The EU will refuse China full market economy status (MES) because of too much state interference, the weak rule of law and poor corporate governance, the Financial Times said yesterday, citing a confidential report.
The newspaper quoted an interim assesment by the European Commission as saying that while the EU "is committed to granting MES [market economy status] to China," Beijing has only fulfilled one of five criteria set by Brussels.
If true, it would prove a big blow for China's communist leaders who have been lobbying hard for the recognition which would signifiantly boost the ability of the world's fastest growing major econony to fight anti-dumping charges.
Currently, other countries can use prices of third-country markets, such as India, as a benchmark to compare with domestic prices in determining whether Chinese products have been dumped or not.
Around one in every seven anti-dumping cases worldwide involves China, according to Chinese state media.
China's Ministry of Commerce said it had yet to receive official notification from the EU.
"We have not had any notification from the EU and we cannot respond until we do get official notification," a ministry official told reporters.
In addition to the commercial value for Chinese manufacturers, Beijing has pursued market economy status for its political symbolism.
Acceptance by Brussels and Washington would, European officials say, be read as yet another sign that China is now on an equal footing with the big industrialized powers of the West.
The report said the criterion used by the EU was the "absence of State-induced distortions in the operations of enterprises linked to privatisation" and the "absence of barter trade."
The report also bemoans the degree of government influence on the economy, for example through tax discrimination.
Other hurdles are the existence and implementation of a coherent, effective and transparent set of laws to ensure property rights.
It also cites a lack of adequate laws on the operation of a bankruptcy regime and the existence of a genuine financial sector which operates independently from the state.
Beijing has far succeeded in winning MES recognition from New Zealand, Singapore, Malaysia, Thailand and Kyrgyzstan but it has yet to persuade the world's biggest trade powers -- the US and the EU.
Last week, US Secretary of Commerce Don Evans said during a visit to Beijing that China needed to make substantial progress in reducing the role of the state in the economy before it could expect US recognition.
The report noted that many private companies cannot compete on a level-playing field and highlighted the weak capacity of the judicial system".
It also points to a lack of sound corporate governance in Chinese companies and in particular weak compliance with accounting standards.
"In some cases it was found that companies did not follow basic accounting rules or had no accounts at all," the report said.
With the EU verdict due, China's communist party mouthpiece People's Daily Monday said: "China has scored remarkable achievement's on its way to a market economy over the past 25 years. It is obvious to all."
In a lengthy piece about why China should be considered a market economy, it blamed politics and the US for preventing more countries recognizing China as a true market state.
"The EU accepts former independent commonwealth countries [of the Soviet Union] as market economies but it hesitates in recognizing China as a market economy under the shadow of the US," it said.
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