U.S. International Trade Commission COMMISSIONERS Daniel R. Pearson, Chairman Shara L. Aranoff, Vice Chairman Deanna Tanner Okun Charlotte R. Lane Irving A. Williamson Dean A. Pinkert Robert A. Rogowsky Director of Operations Robert B. Koopman Director of Economics Address all communications to Secretary to the Commission United States International Trade Commission Washington, DC 20436 U.S. International Trade Commission Washington, DC 20436 www.usitc.gov China: Description of Selected Government Practices and Policies Affecting Decision Making in the Economy Investigation No. 332-492 Publication 3978 December 2007 This report was prepared principally by James Stamps, Project Leader, Office of Economics John Fry, Deputy Project Leader, Office of Industries Office of Economics Kelly Clark, Cindy Cohen, Judith Dean, Michael Ferrantino, Alex Hammer, Amelia Preece Zhi Wang, and Edward Wilson Interns Brian Bombassaro, Dean Gudicello, and Tina Lin Office of Industries Laura Bloodgood, Lisa Ferens-Alejandro, Erland Herfindahl, Dennis Fravel, and Katherine Linton General Counsel William Gearhart Primary Reviewers Michael Anderson and Catherine DeFilippo Administrative Support Patricia M. Thomas Office of Publishing Under the direction of Arona Butcher, Chief, Country and Regional Analysis Division TABLE OF CONTENTS Page Abbreviations and Acronyms...................................................................................vii Executive Summary ...........................................................................................................xiii Chapter 1. Introduction.................................................................................................... 1 Scope and approach......................................................................................................................... 1 Key practices and policies ............................................................................................................... 2 Organization of report...................................................................................................................... 5 Information sources......................................................................................................................... 6 China’s economic decision-making institutions .............................................................................. 6 Central government................................................................................................................... 7 Provincial and local governments .............................................................................................8 Chapter 2. Industrial development, rationalization, and private ownership.................................................................................................................. 11 Industrial development................................................................................................................... 11 Industrial development policy objectives................................................................................ 12 Industrial development policy instruments ............................................................................. 14 Rationalization and private ownership........................................................................................... 18 China’s economic structure..................................................................................................... 18 State sector........................................................................................................................ 19 Nonstate sector.................................................................................................................. 20 Domestic private enterprises...................................................................................... 20 Foreign-invested enterprises....................................................................................... 21 Collective sector............................................................................................................... 21 China’s changing economic structure............................................................................... 22 Rationalization of the state sector............................................................................................ 22 State-Owned Asset Supervision and Administration Commission (SASAC)............ 22 December 2006 SASAC directive....................................................................... 26 Privatization...................................................................................................................... 27 Corporatization........................................................................................................... 28 Closure of uneconomic enterprises................................................................................... 30 Liberalization of the nonstate sector........................................................................................ 31 Domestic private sector development............................................................................... 34 Private ownership....................................................................................................... 35 Foreign-invested enterprises............................................................................................. 36 Implementation of WTO commitments...................................................................... 37 Government guidance of foreign investment ............................................................. 37 i TABLE OF CONTENTS--Continued Chapter 3. Price coordination, utility rates, and taxation........ 41 Price coordination................................................................................................................................. 41 Price controls................................................................................................................................. 43 Current price control practices and policies ............................................................................ 44 Agricultural products........................................................................................................ 45 Pharmaceutical products and medical devices.................................................................. 45 Energy products ................................................................................................................ 46 Land-use rights................................................................................................................. 47 State trading...................................................................................................................... 47 Competition policy......................................................................................................................... 48 Regulatory environment................................................................................................................. 50 Utility rates........................................................................................................................................... 52 Overview of current policies.......................................................................................................... 52 Electricity....................................................................................................................................... 54 Electricity pricing policy by level of government................................................................... 54 Electricity pricing by economic subsector .............................................................................. 55 Water.............................................................................................................................................. 56 Water pricing policy by level of government.......................................................................... 56 Water pricing policy by economic subsector .......................................................................... 57 Natural gas .................................................................................................................................... 58 Natural gas pricing policy by level of government ................................................................. 58 Natural gas pricing policy by economic subsector.................................................................. 58 Regulatory environment................................................................................................................. 59 Taxation................................................................................................................................................ 59 Overview of China’s tax regime .................................................................................................... 59 VAT and other indirect taxes......................................................................................................... 62 VAT......................................................................................................................................... 63 Business tax............................................................................................................................. 64 Enterprise income taxes ................................................................................................................. 64 Agricultural taxes..........................................................................................................................