the coming 3 years, what is your companys expected investment volume in China?
30%
Not applicable
25%
20%
15%
10%

5%
30%
25%
2.5
20%
50002.5
15%
10005000
10%
1001000
100
5%
0%
2015
2014
2013
0%
This year, we find that the distribution of 3-year investment

budgets has skewed toward smaller amounts compared to
2014s results, but in such a way as to align them more closely
with results we have seen in earlier years.
As in the past more than 20 percent of participants
reported that 3-year investment budget amounts were Not
applicable and a peak in the Between $1 million and $10
million category. Participants this year were modestly less
likely to have planned investments of Between $10 million

and $50 million, Between $50 million and $250 million
and Greater than $250 million, while being somewhat more
likely to be planning investments of Less than $1 million
over the 3-year time frame.
Q: For future investments, in which areas of China will you likely expand in the next
three years?
50%
Northern China
2013
2014
1000500050002.5
2.5
100
20%
1001000
50%
40%
Western China (Sichuan)
30%
30%
Western China (other locations)

South China (Guangdong)
20%
South China (Guangxi)
10%
20%
10%
South China (other locations)

Other
2015
2014
2013
This years results show small increases in the proportion of

companies planning investments in the Yangtze River Delta,
the northern part of China, the western part of China outside
288
2014
Yangtze River Delta
40%
0%
2015
of Sichuan and South China outside of Guangdong, and a

decline in the proportion of companies planning investments
elsewhere.
0%
2015
2014
2013
289
Q: Did your companys 1-year budgeted investment volume change over the course of the year?
40%
35%
35%
40%
40%
35%
35%
30%
30%
25%
25%
20%
20%
1001000
15%
15%
100
10%
10%
5%
5%
30%
2.5
50002.5
30%
25%
25%
20%
20%
15%
15%
10%
10%
No change
5%
5%
0%
0%
Decrease
<
No change
2015
>
Increase
0%
Decrease
<
No change
>
Increase
$250 million. Instead, we observe notable growth in the

proportion of participants having increased 1-year investment
budgets by either Between $10 million and $50 million or
Between $50 million and $250 million.
Finally, of those companies whose 1-year investment
budgets decreased over the course of 2014, 80 percent saw
decreases of $10 million or less, while 6.7 percent decreased
their budgets by Between $50 million and $250 million.
Q: Did your companys 3-year budgeted investment volume change over the course of the year?
35%
35%
30%
30%
25%
25%
20%
20%
15%
15%
10%
10%
5%
5%
<
No change
2015
>
Increase
< () >
2014
201260%51.2%
1001001000
2.5 10005000
50002.5
2014
80%10006.7%
50002.5
40%
35%
35%
30%
30%
25%
25%
20%
20%
1001000
15%
15%
100
No change
10%
10%
5%
5%
2.5
0%
Decrease
40%
0%
10005000
0%
< () >
2015
2014
Continuing a downward trend in the proportion of

companies increasing their 1-year investment budgets over the
course of the year, only 51.2 percent of this years participants
reported doing so, down from 60 percent in 2012. This year
also saw the proportion of study participants who decreased
their 1-year investment budgets shrink, albeit by a smaller
amount.
Of those companies who increased their budgets,
comparatively fewer increased them by Less than $1 million,
Between $1 million and $10 million or Greater than
Decrease
<
The percentage of participants whose companies adjusted

their 3-year investment budgets roughly tracks the 1-year
budget changes, albeit with a slightly smaller proportion
reporting no changes for the 3-year term and a slightly greater
percentage reporting having decreased their 3-year budget.
Of the 51 percent who reported increases to their budgets,
290
No change
>
Increase
2014
81 percent indicated increases of Less than $1 million or

Of those participants who reported decreases in 3-year
investment budgets, 88.3 percent reported changes of less
than $10 million and 11.8 percent reported decreases of
50002.5
10005000
0%
0%
< () >
2015
< () >
51%81%100
1001000
2014
88.3%
100011.8%5000
2.5
291
4.5 The Business Environment in South China
4.5
50%
50%
Outstanding
40%
Very good
Good/acceptable
30%
Q: How would you rate the overall

business environment in South
China?
40%
30%
Needs improvement
20%
Poor
10%
0%
2015
2014
2013
50%
Improved greatly
40%
Improved
Decreased
20%
Decreased greatly
10%
0%
2015
2014
2013
30%
Uncertain
25%
Great interest
20%
A little interest
15%
Ambivalent
10%
Not much interest

No interest whatsoever
5%
292
Q: Compared to 12 months ago, in

your opinion the overall business
environment in South China has
20%
10%
2015
2014
In terms of progress, responses to the question

Compared to 12 months ago, in your opinion the overall
business environment in South China has show that
most participants feel that the business environment either
remained about the same or improved only somewhat. Only
4.4 percent felt that the business environment had improved
greatly, whereas 18.7 percent felt that it had declined either
somewhat or greatly.
Q: How much interest would your

company have in opening a new
office or facility within a Free
Trade Zone located in South
China?
Responses to a question measuring interest in a
hypothetical Free Trade Zone in South China show 44.4
percent of participants interested in expanding into such a
zone, with 23.7 reporting not much or no interest whatsoever
and 31.8 percent either ambivalent or uncertain.
/
85.314.7
201415.8%
0%
2015
2014
2013
50%
40%
Remained about the same
30%
0%
This year, as in years past, most participants rated the

overall business environment as Good/acceptable, Very
good or Outstanding. This year that grouping accounts for
85.3 percent of participants while 14.7 percentslightly less
than 2014s historic high of 15.8 percentreport feeling that
the overall business environment either Needs improvement
or that it was simply Poor.
30%
20%
10%
0%
2015
2014
25%
20%
15%
10%
5%
2015
12
?
4.4%
18.7%
2013
30%
0%
12
44
23.7%
31.8
2014
293
50%
Q: A more freely-convertible RMB

would affect your companys China
operations...
Uncertain
40%
Very positively
Somewhat positively
30%
Not much
20%
Q: A more freely-convertible RMB

would affect your companys global
operations...
Somewhat negatively
10%
Very negatively
50%
40%
30%
20%
10%
66
54.2%
63.1%
4.1%
1.5%
0%
0%
50%
This year we also asked two questions about the convertibility

of the yuan. Interestingly, 66 percent of participants indicated
that a more freely-convertible yuan would have a positive effect
on their China operations, up from 54.2 percent last year. The
proportion of companies reporting that a more freely-convertible
yuan would have a positive effect on their global operations also
grew this year, albeit to arrive at a slightly lower total of 63.1
percent. In both the China and global contexts, the proportion
of companies reporting that a more freely-convertible yuan
would have a negative effect on their operations shrank to nearnegligible levels, with only 4.1 percent expecting negative effects
in China and only 1.5 percent expecting negative effects globally.
Uncertain
40%
Very positively
Somewhat positively
30%
Not much
20%
Somewhat negatively
10%
Very negatively
0%
Q: How do you expect the following developments to affect your business in South
China in 2015?
100%
50%
40%
30%
20%
10%
0%
2015
100%
Significant positive effect
90%
90%
80%
Somewhat positive effect
80%
70%
Remain about the same
70%
60%
60%
Somewhat negative effect
50%
Significant negative effect
es
ng
or
at
ive
isl
eg
rl
he
ha
re
g
um
im
in
Ot
yc
an
ul
w
ag
at
or
st
in
g
sin
In
c
m
g
sin
cr
ea
In
da
rd
s
n
fla
tio
es
ol
on
gh
tm
Ti
ie
lic
po
st
ni
tio
re
a
et
ar
yp
pr
ec
ap
B
RM
ici
ia
tio
nt
ri
na
rc
ou
ot
si
om
ic
Ch
i
na
or
na
tio
na
lis
he
in
Ch
i
nt
ri
rc
ou
ot
he
in
m
lis
Pr
ot
ec
0%
es
0%
es
10%
Ec
on
na
na
tio
20%
Not applicable
10%
om
ic
30%
Uncertain
20%
40%
30%
Ec
on
50%
40%
294
295
Increasing inflation, as in past years, was identified as

the largest projected negative influence on future operations,
followed by Increasing minimum wage standards and
Tight monetary policies. Although no category achieved a
positive rating by a majority of participants, 30.5 percent of
Q: In your opinion, what are the top 5

challenges that hinder or limit your
companys opportunities for growth
in South China?
participants indicated that RMB appreciation would have

a Somewhat positive effect or Significant positive effect
on their businessa similar, but less pronounced, result to
last years.
Q: In your opinion, what will be the

top 5 challenges over the coming 3
years that will hinder or limit your
companys opportunities for growth
in South China?
30.5%
1. :
1. :
1. Regulatory issues (Chinese government)
1. Regulatory issues (Chinese government)
2.
2.
2. Local competition
2. Local competition
3.
3.
3. Rising labor costs
3. Rising labor costs
4.
4.
4. Lack of qualifiable managerial and specialist talent
4. Lack of qualifiable managerial and specialist talent
5.
5.
5. Foreign competition
5. Lack of qualifiable general personnel
Asked to identify their top business challenges from a list of

14 common issues, participants once again listed Regulatory
issues (Chinese government, for example: tax, customs, or
regulations of industries) as their primary concern in both
the 1- and 3-year timeframes.
This has been the case since 2006, suggesting that businesses
are not much more confident in Chinas overall regulatory
transparency today than they were nearly a decade ago.
The second and third most common concernsLocal

competition and Rising labor costsare also placed
identically for the 1- and 3-year timelines, making the
replacement of Foreign competition over the coming year
with Lack of qualifiable personnel (general) for the 3-year
time frame the only change in rankings between the two
intervals.
These rankings are identical to last years.
Q: Has your company made specific preparations for emergency situations, such as
a potential outbreak of Avian Influenza (Bird flu) or an earthquake or other
natural disaster?
Yes
(62%)
2015
296
No
(38%)
Yes
(59%)
2014
No
(41%)
The proportion of participants reporting some sort of

programmatic emergency response preparation has grown for
the fourth consecutive yearalbeit slightlyto reach 61.8
percent, up fromNo48 percent in 2012 and 35 percent in 2011.
(43%)
Yes
(57%)Similarly to last year, descriptions of response schemes
provided by study participants included alternate supply
chains and even backup product lines and insurance policies,
in addition to preventative measures such as hygiene training
2013
and remote work procedures.
2006,
61.8%201248%201135%
(62%)
2015
(38%)
(59%)
2014
(41%)
(57%)
(43%)
2013
297
Q: How would you rate AmCham South Chinas 2014 performance on delivering
programs and activities that match your expectations and needs?
2014
50%
50%
Outstanding
40%
Very good
Good/acceptable
30%
Needs improvement
20%
As in years past greater than 90 percent

of participants95.4, to be exactrated
AmCham South Chinas performance as Good/
acceptable, Very good or Outstanding and
a strong majority of 65.9 percent chose the
latter two categories.
40%
30%
90%
95.4%
/
65.9%
10%
0%
2015
2014
0%
2013
60%
More presentations on relevant topics
50%
More social activities
50%
30%
More publications
20%
20%
More services
Other
2013
60%
More lobbying efforts
30%
2014
2013
More round table discussions
2015
2014
40%
40%
10%
This year the most common areas for

improvement selected by participants were,
in descending order, More presentations on
relevant topics, More social activities and
More round-table discussions.
2015
Q: In what areas would you recommend future improvements in AmChams programs

and services?
298
20%
Poor
10%
0%
10%
0%
2014

2015
2014
2013
299
End
300
301

(AmCham South China) is a non-partisan, non-profit
business organization, certified in 1995 by the U.S. Chamber
of Commerce in Washington D.C. AmCham South China
represents more than 2,300 American and International
companies doing business in South China.
1995
2300

State of Business in S China (Amcham White Paper 2015)

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

State of Business in S China (Amcham White Paper 2015)

Uploaded by

Copyright:

Available Formats

2015 White PaPer

Business environment in China

2015 The American Chamber of Commerce in South China

Last updated: Feb 15, 2015

Suite 1801, Guangzhou International Sourcing Center,

(86) 20 8332 1642

The American Chamber of Commerce in South China

Harley Seyedin (Chairman)

(In alphabetical order )

Diane Fermin Roeder

Introduction to South China

David Hon, Ph.D.

Penultima Ratio Regum L.L.C.

The American Chamber of Commerce in South China

2015 White Paper on the Business Environment in China

UR 2015 WHITE Paper on the Business Environment

evolving world. Last year, a combined total of 1,351 copies of

With best regards,

The American Chamber of Commerce in South China

2015 White Paper on the Business Environment in China

Just Do It (in 2013)

The American Chamber of Commerce in South China

2015 White Paper on the Business Environment in China

1.1 Just Do It (in 2013)

Standing Still or Turning Back Would be

ONG YONGTU, THE man who negotiated Chinas

and elimination of agricultural taxes helped raise

of market discipline to their lending decisions. Interest

rebalancing has also been liberalized. The yuan has

A stronger currency has helped reduce the imbalance

Although Higher wages are essential to fuel an increase

Top of the list of achievements is improved public

services and welfare provision. Education spending hit

We are not alone in advocating further reform: China

4 percent of GDP in 2011, up from 2.2 percent in

Investment Corporation Chairman and CEO Lou

2002. Health and pension coverage have expanded,

Jiwei last year argued that although reform efforts

The American Chamber of Commerce in South China

2015 White Paper on the Business Environment in China

over the past thirty years have created a market

We furthermore highlighted a series of recommendations

Watch Brother, Uncle House, Smashing

Further improve rule-making transparency. Chinas

Eliminate duplicative and inconsistent payroll taxes.

caught grinning widely amid the wreckage. As Weibo

Adhere to non-discriminatory, mutually-beneficial

most comical Internet meme.

Some scholars worry that intra-party competition and

and a $10,000 Rolex. Many netizens questioned how

The American Chamber of Commerce in South China

2015 White Paper on the Business Environment in China

By September 21, Watch Brother had been relieved of

With rich households saving more of their income than poor,

in the 21st century, as scholar Zhang Weiwei says, is

on the basis of this formula, not Western-style democracy. 14

The American Chamber of Commerce in South China

2015 White Paper on the Business Environment in China

monopolized by state-owned enterprises, given the

This is arguably an understatement of the economic

Two-thirds of Chinese companies that have posted

third-quarter earnings missed expectations, according

to Citi Private Bank. Profits fell an annual 5.8 percent,

and analysts, on average, are still cutting earnings ex-