Charting the Course of China’s Policies and Regulations

Time: June 23th  2015   Copy editor: Tyrefull

To bring China’s standards in line with those of the World Trade Organization, the United States established a permanent normal trade relations (PNTR) status for China in 2000, paving the road for China in its quest to join the WTO in 2001.

Due to how often the Chinese economy changes, some of the hardest elements to keep up with are the country’s policies and regulations. While those of us who live in democratic countries see trade policy as a result of interest groups and the government working together, China is different in that interest groups and their activities are informal and indirect, and trade policy has been shaped by external factors.

Before we delve into the past decade or so of policies and regulations, we’re going to take a small detour into the country’s history to talk about where China’s trade policy has been. Seeing how it has evolved might shed some valuable light on where China stands today in terms of why certain policies exist and where they may go in the future.

2001 was a year of substantial change for China. In the months before December 2001, in anticipation of joining the WTO, the Chinese government for the first time allowed local automakers to price their vehicles themselves without state approval. While the requirement of state approval hadn’t been more than a formality by that point, its removal was still a significant step toward deregulation. This allowed the automakers to reduce their prices to compete against the anticipated surge of foreign imports that joining the WTO would bring.

To bring China’s standards in line with those of the WTO, the United States established a PNTR status for China in 2000, paving the road for China in its quest to join the WTO. The PNTR between the U.S. and China specified many changes for foreign direct investment in China and for policies governing the automotive sector in particular, including bringing down tariffs on auto parts to 9.5% by 2006; opening the auto financing market fully to foreign investors; eliminating conditions on investment, including performance offsets, foreign-exchange balancing or R&D and all subsidies that were prohibited under the WTO rules, among other measures.

Joining the WTO was a big step in itself. In the past 20 years, this was probably the most significant change on all levels of China’s market. To be included in the WTO, China had to cut tariffs on imports down to at least 25%, when the respective import tariffs for the different markets were sitting at levels that ranged from 80% to 100% when they had originally applied in November 1995. While auto parts, as a newer market that had been widely untapped, held lower tariff rates of around 30%, they were still similarly impacted and lowered. Many of the import quotas, permits and licensing systems were also canceled since China’s admittance into the WTO.

These changes opened the doors for China and quickly accelerated the market for automobiles and automobile parts. In the years that followed (from 2002-07), China’s economy for automobiles grew by an average 21% per year, and the government began signing free trade agreements starting with ASEAN in 2002. A free trade agreement, to date, between China and the U.S. doesn’t exist, but is something that many lawmakers have argued for, as currently, the main way to do business in China is through joint ventures between local and foreign manufacturers, as has been done by Volkswagen, General Motors and many others.

In line with tariff regulations from the WTO, imported automobiles hold a tariff rate of 25%, while the parts and accessories is, on average, around 10% to 13%, and China has agreed to lower these rates to at least 10%. However, used and refurbished auto parts are not allowed to be imported into China.

While these tariffs are still considered to be high, this is because the automobile sector in general is highly protected by the government. Import qualifications still have to be obtained for U.S. manufacturers looking to do business, and that often is a difficult process. As stated by IBISWorld, in the company’s report, “Auto Parts Manufacturing in China” in April, “There are strict regulations concerning the ownership of companies in this industry. Foreign enterprises wanting to enter the market and manufacture automotive parts and accessories in China must establish joint ventures with domestic or foreign complete automobile manufacturers.”

The Central Economic Work Conference at the end of 2007 would state that the main task of the government was “to prevent the fast-growing economy from overheating” and “prevent the price from structural rise to remarkable inflation,” and that a “prudent fiscal policy” and a “tight monetary policy” should be implemented. This led to a series of tight macroeconomic policies, which successfully brought down the inflation rate.

Many of the government policy directives issued by China in the past decade have been aimed at decreasing the number of auto component suppliers as a means of increasing scale and competitive capabilities. The 11th Five-Year Plan (FYP), from 2005 to 2010, called for a reduction in the number of component suppliers while increasing the competence of supplier capabilities. These FYP plans, started in 1953 by the Chinese Communist Party, were designed to map strategies for overall economic and social development, setting growth targets and defining development policies. In addition to the FYP, the National Development and Reform Commission mandate of 2006 encouraged merger and acquisition activity in the sector.

Beginning in 2009, the Chinese government launched a series of measures to boost automobile sector growth. These included reduced automobile sales taxes and direct subsidies to rural households purchasing automobiles. This was successful in boosting sales throughout the year, according to IBISWorld.

The Chinese government’s 12th FYP (2011-16) included directives specifically intended to steer the nation toward energy-efficient vehicles, specifically New Energy Vehicles, as a way to combat petroleum imports and oil dependency, as well as to build new industrial capacity. In one of the notable examples from the 12th FYP, the central government initiated the “Ten Cities, 1,000 Vehicle Program” to stimulate electric vehicle development in 10 cities. The pilot program was eventually expanded and now includes 28 cities.

To promote electric vehicles among consumers, the central and provincial governments introduced purchase subsidies for 100% electric and plug-in hybrid vehicles. Until the end of 2015, the Chinese government will support the development of energy-efficient and NEVs (and its key auto parts manufacturing, such as the motors, controllers and batteries).

However, any company that looks to enter the auto industry in China also has to consider the health and safety regulations in place by the government. One of the biggest considerations that China has is the environment. The surge in automobiles in the country has been felt in that regard, and studies by the Organization for Economic Co-operation and Development have said that China has 16 of the 20 most polluted cities in the world, and, especially in regards to Beijing, most of it is due to the large increase in cars in the city. Since the study was released, many policies have been put in place in an attempt to control this.

On June 16, Chinese political advisors from the Chinese People’s Political Consultative Conference National Committee are meeting to offer advice and suggestions on the new FYP, spanning 2016-20. This will be the 13th version of this plan, and committee members say that the one of the focuses remains to transform China’s manufacturing from being just large to also being strong.

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