CHINA UNIFORMLAW NET

THE CHALLENGE OF GLOBALIZATION AND CHINA’S SECURITIES EXPERIMENT (5)

IV. THE INEVITABLE REFORM DRIVEN BY WTO

Since 1986,[1] China has been pursing its GAAT/WTO membership for 13 years.  On Nov. 15, 1999, Chinese and U.S. negotiators signed a breakthrough agreement that removes trade barriers and clears the biggest hurdle to China’s entry into the World Trade Organization.[2]  It can be reasonably concluded that China will joint WTO in the first half of year 2000. [3]

The General Agreement on Trade in Services (GATS), which was negotiated in the Uruguay Round and completed in 1994, marks the first time that services have been covered by a global trade agreement.  As an agreement liberalizing international financial services sectors, GATS will have significant influence on China’s stock markets if China joins WTO as expected. 

A.  GATS Overview: The Premises of GATS on Financial Services

The GATS deals with trade in three types of services: (1) services supplied in one WTO member state for consumers in another, (2) services provided by a services providing entity of one member in the territory of another member, and (3) services provided by nationals of one member in the territory of another member. [4] The GATS differs from the former GATT regime because regulation of trade in service often involves regulation of the services provider.  Regulation of trade in good, on the other hand, involves the product itself. [5] With respect to financial services, [6]the GATS addresses, basically, the following two principles:

1.       National Treatment and Market Access

A host country might take many measures discriminating against foreign financial firms, such as refusing to grant license to their branches or subsidiaries, imposing limitation on their aggregate market share, or prohibiting them from engaging in certain activities that are permissible for their domestic counterparts.  This is so called “discriminatory barrier to entry and operation”. [7] The GATS uses the widely accepted principles of “national treatment” and “market access” to reduce or eliminate such barriers.  The national treatment obligation requires a host country to treat foreign services or services providers no less favorable than “like” domestic services or services providers. [8]  National treatment under GATS does not apply unconditionally, but only apply to those sectors a State has places on its schedule. [9] As for market access, in theory, it means the right to enter a host-country market in whatever form a service providers chooses. [10] A foreign service supplier could decide to invest locally and provide services across borders to host country customers, it could also choose to establish a branch or a subsidiary. [11] 

2.       Removing Non-quantitative and Non-discriminatory Structural Barriers

Such barriers arise from aspects of national regulatory systems that, even though do not discriminate between domestic citizens and foreigners, afford less favorable treatment to services or services suppliers than those in other major countries. The GATS addresses certain types of nonquantative and nondiscriminatory structural barriers.   For example, it impose a general “transparency” obligation on WTO members to public all measures of general application – including statutes, regulations, and administrative decisions – that are relevant to trade in service.  It also require countries to apply domestic regulations in a “reasonable, objective and impartial manner” to avoid undermining commitments to national treatment and market access.  Moreover, countries are also required to establish appropriate procedures to review administrative decisions affecting trade in service, and to refrain from adopting rules or standards that are so burdensome or restrictive of trade.[12]

B. GATS Impacts upon China’s Securities Markets and Regulatory Systems

As a would-be member of WTO, China’s securities regulatory systems and markets will be inescapably influenced by the GATS in the following manners:

1.       Growing Entry of Foreign Securities Intermediaries into China’s Securities Markets

Currently China is implementing a discriminatory policy against foreign securities firms or other intermediaries, which are only allowed to deal with B shares.  Under GATS regime, China must eliminate those discriminatory barriers and treat foreign securities firms and their domestic counterparts equally. 

As a matter of fact, a great reform in this regard has been foreseen by people since the conclusion of the Sino-U.S. WTO accord.  According to the accord, China will permit "minority" foreign-owned joint ventures to engage in fund management on the same terms as Chinese firms.  Foreign companies will be able to hold a 33 percent stake in such ventures immediately on China's entry into the WTO and up to 49 percent in three years.  In essence, the accord appeared to give fund managers what they have long been seeking -- access to the big domestic A share market. [13]

2.       Internationalization of Accounting System

The core of a sound securities regime is the disclosure system, which needs the strong support of a suitable accounting standard.  GATS contains several articles that deal with the issues of mutual recognition of accounting licenses, international standards, and qualification requirements. Article VII allows for recognition by a member state of multilaterally agreed criteria pertaining to the licensing of service providers, with the Member states itself ensuring the competence of applicants.  Article VII (5) provides that international standards, such as those of the professional practice, should be broadly followed to ensure service trade liberalization.  Article VI provides that domestic measures pertaining to qualifications should not, in and of themselves, constitute a trade barrier. [14]

Since 1993, China has adopted the accounting standards that comply with the IASC accounting standards for business enterprises. [15] However, significant differences still exist between Chinese accounting standards and IASC:  Chinese accounting standards require that fixed assets be stated at cost, unlike the IASC historical cost or revalued amount, and a general provision against stock is forbidden. Similarly, under Chinese accounting standards, inventories are stated at cost, whereas the IASC standard is the lower of cost or net realizable value.  Depreciation is similar under the IASC and Chinese practice, except that residual value under the Chinese system must be within 3% to 5% of original cost.  Pre-operating expenses under the IASC are charged to the income statement whereas in Chinese practice, they are amortized in equal installments over five years.  Under the IASC, intangible assets are amortized over the estimated beneficial period, whereas in China they are amortized over either the beneficial period or a time period specified by state regulation.  Shareholder equity is valued using the prevailing exchange rate on the date of contribution under the IASC, but is valued at the official rate in Chinese practice. Provisions for bad debts under the IASC are required when they have been justified; in China they are required when allowed under state regulations, but are limited to 0.3% to 0.5% of total receivables per year.  However, Chinese accounting standards in theory differ from practice, which presents a continuing problem as to the accuracy of Chinese financial reports. [16] Needless to say, to attract international investors, China must submit its “Chinese characteristics” in accounting system to the international practice.

3.  Transparency of Law and Regulations

As noted above, the GATS require transparency in national regulations.  In brief, transparency means, among others things, extensive publication of all statutes, regulations, rules, norms affecting relevant business; publication before implementation; enforcement only of those laws and regulations that are published; and creation of a single inquiry point with a time limit for response. [17]

Although China has attempted vigorously to make transparent its legislative drafting and publication,[18] it still enjoys notorious reputation of, besides the rules published, enforcing another body of rules – so called internal norms (Nei Bu Gui Ding) – that is not available to general public.  The internal norms were extensively used by administrative bodies, especially at local level.  Today, since most rules or regulations concerning business have been published, the use of internal norms is not so common as it used to be.  However, since Chinese government never declared publicly that it will give up the use of such norms, and never declared as well that it will enforce merely those rules published, the internal norms still remain an uncertain aspect in Chinese legal system.