There are also significant barriers to investment which warrant further reform. FIE's continue to be treated differently for tax purposes. Foreign firms established prior to January 1, 1994, pay a 17 percent value-added tax on domestic materials in exports from which Chinese firms are exempt. Foreign investors may not own land in China. Chinese authorities are, however, approving long term land use deals for investors, some lasting up to 70 years. Chinese regulations and policies place strong pressure on most foreign investors to export and to localize production through greater use of Chinese components rather than imports. China also encourages the development of favored industries through tax incentives and tariff exemptions. Depending on the locality, investments above $30-50 million require national as well as local approval. The law permits repatriation of profits, so long as the venture has earned sufficient foreign exchange to cover the remitted amount. Foreign equity participation is restricted in some industries but not in others, although solely-owned foreign ventures are still rare. In at least one recent case, a U.S. company has tried unsuccessfully to file an international arbitration award with a Chinese court, despite the court's obligation to accept the case under China's law and international treaty obligations.

Although open competitive bidding procedures are increasingly used for both domestic and foreign-funded projects, the great majority of government procurement contracts in China are handled through domestic tenders or direct negotiation with selected suppliers. Projects in certain fields require government approval, usually from several different organizations and levels. Procedures are opaque and foreign suppliers are routinely discriminated against in areas where domestic suppliers exist.

Customs procedures are not applied uniformly throughout China. Importers frequently report being charged different rates for the same product. Some products, including foods and chemicals, are subject to different inspection or registration procedures than domestic products (violations of the GATT principle of national treatment).

6. Export Subsidies Policies

China abolished direct subsidies for exports on January 1, 1991. Nonetheless, many of China's manufactured exports receive indirect subsidies through guaranteed provision of energy, raw materials or labor supplies. Other indirect subsidies are also available such as bank loans that need not be repaid or enjoy lengthy or preferential terms. Import/export companies also cross-subsidize unprofitable exports with earnings from more lucrative products. Tax rebates are available for exporters, as are duty exemptions on imported inputs for export production. Although China does not currently provide extensive agricultural subsidies, it has sought in GATT/WTO accession negotiations to retain the right to offer very large subsidies should it see fit in the future.

7. Protection of U.S. Intellectual Property

China has made significant progress in recent years in the enactment of laws and regulations to protect intellectual property, but enforcement of these measures has been extremely poor. A copyright law, passed in 1990, went into effect in June 1991, and a trade secrets law was passed and went into effect in October 1993. China has joined the World Intellectual Property Organization and has acceded to a number of intellectual property conventions, including the Paris Convention on the Protection of Industrial Property, the Berne Copyright Convention, and the Madrid Agreement Concerning the International Registration of Trademarks. Although not now a member of the GATT/WORLD TRADE ORGANIZATION (WTO), China has publicly declared its support of the Uruguay Round text on trade-related aspects of intellectual property protection (TRIPS).

Much of this progress followed the U.S. decision in April 1991 to identify China as a "priority foreign country" under the Special 301 provisions of the Trade Act for its failure to provide adequate and effective protection of U.S. intellectual property. Subsequent negotiations under the Special 301 investigation resulted in the signing of a bilateral Memorandum of Understanding (MOU) on the Protection of Intellectual Property on January 17, 1992. China met most of its commitments under the MOU, which included amending its patent law, joining the Berne Convention, and enacting trade secrets legislation. Enforcement of laws, however, remained lax. Consequently, China was again named as a "priority foreign country" and a Special 301 investigation was initiated in June 1994 seeking improved enforcement of intellectual property laws and better market access for U.S. products.

In 1994 China has taken some additional steps to strengthen its enforcement regime. The government recently passed legislation adding criminal penalties for copyright infringement. It empowered the Customs Administration to provide border en

forcement for intellectual property and the Copyright Office to enforce software copyrights. The State Council established an intellectual property enforcement office whose mandate includes coordinating enforcement efforts countrywide. However, these recent steps have yet to alter the environment of rampant infringement of products relying on intellectual property. Factories producing massive quantities of pirated sound and video recordings, long identified to China as IPR infringers, continued to produce IPR infringing works at the end of 1994. Lack of market access for licit audiovisual products also remains an impediment to effective enforcement. Recent regulations outlining agency responsibilities in this area have not clarified access procedures for foreign exporters and manufacturers.

Among the most serious issues facing U.S. right holders is the pervasiveness of copyright infringement. For instance, U.S. industry associations estimate that pirating of U.S. copyrighted works cost U.S. rights holders nearly $1 billion in China in 1994. Competing bureaucratic interests and the lack of a reliable legal system for resolving commercial disputes have hampered the establishment of effective enforcement mechanisms. Chinese authorities also face great challenges in educating the public on the value and importance of protecting intellectual property, a concept hitherto foreign to the vast majority of Chinese.

The 1992 intellectual property rights MOU committed China to make important improvements in the protection of patented products. An amendment to China's patent law, which took effect on January 1, 1993, extended patent protection to chemical, pharmaceutical and food products, materials which heretofore were excluded from eligibility. The amendment also extended the term of patent protection from 15 to 20 years from the date of filing and gave the patent holder rights over importation. The MOU additionally provided for administrative protection of certain U.S. pharmaceutical and agricultural chemicals as of January 1, 1993. China agreed to provide the equivalent of full product patent protection for these products if they were patented in the U.S. between 1986 and 1993 but not yet marketed in China. The Ministry of Chemical Industries is administering the regime, and the U.S. government is currently monitoring the Ministry's procedures.

China's trademark regime is generally consistent with international practice. Revisions providing for increased criminal penalties for infringement have significantly strengthened the law's efficacy. However, pirating of trademarks is still widespread and actions taken against infringers generally must be initiated by the injured party.

8. Worker Rights

a. The Right of Association. China's 1982 Constitution provides for "freedom of association," but this right is subject to the interest of the State and the leadership of the Chinese Communist Party. The country's sole officially-recognized workers' organization, the All-China Federation of Trade Unions (ACFTU), is controlled by the Communist Party. Independent trade unions are illegal. The 1993 revised Trade Union Law required that the establishment cf unions at any level be submitted to a higher level trade union organization for approval. The ACFTU, the highest level organization, has not approved the establishment of independent unions. Workers in companies with foreign investors are guaranteed the right to form unions, which then must affiliate with the ACFTU. Fourteen coastal provinces have passed regulations requiring all foreign-invested enterprises to establish unions before the end of 1994.

b. The Right to Organize and Bargain Collectively. The long-awaited National Labor Law, passed by the Chinese National People's Congress Standing Committee on July 5, 1994, permits workers in all types of enterprises in China to bargain collectively. The law, which will take effect January 1, 1995, supersedes a 1988 law that allowed collective bargaining only by workers in private enterprises. Some high profile experiments in collective bargaining have been carried out at state enterprises. In the past, the ACFTU has limited its role to consulting with management over wages and regulations affecting working conditions and serving as a conduit for communicating workers' complaints to management or municipal labor bureaus. Worker congresses have mandated authority to review plans for wage reform, though these bodies serve primarily as rubber stamp organizations.

c. Forced or Compulsory Labor.-In addition to prisons and reform through labor facilities, which contain inmates sentenced through judicial procedures, China also maintains a network of "reeducation through labor" camps where inmates are sentenced through non-judicial procedures. Inmates of reeducation through labor facilities are generally required to work. Reports from international human rights organizations and foreign press indicate that at least some persons in pretrial detention are also required to work. Justice officials have stated that in reeducation through labor facilities there is a much heavier emphasis on education than on labor. Most

reports conclude that work conditions in the penal system's light manufacturing factories are similar to those in ordinary factories, but conditions on farms and in mines can be harsh.

d. Minimum Age of Employment of Children.-China's new National Labor Law forbids employers to hire workers under 16 years of age and specifies administrative review, fines and revocation of business licenses of those businesses that hire minors. In the interim, regulations promulgated in 1987 prohibiting the employment of school-age minors who have not completed the compulsory nine years of education continued in force. In poorer isolated areas, child labor in agriculture is widespread. Most independent observers agree with Chinese officials that, given its vast surplus of adult labor, China's urban child labor problem is relatively minor. No specific Chinese industry is identifiable as a significant violator of child labor regulations. e. Acceptable Conditions of Work.-The Labor Law adopted in July codified many of the general principles of China's labor reform, setting out provisions on employment, labor contracts, working hours, wages, skill development and training, social insurance, dispute resolution, legal responsibility, supervision and inspection. In anticipation of the law's minimum wage requirements, many local governments already enforce regulations on minimum wages. Unemployment insurance schemes now cover a majority of urban workers (primarily state sector workers). In February 1994, the State Council reduced the national standard work week from 48 hours to 44 hours, excluding overtime, with a mandatory 24-hour rest period. A system of alternating weeks of six and five-day work weeks began in March 1994, with a sixmonth grace period for implementation. The same regulations specified that cumulative monthly overtime could not exceed 48 hours.

Every work unit must designate a health and safety officer. Moreover, while the right to strike is not provided for in the 1982 Constitution, the Trade Union Law explicitly recognizes the right of unions to "suggest that staff and workers withdraw from sites of danger" and to participate in accident investigations. Labor officials reported that such withdrawals did occur in some instances during 1994. Nonetheless, pressures for increased output, lack of financial resources to maintain equipment, lack of concern by management, and a traditionally poor understanding of safety issues by workers have contributed to a continuing high rate of accidents. Partial year statistics provided by the ACFTU indicate that 11,600 workers were killed in industrial accidents from January to August of 1993, up 12.9 percent over the same period of 1992.

f. Rights in Sectors with U.S. Investment.-Worker rights practices do not appear to vary substantially among sectors. In general, safety standards are higher in U.S.invested companies. There are no confirmed reports of child labor in the Special Economic Zones or foreign-invested sectors.

Extent of U.S. Investment in Selected Industries.-U.S. Direct Investment Position Abroad on an Historical Cost Basis-1993

11994 projections are by the Consulate and are based on first three quarters statistics. 1994 exchange rates were based on HKD 7.726 to US $1.00; 1992 and 1993 exchange rates as listed.

2 Includes financing, insurance, real estate and business services.

Includes wholesale, retail, import/export trades, restaurants, hotels, transport, storage and communicaHong Kong government provides only the consumer price index (CPI).

tions.

Oct 1989-Sept 1990 equals 100; CPI(A) covers urban households with monthly expenditure of US $3251300 (approximately 50 percent of households).

Foreign currency assets of exchange fund (US dollars). Statistical Note: the Census and Statistics Department has recently completed a non-routine revision of GDP, to base real GDP at 1990 prices and to include certain offshore service activities.

1. General Policy Framework

The Hong Kong government pursues economic policies of noninterference in commercial decisions, low and predictable taxation, government spending increases within the bounds of real economic growth, and competition subject to transparent laws (albeit without anti-trust legislation) and consistent application of the rule of law. Market forces determine wages and prices in Hong Kong, with price controls

limited only to certain government-sanctioned monopolies in the service sector. There are no restrictions on foreign capital or investment, except for some limitations in the media sector, nor are there export performance or local content requirements. Profits may be freely repatriated. There are some barriers to entry in certain service sectors, in particular medicine, law, and aviation. Hong Kong reverts to People's Republic of China (PRC) sovereignty in 1997, but China has committed to leaving Hong Kong's economic system intact for 50 years.

Hong Kong's free market, generally non-interventionist policies have spurred high rates of real growth, low unemployment, rising wages, and one of the highest percapita GDP levels in the world. The growing economy has produced additional tax revenues despite modest increases in excise, real estate and business profits taxes. The corporate profits tax is 16.5 percent, and personal income is taxed at a maximum rate of 15 percent. Property is taxed; interest, royalties, dividends, capital gains and sales are not. In spite of the growth of government spending from approximately 14 percent of GDP in the mid 1980s to about 19 percent by the early 1990s, the Hong Kong Government annually runs budget surpluses and has amassed large fiscal reserves.

Asset price inflation, a dominant feature of Hong Kong's economy during 1993, has shown signs of moderating during the second half of 1994 as interest rates have increased. Skyrocketing property prices have fallen some 10-15 percent since June 1994, when the government introduced a package of measures designed to curb property speculation, release more land for building, and accelerate major housing projects. Hong Kong's Hang Seng index of blue chip stocks, which increased by 116 percent in 1993, was down by 1.7 percent year-on-year as of November 15, 1994. Hong Kong is a duty-free port. It levies consumption taxes on certain goods, including tobacco, alcoholic beverages, methyl alcohol and some fuels, but otherwise goods trade freely. Hong Kong is also an entrepot for Chinese and regional trade. In 1993, Hong Kong reexported US $106 billion worth of goods made elsewhere, more than three times as much as it produced domestically for export (US $29 billion). One third of all of China's exports flow through Hong Kong on their way elsewhere, and 25 percent of China's imports come via Hong Kong. The opening of China, and especially the development of Guangdong province as a low-cost manufacturing base, has encouraged Hong Kong to shift from a manufacturing to a services-based economy; over 75 percent of Hong Kong's GDP now derives from the service sector, much of it connected in one way or another with China.

The Hong Kong dollar is linked to the U.S. dollar at an exchange rate of HKD 7.8 = US $1.00. The link was established in 1983 to encourage stability and investor confidence in the run-up to Hong Kong's reversion to Chinese sovereignty in 1997. The linked exchange rate requires that Hong Kong interest rates generally track U.S. interest rates. Despite several interest rate increases during 1994, Hong Kong's prevailing 8 percent inflation rate has meant that savers have continued to face negative real interest rates.

Ŏn July 1, 1997, Hong Kong will revert to PRC sovereignty. As guaranteed by the 1984 Sino-United Kingdom (UK) "Joint Declaration" and the 1990 PRC "Basic Law"-the latter passed by China's National People's Congress-Hong Kong will become on July 1, 1997, a "Special Administrative Region" (SAR) of the PRC. China will take over responsibility for Hong Kong's foreign affairs and defense. However, under China's "one country, two systems" doctrine, Hong Kong has been guaranteed "a high degree of autonomy" in managing its economic, social, legal, budget and other internal policies for fifty years. Hong Kong will remain a separate customs territory with all of its current border arrangements, and it will retain its independent membership in economic organizations such as the GATT.

Sino-British consultations on transition concerns take place chiefly in the Joint Liaison Group (JLG). The JLG (or other joint bodies) must approve Hong Kong's laws, economic agreements with third countries, and economic decisions that will stretch beyond July 1, 1997. This includes major infrastructure contracts and franchises, such as the new airport and port projects. Cooperation on transition issues in the JLG has been uneven because of China's opposition to Governor Patten's electoral reforms, which were implemented in 1994.

Hong Kong ratified the Uruguay Round agreements and became a founding member of the World Trade Organization (WTO) on January 1, 1995. Hong Kong strongly supports an open multilateral trading system and is a member, in its own right, of a number of other multilateral organizations, including the Asia Pacific Economic Cooperation (APEC) forum and the Asia Development Bank, notwithstanding its status as a colony of the United Kingdom. In other international economic fora, such as the International Telecommunications Union or the International Labor Organization, Hong Kong participates as part of the UK delegation.