Chinese and German leaders talk on China market status tensions

Beijing sees Germany, China's largest trading partner in the European Union, as influential in the 28-member bloc's debate on the politically sensitive issue of its market economy status.

China agreed when it signed up to the WTO in 2001 that some countries could use often advantageous third-market comparisons when determining if Chinese imports were being sold at cut prices.

That provision is set to expire automatically in December but anger persists over Beijing undercutting foreign industries with its heavily subsidised goods, particularly with massive overcapacity in Chinese sectors such as steel.

China is adamant that countries must abide by the deal struck 15 years ago, but reluctance in Europe to give up a method to defend against cheap Chinese imports has set up a looming dispute at the WTO and the prospect of broader trade friction.

"China has already fulfilled its obligations on joining the WTO. What's needed now is for the other parties to fulfill the matching obligations they had promised," Li said.

"We don't want to fight a trade war because this will benefit nobody," he said.

Merkel, who on Sunday began her ninth trip to China since taking office, said the two sides should avoid an emotional debate on the issue.

She said during a trip to China last year Germany favoured granting China market economystatus in principle but that Beijing still had work to do, including further opening its public procurement markets.

European commissioners are expected to debate the issue in late June or July, at a time of heightened trade tension after global rivals accused China of dumping cheap steel exports after a slowdown in demand at home.

Li said unilateral trade protection measures wouldn't help resolve the problem and that low-end steel was not something China wanted to produce or sell and was committed to phasing it out.

Merkel has stressed the need for a level playing field for foreign firms amid growing pressure from industry to confront the Chinese more forcefully.

Germany is open to foreign investment and expects the same from China, she said.

China has repeatedly pledged to increase market access for foreign firms and carry out marketreforms in its effort to revamp its slowing economy. Foreign critics however accuse it of not following through on its reform agenda and introducing new regulations that are restrictingmarket access even further.

Li reiterated China's intention to open up to more foreign investment.

"The facts prove that China's market is open. We will be even more open. We will take evenmore steps based on the principles of treating everyone equally, fairness and transparency," he said. (Reporting by Ben Blanchard, Writing by Michael Martina; Editing by Kim Coghill and Paul Tait)