WTO and The Transformation of

CHINA

ART FRANCZEK,MST,MBA,CPA President The American Institute of Business and

Economics

Brief History of Financial Reforms in China

Prior to the “Open Door Policy” adopted in 1978, China was a mono-bank system. The Peoples’ Bank of China was the main bank, providing both central banking and commercial banking functions.

Phase 1 Reforms (1979-85) : Breaking up of the mono-bank system by separating commercial banking functions from central banking functions.

Phase 2 (1986-1992): Setting up more financial institutions such as national and regional and commercial banks, and the establishment of the Shanghai and Shenzhen stock markets.

Phase 3 (1992-91): Unify the dual exchange rate system; separate the monetary and fiscal functions of government. Also Commercial banking functions were defined under the Commercial Banking Act of 1995.

Phase 4 (1998-2002): Attempts to resolve non-performing loans of banking institutions by forming asset management companies (AMC) and by capital injections. These measures were in response to the Asian crisis.

Phase 5 (2003-current) :Separating regulatory function from central banking function by setting up the China Regulatory Commission. China also moved to strengthen domestic financial institutions ahaead of WTO accession commitments in 2006.

When China acceded to WTO in

2001 in 2001 it agreed to the General agreement on Trade and Services (GATS) that aims at reducing or even totally removing trade barriers in the financial services sector by allowing foreign financial firms in insurance , banking and the securities industries to enter a host country and enjoy national treatment.

Some other agreements in GATS were:Most favored Nation (MFN): All

liberalization measures must be extended to all WTO members equally.

Market access and national treatment between domestic and foreign firms.

Dispute settlement mechanism : All commitments are legally binding . Injured states can initiate an arbitration procedure.

China also agreed to phase out the geographical restrictions for foreign banks on local currency business within 5 years of accession and to allow foreign banks to provide local currency services to Chinese enterprises.

In addition, all current non-prudential measures regarding ownership,operation and establishment of foreign banks and their branches and restrictions on licenses will be eliminated (national treatment)

China agreed to fulfil WTO commitments within 5 years of

accession While many WTO commitments have

been completed some open issues are:

China has imposed working capital requirements and other prudential requirements on foreign banks that far exceed international norms.

China limits the sale of equity stakes in state banks to 20% per investor and 25% total foreign ownership

There are still geographic limitations imposed on foreign banks to conduct domestic currency business

China has imposed severe restrictions on foreign suppliers of electronic payment services like major U.S. credit card companies.

“crossing the river by feeling for the stones.” (摸着石头过河 )

US/CHINA CURRENCY WARS

JOBS JOBS JOBS…!

SINCE 2001 CHINA HAS MORE THAN DOUBLED ITS EXPORTSMOST OF THESE EXPORTS BETWEEN 2001 AND 2010 CHINA’S

EXPORTS TO THE US WERE 3 TRILLION $ MORE THAN IMPORTS

China’s currency controls require that exporters sell dollars for yuan thereby keeping the yuan undervalued

The US believes that China is a currency manipulator and provides a subsidy to its exporters.The US estimates that 1.5 million jobs have been lost because of this issue.

The US Congress wants to impose a 27% tariff and has appealed to the WTO for relief.

China believes that a rapid appreciation of the Yuan will cause exports to decrease and increase unemployment .

Thank You