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WTO: Year FiveWith China's WTO entry requirements winding down, will 2006 become China's "Year of the Bank"?by Michael Overmyer China is reaching the final deadlines to open its services sectors to foreign companies, as set forth in its World Trade Organization (WTO) entry agreement. The focus this year will be on the banking sector, which has been relatively protected from foreign competition and is scheduled to be fully opened by December 11, 2006. This is one of the most anticipated commitments China has yet to phase in. As China nears the end of its WTO implementation process, however, foreign companies and governments are increasingly looking at more subtle barriers to trade and pressing China to open its markets more widely than its WTO entry agreement requires in an attempt to foster a more competitive, level playing field for all companies in China. China's 2006 services commitmentsThough some year-four commitments remain outstanding (see Year Four Status Check), China faces a new round of commitments due by December 11, 2006.
Banking in depthChina's banking sector commitments stand out as the most important of the items on the year-five agenda. In other sectors, such as distribution services and insurance, China's year-five commitments follow through on the more fundamental openings mandated in previous years. In the telecom sector, foreign-invested service providers will continue to face high barriers even with complete WTO compliance. In contrast, China's year-five banking commitments should fully open a sector that until now has largely been protected. Whether the phase-in will occur smoothly remains uncertain. Poor intra-government communication and minimal transparency has sometimes led to slow issuance of legal and regulatory changes, thereby delaying the implementation of important WTO commitments. China's dilatory pace in implementing its major distribution services commitments is a case in point (see the CBR November-December 2005, p.24). China was scheduled to fully implement its distribution rights commitments by December 11, 2004, but vaguely worded regulations and poorly explained application procedures meant that many foreign-invested companies had a hard time exercising these rights well into August 2005. Businesses and foreign governments will watch the implementation of banking sector openings closely. A similarly slow and difficult process in the banking sector could lead many companies and governments to question China's desire and ability to carry out its remaining WTO reforms. Most foreign bankers, however, discount the possibility of such a slow process. Indeed, should Beijing make the political decision to open the renminbi (RMB) market to foreign banks, China appears to be in a good position to bring about the full implementation of its WTO banking reforms on time. China governs the activities of foreign-invested financial institutions through the State Council-issued PRC Regulations on the Administration of Foreign-Capital Financial Institutions, which took effect in February 2002, and the China Banking Regulatory Commission's (CBRC) accompanying implementing rules, which took effect in September 2004. Together, these measures already enable CBRC to approve foreign bank licenses to engage in local currency business with Chinese individuals. Moreover, the implementing rules spell out detailed application procedures for existing foreign-invested banks to expand their business scope and open new branches. Therefore, all that appears to be needed for WFOEs to enjoy full access to China's banking sector after December 11, 2006 is for CBRC to approve applications. In a positive sign, CBRC announced in December 2005 that it would allow foreign banks to provide RMB business in five cities that were not yet required to be opened (see below). Moreover, CBRC also lowered operating-capital requirements by ¥100 million ($12.4 million). Nevertheless, some PRC officials appear hesitant to allow foreign banks full access to the PRC market. CBRC Vice Chair Shi Jiliang said in May 2005 that China was considering restricting foreign banks to the less-prosperous central and western regions and capping at two the number of PRC banks in which a single foreign bank could take a stake. Although other officials quickly contradicted these comments, according to EuroWeek, CBRC Vice Chair Tang Shuangning reiterated the two-bank cap at a November 2005 conference. Also in November, Bloomberg News quoted Tang as saying, "We must set limits because we don't want foreign banks to gain control." CBRC Chair Liu Mingkang endorsed these views in December 2005. As mentioned, foreign investment in PRC banks is currently limited to 25 percent, and single foreign entities are limited to less than 20 percent of a single bank. Current restrictions on foreign ownership in PRC banks do not violate China's WTO commitments. Even so, comments like those above lend support to worries that PRC officials will look for ways to slow the expansion of wholly foreign-owned banks into the RMB market for Chinese individuals. Indeed, foreign bankers and industry analysts agree that the top priority of China's banking regulators is to protect the domestic market from foreign competition. Thus far, exorbitant capital requirements and slow license approval processes have limited the ability of foreign banks to expand their branch networks. Some banks have reported waits of one year to open new branches. Others have noted that China's regulators are strategic in the granting of approvals, protecting vibrant coastal cities from increased competition while at the same time encouraging investment in less-developed interior cities. The cities that CBRC opened to RMB business ahead of schedule this past December—Changchun, Jilin; Harbin, Heilongjiang; Lanzhou, Gansu; Nanning, Guangxi; and Yinchuan, Ningxia—had 2004 per capita GDP levels ranging from ¥13,693 ($1,654) to ¥21,202 ($2,561). In comparison, Hangzhou in Zhejiang and Suzhou in Jiangsu, which CBRC has yet to open to foreign banks, enjoyed per capita GDP levels of ¥38,574 ($4,659) and ¥57,922 ($6,995), respectively, in 2004. Though many foreign bankers believe China will implement its banking commitments on time, they expect China's regulators to continue to restrict the RMB business of foreign banks, even after its WTO commitments are implemented, through prudential criteria and protracted approval processes. Regardless of any effort by PRC officials to protect domestic players, in fact, only a handful of foreign banks plan to establish branch networks throughout China after December 2006. Most international banks, including some of the world's largest, expect the cost of organic growth to be prohibitively high. Many of these banks are, however, attempting to benefit from China's growth in other ways, such as through minority stakes in domestic banks. United States, Japan question China on IPRThe United States in October 2005 broke new ground in China's relationship with the WTO when it filed a request for information on specific enforcement actions the PRC government has taken to protect the intellectual property rights of foreign businesses. Separate from the phase-in of the last WTO commitments, the coming year promises to see more activity in Geneva on China's level of compliance with past commitments. The United States in October 2005 broke new ground in China's relationship with the WTO when it filed a request for information on specific enforcement actions the PRC government has taken to protect the intellectual property rights (IPR) of foreign businesses. Japan quickly followed the United States with an identical filing. Both are known as Article 63 requests, referring to the section of the WTO agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) that authorizes such action. The requests ask China to provide by January 26, 2006 detailed material regarding judicial rulings and administrative decisions to which China has referred in public reports and previous WTO filings. In these previous comments, China attempted to show its trading partners its progress in, and commitment to, enforcing IPR. US trade officials say, however, that the information China has provided so far has been too general to provide an exact understanding of China's actions. Although advertised as only an attempt to more fully understand China's actions to protect IPR, the Article 63 request can also be viewed as a preliminary step in a possible WTO dispute settlement case. Should China's response demonstrate an unsatisfactory level of IPR enforcement, the information in the response could be used as evidence in a WTO case. The Office of the US Trade Representative (USTR) in April 2005 signaled its intent to file the Article 63 request in a report on international IPR matters. In that report, USTR placed China on its Priority Watch List of countries with a questionable IPR enforcement record. Countries included in the list must enter into good-faith negotiations and make significant progress in adequately and effectively protecting IPR to avoid being labeled a "Priority Foreign Country." Such countries could find themselves the subject of a US-initiated WTO dispute settlement case. The TRM in actionThe European Union, Japan, and the United States continued to make frequent use of the WTO Transitional Review Mechanism (TRM) for China in 2005. As in previous years, China's other trade partners used the TRM sparingly, if at all. The TRM is a process specific to China that the WTO established to report on China's implementation efforts and for member countries to question China's trade and business policies. Subsidies were a key concern that the United States raised in the TRM in 2005. The PRC government agreed at the time of China's WTO entry to provide a full account of the subsidies it provides to companies, but China has yet to meet this pledge. The Office of the USTR said in July 2005 that China agreed once again at the 2005 Joint Commission on Commerce and Trade (JCCT) meeting to provide a full list of its subsidies by the end of 2005 (but as CBR went to press, China had yet to submit the list). In a September 2005 TRM filing, USTR asked China to account for its export, agriculture, and state-owned enterprise subsidies; price controls; and industrial assistance programs under the Northeast Revitalization Policy. USTR also asked China to explain what banking and financial sector reforms were planned to increase the role of market forces in determining loan allocations. USTR, and many independent analysts, allege that China's banks often make loans to subsidize companies and industries favored by government officials. The European Union and Japan have also called on China to account for its subsidies. Trade officials from Brussels, Tokyo, and Washington also share concerns that China is developing policies to promote domestic auto manufacturers at the expense of foreign rivals, even though the WTO does not prohibit industrial policies. Questions have focused on changes to China's classification of certain auto parts that would raise tariffs on a number of currently imported components and therefore encourage localization. In addition, EU, Japanese, and US trade officials have questioned China's development of standards and technical regulations for automobiles. Concerns with standards, technical regulations, and other nontariff trade barriers appeared throughout TRM filings. US and EU officials said the process companies must go through to acquire a China Compulsory Certification (CCC) mark is overly burdensome and asked China to allow foreign test laboratories to perform the tests needed to grant the CCC mark. US officials repeatedly questioned China's uses of sanitary and phytosanitary regulations, which US agricultural exporters say unfairly limit their sales. China's dumping laws and procedures, which many observers criticize as opaque and biased, were also questioned in the TRM. China replied to the criticisms, saying its antidumping laws comply fully with WTO requirements. Inching toward a fair procurement regimeIn the second half of 2005, China took preliminary steps that may lead to its eventual accession to the WTO Government Procurement Agreement (GPA). GPA signatories agree to allow companies from GPA countries roughly equal access to government procurement contracts as domestic firms. China agreed during its WTO entry negotiations to begin the process of joining the GPA "as soon as possible." Serious discussions on the matter did not take place until mid-2005, however, when US officials began to press China to move forward on GPA accession in response to proposed PRC rules on government procurement of software. The rules would have introduced high barriers to international software providers seeking to sell to the PRC government. Because observers expect more government procurement regulations to be issued over the next few years, getting China to sign the GPA is a key priority for US trade officials. USTR said in July 2005 that China agreed at the JCCT meeting in Beijing to begin technical consultations with WTO members regarding GPA accession. Washington interprets this as a first move toward signing the GPA. MOFCOM officials say that they have no timetable for signing the GPA but that it is on the ministry's agenda. MOFCOM officials met with WTO officials in September 2005 to discuss the GPA. US officials say they aim to hold technical talks with their PRC counterparts in February 2006. Negotiations on GPA accession are certain to involve bureaucratic wrangling within China. Many domestic industries and key PRC ministries view government procurement as a tool to promote domestic firms and therefore oppose China's signing of the GPA. US officials say their task is to show China how it would benefit from signing the GPA by gaining access to the US and other government procurement markets. (Of course, the prospect of PRC bidders for US government contracts is likely to be unpalatable to protectionist-minded lawmakers in Washington.) Beyond WTOAs China nears the end of its WTO implementation process, foreign investors and government officials of some of China's main trade partners have begun to call on Beijing to pursue market openings not required by its WTO entry agreement. As China nears the end of its WTO implementation process, foreign investors and government officials of some of China's main trade partners have begun to call on Beijing to pursue market openings not required by its WTO entry agreement. As noted above, China's banking sector commitments do not require the government to allow foreign acquisitions of PRC banks. Raising the caps on foreign holdings of Chinese banks to allow foreign-majority ownership, however, is a key goal of the US banking industry and the US government. Similarly, the US government and US securities firms are pressing China to go beyond its WTO commitments to allow foreign-majority ownership in that industry. Telecom providers are also seeking market access beyond the limited scope required by China's WTO accession protocol. In industries that China's WTO commitments purportedly open completely to foreign-invested firms, companies sometimes find that China's laws and regulations meet the technical requirements of its WTO agreement but keep foreign-invested companies at a significant disadvantage to their domestic competitors. For example, foreign companies and trade officials point to China's use of technical standards, food-safety regulations, licensing requirements, and professional qualifications, among other nontariff barriers, as evidence of China's efforts to limit foreign access to the PRC market even as it implements WTO-mandated openings. Although the benefits that foreign firms bring to China in terms of technical and managerial expertise are widely acknowledged, many PRC officials view market openings as one-sided concessions to trading partners and not as mutually beneficial. Whether foreign trade officials will be able to convince China to go beyond what is required by its WTO entry agreement and embrace market openings with fewer qualifications is, at best, uncertain. To date, PRC officials have been reluctant to discuss such market openings. Although the benefits that foreign firms bring to China in terms of technical and managerial expertise are widely acknowledged, many PRC officials view market openings as one-sided concessions to trading partners and not as mutually beneficial. As in all countries, PRC trade officials also face pressure from domestic companies and their bureaucratic champions to limit the market access of foreign competitors, which sometimes results in policies that undermine WTO principles. (For example, Washington continues to violate WTO rulings by distributing funds collected through antidumping duties to domestic companies, and an EU sugar subsidy was also found to violate WTO rules.) Unless its perspective changes, China will likely continue to seek ways to support domestic firms at the expense of foreign investors, while remaining within the bounds of its WTO commitments. Year-Four Status CheckFulfilled commitmentsChina met four significant year-four World Trade Organization (WTO) services commitments by its December 11, 2005 deadline.
Outstanding commitmentsBut a few of China's year-four WTO services commitments remained unfulfilled as CBR went to press in mid-December 2005. Foreign companies are still waiting for signs from the PRC government that the following year-four commitments have been met.
—Michael Overmyer  |
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