Unlocking China's Services Sector

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UNLOCKING CHINASSERVICES SECTOR


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www.dfat.gov.au/eau

UNLOCKING CHINASSERVICES SECTOR


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Commonwealth of Australia 2005

This work is copyright. Apart from any use permitted under the Copyright Act 1968, no part may

be reproduced by any process without prior written permission from the Commonwealth available

through the Attorney-Generals Department. Requests and inquiries concerning reproduction and

rights should be addressed to Commonwealth Copyright Administration, Copyright Law Branch,

Attorney-Generals Department, Robert Garran Ofces, National Circuit, Canberra ACT 2600 or by

email to [email protected].

AusAID and the Insurance Australia Group contributed to meeting the cost of producing this report

.

Unlocking Chinas Services Sector.

Bibliography.

ISBN 1 920959 47 5.

1. Service industries - China. 2. China - Economic

conditions. I. Australia. Dept. of Foreign Affairs and

Trade.

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Editing by Peter Judge. Typesetting by Lyn Lalor. Production by Adcorp Canberra.

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A c k n o w l e d g e m e n t s

AcknowledgmentsI

Dr Evanor Palac-McMiken, Director, Economic Analytical Unit prepared this report with the overall

direction and guidance of Nicholas Coppel, Executive Director, Economic Analytical Unit. Andrew

Flowers provided administrative support.

The Economic Analytical Unit would like to thank the Insurance Australia Group and AusAID for their

nancial contribution towards meeting the cost of producing and launching this report.

Within the Department of Foreign Affairs and Trade, we thank Doug Chester, Deputy Secretary;

Ric Wells, First Assistant Secretary and Mary McCarter, Director, China FTA Task Force; Lachlan

Strahan, Director, Angela Carey and Michael Sadleir, Executive Ofcers and Marcia Pius, Graduate

Trainee, China Economic and Trade Section; Dene Yeaman, Executive Ofcer, Services Trade and

Negotiations Section; Judith Laffan, Executive Ofcer, Agriculture and Food Branch; Susan Begley,

Executive Ofcer and Karen Medson, Desk Ofcer, Market Information and Analysis Section.

The Australian Embassy in Beijing and the Australian Consulate-General in Shanghai and in Hong

Kong coordinated the Economic Analytical Unit visits to Beijing, Shanghai and Hong Kong and

provided assistance in producing this report. At the Australian Embassy in Beijing we thank Dr Alan

Thomas, Ambassador, Graham Fletcher, Deputy Head of Mission, Stephen Joske, Treasury Minister-

Counsellor, Steve Scott, Counsellor (Economic), Ian Macintosh, First Secretary (Economic), Adam

Coin, Second Secretary (Economic), Katharine Campbell, Counsellor (Education, Science and Training)

and An Wu, Research and Visits Ofcer. At the Australian Consulate-General in Shanghai we thank Sam

Gerovich, Consul-General, Gary Cowan, Deputy Consul-General and Dorothy Li, Executive Assistant.

At the Australian Consulate-General in Hong Kong we thank Murray Cobban, Consul-General, Julie

Chater, Deputy Consul-General, Peter Osborne, Deputy Consul-General (Commercial) and Senior

Trade Commissioner, Damien Kilner, Consul (Immigration), Ivy Ngan, Director, Education, Science

and Training Section, Australian Education International and Naomi White, Visits Liaison Ofcer.

In Beijing, we thank Liu Jinming, Deputy PresidentInstitute of International Economy, Ren Wang

Bing, Director, Liu Zhong Xian and Guo Huai Ying, Tertiary Industry Research Division, Industrial

Development Research Institute, National Development and Reform Commission; Mr Han Mingzhi,

Director-General, China Banking Regulatory Commission; Hong Xiaodong, DirectorDivision

of Trade in Services, Department for WTO Affairs, Ministry of Commerce; Gao Daping, Deputy

DirectorAccounting Regulatory Department, Ministry of Finance; Wei Jigang, Research Fellow and

Liu Feng, Senior Research Associate, Development Research Center of the State Council; Xu Yongji,

DirectorDivision of Policy and Planning and Yang Jun, DirectorDivision of American and Oceanian

Affairs, Department of International Cooperation and Exchanges, Ministry of Education; Min Zhao,

Economist, World Bank OfceBeijing; Richard Harding, Head of IAGChina, Marc Nourse, Senior

ManagerStrategic Projects and M&A and Jason Yat-sen Li, General ManagerSales & Marketing,

Insurance Australia Group; Paul Y. Au, Group Chief RepresentativeChina, Commonwealth Bank;

John Shi, Chief Representative, Mallesons Stephen Jaques; Suyin Lee, General ManagerChina,

Flight Centre Comfort Travel Solutions; Alan Eriwata, Vice President, Beijing AustChina Technology


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U N L O C K I N G C H I N A S S E R V I C E S S E C T O R

Ltd; Betty Gu, Deputy Director, IDPChina; Vincent Lo, Chief RepresentativeChina, MLC Limited

Beijing Ofce; Ferdinand Song, AVPPersonal Financial Services, Hong Kong and Shanghai Banking

Corporation; Chuck Zhang, Chief Representative , CPAAustralia Beijing Representative Ofce; Jaye

Han, General ManagerChina, Macquarie Property Investment Banking; Eric Chen, Chief Executive

Ofcer, General Management System Organisation; Edward W. Smith, Director, Beijing Consulting

Group; Kent Matla, Chief Executive Ofcer, GNS; Auslan Ishmael, AustCham Beijing; Rebecca Qiu,

Chief Executive Ofcer, Aspiration Trade Co Ltd; and Michelle Jia, DirectorLegal & Government

Affairs, WesTrac ChinaBeijing.

In Shanghai, we thank Professor Jianping Dong, Deputy Director-General and Hong Yongqing,

Assistant Director, Shanghai Intellectual Property Administration; Shi Kang Nei, Vice Chairman,

Shanghai Association of International Services Trade; Fang Yao Guang, General Manager, Shanghai

Foreign Investment Service Center; Feng Jun, Chief OfcerConsulting, Shanghai WTO AffairsConsultation Center; A. Jock McGregor, PresidentChina, ANZ; Richard David, Chief Executive Ofcer,

First China Property Group; Leigh Zhang, Chief Executive Ofcer, CommFinance Co Ltd; Chong Lee,

General Manager and Michael Yang, General ManagerMarketing Department, China Life CMG Life

Assurance Co Ltd; Seamus Cornelius and Nigel Papi, Partners, Allens Arthur Robinson; Martin Snell,

Chief Executive Ofcer, International Education Network; Stuart Costello, DirectorChina Programs,

TAFE Global NSW Australia; and Stephen White, Managing Director, Interior Action.

In Hong Kong, we thank Clement Leung, Deputy Director-General, Trade and Industry Department,

The Government of the Hong Kong SAR; Stephen Selby, Director, Intellectual Property Department,

The Government of the Hong Kong SAR; Bonnie Chan, Vice PresidentBusiness Development &

Investor Services Division, Hong Kong Exchanges and Clearing Ltd; Kwok Shu Wong, Assistant

Director, Ofce of the Telecommunications Authority; Julia Leung, Executive DirectorExternal

Department and Dong HE, HeadExternal, Hong Kong Monetary Authority; Andrew Reilly, Senior Vice

PresidentInternational Investments, Telstra Asia; Alan Johnson, Chief Executive Ofcer, Horwath

Hong Kong Group Ltd and Chairman, The Australian Chamber of Commerce in Hong Kong; Anthony

Lloyd, Partner and Damien Bailey, Asia Registered Foreign LawyerTechnology & Communications

Group, Minter Ellison Lawyers; Paul Chong, Managing DirectorCorporate Finance and Steven Lu

Jr., Division DirectorCorporate Finance, Macquarie (Hong Kong Ltd); Allard M Nooy, DirectorChina

and Chris Gordon, General ManagerGroup Communications, Leighton Asia; Freddy Li, General

ManagerGreater China and Nancy Mak, Regional Business Manager & Financial Controller, Qantas

Airways Ltd; Gayle Gledhill, Head of Private BankHong Kong, Westpac; Stuart Valentine, Clifford

Chance; Michael Tracey, Associate DirectorRegional Marketing and Distribution, International

Financial Services, North Asia, Commonwealth Bank Group; Alex Cho, DirectorChina & Business

Services, Horwath Management Services Ltd; Catherine YW Tse, Senior Manager, Ernst & Young;

Paul Belcher, Operations Manager, United ConinanHong Kong, Deborah Biber, Chief Executive and

Terry Grose, Director, The Australian Chamber of Commerce in Hong Kong.

Finally, we thank Professor Christopher Findlay, Australian National University; Peter Judge for editing

services; Lyn Lalor for typesetting; and Adcorp Canberra for publishing services.


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E c o n o m i c A n a l y t i c a l U n i t

economIc AnAlYtIcAl UnIt I

The Economic Analytical Unit (formerly the East Asia Analytical Unit) is part of the Department of

Foreign Affairs and Trade and is responsible for publishing reports analysing major trade and economic

issues of relevance to Australia.

The Economic Analytical Unit is staffed with six economists and has produced 42 major reports since

its establishment in 1990. Executive summaries of recent reports, electronic copies of many previous

reports and information on how to purchase reports are on the Units website.

Contact details:

Economic Analytical Unit

Department of Foreign Affairs and Trade

RG Casey Building

John McEwen Crescent

Barton ACT 0221

Australia

Telephone: +61 2 6261 2237

Facsimile: +61 2 6261 3493

Email: [email protected]

Internet site: www.dfat.gov.au/eau

Executive Director of the Unit

Nicholas Coppel

Directors

Evanor Palac-McMiken

Robert Walters

Deputy Director

Gita Nandan

Oce Manager

Andrew Flowers


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P A G E vii

T a b l e o f C o n t e n t s

tABle oF contentsI

ACKNOWLEDGEMENTS iii

ECONOMIC ANALYTICAL UNIT v

EXECUTIVE SUMMARY ix

CHAPTER 1 OVERVIEW Of CHINAS SERVICES SECTOR 1

Services sector is important for sustained growth 2

A competitive services economy has yet to emerge in China 4Chinas services sector has enormous potential 11

Performance and sectoral structure 12

Increasing foreign investor interest in Chinas services sector 15

Chinas trade in services growing 17

Services sector generates an increasing number of jobs 18

Implications 20

CHAPTER 2 LIbERALISATION Of CHINAS SERVICES SECTOR 21

Chinas services liberalisation: WTO commitments, achievements

and reform challenges 23Financial services 26

Telecommunications 34

Transport, logistics and distribution services 40

Education services 45

Professional and other services sectors 46

Intellectual property rights 47

Above and beyond WTO commitments: Mainland Hong Kong

Closer Economic Partnership Agreement (CEPA) 49

Overriding importance of legal and regulatory reforms 51

Implications 53Appendix 2.1 Chinas WTO accession commitments on trade in services 54

CHAPTER 3 ACCESSING CHINAS SERVICES MARKET: AUSTRALIAN

bUSINESS EXPERIENCE 61

Financial services 63

Education and training services 74

Telecommunications 76

Tourism and travel-related services 79

Transport and logistics 82

Legal and other professional services 84Construction and related engineering services 86

Implications 87


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CHAPTER 4 AUSTRALIA AND CHINA: SERVICES TRADE AND INVESTMENT 89

Australias services exports to China 90

Chinas services exports to Australia 92

Australias investment in China 95

Chinas investment in Australia 96

Summary and prospects 99

REfERENCES 101

ECONOMIC ANALYTICAL UNIT PUbLICATIONS 111


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P A G E ix

E x e c u t i v e S u m m a r y

execUtIve sUmmArYI

chInAs servIces sector hAs Yet to reAch Its potentIAl

Chinas services sector is opening up, but further reform is needed. The services sector in China

should account for a much greater proportion of the countrys total output than it currently does given

the countrys level of per capita income. The services sector needs to grow and expand its share

of the national economy to help strengthen the business sector, address unemployment pressures,

accelerate trade and technological progress and increase overall economic efciency.

Chinas services sector grew strongly in the 1990s as per capita income soared. However, an efcient

and competitive services economy has yet to emerge. The development of the services sector

has been constrained by the countrys development strategy, which has focused on manufactured

exports, and by the substantial barriers to trade and investment in the services sector. While Chinas

share of merchandise trade to GDP jumped from 45 per cent in 1993 to over 60 per cent in 2004,

its share of commercial services trade to GDP only increased slightly from 5 per cent to 7 per cent

of GDP over the same period.

However, China has started to address its neglect of the services sector. In its Tenth Five-Year Plan,

200105, the Government announced plans to develop the services sector and substantially expand

its presence in the national economy. China committed to a dramatic opening of its services sectorwhen it acceded to full membership of the World Trade Organization (WTO) in December 2001.

Chinas trade in services has increased signicantly since its WTO accession. Foreign investors

interest in the services sector has been increasing. Transport, storage and telecommunications

services recorded unprecedented growth in 2004. Education, health and social services are growing

in importance reecting the increasing value China and its people are placing on human capital

investment a critical ingredient for the emergence of competitive service industries.

lIBerAlIsAtIon oF chInAs servIces sector

Chinas market opening commitments in services have been considered possibly the most

comprehensive liberalisation ever negotiated in the WTO. These commitments were far-reaching,

although there remain restrictions on ownership, business scope and geographical coverage.

China has made signicant progress in implementing its liberalisation commitments in many services.

But implementation is not yet complete and has not been without problems. At times China has shown

difculty in adhering to WTO rules. Its commitment to market access, for example, is being undermined

by administrative measures. An opaque regulatory process and overly burdensome licensing and

operating requirements continue to frustrate foreign providers of services.


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China also has committed to broad legal reforms in the areas of transparency, uniform application of

laws and judicial review. While there are episodes of increasing transparency, Chinas basic compliance

with notice-and-comment commitments continues to be uneven. China has established an internal

review mechanism to monitor non-uniform application of law, but problems persist.

Unlocking the enormous potential of services requires wide ranging and deeper reforms of the

legal and enforcement system, the nancial system, labour markets and state-owned enterprises.

Complementary reform of the regulatory and legal enforcement system is necessary to give effect to

Chinas commitments and ensure durability of liberalisation measures. Reform of the hukou system

(Chinas household registration system, which places limits on the mobility of Chinese citizens) will

be crucial in enhancing labour mobility and maximising the employment gains from the expansion

of service industries.

Financial Services

Foreign banks now face no geographic restrictions in the conduct of foreign currency business. Since

the end of 2004, China has allowed foreign banks to conduct local currency business in 18 cities. The

insurance market is now also largely open to foreign competition although foreign insurers remain

prohibited from statutory insurance business. Market access is constrained by high capital requirements

and prudential requirements which are beyond international norms. Concerns about discriminatory

treatment in branch approval processes also are being raised.

Transport, Logistics and Distribution Services

At the time of Chinas WTO accession, China had already introduced liberalisation measures along

various points in its logistics chain. Today, China is beneting from the partial opening of some

distribution services, which has contributed to the development of modern organised food retailing

and food service industries in the country. Some of the remaining restrictions on establishment,

geographic scope and products are being removed in accordance with Chinas schedule of specic

commitments. China has liberalised road and auxiliary services and issued regulations permitting

wholly foreign-owned rms in storage, warehousing and in freight transport services. However, in

practice substantial establishment and operational barriers remain, and at the provincial level, there

is an additional layer of regulation.

Telecommunications

China took tentative rst steps in 1994 to introduce competition in its telecommunication sector.

More signicant reforms were introduced from 1998 in anticipation of Chinas WTO accession.

Since accession, China has relaxed foreign equity and geographic restrictions, although it has not

committed to allowing more than 49 per cent foreign ownership in mobile telephony and xed line

services. Chinas restrictive interpretation of value-added services has also limited the opportunities

for foreign rms to undertake innovation and development in value-added services. Overall, Chinas

telecommunications sector remains highly restrictive with healthy competition being constrained by an

unclear licensing system, compromised pricing regulations, inadequate regulations on interconnection

and high capital requirements. Further reforms are needed to give effect to Chinas telecommunications

services commitments.


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Education Services

Foreign majority ownership is now permitted in joint ventures providing education services, but there is

no guarantee that foreign educational institutions will receive national treatment. China still maintainsa number of regulatory barriers restricting the delivery of education and training in relation to cross-

border supply, commercial presence and the movement of educational professionals.

Professional Services

China eliminated geographic and quantitative limitations on legal services in 2002 but legal rms are

not permitted to enter into joint ventures with local rms. Accounting, engineering and construction

providers also face continuing restrictions. China has agreed to allow wholly foreign-owned

subsidiaries to operate accounting, taxation, architecture and urban planning services by 2007, but

some restrictions will remain, especially in legal and medical services.

Tourism and Travel-Related Services

Market access restrictions on foreign-invested travel service providers were lifted in 2004 much

earlier than promised, but competition remains constrained by licensing requirements including

extremely high turnover requirements and restrictions on business scope.

Intellectual Property Rights

China has amended its intellectual property rights regime to comply with the Agreement on Trade-

Related Aspects of Intellectual Property Rights. However, enforcement remains problematic, with

counterfeiting and piracy still at very high levels.

AUstrAlIAn BUsInesses AccessIng chInAs servIces mArket

Australian companies are taking advantage of services liberalisation in China and are positioning

themselves to gain access to Chinas rapidly expanding services markets. Despite the improved

environment, Australian rms still face major challenges from entrenched domestic players, high

capital requirements and a lack of transparency in a rapidly changing regulatory and administrative

situation. China has to be viewed as a long-term market. Before entering the China market, businesses

need to assess the risks along with the opportunities.

Financial sector revenues in the Asia-Pacic region are projected to grow from US$390 billion in

2004 to US$1.8 trillion by 2020. China will be the driving force of this growth. Australian banks have

positioned themselves in anticipation of the potentially huge market and in light of Chinas commitment

to fully liberalise the sector by 2006. The ANZ and the Commonwealth Bank have each taken

equity stakes in local banks and the Macquarie Group is actively involved in property development,

funds management and stock trading businesses. However, competition is constrained by the

entrenched dominance of state-owned banks, high operating requirements and the constantly

changing regulatory environment.


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China is the worlds largest consumer of international education. Australia has made signicant gains

in increasing its share of the market in recent years. Grifth University, the International Education

Network (a consortium of Australian Universities) and TAFE NSW Global are just some of the many

active providers of education services to Chinese students in Australia and in China. Regulatory

barriers, including restrictions on recognition of overseas qualications remain major challenges to

foreign education providers.

China overtook the United States in 2002 to become the worlds largest telecommunications market.

This market still has huge potential for further growth given Chinas relatively low telecommunications

penetration rate. Telstra is currently providing services as a consultant or facilitator to Chinese

telecommunication companies looking to improve efciency and service quality or to introduce new

products and services. Telstra looks forward to greater regulatory liberalisation, including the enactment

of a Telecoms law that would put in place a more transparent legal environment conducive to thedevelopment of competitive industry structures.

By 2020, China will become the worlds largest tourist destination and the fourth largest source

of tourists. Flight Centre, through a joint venture with an established agency, China Comfort, has

gained a strategic opportunity to enter Chinas rapidly growing corporate travel market. Qantas has

recommenced ights to Shanghai and will commence ights to Beijing in January 2006. While China

has liberalised its travel agency market ahead of schedule, current licensing and business scope

restrictions severely hamper foreign tour operators.

Many international rms have established sizeable professional practices in China to service theincreasing needs of their clients. In 2004, seven Australian rms were among the 114 foreign law

rms licensed to operate in China. One of the key issues for legal rms remains the restriction on

entering into partnership with Chinese rms.

China will become the worlds second largest trading entity by 2020, overtaking Germany and Japan.

Linfox, one of Australias largest transport and logistics management companies, has operated in

China since 1984. Linfoxs operations in China recently received a boost with the signing of a ve-year

contract with Chinas largest private construction material and department store chain, the Home World

Group. While signicant openings have occurred in the logistics and transport market, establishment

remains hampered by regulations both at the national and provincial levels.

China is undergoing a boom in construction. Leighton, Australias largest construction-oriented

company has taken a cautious approach to its activities in China. It operates as a wholly foreign-

owned project company focusing on build-operate-transfer (BOT) schemes in environmental and

infrastructure projects, rail and tunnelling, contract mining and petrochemical and power industries.

But changes to regulations were introduced in 2002 and in 2004 that are seen by many contractors

as a step backwards, being less cost effective and less exible.


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AUstrAlIA chInA servIces trAde And Investment growIng

Resources and rural exports are the core of Australias exports to China, but the combination of rising

real incomes and reform of the services sector are boosting signicantly services trade and investment

between the two countries. Bilateral trade in services has expanded from A$1.47 billion in 2000 to

A$2.34 billion in 2004, with Australia recording a surplus over the past ve years.

China was Australias 6th largest services export market in 2004, up from 13th largest in 1995. Australias

services exports to China have almost quadrupled from A$350 million in 1995 to A$1.3 billion in 2004,

representing 3.7 per cent of Australias total services exports. China is now Australias number one

source of overseas students and fth largest source of tourists.

China was Australias 8th largest source of services imports in 2004, up from 12th largest in 1995. China

exported services worth over A$1.0 billion to Australia in 2004, representing around three per cent of

Australias total services imports. Transport and travel dominate Chinas exports to Australia. Over

the past decade, the number of Australian short-term visitors to China has grown over twice as fast

as the total number of Australian overseas tourists.

Bilateral foreign investment has remained fairly modest relative to overall growth in bilateral trade

between Australia and China. But there has been a signicant turnaround in Australian investors

sentiment during the past two years and in 2004, Australian investors signed over 700 agreements

committing over US$2 billion worth of foreign direct investment in China. Meanwhile, Chinas

investment in Australia rose from A$1.2 billion in June 1997 to over A$3.4 billion in June 2000 butdropped to just under A$2.0 billion in 2004. The reasons for this drop are not fully understood but it is

not interpreted as a trend because of the very lumpy nature of Chinese investment and the sometimes

lengthy period between investment approval and actual cross-border transaction. Chinas largest

and high prole Australian investments are in the resources sector reecting Chinas aim to secure

upstream resources for its ongoing rapid industrialisation.

The free trade agreement currently being negotiated between China and Australia will enhance bilateral

trade in services and investment. It will provide an opportunity to reduce barriers further, streamline

and improve transparency of regulatory requirements and facilitate improved mutual recognition of

professional qualications further enhancing trade in professional services.


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C h a p t e r

overview of chinas services sectort

Key Points

Chinasservicessectorhasenormouspotential.

Alongwith rising per capita incomes, greater services sector

liberalisation is expected to contribute significantly to the

expansion of the sectorand encourage the emergence of

competitiveserviceindustries.

Chinasservicessectorgrewstronglyinthe1990sasincomelevelssoared

but an efcient and competitive services economy has yet to emerge.

ThedevelopmentoftheservicessectorinChinahasbeenconstrained

bythecountrysfocusonmanufacturedexportsandthesubstantial

barrierstotradeandinvestmentintheservicessector.

Chinaneedstocontinuetoliberaliseandreformitsservicessectorto

meetitsdevelopmentobjectives.WhileChinahastakenstepstoliberalise

andreformsomeofitsservices,muchremainstobedone.

TheservicessectorinChinaneedstogrowfurtherandexpanditsshare

ofthenationaleconomytohelpstrengthenthebusinesssector,address

unemploymentpressures,acceleratetradeandtechnologicalprogress

and increase overall economic efciency.

Transport,storage,postandtelecommunicationsrecordedunprecedented

growthin2004.

ThestructureoftheservicessectorischanginginChina,witheducation,

healthandsocialservicesgrowinginimportance.

ForeigndirectinvestmentisgrowinginChinasservicessector.

Chinastradeinserviceshasacceleratedsincethecountrysaccession

totheWorldTradeOrganization.


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Chinas services sector is opening up, but further reform is needed. Since 979, Chinas economic

reform program has been focused mainly on agriculture and manufacturing, especially export-oriented

manufacturing in coastal cities and special economic zones (SEZs). Until recently, little attention

had been paid to the services sector services were seen primarily in terms of consumption and

redistribution rather than production. Chinas accession to the World Trade Organization (WTO) has

changed this. In December 00, China committed to a dramatic opening of its services sector. This

report analyses these commitments, Chinas progress on its path to liberalisation of its services sector

and the implications for Chinas economy and Australian business.

services sector is imPortant for sustained growth

Services matter. As economies grow, achieve higher levels of income and become more urbanised,

consumer demand and production capability shift towards services and more sophisticated

services-embedded goods. Service industries tend to develop on a large scale after agricultural and

manufacturing sectors have reached a certain stage of development. Along with growth of the services

sector, growth of manufacturing continues and a two-way spill-over effect induces growth in the whole

economy. The development of service industries reinforces growth, as it supports and makes possible

increasing efciency in other sectors (see Box Role of Services in the Growth Process).

The proportion that services contribute to the Gross Domestic Product (GDP) tends to rise with the

level of income. In high-income countries (average per capita Gross National Income (GNI) greater

than $8 600) services contribute on average 69 per cent to GDP, while in the upper middle (averageper capita GNI of US$5400) and lower middle income countries (average per capita GNI of US$490)

services contribute 55 per cent and 5 per cent respectively to GDP (WTO 003). Employment in

the services sector also increases with per capita income. The services sector on average accounts

for 70 per cent of total employment in high-income countries compared with 54 per cent in upper

middle-income and per cent in lower middle-income countries (WTO 003).

Special economic zones (SEZs) are development zones established by the Chinese government since the 980s to encourage

foreign investment, bring in much needed jobs, technical knowledge and future tax revenues in return for signicant tax

concessions at start up and over a number of years. Current SEZs are located in Guangdong province, Fujian province, Hainan

(whole province), Hunchun and Pudong New Zone (Shanghai) (China Internet Information Center 005a).

Studies (such as Fisher 935, Kuznets 966, Chenery 960 and Fuchs 980) have documented the positive association between

growth and share of services in the distribution of the labour force based on Pettys law which states that the proportion of the

working population engaged in services increases as an economy develops (Banga 2005).


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O v e r v i e w

role of services in the growth Process

The most common explanation put forward to explain the increasing share of services in GDP,

investment and employment relates to the high-income elasticity of demand for nal product

services. That is, the demand for services rises more than the demand for goods as real per capita

income increases. Some also point out that the increased use of consumer durables increases

the need for intermediate services such as servicing and repair of household equipment.

Demand for services also comes from the producers side. Growth in manufacturing leads

to increasing demand for producer services as structural changes make contracting out

cheaper and more efcient. Increasing expenditure on producer services enhances efciency

of production by allowing higher level of specialisation. Growth in the services sector in turn

stimulates growth in manufacturing, since it leads to higher demand for new products andbrings about improvement in productivity in the manufacturing sector. Economic growth is

enhanced and sustained by the spill-over effects between the manufacturing and the services

sector. This interdependence is reinforced by factors such as:

technological progress, which makes services even more crucial in coordinating production

processes and in creating and absorbing new innovations

increasing complexities of modern industrial organisations, which make manufacturing

activities become more services oriented both upstream (e.g. design and research and

development) and downstream (e.g. marketing and advertising)

increasing competition, which makes rms become more dependent on providing specialised

services like nancing and after-sales facilities to maintain competitive edge.

Trade liberalisation, foreign direct investment and improvements in technology have led to

higher use of services and reinforced the growth-enhancing effects of services. Liberalisation of

services leads to enhanced competition. Increased competition and greater foreign participation

more often lead to larger scale activities providing greater scope for generating the special

growth-enhancing effects from services. Even without scale effects, the increasing use of

foreign factors could still have positive effects because they are likely to bring with them more

advanced management and technical know-how.

Sources: Gershuny 1978, Greeneld 1966, Katouzian 1970, Francois 1990, Pilat 2000, Gordon and Gupta 2004, and Banga and

Goldar 2004, cited in Banga 2005.


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P A G E 4


a comPetitive services economy has yet to emerge in china

An efcient and competitive services economy has yet to emerge in China. Until recently, China had

failed to recognise the important role services can play in economic development. This partly reects

the ideological bias which has dominated the thinking of central planners in the past that services only

perform a redistributing function and so should be treated as unproductive (Fukasaku et.al 1999). As

a result, the services sector has remained relatively underdeveloped and has structural weaknesses

that could impede Chinas sustained development in coming years (Fukasaku et.al 999).

china services sector defined

The term services covers a wide range of intangible and different products and activities such

as transport and logistics, telecommunications and computer services, construction, nancial

services, wholesale and retail distribution, hotel and catering services, insurance, real estate,

health and education, professional, marketing and other business support, government,

community, audiovisual, recreational and domestic services.3

In China, the term tertiary industry is used typically to represent the services sector as it

includes all other industries not included in primary (agriculture, forestry, animal husbandry and

shery) or secondary industry (mining and quarrying, manufacturing, production and supply

of electricity, water and gas and construction). More specically, tertiary industry in China

includes transportation, storage, postal and telecommunications, wholesale and retail trade,catering trade, banking, insurance, geological survey, water conservancy management, real

estate, services for residents, services for agriculture (including for forestry, animal husbandry

and shery), subsidiary services for transportation and communications, comprehensive

technical services, education, culture and arts, broadcasting, movies, television, public health,

sports, social welfare, scientic research and services for public needs (including government

agencies, political parties, social organizations, military and police service).

In this report, Chinas services sector includes all the activities in the tertiary industry as well

as construction.

Sources: NBSC 2005a, WTO 2003.

3 Government services are excluded in the WTO General Agreement on Trade in Services (see Chapter ).


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P A G E 5

O v e r v i e w

The past 5 years have seen rapid industrialisation in China. Over the period 990 to 004, the contribution

of the industrial sector to the total output increased from 37 per cent to 46 per cent (Figure .). The

increase came entirely from the diminution of the primary sector, whose contribution has declined from

7 per cent to 5 per cent. The contribution of the services sector, on the other hand, increased slightly

from 36 per cent to 39 per cent over the same period.

F i g u r e .

Chinas services sector contribution to total output has increased slightly over the

past 5 years

SectorsharesinGDP,inpercent,19902004

Note: The industrial sector refers to the secondary industry less construction. This gure is referred to in Chinese statistics simply as

Industry.

Source: CEIC 005.

0

20

40

60

80

100

1990 1992 1994 1996 1998 2000 2002 2004

PercentofGDP

Primary Industry Services


22/132

P A G E 6


The contribution of services to Chinas overall output is substantially lower than in many economies

of comparative levels of income and falls below the curve that plots per capita GNI against the share

of services in GDP (Figure .). Chinas per capita GNI was US$00 in 003 and the contribution of

services in Chinas total output was 33 per cent (World Bank 2005). Even if construction was included

in services (as in this report), the contribution of services in Chinas total output was only 39 per cent

in 004. In the Philippines (with a per capita GNI of US$080) services represented over 53 per cent

of GDP and in India, where per capita GNI was US$540, services also represented over 50 per cent

of GDP. In the context of world development experience, the services sector in China should account

for a much greater proportion of the countrys total output than it currently does, given Chinas level

of per capita income.

F i g u r e .

Chinas services sector contribution to GDP is lower than in many economies of similarincome level

PercapitaGNIinUS$andservicesvalue-addedaspercentofGDP,2003

Notes: For purposes of consistency, the data for the cross-country comparison were taken from the same source, i.e. the World Bank.

The World Banks statistic on Chinas services sector contribution to GDP is lower than the gure used in this report because it

only included the tertiary sector.

Sources: World Bank 2005, Nicholson and Thompson 2005 (using GDP per capita in PPP US$ terms showed similar results).

Servicesasper

centofGDP

20

30

40

50

60

70

80

90

0 5 000 10 000 15 000 20 000 25 000 30 000 35 000 40 000

Per capita GNI US$

CHINA

United States

High-income

Upper middle-income

lower middle income

India

ThailandMalaysia

Philippines

Singapore

United KingdomFrance

GreeceMexico Australia


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P A G E 7

O v e r v i e w

The state of the services sector in China reects the countrys development strategy, which has

been focused mainly on industry and manufacturing for export. Service industries were seen as

consumption and redistributing activities rather than production and hence were overlooked as

growth drivers. Substantial barriers to foreign participation and the entrenched dominance of state-

owned enterprises (SOEs) have constrained competition and the overall development of the services

sector. New players both domestic and foreign service providers found it difcult to break into the

market, given government monopolies and a difcult regulatory environment. Service industries also

need a critical mass of demand to thrive. China has experienced rapid increases in income levels

but urbanisation has been relatively slow.4 Compared with other countries, Chinas current level of

urbanisation is relatively low given its level of per capita income (Figure .3). In municipalities such as

Beijing, Shanghai and Tianjin, where urbanisation has been massive, the services sector is relatively

more advanced.

F i g u r e . 3

Chinas urbanisation is low relative to the countrys level of per capita income

PercapitaGDPinUS$andproportionofurbantototalpopulationinpercent,2002

Note: Urbanisation is dened as the process in which there is an increase in the proportion of people living in the urban areas.

Data are based on national denitions of what constitutes a city or metropolitan area, cross-country comparisons should be made

with caution.

Source: UNDP 005.

4 While the proportion of urban population in major municipalities such as Beijing, Shanghai and Tianjin (i.e., 77.5 per cent,

88 per cent, and 7 per cent respectively) is much higher than the countrys level of urbanisation of 36 per cent, a large number

of medium and small size regions and provinces still have relatively low urban population (NBSC 2005b cited in Song and Yu

005).

0

20

40

60

80

100

120

0 10 000 20 000 30 000 40 000 50 000

GDP per capita in US$

Urbanpopulationaspercen

toftotalpopulation

CHINA

Australia

KoreaUnited States

United KingdomNew Zealand

India

Malaysia

Philippines

Thailand

Indonesia

Bolivia


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P A G E 8


Chinas low urban growth can be attributed to two major factors. First, Chinas one child policy has

been more rigorously enforced in the major cities than in rural areas. In rural areas, peasant families

whose rst child is a girl are allowed to have a second child after four years. Chinese minority groups

which are predominantly rural are also allowed to have more than one child. Secondly, Chinas hukou

system has restricted rural to urban mobility because rural peasants who move to the cities are not

afforded access to basic services such as education and health.5

Substantial barriers to trade and investment in the services sector

Chinas substantial barriers to trade and investment in the services sector have constrained the

development of an efcient and competitive services sector. In 2000, the tax equivalent of restrictions

to output and capital of foreign afliates in Chinas services sector were estimated at over 36 per cent

and 50 per cent respectively (Table .) (Dee and Hanslow 000). These additional cost burdensarose from restrictions on market access and on national treatment.6 Even domestic rms were not

immune they too were subject to market access restrictions affecting both establishment and ongoing

operations. Sectoral analyses of restrictions also have shown that China has relatively high barriers

in the services sector (for example in telecommunications sector, see Chapter for details).

5 Hukou is a household registration system introduced by the Chinese government in the 1950s to control the inux of rural

migration to the cities and the intra-rural and intra-urban population movement (Liu 004).

6 Market access restrictions are restrictions to entry that apply to locally and foreign-owned rms. Restrictions on national

treatment mean that foreign-owned rms are treated less favourably than domestic rms (for more details see the Box on

Chapter on The General Agreement on Trade in Services and Modes of Supply).


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P A G E 9

O v e r v i e w

T a b l e .

High barriers to trade and investment in Chinas services sector

Taxequivalentsofpost-Uruguaybarrierstotradeandinvestmentintheservices

sectorinpercent,2000

Barrierstoongoingoperation

Taxequivalentin%

Barrierstoestablishment

Taxequivalentin%

Domestic

output

Foreign

afliates

output

Domestic

capital

Foreign

afliates

capital

China 8.75 36.40 3.46 50.66

Indonesia 3.3 8. .69 68.06

Philippines 8.38 .65 7.40 54.8

Malaysia 3.58 0.0 5.35 37.58

Thailand 4.69 3.36 .6 36.49

Singapore 3.40 8.3 .4 4.50

Korea 5. 6.78 .9 .0

Chile .97 4. 4.5 0.36

Taiwan .88 4.90 .90 9.9

Australia 0.00 0.69 0.6 4.79

Mexico .7 5.59 0.68 .99

Canada 0.5 .67 0.53 6.

Hong Kong .39 .36 .35 5.4

New Zealand 0.00 0.67 0.4 4.8

United States 0.07 .08 0.00 3.83

Japan 3.59 4.75 0.33 3.0

Notes: Tax equivalents estimated using FTAP, a version of the General Trade Analysis Project (GTAP) model with foreign direct investment

(see Hertel 997 for more details on GTAP).

The FTAP model distinguishes barriers to establishmentfrom barriers to ongoing operation. This was reported as analogous to the

distinction between commercial presence and other modes of delivery under the General Agreement on Trade in Services since

barriers to establishment are a component of the barriers to commercial presence (see Chapter ). Barriers to establishmenthave

been modelled as taxes on capital. Barriers to ongoing operation, on other hand may affect either foreign-owned rms or those

supplying via other modes and have been modelled as taxes on output (see Dee and Hanslow 000 for more explanation).

Hong Kong refers to Hong Kong, Special Administrative Region of the Peoples Republic of China.

Source: Dee and Hanslow 000.


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P A G E 0


The past decade witnessed the further opening up of the Chinese economy to international trade.

However, the opening has been largely limited to merchandise trade. The share of merchandise trade

to GDP in China jumped from 45 per cent in 993 to over 60 per cent in 004 (Figure .4). Trade in

commercial services, on the other hand, over the same period, increased slightly from 5 per cent to

7 per cent of GDP.

F i g u r e . 4

Unlike the trade in goods, Chinas economy has not been very open to trade in services

Opennessindex,tradeingoodsandtradeinservicesaspercentofGDP,19932003

Source: WTO 004.

China is yet to develop strength and depth in services with high-value added, such as various

professional services and information-technology related services. Barriers to market entry for foreign

competitors still exist. Frequently applied restrictions on the establishment of service enterprises

include restrictions on the form of establishment; restrictions on geographic scope; and regulatory

requirements. These restrictions have a long history in China, but are currently undergoing signicant

changes following Chinas WTO accession. China has also taken important steps to reform some of

its services, but much remains to be done (see Chapter ).

0

10

20

30

40

50

60

70

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

PercentofGDP

Commercial services trade Merchandise trade


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P A G E

O v e r v i e w

chinas services sector has enormous Potential

The manufacturing sector will remain the main powerhouse of economic growth in China for some

time to come. However, the services sector also is now being touted as the countrys next main engine

of growth that will provide a solution to Chinas serious employment challenges, sustain economic

growth and raise living standards. Chinas accession to the WTO in 00, with its commitment to

liberalise services, is expected to herald a new era in the countrys services trade (see Chapter

for details).

Two forces, mutually reinforcing each other, will propel Chinas real take-off as a services economy in

the future: rst, the result of rising incomes; and secondly, the dramatic liberalisation of the services

sector. The transformation of China to a services-oriented economy will depend on the extent to which

ongoing liberalisation and deeper economic reforms are pursued and effectively implemented.

China has acknowledged the importance of services. According to the then Vice-Premier (now Premier)

Wen Jiabao, the expansion of Chinas service industry over the past two decades had played an

important role in increasing employment, improving industrial structure, upgrading the peoples quality

of living, boosting economic growth and maintaining social stability (Peoples Daily4 April 00). In

its Tenth Five-Year Plan (20012005), the Government announced that great efforts must be made

to develop the services sector and substantially expand its presence in the national economy (China

Internet Information Center 00).7 The Plan highlighted Chinas determination to develop producer

service industries by introducing new forms of enterprises and advanced technology; developing chain

operations, logistics and distribution, agency systems and multi-modal transportation; and upgrading

the transportation industry and postal services (Li & Fung Research Centre 004).

China sees a number of solutions to speed up the development of the services sector. These

include: increasing foreign participation to promote competition and improve efciency; accelerating

urbanisation; and continuing with industrial development that will in turn encourage the expansion of

service industries (NDRC 005).

7

According to the Plan, the share of the services sector in GDP (China uses a much narrower denition of services whichdoes not include construction) is to rise to 36 per cent by 005 from 33 per cent in 000; employment in the services sector is

targeted to increase to 4 per cent per year on average and account for 33 per cent of total employment by 005 (China Internet

Information Centre 00).


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P A G E


Performance and sectoral structure

Over the past 5 years, the services sector, stimulated by rapid increases in real per capita income, has

grown by around 9 per cent per year. This rate is well below industrial sectors growth of .4 per cent

per year over the same period, although since 998, the growth differential between the two sectors

has started to diminish (Figure .5).

F i g u r e . 5

Services sector less dynamic than the industrial sector

Industryandservicesrealvalueadded,growthinpercentandrealGDPpercapita,

index(1978=100),19902004

Source: CEIC 005.

Chinas services sector is projected to expand signicantly as rising per capita incomes are now

being accompanied by substantial removal of restrictions in the services sector. The services sector

in China was projected to be 33 per cent larger if the relatively large barriers to entry (referred to in

Table .) were removed than if these barriers had remained in force (Dee and Hanslow 000). Theremoval of particularly stringent services sector restrictions alone was forecast to increase Chinas

real GDP by over US$90 billion after 0 years (Dee and Hanslow 000 also cited in McGuire and

Findlay 005)

0

8

12

16

20

24

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

Percent

0

100

200

300

400

500

600

700

800

Index,

1978=100

GDP per capita (rhs) Services (lhs) Industry (lhs)

4


29/132

P A G E 3

O v e r v i e w

Even in a highly restrictive environment, transport, storage, post and telecommunications recorded

remarkable growth of around per cent per year over the period 990000 fuelled by demand from

industry and consumers. While growth slowed in the rst three years of Chinas WTO accession, in 2004,

the sector grew by an unprecedented 5 per cent as China started to implement liberalisation measures

in transport, storage, post and telecommunications sector (Figure .6) (see Chapter for details).

After expanding by per cent in 99, growth in construction declined and reached a low of less

than 3 per cent in 997, as the Asian crisis accentuated the economic slowdown that followed the

investment boom of the early 990s (IMF 000).8 The sector started picking up again in 000 and

recorded . per cent growth in 003. Growth has remained robust in 004; and the prospects over

the near-to-medium term remain positive as China prepares for the 008 Olympics and implements

its ongoing liberalisation measures.

F i g u r e . 6

Transport, storage, post and telecommunications recorded unprecedented growth in 004

Annual(real)rateofgrowthofthethreelargestservicesectorsinpercent,19902004

Notes: Value-added data in real terms are only available for the three largest sectors of services.

Sources: CEIC 2005 and NBSC 2005b.

The structure of Chinas services sector is changing with the growing importance of education, health

and social services, which altogether have increased its share from 4.6 per cent in 996 to over

9 per cent in 00 (Figure .7a). Over the same period, the two sectors more than doubled in value

from RMB 364 billion to RMB 852 billion (Figure 1.7b). This sectoral change reects the increasing

importance China and its people are placing on human capital investment, a critical ingredient for

the emergence of competitive service industries.9

-10

-5

0

5

10

15

20

25

1990 1992 1994 1996 1998 2000 2002 2004

Percent

Construction

Transport, storage, post & telecommunications

Wholesale & retail trade & catering services

8 To support economic activity, China introduced a scal package amounting to 2.5 per cent of GDP of infrastructural spending

in 998 and interest rates were progressively lowered (IMF 000).

9 The sectoral share of education, health and social services in China is now comparable to that of Australia. In Australia, the

share of education, health and community services in total services has averaged close to 8 per cent over the past two decades

(ABS 2005a).


30/132

P A G E 4


The implementation of liberalisation measures may pose a serious challenge to highly protected rms in

the services sector, including a number SOEs. However, sustained improvement in Chinas services sector

can only be ensured by highly efcient and competitive rms operating in a liberalised environment.

F i g u r e . 7

Education, health and social services are expanding

a)Sectoralbreakdownofservices,percentshare,1996,2002and2004

b)Sectoralbreakdownofservices,RMBbillion,1996,2002and2004

Notes: Other services also include: scientic, research & technical services; and services related to agricultural and mineral

sectors.

Health and social services include provision of healthcare, sports, social welfare and other social services.

Latest 004 data are only available for the three largest service sectors.

Sources: CEIC 2005 and NBSC 2005b.

0 5 10 15 20 25

Other services

Real estate

Government agencies andsocial organisations

Education

Health and social services

Finance and insurance

Transport, storage, post andtelecommunications

Construction

Wholesale and retail trade andcatering services

1996 2002 2004

Per cent of total services

0 200 400 600 800 1000 1200

RMB billion

1996 2002 2004

Other services

Real estate

Government agencies andsocial organisations

Education

Health and social services

Finance and insurance

Transport, storage, post andtelecommunications

Construction

Wholesale and retail trade andcatering services


31/132

P A G E 5

O v e r v i e w

increasing foreign investor interest in chinas

services sector

Since 997, foreign direct investment (FDI) in Chinas services sector has accounted for around

a quarter of total FDI per year.0 While FDI in services was reported to have reached only around

US$ billion each year since 00, the amount of contracted (but not yet fully utilised) FDI in the

services sector has increased signicantly since 2001 (Figure 1.8). Rising levels of contracted FDI

suggest increasing foreign investor interest in Chinas services sector.

F i g u r e . 8

Increasing FDI in services yet to be fully utilised

SectoraldistributionofFDI,US$billion,19972003

Source: CEIC 005.

0 CEIC reports two types of FDI data from China (originally taken from National Bureau of Statistics of China), namely contracted

(i.e. foreign capital indicated in signed agreements) and utilised (i.e. foreign capital actually utilised) both in US dollars. The

gures reported here refer to utilised FDI unless otherwise stated.

0

5

10

15

20

25

30

35

40

1997 1998 1999 2000 2001 2002 2003

US$billion

0

5

10

15

20

25

30

35

40Agriculture, mining and others

Manufacturing

Services

Contracted (but not fully utilised) FDI in services

US$billion


32/132

P A G E 6


Real estate continues to attract the largest share of FDI in services although its share has decreased

from 47.4 per cent in 999 to 44.8 per cent in 003 (Table .). FDI in social services, on the other

hand, reached US$3. billion in 003, up from US$.6 billion in 999, and increased its share from

.7 per cent to 7. per cent over the same period.

T a b l e .

Real estate and social services attract the most FDI in services

DistributionofFDIinservices,bysector,US$billionandpercentshare,

1999and2003

1999 2003

SectorsUS$

billion

%

share

US$

billion

%

share

Real Estate 5.6 47.4 5. 44.8

Social Services .6 .7 3. 7.

Wholesale, Retail and Catering .0 8. . 9.6

Transport, Storage and Telecom .6 3. 0.9 7.4

Construction 0.9 7.8 0.6 5.

Scientic Research and Polytechnical 0.0 0.0 0.3 .

Finance and Insurance 0.0 0.0 0. .0

Health Care, Sports and Social Welfare 0. .3 0. .

Education, Culture and Broadcasting 0. 0.5 0. 0.5

Geological Prospecting & Conservancy 0.0 0.0 0.0 0.

Total 11.8 100.0 11.7 100.0

Per cent of total FDI 6.4 .8

Source: CEIC 005.

Chinas services sector is seen as the next battle ground for many multinational corporations as the

opening of the sector offers enormous market opportunities (Luo 00). China has allowed multinational

corporations to enter into a variety of Chinese service industries, albeit under strict regulations. By the

end of 00, the number of service enterprises with foreign investment reached 5 699, while capital

invested by foreign partners stood at US$. billion, accounting for around 74 per cent of the total

registered capital of foreign-invested enterprises in the services sector (NBSC 2005b).


33/132

P A G E 7

O v e r v i e w

0

20

40

60

80

100

120

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

US$billion

Exports Imports

chinas trade in services growing

Chinas trade in commercial services has increased signicantly since the countrys WTO accession

in 00, which saw the removal of some of the barriers to trade in services (Figure .9). This trade

reached US$0 billion in 003, up from US$7 billion in 00, and in the same period commercial

services exports increased from US$3.9 billion to over US$46.3 billion and imports from US$39.0 billion

to US$54.8 billion. In 003, China was the worlds 9th largest exporter and 8th largest importer of

commercial services, accounting for around 3 per cent of global services trade (WTO 004). In spite

of these increases, Chinas trade in commercial services remains relatively modest, accounting for

less than 0 per cent of its total trade. It is expected to grow considerably as China implements its

accession commitments and pursues further reforms.

F i g u r e . 9

Chinas trade in commercial services accelerated since its WTO accession

Commercialservicesexportsandimports,US$billion,19932003

Source: WTO 004.

Transport and travel, which account for more than half of Chinas trade in commercial services

(54.5 per cent of exports and 60.9 per cent of imports) are expected to continue to dominate Chinas

growing commercial services trade. China is projected to become the worlds biggest tourist destination

and fourth largest source of tourism by 00 (see Chapter 3). Computer and information services

and insurance are also becoming important drivers of Chinas trade in services. China exported

US$. billion of computer and information services in 003 and the sector increased its share from

less than half a per cent of Chinas total commercial services exports in 997 to .4 per cent (Table .3).

Chinas import of insurance services, on the other hand, reached US$4.6 billion in 003, increasing

its share from 3.8 per cent to 8.3 per cent of the countrys total commercial services imports. Chinastrade in other business services, which accounts for a third of exports and a quarter of imports, is also

expected to expand signicantly with the ongoing liberalisation of the sector.


34/132

P A G E 8


T a b l e . 3

Transport and travel dominate but computer and information services and insurance are

also driving Chinas trade in services

Chinastradeincommercialservices,US$billionandpercentshare,1997and2003

Exports Imports

US$

bn

%Share US$

bn

%Share

2003 1997 2003 2003 1997 2003

Transportation 7.9 . 7.0 8. 35.9 33.

Air transport ... .7 ... ... 6.5 ...

Sea transport ... 4.0 ... ... 4.5 ...

Other transport ... 5.3 ... ... 4.8 ...Travel 7.4 49.3 37.5 5. 9.3 7.7

Other commercial services . 38.7 45.4 .4 34.8 39.

Communication services 0.6 . .4 0.4 .0 0.8

Computer and information services 1.1 0.3 2.4 .0 0.8 .9

Construction services .3 .4 .8 . 4.4 .

Financial services 0. 0. 0.3 0. . 0.4

Insurance services 0.3 0.7 0.7 4.6 3.8 8.3

Other business services 7.4 33.7 37.6 0.4 .5 8.9

Personal, cultural, and recreationalservices

0.0 0.0 0. 0. 0. 0.

Royalties and licence fees 0. 0. 0. 3.5 .0 6.5

Total 46.4 100.0 100.0 54.9 100.0 100.0

Per cent of world commercial

services trade

.6 3.

Source: WTO 004.

services sector generates an increasing number of jobs

While the services sector in China still remains largely underdeveloped, the sector has been very

important in addressing Chinas employment challenges and over the past two decades, it has been

the fastest growing source of new jobs in China. In 00, over 0 million people were employed in

service industries, accounting for over 35 per cent of total employment (Figure .0). While the primary

sector still employs the greatest number of people, employment in the sector has been falling since

990. Since the mid-990s, the manufacturing sector has also been shedding jobs. The increasing

capacity of the services sector to generate jobs has been extremely important in offsetting job losses

from the primary and manufacturing sectors and in absorbing new workers entering the market. The

regional pattern of employment shows a positive correlation between the share of tertiary industryemployment and GDP per capita (Figure .). This relationship serves to highlight the potential

benets that could ow from further expansion of services in the other provinces.


35/132

P A G E 9

O v e r v i e w

0

50

100

150

200

250

300

350

400

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Millionpersons

Primary Services Manufacturing

0

10

20

30

40

50

60

70

0 500 1000 1500 2000 2500 3000 3500 4000 4500

GDP per capita in US$

Pe

rcentshareoftertiaryindustryintotalemployment

..

Beijing

ShanghaiTianjin

Liaoning

Zhejiang

Guangdong

To maximise employment gains from the expansion of services, China must also pursue further reform

to enhance the functioning of the labour market. Reform of the hukou system, better information on

job opportunities, improved education and training, and steps to enhance labour mobility would add

to labour market efciency.

F i g u r e . 0

Services creating more jobs

Sectoralemployment,millionpersons,19902002

Source: CEIC 005.

F i g u r e .

Services employment predominant in provinces and municipalities with highest per capita GDP

PercapitaGDPinUS$andshareoftertiaryindustryemploymentintotalemployment

inpercent,2002

Source: CEIC 005.


36/132

P A G E 0


imPlications

Despite rapid growth in Chinas services sector, it remains a relatively weak part of the economy.

China will need to develop a stronger services economy to sustain high rates of economic and

employment growth and to increase overall economic efciency. Gradual liberalisation of nancial

services, telecommunications, logistics and professional services is seen by the authorities as central

to the development of the sector and the economy as a whole.

Unlocking the enormous potential of services also requires wide ranging and deep reform of the legal

and enforcement system, the nancial system, labour markets and SOEs. Labour market reform, in

particular, will be crucial in maximising the employment gains from the expansion of service industries.

Plans and progress in services liberalisation and reform are analysed in the following chapter.


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P A G E

C h a p t e r

liberalisation of chinas services sector.

Key Points

ChinasWorldTradeOrganization(WTO)commitmentsfortradein

servicesarefar-reaching.

Overthenextfewyears,Chinahaspromisedtoeliminatemost

restrictionsonforeignentryandownershipandmostformsof

discrimination against rms.

Chinahaspromisedtofullyopencross-bordersupply(Mode1)

andconsumptionabroad(Mode2)formostservices,although

there are signicant exceptions in a number of areas.

Chinahaspromisedtoguaranteeentryofmanagers,executivesand

specialistemployeesofforeign-investedenterprises(Mode4).

In recent years, China has made signicant progress in implementing

itsliberalisationcommitmentsinmanyservicesandmoreopenings

areanticipatedoverthenextfewyears.

Market openings,however, are beingfrustratedby burdensome

licensingand operatingrequirements particularly in financial

services,telecommunications,constructionservices,and tourism

andtravel-relatedservices.

Lack of transparency of regulations and laws isconstrainingthe

establishment and the scope of operations of rms.

Conict between national and sub-national laws is creating

problemsforserviceprovidersparticularlyintheareasoflegal

services,telecommunicationsanddistributionservices.

Implementationisnotyetcomplete.

Complementaryreformsoftheregulatoryandlegalenforcement

systemarenecessarytogiveeffecttoChinascommitmentsand

sustainliberalisationefforts.


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P A G E


Reformshavetobeimplementedtorehabilitatestatebanksandthe

rural nancial system and address problems facing Chinas edgling

capitalmarkets.

Intelecommunications,authoritieshaveoverlappingpolicysetting

andregulatoryfunctionswhichcontributetonon-transparentand

unpredictableoutcomes.

Inlogistics,furtherreformsareneededtoremovebothdiscrimination

againstparticulartypesofenterpriseandlocalprotectionism.

Aboveandbeyond its WTOcommitments, China alsohas agreed to

furtherrelaxmarketaccessconditionstoitsservicesmarketforHongKongcompaniesundertheMainlandHongKongCloserEconomicPartnership

Agreement.

Chinahasstrengtheneditslegalframeworkandamendeditsintellectual

propertyrightsregimetocomplywiththeAgreementonTrade-Related

AspectsofIntellectualPropertyRights.However,enforcementremains

problematic,withcounterfeitingandpiracystillatveryhighlevels.


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P A G E 3

L i b e r a l i s a t i o n o f C h i n a s S e r v i c e s S e c t o r

chinas services liberalisation: wto commitments,

achievements and reform challenges

In December 00, the worlds sixth largest trading nation, the Peoples Republic of China, became a

full member of the World Trade Organization (WTO), the culmination of a 5-year negotiation process.

the general agreement on trade in services (gats) and modes

of suPPly

The WTO General Agreement on Trade in Services (GATS) is the rst set of multilaterally

negotiated and enforceable rules covering international trade in commercial services, excluding

government services and certain rights in the aviation sector. The Agreement entered into force

on January 995. GATS denes international trade in services as the supply of servicesthrough any of four modes.

Mode , cross-border supply, only the service crosses the border. The delivery of the service

can take place, for example, through telecommunications (telephone, fax, television, internet,

etc) or the sending of documents, disks and tapes.

Mode , consumption abroadoccurs when consumers travel outside their country and consume

services abroad. Visits to museums in a foreign country as well as medical treatment and

language courses taken abroad are typical examples.

Mode 3, commercial presence involves foreign direct investment, for example, when a foreignbank or telecommunications rm establishes a branch or subsidiary in the territory of a country.

Mode 4, movement of individuals occurs when an individual has moved temporarily into the territory

of the consumer to provide a service, whether self-employed or as an employee. Examples are

computer consultancy services or the temporary employment of construction workers.

The core liberalising provisions of GATS relate to market access (Article XVI) and national

treatment(Article XVII). These provisions only apply to sectors explicitly included by a Member

in its schedule of commitments a positive list approach and are subject to the limitations

that the member has scheduled. Where commitments have been made, the market access

provision prohibits six types of limitations: on the number of suppliers; on the total value of

service transactions or assets; on the total number of service operations or on the total quantity

of services output; on the total number of natural persons that may be employed; on measures

that restrict or require specic types of legal entity or joint venture and on the participation of

foreign capital. The national treatmentprinciple is dened as treatment no less favourable

than that accorded to like domestic services or service suppliers.

Source: WTO 005a.

This report provides greater detail of Chinas commitments on trade in services and updates a major report the EconomicAnalytical Unit released in 00 on Chinas WTO entry reform, China Embraces the World Market.

China also submitted a schedule under GATS in April 994 but the schedule did not have legal status because China was not

then a member of the WTO (Mattoo 004).


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Trade in services was a key area in Chinas WTO accession negotiations, and Chinas commitments

represent perhaps the most thoroughgoing liberalisation of services trade ever negotiated in the

WTO (Mattoo 004).

So far, Chinas implementation of its WTO accession commitments has generally been good.

Reviews of Chinas WTO services commitments nd that considerable progress has been made

in implementing key commitments in nancial services, trading rights and distribution services. 3

However, implementation is not yet complete and at times China has found difculty in adhering to

WTO rules. Market access, for example, is still being closely managed, particularly through the use

of administrative measures. China has revised or adopted a wide range of laws, regulations and

other measures to ensure the protection of intellectual property rights. However, the enforcement of

intellectual property rights is problematic and counterfeiting and piracy in China have been described

as at epidemic levels (USTR 2005). Nor have Chinas commitments to open service sectors been fully

realised in all sectors. An opaque regulatory process and overly burdensome licensing and operating

requirements continue to frustrate foreign providers of services. Sustaining the liberalisation of services

and realising the gains from this will require complementary reform of the regulatory framework and

enforcement system in addition to other economic reforms (Mattoo 004).

trade Policy reforms associated with chinas accession

Chinas accession to the WTO means the country now operates within the terms of the General

Agreement on Tariffs and Trade (GATT) and General Agreement on Trade in Services (GATS)

and other WTO agreements. These include the ve principles of:

nondiscrimimination [most favoured nation treatment (MFN)]ensures that the best market

access given to any one Member is extended to all other Members. In the case of China,

the application of this general principle has involved some additional commitments,

including the elimination of dual pricing systems, phasing out of restrictions on trading and

the introduction of more uniform administrative arrangements and judicial review. These

agreements are important, not just for the central authorities, but also for the lower tiers

of government, which are often involved in internal trade and regulation

market openingis reected in Chinas commitment to open its services sector, abolish

nontariff barriers and reduce tariffs

undistorted trade involves general disciplines in areas such as subsidies and countervailing

measures, antidumping and safeguards

transparency and predictabilityrequire among other things, that each member publish

promptly all trade rules and regulations and other specic commitments. Chinas specic

3 As part of Chinas Protocol of Accession, a special WTO procedure, the Transitional Review Mechanism was established. The

2002 review saw signicant progress and did not reveal any major source of contention with regard to Chinas implementation

of its WTO commitments, and specic difculties reected primarily technical problems rather than a broad pattern of non-

compliance. However, implementation was seen as uneven. The 003 review noted some positive developments but ChinasWTO implementation efforts were seen to have lost a signicant amount of momentum. The 2004 review noted more positive

developments although serious problems remain and new problems emerged regularly (Rumbaugh and Blancher 2004, USTR

003, USTR 004).


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commitments include: provision for uniform application of the trade regime and for

independent judicial review; putting in place a mechanism whereby parties can bring

problems of local protectionism to the attention of the central government; binding its

entire tariff schedule for goods, almost always at tariff levels below previous applied rates

thereby increasing predictability by ruling out tariff increases in the future; phasing out

restrictions on trading rights for all products except for a short list of commodities that may

remain subject to state trading; and allowing the entry of foreign and domestic suppliers

into distribution and wholesale services

Preferential treatment for developing countries means that China has full access to the

WTO developing country provisions although, in particular cases, it faces tighter restrictions

than other developing countries. Although China has a much lower per capita income than

many economies in the WTO classied as developing, its size and growth performancemade existing WTO members reluctant to accord it full developing country status.

Source: Martin et al. 004.

Chinas services commitments wider and deeper than those of many countries

In its accession to WTO, China committed to the substantial opening of a broad range of service sectors

through the elimination of many existing limitations on market access, at all levels of government, such

as banking, insurance, telecommunications and professional services. Chinas commitments were

far-reaching, particularly when compared to the services commitments of many other WTO members

(USTR 004). Indeed, China has made more commitments in more service sectors than a number

of industrialised countries, other developing countries, or other countries that have recently acceded

to the WTO (Mattoo 004).4 However, Chinas commitments on commercial presence were subject

to a number of restrictions, including restrictions on form of establishment (the requirement to form

a joint venture with foreign ownership frequently restricted to specied levels), geographic scope

(allowed only in specied cities or in the Special Economic Zones), business scope (permitted only in

a subset of consumers) and regulatory requirements (minimum capital requirements and requirement

to establish a representative ofce prior to full business operations). At the time of accession, the

number of sectors with a guarantee of full access in Chinas schedule was less than those for the othercountry groups, but by 008, when all liberalisation measures should have been phased in, Chinas

market access commitments will be more extensive and its commitments on national treatment will

be deeper and broader than those of all country groups (Mattoo 004).5

Phased liberalisation has already taken place in the important areas of financial services,

telecommunications, logistics, tourism and travel-related services and in some professional services.

While more openings are anticipated over the next few years, there is still much more room for further

liberalisation. These developments are discussed in more detail in the succeeding sections.

4 China has made commitments in 356 sectors, high-income countries in 93 sectors, low- and middle-income countries in00 sectors and large developing nations in 39 sectors (Ianchovchina 00 cited in Mattoo 004).

5 See Mattoo (004) for details on numerical estimates of the breadth and depth of Chinas services commitments vis--vis other

groups of countries.


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chinas legal system and the wto: ProsPects for comPliance

China undertook to meet its WTO commitments by revising its existing laws and enacting new

laws in full compliance of the WTO Agreement. The extent to which China revises its existing

laws and promulgates new laws is something that can be monitored with relative ease. But

clearly it is not enough simply to promulgate new regulations. They must be applied and

enforced. There are at least two major issues of concern.

The rst is the extent to which local governments will engage in WTO-inconsistent practices

that the central government is unable or unwilling to stop. Under Chinas constitutional

system, local governments are bound by the central government. But in practice, sub-national

governments in China enjoy considerable de facto autonomy from Beijing. China has numerous

barriers to international trade that the central government is struggling to remove.The second

issue is that of the capacity of Chinas courts to handle a substantial workload of reasonably

complex cases. Chinas courts are weak and its judges, on the whole, are poorly qualied

and lacking in experience.

Even assuming the utmost good faith on the part of the central government, there are bound

to be WTO-inconsistent measures and practices, many of which may persist. It is unlikely,

however, that such problems will amount to more than routine frictions.

Source: Clarke 00.

financial services

The liberalisation of nancial services in China has been gradual reecting the authorities attempt to

keep it in harmony with the speed and process of the countrys overall economic reform. Banking was

the rst nancial sector to allow the involvement of foreign investors; it was followed by insurance.6

Their entry was subject to a range of restrictions particularly on business scope and geographical

coverage. Chinas tradable corporate securities markets formally opened in the 990s.7 To tap foreign

investment sources under a closed capital account regime, China developed a B share market

exclusively for foreigners. Foreigners can also invest in Chinese rms through H shares and Red

Chips stocks (these are Hong Kong rms with most of their cash ows derived from mainland Chinese

operations and are essentially considered Chinese stocks by the market) listed in Hong Kong and

N shares listed on the New York Stock Exchange (Hasenstab 1999) (see Box Listing of Chinese

Companies in Hong Kong A Mutually Benecial Relationship).

6 China rst allowed foreign banks to open representative ofces in 1981 (Hasenstab 1999). During the period 1992-1996,

China extended life and non-life insurance licenses to foreign rms but with tighter product and geographic restrictions than

for domestic providers (Bhattasali et al. 2004).

7 China opened the Shanghai Stock Exchange in December 990 and the Shenzhen Stock Exchange in April 99. Once the

exchanges were opened, domestic investors were restricted to the A share markets. Tradable A shares, which make up a

minimum of 5 per cent of total shares at the time of initial public offering but rarely make up a controlling stake, are the only

class of shares that can be traded. The government often holds the controlling interest in listed rms through direct ownership

of non-tradable shares, while the remaining shares are distributed between other non-tradable legal person shares owned

by domestic institutions and employee shares (Hasenstab 999).


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listing of chinese comPanies in hong Kong a mutually

beneficial relationshiP

The listing of Chinese en

Documents

Unlocking China's Services Sector