Lapas attēli

f. Rights in Sectors with U.S. Investment.-Most of Australia's industrial sectors enjoy some U.S. investment. Worker rights in all sectors are essentially identical in law and practice and do not differ between domestic and foreign ownership. Extent of U.S. Investment in Selected Industries.-U.S. Direct Investment Position Abroad on an Historical Cost Basis—1993

(Millions of U.S. dollars)

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Income, Production and Employment:

Real GDP (RMB bn/1980 base) 2
Real GDP Growth (pct.)
GDP (at current prices)
GDP by Sector:

Financial Services
Other Services

Government Health Education
Net Exports of Goods & Services
Real Per Capita GDP (RMB)2
Labor Force (millions)

Official Unemployment (pct.)
Money and Prices (annual percentage growth):

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Money Supply (M2)
Base Interest Rate
Personal Saving Rate 3
Retail Inflation
Wholesale Inflation
Consumer Price Index



25.0 N/A 40.0 14.0 N/A 16.0

35.0 N/A 40.0 21.0 N/A 23.0

Key Economic Indicators-Continued

(Billions of U.S. dollars unless otherwise noted)



1994 1


Exchange Rate (RMB/USD;yearend)


N/A Parallel


8.5 Balance of Payments and Trade: Total Exports (FOB) 5

84.9 91.8 118.0 Exports to U.S. (CV) 5

25.7 31.5

38.5 Total Imports (CIF) 5

80.6 104.0 117.0 Imports from U.S. (FAS) 5


10.3 Aid from U.S.


0.0 Aid from Other Countries


N/A External Public Debt


80.0 Debt Service Payments (paid)


10.5 Gold and Foreign Exch. Reserves


40.0 Trade (Merchandise) Balance 5

4.4 - 12.2 Trade Balance with U.S. 5


28.2 NIA-Not available.

11994 figures are all estimates based on monthly data available in October 1994. Sources: State Statistical Bureau Yearbook, PRC General Administration of Customs Statistics, International Monetary Fund and World Bank reports, U.S. Department of Commerce trade data and U.S. Embassy estimates.

Real GDP and real per capita GDP are given in renminbi (RMB) using 1980 prices. All other income and production figures are converted into dollars at the parallel rate.

* Personal Saving Rate is as estimated by the IMF in May 1992.

* Prior to 1994 China maintained a dual exchange rate system with an official rate and a parallel “swap market" rate. In January 1994 these two rates were unified.

5 Source: U.S. Department of Commerce (U.S. China bilateral trade data); PRC Customs (Chinese global trade data). 1. General Policy Framework

Since the beginning of economic reforms in 1979, the Chinese economy has grown at an average rate of nine percent per year, and in 1992 and 1993 growth acceler. ated to over 13 percent per year. This striking evidence of the dynamism of the Chinese economy has transformed foreign views of the potential of the Chinese economy and encouraged large inflows of foreign direct investment over the past three years. With appropriate economic reforms, China should be able to sustain high growth rates into the next century. But the next phase of reform will require China to tackle problems such as enterprise reform that were largely bypassed in the first phase of reform, and to build new legal and political structures more appropriate to a market economy

During the first nine months of 1994, real GDP growth reached 11.4 percent, down only slightly from the torrid pace set last year. But despite the introduction of stabilization measures in mid-1993, rapid growth in 1994 has been accompanied by a steady increase in inflation. The national cost of living index was up 24 percent in 1994, as inflation reached its highest level since 1988-89. Chinese authorities blame most of the 1994 inflation on price reform and developments in the agricultural sector. But the more fundamental cause appears to be the accommodating monetary and fiscal policies that China has maintained, except for a few brief interludes, since the current boom began in 1991–92.

China's economic reform program in 1994 has been guided by the landmark “decision” approved at the Third Plenum of the Chinese Communist Party, held in No. vember 1993. This "decision” established a broad framework for China's transition to a "socialist market economy," including ambitious plans for fiscal, financial, and enterprise reforms to be implemented by the end of the decade. In keeping with the spirit of the Third Plenum "decision," the Chinese government introduced major reforms of China's foreign exchange and taxation systems at the beginning of 1994, and it announced plans for a series of important économic laws, including commercial and central banking laws, a foreign trade law, and a securities law. Some of these reforms have been taken with an eye to China's standing application to join the World Trade Organization (WTO) which remains under consideration by WTO members.

During 1994, however, concern over inflation and domestic stability have slowed the pace of some reforms while others have met with mixed success. The unification of China's foreign exchange rates has gone relatively smoothly, with the renminbi actually appreciating slightly against the U.S. dollar since January 1994. Tax reform has led to a more simplified code and has reduced the gap in tax rates for state-owned and other enterprises. The new structure of tax-sharing between central and provincial governments also marks a significant improvement over the old tax-contracting system. But the new tax system has yet to increase real government revenues or the share of government revenues in GDP, two of its key objectives. During 1994 many foreign corporations in China expressed concerns about possibly discriminatory application of taxes to their operations there.

Concern over the social costs of cutting subsidies to state enterprises has slowed enterprise reform, and little progress has been made in reforming China's backward financial system. The Draft Securities Law and the Central and Commercial Banking Laws now appear unlikely to be passed by the National People's Congress before the first quarter of 1995, and despite the establishment of three new state development banks, China's large state banks remain only in the preliminary stages of their transformation into true commercial banks.

Chinese authorities have announced that enterprise reform will be the centerpiece of their reform efforts in 1995. Some loss-making state enterprises will reportedly be forced into bankruptcy, and there has been continued discussion of possible measures to establish a new social insurance system that could buffer the costs of restructuring the state sector. But the success of reform in 1995 will depend heavily on China's ability to limit high inslation and by continued concern about the poss impact of rising urban unemployment on social stability.

While the government hopes to reduce inflation to 15 percent or less in 1995, it has avoided implementing tough austerity measures of the type that have been effective in the past but that might slow economic growth and increase urban unemployment. Unfortunately, the government's tentative stabilization program has prov. en ineffective, and there is a significant risk of inflation worsening still further unless the government takes more decisive steps to cut lending to the state sector and control China's rapidly increasing money supply. 2. Exchange Rate Policies

China unified its dual exchange rate system on January 1, 1994 and began phasing out the use of Foreign Exchange Certificates, a convertible form of the renminbi (RMB) formerly reserved for use by foreigners within China. Chinese authorities describe the current exchange rate as a “managed soating rate.” During each day's trading the exchange rate is permitted to sluctuate in a narrow band around a central rate announced by the People's Bank of China. Since January 1994, the RMB/USD exchange rate has appreciated slightly from about 8.7 to 8.5.

Under new foreign exchange guidelines, the ŘMB is conditionally convertible for certain trade and current account transactions. Most Chinese enterprises are now required to sell their foreign exchange earnings to Chinese banks at the new unified rate. A Chinese importer with a valid import contract and any required import licenses or quota permits can, în principle, purchase foreign exchange through a des, ignated foreign exchange bank at the unified rate, without receiving prior approval from the State Administration for Exchange Control (SAEC).

The Chinese authorities have maintained separate foreign exchange rules for for, eign-invested enterprises (FIEs), which can maintain foreign currency deposits and keep their foreign exchange earnings. FIEs are formally excluded from the “interbank” foreign exchange market and required to buy and sell foreign exchange from each other in a modified version of the old swap center. In practice, however, most FIEs now buy and sell foreign exchange using designated foreign-exchange banks, including branches of foreign banks, as their agents. These transactions are completed over the same trading system used by Chinese banks for their domestic customers.

While FIEs have generally enjoyed improved access to foreign exchange this year, the current system has several serious shortcomings. FIEs still need to obtain SAEC approval before they can purchase foreign exchange, and they remain subject to foreign exchange balancing requirements. While the SAEC did not enforce these re. quirements strictly in 1994, they could be used to control FIE purchases of foreign exchange for imports or the repatriation of profits is conditions in the foreign exchange market should change. 3. Structural Policies

China's structural policies remain caught between plan and market. The deci. sion” of the Party's Third Plenum in the fall of 1993 detailed plans to establish by the end of the decade the foundation for a “socialist market economy,” in which srec market principles would guide nearly all economic activity but public or socialist ownership would still predominate. The government claims that prices have been freed for about 95 percent of consumer goods and 85 percent of industrial inputs. 43

Nevertheless, as part of the fight against inflation, the government has over the past year intervened extensively in pricing for daily necessities, basic urban services, and key commodities, including petroleum imports.

In addition, under the guise of "macroeconomic management," the government has begun to formulate sectoral industrial policies that will affect U.S. investment in, and exports to, China. The Automotive Industrial Policy, issued in July 1994, contains a number of measures to protect infant industry, including import controls, local content and other performance requirements for foreign investors, and temporary price controls for sedans. In the "Framework Industrial Policy for the 1990s," the government announced plans to issue industrial policies for the following other sectors: telecommunications and transportation, machinery and electronics, construction, foreign trade, investment and, possibly, textiles. 4. Debt Management Policies

China's current external debt burden remains within acceptable limits. At the end of 1993, China's external debt stood at about $80 billion, or 87.2 percent of exports, according to official Chinese estimates. China's 1993 debt service to export ratio was about 12-13 percent. The Asian Development Bank, the World Bank, and Japan are China's major creditors, providing approximately 60 percent of all China's governmental and commercial loans. In September 1994, China's official foreign exchange reserves were $39.8 billion, up $18.6 billion from the beginning of the year; foreign exchange reserves continued to climb later in the year with the People's Bank of China alone holding $48.9 billion in November 1994. 5. Significant Barriers to U.S. Exports

China continues to impose barriers to U.S. exports, despite its stated goal of reforming and liberalizing its trade regime. In addition to prohibitively high tariffs in many sectors, China relies on multiple, overlapping nontariff barriers, administered at the national and provincial levels by various bureaus or ministries, to limit imports. These barriers include absence of transparency in the trade regime; import licensing requirements; import quotas, restrictions and controls; standards and certification requirements; and scientifically unjustified sanitary and phytosanitary (SPS) measures. Strict controls over Chinese enterprises' trading rights are also a major market access barrier.

On October 10, 1992, the United States and China signed a Memorandum of Understanding (MOU) on Market Access that commits China to dismantle most of these barriers and gradually open its markets to U.S. exports. The actions China has committed to take are among those being considered

by members of the GATT/ World Trade Organization (WTO) in examining China's pending application for membership. Until the signing of the MOU, many of China's trade laws and regulations were considered "internal” documents not available to foreigners. As agreed in the MOU, China has taken certain steps to make its trade regime more transparent, including: 1) publishing trade laws and regulations in a newly established central register and making available some information of commercial interest to U.S. companies; 2) publishing a State Council notice, intended to halt the use of restricted internal directives, stating that only trade laws that are published can be enforced; and 3) identifying agencies involved in the import approval process. To date, however, China has not fulfilled its MOU commitment to publish import quotas or to deal with SPS restrictions.

High and unpredictable tariffs make importing into the Chinese market difficult. Tariffs on discouraged imports, such as automobiles, can run in excess of 100 percent. In addition, tariffs may vary for

the same product, depending on whether the product is eligible for an exemption from the published' tariff. Under commitments made in the market access MOU, the Chinese government lowered tariffs on 3,371 items in December 1992 and on an additional 2,898 items in December 1993. Among imports with lowered tariffs are edible fruits and nuts, vegetable oils, photographic cinematographic goods, games, miscellaneous chemical products, iron/steel articles, machinery/mechanical appliances, electrical machinery and parts, and perfumery, cosmetic and toiletry preparations.

China currently retains nontariff measures (quotas, licenses or tenders) for 784 tariff line items. Under commitments made in the market access MOU to progressively phase out import barriers, China

eliminated such measures for 283 items on December 31, 1993, and an additional 208 items on June 1, 1994, including a number ahead of, or in'addition to the schedule set in the MOỦ. Time frames for liberalization vary from product to product. Under the market access MOU liberalization time table, China agreed to eliminate approximately 75 percent of all import licensing requirements, quotas, controls and restrictions by the end of 1994, and 90 percent will be removed by the end of 1997. Export sectors affected by the MOU which

are of interest to U.S. firms include: autos and parts, medical equipment, computers, photocopiers, telecommunications, electrical appliances, chemicals, agrichemicals, pharmaceuticals, film and instant print film, instant cameras, beer, wine, alcoholic beverages, mineral waters, wood products, steel, and a wide range of machinery products.

Despite its commitments in the market access agreement, China has not stopped using unscientifically-based standards and certification as barriers to trade. China's phytosanitary and sanitary measures for imports of plants and animals are often overly strict, unevenly applied and not backed by modern scientific practices. In the market access MOU, China committed to resolve questions about scientifically unjustified phytosanitary restrictions on citrus fruits, stone fruits, apples, grapes, wheat, and tobacco, and to negotiate a veterinary protocol regarding the import of animal breeding stock. As of October 1994, U.S. concerns have been partly resolved with regard to apples and bovine semen. For manufactured goods, China has re. quired quality licenses before granting import approval, with testing based on standards and specifications often unknown or unavailable to foreigners and not applied equally to domestic products. In the MOU, China committed to applying the same standards and testing requirements to nonagricultural products, whether foreign or domestic.

A fundamental philosophy of import substitution stood behind these various policies. In the market access MOU, China has agreed to eliminate the use of import substitution policies and measures, and has promised that it will not subject any imported products to such measures in the future, nor will it deny approval to imports because an equivalent product is produced in China. Import substitution lists have been publicly disavowed. Nonetheless, the Chinese government has continued to place local content requirements on foreign investments in China, most recently in the industrial policy governing the automotive industry.

In the past few years, China undertook a number of reforms to improve its trade regime. The National People's Congress (NPC) adopted an Unfair Competition Law, effective December 1, 1993, which deals with protection of trademarks and commercial secrets, unfair practices by state monopolies and government departments, bribery, false or misleading advertising, predatory pricing, collusion, and other unfair practices. China's first comprehensive Foreign Trade Law also went into effect on July 1, 1994. The law aspires to be consistent with requirements of the GATT, but it serves mainly as a framework codifying the existing system or setting goals for future reforms. A key concern is that the Foreign Trade Law does not establish a legal standing for foreign individuals or foreign-owned firms engaged in trade in China. Implementing regulations have in many cases not yet been drafted.

While implementation of the market access MOU will reduce or eliminate many of the most serious barriers to trade in goods, China has only recently begun to reform its services sector. China has permitted "experiments” in foreign investment in service sectors by authorizing a limited number of foreign firms to establish joint ventures in insurance, legal services, tourist resorts and department stores. In general, Chinese restrictions on certain foreign service activities (including construction, banking, accounting, travel services, audio visual services, and data processing services) prevent U.S. firms from enjoying a reciprocal level of participation in China's service sector. U.S. and other foreign banks cannot engage in local currency business in China or deal with Chinese clients, while the Bank of China branch in New York has conducted all forms of branch banking activities since 1980. Numer. ous non-transparent approval procedures hamper foreign banks' dealings with other foreign-invested enterprises. Except for one "experimental firm,” U.S. insurance firms are not allowed to participate in the direct insurance market in China. U.S. lawyers and accountants must largely limit their activities to servicing foreign firms that do business in China. Foreign firms cannot establish wholesaling operations and can only engage in a very narrow range of retailing: restaurants, "experimental” department stores and retail outlets selling only products made at a foreign investor's own factory in China.

Many joint ventures are highly dependent on China's state-owned sector for downstream services. Some investors have been permitted to set up their own marketing and service organizations, but many have no choice but to rely on PRC channels for support. Imports of audio and video recordings are hampered by quotas, restrictions on foreign exchange availability, and lax enforcement of intellectual property laws. China does not permit foreign investment services firms to establish profitmaking operations or gain membership on its stock exchanges. Foreigners are limited to holding “B” shares, a small volume of outstanding equities. Representative offices of foreign companies must hire their local employees through a labor services company.

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