72 FR 17484, April 9, 2007
DEPARTMENT OF COMMERCE
International Trade Administration
[C-570-907]
Coated Free Sheet Paper From the People's Republic of China:
Amended Preliminary Affirmative Countervailing Duty Determination
AGENCY: Import Administration, International Trade Administration,
Department of Commerce.
SUMMARY: The Department of Commerce preliminarily determines that
countervailable subsidies are being provided to producers and exporters
of coated free sheet paper from the
[[Page 17485]]
People's Republic of China. For information on the estimated subsidy
rates, see the ``Suspension of Liquidation'' section of this notice.
The version released on Friday, March 30, 2007, contained a
``Benchmarks'' section that was intended to be deleted from the final
version because it was duplicative, so this amended preliminary
determination corrects that error. This error was discovered prior to
publication in the Federal Register, consequently, this amendment is
being published in its place.
EFFECTIVE DATE: April 9, 2007.
FOR FURTHER INFORMATION CONTACT: David Layton or David Neubacher, AD/
CVD Operations, Office 1, Import Administration, International Trade
Administration, U.S. Department of Commerce, 14th Street and
Constitution Avenue, NW., Washington, DC 20230; telephone: (202) 482-
0371 or (202) 482-5823, respectively.
SUPPLEMENTARY INFORMATION:
Case History
    The following events have occurred since the publication of the
Department of Commerce's (the Department) notice of initiation in the
Federal Register. See Notice of Initiation of Countervailing Duty
Investigations: Coated Free Sheet Paper From the People's Republic of
China, Indonesia and the Republic of Korea, 71 FR 68546 (November 27,
2006) (Initiation Notice).
    On December 1, 2006, the Department selected the two largest
Chinese producers/exporters of coated free sheet paper, Gold East Paper
(Jiangsu) Co., Ltd. (Gold East) and Shandong Chenming Paper Holdings
Ltd. (Chenming) as mandatory respondents. See Memorandum to Stephen J.
Claeys, Deputy Assistant Secretary for Import Administration,
``Respondent Selection'' (December 1, 2006). This memorandum is on file
in the Department's Central Records Unit in Room B-099 of the main
Department building (CRU). On December 4, 2006, we issued the
countervailing duty (CVD) questionnaire to the Government of the
People's Republic of China (GOC), Gold East and Chenming.
    On December 29, 2006, the International Trade Commission (ITC)
issued its affirmative preliminary determination that there is a
reasonable indication that an industry in the United States is
materially injured by reason of allegedly subsidized imports of coated
free sheet paper (CFS) from China, Indonesia, and Korea. See Coated
Free Sheet Paper China, Indonesia, and Korea, Investigation Nos. 701-
TA-444-446 (Preliminary) and 731-TA-1107-1109 (Preliminary), 71 FR
78464 (December 29, 2006).
    Also on December 29, 2006, we published a postponement of the
preliminary determination of this investigation until March 30, 2007.
See Coated Free Sheet Paper From Indonesia, the People's Republic of
China, and the Republic of Korea: Notice of Postponement of Preliminary
Determinations in the Countervailing Duty Investigations, 71 FR 78403
(December 29, 2006).
    We received responses from the GOC on December 11, 2006 and January
31, 2007, Gold East on January 31, 2007, and Chenming on February 2,
2007. On February 9, 2007, the petitioner, New Page Corporation, and
the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy,
Allied Industrial and Service Workers International Union, AFL-CIO-CLC
(USW), a domestic interested party, submitted comments regarding these
questionnaire responses. We issued supplemental questionnaires to Gold
East and Chenming on February 15, 2007, and to the GOC on February 21,
2007. We received responses to these supplemental questionnaires from
the GOC on March 15, 2007, Chenming on March 12, 2007, and Gold East on
March 9 and 13, 2007. We issued a second supplemental questionnaire to
the GOC, Gold East and Chenming on February 22, 2007, and received
responses to these questionnaires from Chenming on March 12, 2007, and
the GOC and Gold East on March 15, 2007.
    On February 20, 2007, the USW submitted two new subsidy
allegations. These allegations were timely as they were filed 40 days
prior to the scheduled date of the preliminary determination, in
accordance with 19 CFR 351.301(d)(4)(i)(A). We decided to include both
of these newly alleged programs in our investigation. See Memorandum to
Susan Kuhbach, Office Director, ``New Subsidy Allegation'' (March 5,
2007). On March 7, 2007, we issued a questionnaire to each of the
respondents with respect to the new programs. We received responses to
these questionnaires from Gold East on March 15, 2007, and from the GOC
and Chenming on March 19, 2007.
    On March 8, 2007, the petitioner submitted comments for
consideration in the preliminary determination. The USW filed comments
on March 14, 2007. We also received comments from Gold East on March
20, 2007, and March 22, 2007.
    On March 26, 2007, petitioner requested that the final
determination of this countervailing duty investigation be aligned with
the final determinations in the companion antidumping duty
investigations in accordance with section 705(a)(1) of the Act. We will
address this request in a separate Federal Register notice.
Period of Investigation
    The period for which we are measuring subsidies, or the period of
investigation (POI), is calendar year 2005.
Scope of the Investigation
    The merchandise covered by this investigation includes coated free
sheet paper and paperboard of a kind used for writing, printing or
other graphic purposes. Coated free sheet paper is produced from not
more than 10 percent by weight mechanical or combined chemical/
mechanical fibers. Coated free sheet paper is coated with kaolin (China
clay) or other inorganic substances, with or without a binder, and with
no other coating. Coated free sheet paper may be surface-colored,
surface-decorated, printed (except as described below), embossed, or
perforated. The subject merchandise includes single- and double-side-
coated free sheet paper; coated free sheet paper in both sheet or roll
form; and is inclusive of all weights, brightness levels, and finishes.
The terms ``wood free'' or ``art'' paper may also be used to describe
the imported product.
    Excluded from the scope are: (1) Coated free sheet paper that is
imported printed with final content printed text or graphics; (2) base
paper to be sensitized for use in photography; and (3) paper containing
by weight 25 percent or more cotton fiber.
    Coated free sheet paper is classifiable under subheadings
4810.13.1900, 4810.13.2010, 4810.13.2090, 4810.13.5000, 4810.13.7040,
4810.14.1900, 4810.14.2010, 4810.14.2090, 4810.14.5000, 4810.14.7040,
4810.19.1900, 4810.19.2010, and 4810.19.2090 of the Harmonized Tariff
Schedule of the United States (HTSUS). While HTSUS subheadings are
provided for convenience and customs purposes, our written description
of the scope of these investigations is dispositive.
Scope Comments
    In accordance with the preamble to the Department's regulations, in
our Initiation Notice we set aside a period of time for parties to
raise issues regarding product coverage, and encouraged all parties to
submit comments within 20 calendar days of publication of the
Initiation Notice. See Antidumping Duties; Countervailing Duties, 62 FR
27296, 27323, (May 19,
[[Page 17486]]
1997) (Preamble) and Initiation Notice, 71 FR at 68546.
    On December 18, 2006, respondents in the antidumping duty
investigation of CFS from Indonesia submitted timely scope comments. On
January 12, 2007, the Department requested that the respondents file
these comments on the administrative record of the CFS Investigations.
See Memorandum from Alice Gibbons to The File (January 12, 2007). On
January 12, 2007, the respondents re-filed these comments on the
administrative record of the CFS Investigations. On January 19, 2007,
the petitioner filed a response to these comments.
    The respondents requested that the Department exclude from its
investigations cast-coated free sheet paper. The Department analyzed
this request, together with the comments from the petitioner, and
determined that it is not appropriate to exclude cast-coated free sheet
paper from the scope of these investigations. See Memorandum to Stephen
J. Claeys, Deputy Assistant Secretary for Import Administration,
``Request to Exclude Cast-Coated Free Sheet Paper from the Antidumping
Duty and Countervailing Duty Investigations on Coated Free Sheet
Paper,'' (March 22, 2007) (memorandum is on file in the Department's
CRU).
Application of the Countervailing Duty Law to Imports from the PRC
    On December 15, 2006, the Department requested public comment on
the applicability of the countervailing duty law to imports from the
People's Republic of China (PRC). See Application of the Countervailing
Duty Law to Imports from the People's Republic of China: Request for
Comments, 71 FR 75507 (December 15, 2006). The comments we received are
on file in the Department's CRU, and can be accessed on the Web at
http://ia.ita.doc.gov/ia-highlights-and-news.
    Informed by those comments and based on our assessment of the
differences between the PRC's economy today and the Soviet and Soviet-
style economies that were the subject of Georgetown Steel Corp. v.
United States, 801 F.2d 1308 (Fed. Cir. 1986), we preliminarily
determine that the countervailing duty law can be applied to imports
from the PRC. Our analysis is presented in a separate memorandum,
Memorandum to David M. Spooner, Assistant Secretary for Import
Administration, ``Countervailing Duty Investigation of Coated Free
Sheet Paper from the People's Republic of China: Whether the analytical
elements of the Georgetown Steel holding are applicable to the PRC's
present-day economy,'' (March 29, 2007) (``Georgetown Memo'')
(memorandum is on file in the Department's CRU).
Subsidies Valuation Information
Allocation Period
    The average useful life (``AUL'') period in this proceeding as
described in 19 CFR 351.524(d)(2) is 13 years according to the U.S.
Internal Revenue Service's 1977 Class Life Asset Depreciation Range
System. No party in this proceeding has disputed this allocation
period.
Attribution of Subsidies
    The Department's regulations at 19 CFR 351.525(b)(6)(i) state that
the Department will normally attribute a subsidy to the products
produced by the corporation that received the subsidy. However, 19 CFR
351.525(b)(6) directs that the Department will attribute subsidies
received by certain other companies to the combined sales of those
companies if (1) cross-ownership exists between the companies, and (2)
the cross-owned companies produce the subject merchandise, are a
holding or parent company of the subject company, produce an input that
is primarily dedicated to the production of the downstream product, or
transfer a subsidy to a cross-owned company. The Court of International
Trade (CIT) has upheld the Department's authority to attribute
subsidies based on whether a company could use or direct the subsidy
benefits of another company in essentially the same way it could use
its own subsidy benefits. See Fabrique de Fer de Charleroi v. United
States, 166 F. Supp. 2d. 593, 604 (CIT 2001).
    According to 19 CFR 351.525(b)(6)(vi), cross-ownership exists
between two or more corporations where one corporation can use or
direct the individual assets of the other corporation(s) in essentially
the same ways it can use its own assets. This section of the
Department's regulations states that this standard will normally be met
where there is a majority voting interest between two corporations or
through common ownership of two (or more) corporations.
    Chenming: Chenming reported that it is the only producer of CFS
among the companies affiliated with Shandong Chenming Paper Holdings,
Ltd. Chenming further reported that its pulp supplier did not receive
subsidies from the GOC. Therefore, we are attributing the subsidies
received by Chenming to its sales of CFS or total sales, as
appropriate.
    Gold East: Gold East has responded to the Department's original and
supplemental questionnaires on behalf of itself, its parent company and
Gold Huasheng Paper Co., Ltd. (GHS). Gold East reported that GHS
produces CFS, but that GHS did not produce CFS that is subject to
investigation during the POI.
    Gold East has also acknowledged that it and GHS are affiliated with
a domestic pulp supplier that provides inputs to both companies. Gold
East asserts, however, that the pulp supplied by this company cannot be
considered an ``input product'' within the meaning of 19 CFR
351.525(b)(6)(iv) because the pulp provided by this supplier is not
suitable for use in the CFS paper that is exported to the United
States. Instead, this pulp was used exclusively in the production of
lower-end paper products that were sold in the PRC and would not meet
the specifications of its U.S. customers. Furthermore, Gold East states
that it and GHS strictly segregate the pulp provided by the domestic
supplier and the pulp used in export sales. Gold East claims that its
situation is analogous to that in Cold-Rolled Steel Flat Products from
Korea,\1\ where the Department did not find a subsidy because the input
allegedly sold for less than adequate remuneration was not used to
produce subject merchandise. Therefore, Gold East argues that the pulp
provided by the domestic supplier is not an input product that is
primarily dedicated to the production of the subject merchandise.
---------------------------------------------------------------------------
    \1\ See Notice of Preliminary Affirmative Countervailing Duty
Determination and Alignment of Final Countervailing Duty
Determination with Final Antidumping Duty Determination: Certain
Cold-Rolled Carbon Steel Flat products From the Republic of Korea,
67 FR 9685, 9683 (March 4, 2002) (Cold-Rolled Steel Flat Products
from Korea).
---------------------------------------------------------------------------
    Based on information currently on the record, we preliminarily
determine that because of common ownership, cross-ownership exists
between Gold East, GHS, the parent company, the affiliated pulp
supplier and other affiliated companies, in accordance with 19 CFR
351.525(b)(6)(vi).
    We further preliminarily determine that Gold East and GHS are
cross-owned producers of the subject merchandise, as addressed in 19
CFR 351.525(b)(6)(ii). Although Gold East has claimed that GHS did not
produce subject merchandise during the POI, there is no evidence
indicating that GHS could not produce subject merchandise. Therefore,
the subsidies received by Gold East and GHS have preliminarily been
attributed to the combined sales of the two companies. Although we have
combined Gold East and GHS in this
[[Page 17487]]
manner, we have continued to refer the respondent as ``Gold East'' in
this notice.
    Additionally, we preliminarily determine that subsidies received by
Gold East's parent company should be attributed to the consolidated
sales of the parent company and its subsidiaries. See 19 CFR
351.525(b)(6)(iii).
    Finally, we preliminarily determine that subsidies received by Gold
East's cross-owned pulp supplier should be attributed to the combined
sales of the input and the downstream products produced from those
inputs. This is consistent with the Department's prior determination
that pulp is ``primarily dedicated'' to the production of paper, as
required by 19 CFR 351.525(b)(6)(iv). See Final Affirmative
Countervailing Duty Determination and Final Negative Determination of
Critical Circumstances: Certain Lined Paper Products from Indonesia, 71
FR 47174 (August 16, 2006), and accompanying Issues and Decision
Memorandum at Comment 3. Moreover, absent a showing that the domestic
pulp cannot be used to produce CFS sold to the United States, there is
no basis to tie subsidies bestowed on these input products exclusively
to sales in the domestic Chinese market.
    Certain other of Gold East's affiliated companies are discussed in
a separate, proprietary memorandum, Memorandum to Susan Kuhbach, ``Gold
East: Cross-owned Companies'' (March 29, 2007) (memorandum is on file
in Department's CRU).
Benchmarks
    Summary: The Department is investigating loans received by
respondents from Chinese banks, including state-owned commercial banks
(SOCBs), which are alleged to have been granted on a preferential, non-
commercial basis. Section 771(5)(E)(ii) of the Act explains that the
benefit for loans is the ``difference between the amount the recipient
of the loan pays on the loan and the amount the recipient would pay on
a comparable commercial loan that the recipient could actually obtain
on the market.'' Normally, the Department uses comparable commercial
loans reported by the company for benchmarking purposes. See 19 CFR
351.505(a)(2)(i). However, the Department does not treat loans from
government banks as commercial if they were provided pursuant to a
government program. See 19 CFR 351.505(a)(2)(ii). Because the loans
provided to the respondents by SOCBs are under the ``Government Policy
Lending Program,'' explained below, these loans are the very loans for
which we require a suitable benchmark. Additionally, if respondents
received any loans from foreign banks, these would be unsuitable for
use as benchmarks because, as explained in greater detail below, the
GOC's intervention in the banking sector creates significant
distortions, even restricting and influencing foreign banks within the
PRC.
    If the firm did not have any comparable commercial loans during the
period, the Department's regulations provide that we ``may use a
national interest rate for comparable commercial loans.'' See 19 CFR
351.505(a)(3)(ii). However, the Chinese national interest rates are not
reliable as benchmarks for these loans because of the pervasiveness of
the GOC's intervention in the banking sector. Loans provided by Chinese
banks reflect significant government intervention and do not reflect
the rates that would be found in a functioning market. The statute
directs that the benefit is normally measured by comparison to a ``loan
that the recipient could actually obtain on the market.'' Section
771(5)(E)(ii) of the Act. Thus, the benchmark should be a market-based
benchmark, yet, there is not a functioning market for loans within the
PRC. Therefore, because of the special difficulties inherent in using a
Chinese benchmark for loans, the Department is selecting a market-based
benchmark that is a simple average of the national lending rates for
countries with comparable gross national income (GNI), as explained
below. The use of an external benchmark is consistent with the
Department's practice. For example, in Softwood Lumber, the Department
used U.S. timber prices to measure the benefit for government provided
timber in Canada. See Final Results of the Countervailing Duty
Investigation of Certain Softwood Lumber Products from Canada, 67 FR
15545 (April 2, 2002), and accompanying Issues and Decision Memorandum,
at ``Provincial Stumpage Programs'' (``Softwood Lumber''). In the
current proceeding, as described in detail, below, the GOC plays a
predominant role in the banking sector resulting in significant
distortions that render the lending rates in the PRC unsuitable as
market benchmarks. Therefore, as in lumber, where domestic prices are
not reliable, we have resorted to prices outside the PRC.
    Discussion: In its analysis of the PRC as a non-market economy in
the recent lined paper investigation, the Department found that the
PRC's banking sector does not operate on a commercial basis and is
subject to significant distortions, primarily arising out of the
continued dominant role of the government in the sector. See ``the
People's Republic of China (PRC) Status as a Non-Market Economy,'' May
15, 2006 (``May 15 Memorandum''); and ``China's Status as a Non-Market
Economy,'' August 30, 2006 (``August 30 Memorandum'') (collectively,
the ``memoranda''). The PRC's stated goal for banking sector reforms
since 1994 has been to develop banks that operate on a commercial
basis. See May 15 Memorandum at 4; and August 30 Memorandum at 56-58.
Despite ongoing efforts made by the GOC to move toward this goal, SOCBs
in the PRC continue to be plagued by functional and operational
problems that have necessitated repeated, large government capital
injections and debt write-offs to stave off insolvency. In addition to
a chronic problem of non-performing loans, the Department discussed in
its memoranda the aspects of the PRC's banking sector that led
International Monetary Fund (IMF) economists to conclude in 2006 that,
despite a decade of reform, ``it is difficult to find solid empirical
evidence of a strong shift to commercial orientation by the SOCBs.''
See August 30 Memorandum at 58, citing ``Progress in China's Banking
Sector Reforms: Has Bank Behaviour Changed?,'' Washington, DC:
International Monetary Fund Working Paper, at 4 (March 2006). For
example, the Department found that funds continue to be allocated in a
``manner consistent with the general policy to maintain the state-owned
industrial sector'' and loan pricing remains undifferentiated, despite
liberalization of lending caps. See May 15 Memorandum at 5; and August
30 Memorandum at 58.
    As one commentator notes, the PRC's banking sector has ``fallen
short in its task of allocating credit to the most productive players
in the economy,'' which is the hallmark of a banking system operating
on a commercial basis. See August 30 Memorandum at 54, citing ``Putting
China's Capital to Work: The Value of Financial System Reform,''
McKinsey & Company, at 25 (May 2006). The Department concluded that the
PRC's banks are ``still in the process of developing the institutional
underpinnings and human resources necessary to operate on a fully
commercial basis.'' See August 30 Memorandum at 52.
    In addition, ``the various levels of government in the PRC,
collectively, have not withdrawn from the role of resource allocator in
the financial sector, principally the banking sector.'' See May 15
Memorandum at 3. The GOC's continued ownership of virtually all of the
banking sector assets is ``the
[[Page 17488]]
fundamental gap in banking sector's reform'' inhibiting the sector from
operating on a commercial basis. Id. at 3-4. In fact, the PRC has the
highest level of state ownership of banks of any major economy in the
world. The four largest SOCBs, the Bank of China (``BOC''), the China
Construction Bank (``CCB''), the Agricultural Bank of China (``ABC'')
and the Industrial and Commercial Bank of China (``ICBC''),
(collectively, the ``Big Four''), represent over 50 percent of the
formal sector's assets and deposits. Small state-owned institutions,
such as rural credit cooperatives, which are characterized by extremely
poor performance, account for 9-10 percent of banking assets. Foreign
banks account for approximately 2 percent of total assets. Although
limited ownership diversification has been introduced through minority
foreign shareholdings in the BOC, CCB and the joint-stock commercial
banks (with the latter category of banks accounting for 13 percent of
the sector's assets), the GOC continues to control the vast majority of
financial intermediation in the banking sector. A further portion of
the PRC's banking sector is accounted for by smaller entities, such as
city banks and credit cooperatives, which are likewise government-
owned, albeit on a sub-central level. See August 30 Memorandum at 54-
55, citing ``Economic Survey of China,'' Paris: Organization for
Economic Cooperation and Development, at 139 (2005).
    While foreign banks have recently been permitted to purchase
minority stakes in a number of state-owned domestic Chinese banks, such
investment does not signal a decisive shift towards putting the banks
on a fully commercial footing. This is because foreign investment in
PRC banks is tightly constrained, and the GOC has signaled its
intentions to preserve its control over the banking sector
indefinitely. See August 30 Memorandum at 61, citing ``Go Away,
Crocodiles?,'' the Economist Intelligence Unit, Business China (March
27, 2006). Continued GOC control of the Chinese banking sector is
possible because, while foreign banks have recently been allowed to
purchase minority stakes in certain banks in the PRC, total foreign
purchases of shares in existing SOBCs have been limited to 25 percent.
See August 30 Memo at 60, citing ``It's so Far, so Good for China's
Banking Sector,'' the Economist Intelligence Unit, Business China
(March 27, 2006). Similarly, some domestic banks in the PRC are now
listed on foreign stock exchanges, but majority control remains with
the GOC. Foreign interests have acquired approximately 10 percent of
the CCB, ICBC and BOC, and are afforded just one place on the board at
each bank. See August 30 Memo at 61, citing ``What are the Prospects
for Foreign Banks in China,'' the Economist Intelligence Unit,
Viewswire, China Finance (March 15, 2006). These investments bring
market expertise to the management and board of the state-owned banks,
but the foreign-owned shares remain small, thereby limiting the degree
of influence over bank operations. See August 30 Memo at 61, citing
Overmyer, Michael, ``WTO: Year Five,'' the US-China Business Council,
The China Business Review, at 2 (January--February 2006). Therefore,
the constrained degree of foreign investment that the GOC has permitted
in the domestic Chinese banking sector does not alter the Department's
preliminary conclusion that the domestic PRC banking sector does not
operate on a commercial basis.
    Because the GOC still dominates the domestic Chinese banking sector
and prevents banks from operating on a fully commercial basis, the
Department preliminarily determines that the interest rates of the
domestic Chinese banking sector do not provide a suitable basis for
benchmarking the loans provided to respondents in this proceeding.
Moreover, while foreign-owned banks do operate in the PRC, they are
subject to the same restrictions as the SOCBs, including a government-
imposed cap on deposit rates, which puts downward pressure on lending
rates. In addition, foreign banks' share of assets and lending is
negligible compared with the SOCBs. SOCBs issue most of the credit in
the PRC and lend at rates close to the Central Bank's announced base
lending rate. See ``Economic Survey of China,'' Paris: Organization for
Economic Cooperation and Development, at 153 (2005) (``Economic Survey
of China''). Accordingly, foreign banks participating in this system
are inevitably influenced by this broader environment in the rates at
which they issue loans. Additionally, while foreign banks are slowly
increasing their participation in the domestic PRC banking sector, the
OECD has observed that foreign banks, in addition to providing only a
tiny share of credit in the PRC, still operate mostly in niche markets,
rather than compete directly with the state-owned commercial banks. See
August 30 Memorandum at 60, citing ``Economic Survey of China,'' at
150-151. Therefore, foreign bank lending does not provide a suitable
benchmark.
    The Department's conclusion that the lending rates offered by
foreign banks do not offer a suitable benchmark because of the market-
distorting behavior of the GOC is consistent with the Department's
determination in the countervailing duty investigation in Softwood
Lumber. That case dealt with the provision of goods for less than
adequate remuneration. The Department explained that, ``if there is no
market benchmark price available in the country of provision, it is
obviously impossible to determine adequacy of remuneration except by
reference to sources outside the country.'' See Softwood Lumber at
``Provincial Stumpage Programs.'' Further, ``a valid benchmark must be
independent of the government price being tested; otherwise the
benchmark may reflect the very market distortion the comparison is
intended to detect.'' Id. In that proceeding, the Department determined
that the small private market for timber in Canada was not a suitable
basis for comparison because of the dominant position of the government
in the marketplace. Id. This is quite similar to the fact pattern in
the current proceeding, where a small private (foreign) sector exists
alongside a vastly larger state-owned sector where a considerable
portion of lending is not conducted on terms and conditions consistent
with commercial considerations. Just as the prices in the private
market for timber were found to be distorted by the presence of a
largely state-controlled sector, lending rates by foreign banks in the
PRC would be affected by the non-commercial lending rates of the much
larger and dominant state-owned banks.
    On March 22, 2007, Gold East cited to the PRC's Accession Protocol
and argued that before rejecting benchmarks within the PRC, the
Department should ``adjust such prevailing terms and conditions before
considering the use of terms and conditions prevailing outside China.''
However, it is not practical to adjust internal PRC lending rates for
benchmarking the loans made by respondents. The distortions in the
Chinese banking sector cannot be attributed to a single factor or set
of factors that the Department could account for by adjusting an
internal lending figure. Rather, this distorted sector is due to the
PRC's history of government domination of the banking system and
continuing ownership of the sector. Under these circumstances, for the
purposes of this preliminary determination, it is necessary for the
Department to disregard all internal benchmark data for loans.
[[Page 17489]]
    We now turn to the issue of choosing an external benchmark.
Selecting an appropriate external interest rate benchmark is
particularly important in this case because, unlike prices for certain
commodities and traded goods, lending rates vary significantly across
the world. Nevertheless, there is a broad inverse relationship between
income levels and lending rates. In other words, countries with lower
per capita gross national income (GNI) tend to have higher interest
rates than countries with higher per capita GNI, a fact demonstrated by
the lending rates across countries reported in International Financial
Statistics. There are several possible explanations for this
phenomenon. High-income countries generally have stronger market-
supporting institutions, which reduce the risk and transaction costs
associated with lending. High income countries may also be more stable,
further reducing perceived risk, and have high levels of credit in the
economy, which helps to achieve economies of scale. For these reasons,
the Department has determined that it is appropriate to use income
level as a criterion for choosing the external lending rate to use as a
benchmark.
    Nevertheless, relying on a single country's figure could introduce
distortions in the benchmark calculation if, for example, the country's
central bank temporarily tightened monetary policy to reduce
inflationary pressures. Because such factors, and their effect on
interest rates vary across countries, the Department has preliminarily
determined that a cross-country average lending rate is the most
appropriate benchmark rate in this proceeding. A lending rate averaged
across countries with similar income levels to the PRC captures the
broad relationship between income and interest rates, as well as the
institutional and macroeconomic factors that affect interest rates.
Moreover, a large number of the world's countries report comparable
lending rates to International Financial Statistics, providing a
suitable basis for calculating a cross-country average.
    The Department has used the country classifications of the World
Bank to determine which countries to include in the benchmark average.
The World Bank divides the world's economies into four categories,
based on per capita GNI: Low income, lower-middle income, upper-middle
income, and high income. The PRC, with its 2005 per capita GNI of
$1740, falls into the lower-middle income category, a group that
includes 58 countries as of July 2006. The Department then calculated
an average of the lending rates that these countries reported to
International Financial Statistics in 2005. This calculation excludes
those economies that the Department considered to be non-market
economies for antidumping purposes in 2005: the PRC, Armenia,
Azerbaijan, Belarus, Georgia, Moldova, Turkmenistan, and Ukraine. The
average necessarily also excludes any economy that did not report
lending data to International Financial Statistics in 2005. The
Department also excluded two aberrational countries, Angola, with a
rate of 67.72 percent, and Brazil, with a rate of 55.38 percent. The
Department then computed a simple average of 13.147 percent of the
remaining 37 lending rates and used this average to determine whether a
benefit existed for the loans received by Chenming and Gold East on
their short-term loans in 2005. The resulting average provides an
appropriate benchmark because the loan figures reported to
International Financial Statistics represent base short-term lending
rates in each reporting country.
    The lending rates reported in International Financial Statistics
represent short-term lending, and there is no publicly available long-
term interest rate data. To identify and measure any benefit from long-
term loans, the Department developed a ratio of short-term and long-
term lending for 2005. The Department then applied this ratio to the
benchmark short-term lending figure (using the methodology explained
above) to impute a long-term lending rate. For example, for loans
issued in 2000, the Department calculated an average of the 37 lower-
middle income countries' short-term lending rates in 2000. To convert
the resulting short-term interest rate into a long-term rate, the
Department calculated a ratio between short-term lending drawn from
London Interbank Offered Rate (LIBOR) data and long-term interest rates
from in the interest rate swap market. The ratio of the two figures
provides an indication of the varying cost of money over different time
periods. In this case, the Department computed a ratio of the average
short-term LIBOR rate in 2005 and the prevailing interest rates on
long-term (five-year) interest rate swaps reported by the Federal
Reserve for the year in question. That is, if the long-term swap rate
were 25 percent higher than the short-term LIBOR rate, the Department
would inflate the average short-term lending rate by 25 percent to
arrive at a long-term interest rate benchmark. This methodology is
appropriate because the interest rate swap rates are based on short-
term LIBOR rates, and the ratio between them offers an estimate of the
market consensus premium that borrowers would pay on a long-term loan
over a short-term loan.
Creditworthiness
    The examination of creditworthiness is an attempt to determine if
the company in question could obtain long-term financing from
conventional commercial sources. See 19 CFR 351.505(a)(4). According to
19 CFR 351.505(a)(4)(i), the Department will generally consider a firm
to be uncreditworthy if, based on information available at the time of
the government-provided loan, the firm could not have obtained long-
term loans from conventional commercial sources. In making this
determination, according to 19 CFR 351.505(a)(4)(i)(A)-(D), the
Department normally examines the following four types of information:
(1) Receipt by the firm of comparable commercial long-term loans; (2)
present and past indicators of the firm's financial health; (3) present
and past indicators of the firm's ability to meet its costs and fixed
financial obligations with its cash flow; and (4) evidence of the
firm's future financial position. If a firm has taken out long-term
loans from commercial sources, this will normally be dispositive of the
firm's creditworthiness. However, if the firm is government-owned, the
existence of commercial borrowings is not dispositive of the firm's
creditworthiness. This is because, in the Department's view, in the
case of a government-owned firm, a bank is likely to consider that the
government will repay the loan in the event of a default. See
Countervailing Duties; Final Rule, 63 FR 65348, 65367 (November 28,
1998). For government-owned firms, we will make our creditworthiness
determination by examining this factor and the other factors listed in
19 CFR 351.505 (a)(4)(i).
    Chenming: The Shouguang State-Owned Asset Administration owned
31.24 percent of Chenming during the POI. Therefore, for purposes of
the creditworthiness determination, we are preliminarily treating
Chenming as government-owned and are not considering the existence of
commercial borrowing to be dispositive of the company's
creditworthiness.
    Chenming's consolidated financial statements show that the Group
had negative working capital in 2003 through 2005, and its cash flow
was negative in 2005. In addition, the current and quick ratios were
less than 1 during the same time period and have
[[Page 17490]]
consistently declined since 2001.\2\ Chenming's 2005 financial
statements indicate that the Group has a large amount of short-term
debt, and that working capital was applied in the expansion and
construction of production facilities in the Group. Indeed, its annual
reports show that the Group completed several large projects in 2004
and 2005 (fixed assets increased by 83% from the end of 2003 to the end
of 2005), including new facilities. While the net profit margin, times
interest earned, return on assets, and return on equity have decreased
since 2003, they are comparable to or greater than the Group's 2001
ratios. The ``times interest earned'' ratio calculates the extent to
which pre-tax income covers interest expense and creditors monitor it
to gauge the risk of default. Cash flow to liabilities, which indicates
bankruptcy risk, has been very variable since 2001. Debt-to-equity and
debt-to-assets, two solvency ratios, have increased since 2001, and
demonstrate that the Group has become more leveraged. Turnover,
however, has increased by at least 20 percent each year since 2001. In
addition, despite the negative working capital and negative net cash
flow, the company continued to pay dividends in 2004 and 2005.
---------------------------------------------------------------------------
    \2\ See Memorandum to File, ``Creditworthiness Determination for
Chenming,'' (March 29, 2007) (``Chenming Creditworthy Memo'')
(providing the calculation of the financial ratios for 2001 through
2005). It is the Department's standard practice to examine ratios
for the years in which a creditworthiness determination is to be
made and the three preceding years.
---------------------------------------------------------------------------
    In Chenming's consolidated 2005 financial statements, the auditors
explained that the Group is exposed to liquidity risk because a
significant percentage of the Group's capital funding requirements are
financed through short-term bank borrowing. The company acknowledged
this risk and intended to convert a significant portion of such short-
term debt to long-term debt in the near future. A December 2, 2005
article in Euroweek, indicated that Sumitomo Mitsui Banking Corporation
(a foreign bank) was arranging an $80 million three-year term-loan for
Chenming. The article explains that the deal is the company's debut
international loan, although the company was in the market in 2005 as a
sponsor of an affiliated company project.\3\ The group also had a five-
year convertible bond issue in September 2004.
---------------------------------------------------------------------------
    \3\ See Chenming Creditworthy Memo.
---------------------------------------------------------------------------
    We note that the financial statements, upon which the above ratios
have been calculated, are for the consolidated Chenming Group. In its
response, Chenming submitted financial ratios based on the
unconsolidated parent company, which is the responding company and,
according to its response, the sole producer within the consolidated
group of the merchandise under investigation. These ratios show that
the parent company's current ratios for 2004 and 2005 are more than 1
and its quick ratios are nearly 1, which indicate that the parent
company is in a more liquid position. In addition, the time interest
earned ratios for these years are stronger for the parent than for the
Group. While Chenming has not submitted the unconsolidated financial
statements upon which these ratios are based, the Department has found
publicly available financial statements for Chenming for the first half
2005, which show the financial information for the parent and the
Group. These statements confirm that the current ratio for the parent
company is greater than 1 and the quick ratio is substantially better
for the parent than the Group. In addition, the parent had positive
working capital, although its cash flow in the first half 2005 was
negative.
    We find the ratios for the Chenming Group provide varying
indications of the firm's financial creditworthiness. While working
capital is negative, working capital is only a rough indication of
changes in liquidity and supplemental analysis with other ratios is
required. Working capital in this case is negative due in large part to
the large amount of short-term liabilities. The liabilities in this
case were used to finance Group expansion, which should provide for
future sales increases. While a company with excellent long-term
prospects could fail to realize them if forced into bankruptcy because
it could not pay its short-term liabilities, there is no indication
that this is the case for the Chenming Group.
    Indeed, Chenming acknowledges this risk and states its intention to
mitigate it through the acquisition of long-term debt. The December
2005 article cited above demonstrates that the company was likely to be
successful in carrying out this intention. Moreover, there is no
information on the record that Chenming has defaulted on any of its
debt or failed to meet any of its financial obligations. To the
contrary, it has even continued to pay dividends. Also, the record
shows that Chenming has continued to borrow from private parties, as
evidenced by the 2004 convertible bond issue. We note that while we
have performed this analysis for the Chenming Group, the unconsolidated
financial situation for the parent company, the respondent in this
case, appears to be even better.\4\
---------------------------------------------------------------------------
    \4\ See Chenming Creditworthiness Memo.
---------------------------------------------------------------------------
    In summary, while certain financial ratios indicate some degree of
financial distress, there are several factors that weigh against
finding Chenming uncreditworthy, such as: Continuing annual sales
growth, its positive net income in 2005, and its ability to meet its
interest expenses and issue convertible bonds. Therefore, we
preliminarily determine Chenming to be creditworthy in 2004 and 2005.
    Gold East: On March 8, 2007, the petitioner alleged that the APP
companies, including Gold East, should be considered uncreditworthy
beginning in 2001.
    On March 20, 2007, Gold East objected to petitioner's allegation on
the grounds that it was untimely filed. Specifically, Gold East argues
that any new subsidy allegation, including an allegation of
uncreditworthiness, is due no later than 40 days before the scheduled
date of the preliminary determination, citing 19 CFR
351.301(d)(4)(i)(A).
    We disagree with Gold East that uncreditworthiness allegations must
be filed within the same timeframe established for new subsidy
allegations in 19 CFR 351.301(d)(4)(i)(A). Uncreditworthiness in and of
itself is not a countervailable subsidy. Instead, it is a valuation
issue that is properly addressed in the course of an investigation as
long as parties have ample time to submit information and argument on
the point. In this case, adequate time exists. Therefore, we have
analyzed petitioner's allegation.
    According to 19 CFR 351.505(a)(6), the Department ``will not
consider the uncreditworthiness of a firm absent a specific allegation
by petitioner that is supported by information establishing a
reasonable basis to believe or suspect that the firm is
uncreditworthy.'' The petitioner has submitted financial ratios for the
companies and has pointed to other evidence on the record. (Because
this allegation is based almost exclusively on proprietary information,
it is described in a separate memorandum, Memorandum to Susan Kuhbach,
``Uncreditworthiness Allegation for APP Companies'' (March 29, 2007)
(``APP Creditworthiness Allegation Memo'') (memorandum is on file in
the Department's CRU).
    Based on our review of the allegation, we find that the petitioner
has provided a reasonable basis to believe or suspect that the APP
companies were uncreditworthy in 2001-2005. See APP Creditworthiness
Allegation Memo.
[[Page 17491]]
Therefore, we intend to investigate the creditworthiness of the APP
companies for those years between 2001 and 2005 in which the companies
received subsidies under investigation in this case. We intend to make
a preliminary finding on the companies' creditworthiness prior to our
final determination and will provide the parties with an opportunity to
comment on that finding.
Denominator
    In its March 20, 2007 filing, Gold East asks the Department to
adjust its subsidy rate to reflect the fact that the company's exports
to the United States are invoiced by an affiliate. Gold East claims
that the Department previously made such an adjustment in Ball Bearings
and Parts Thereof from Thailand; Final Results of Countervailing Duty
Administrative Review, 57 FR 26646 (June 15, 1992) (``Ball Bearings
from Thailand'').
    Based upon our review of Ball Bearings from Thailand and the
information submitted by Gold East in support of its claim, it appears
that the pattern of transactions differ in the two situations, and it
is not clear that the adjustment is appropriate for Gold East's
situation. However, we intend to seek further information and analyze
this claim further for our final determination.
Analysis of Programs
    Based upon our analysis of the petition and the responses to our
questionnaires, we determine the following:
I. Programs Preliminarily Determined To Be Countervailable
A. Grant Programs
    The petitioner alleged that the GOC, including local and provincial
authorities, provide grants to CFS producers and their cross-owned
companies, pursuant to five-year plans for the pulp and paper industry.
    The GOC has identified two grant programs that relate to this
allegation: The State Key Technology Renovation Fund, and the Clean
Production Technology Fund. The former is discussed below, and the
latter is addressed under ``Programs Preliminarily Determined to be Not
Used.''
The State Key Technology Renovation Project Fund
    The State Key Technology Renovation Project Fund program (``Key
Technology Program'') was created pursuant to state circular
GUOJINGMAOTOUZI (1999) No. 886 (Circular No. 886), and operates under
the regulatory guidelines provided in Circular No. 886, including
``Measures for the Administration of National Debt Special Fund for
National Key Technological Renovation Project'' (``Special Fund
Measures''), GUOJINGMAOTOUZI (1999) No. 122, GUOJINGMAOTOUZI (1999) No.
1038 and state circular GUOJINGMAOTOUZI (2000) No. 822. The purpose of
this program is to promote: (1) Technological renovation in key
industries, key enterprises, and key products; (2) facilitation of
technology upgrade; (3) improvement of product structure; (4)
improvement of quality; (5) increase of supply; (6) expansion of
domestic demand; and (7) continuous and healthy development of the
state economy.
    Under the Key Technology Program, companies can apply for funds to
cover the cost of financing specific technological renovation projects.
Under Article 9 of the Special Fund Measures, Key Technology Program
grants are disbursed in the form of ``project investment facility''
grants covering two years' worth of interest payable on loans to fund
the project, or up to three years for enterprises located in certain
regions. Under Article 11 of the Special Fund Measures, Key Technology
Program funds may also be disbursed as ``loan interest grants,'' which
are calculated with reference to the amount of the project loans and
prevailing interest rates during a period of one to two years.
    Pursuant to Article 4 of Circular No. 886, the recipients of these
funds will mainly be selected from large-sized state-owned enterprises
and large-sized state holding enterprises among the 512 key
enterprises, 120 pilot enterprise groups and the leading enterprises in
industries. To be considered for funding, the enterprise files an
application that is reviewed at various levels of government, with
final approval given by the State Council. Once approved, the local
finance bureaus appropriate the funds into the enterprise's account.
    The GOC has reported that Chenming was among the 512 key
enterprises or 120 pilot enterprise groups, and that Gold East was not
included in these groups. Also, the GOC reported approving funding for
Chenming under the Key Technology Program in 2000, and that the funds
were disbursed in 2001.
    The GOC has further reported that the Key Technology Program has
not operated since 2003, although the implementing regulations remain
in effect. This is due to institutional reform in the government--the
implementing agency, the State Economic and Trade Commission, was
dissolved and the program was not taken over by another agency.
    We preliminarily determine that the Key Technology Program provides
countervailable subsidies to Chenming within the meaning of section
771(5) of the Act. We find that these grants are a direct transfer of
funds within the meaning of section 771(5)(D)(i) of the Act, providing
a benefit in the amount of the grant. See 19 CFR 351.504(a). We further
preliminarily determine that the grants provided under this program are
limited as a matter of law to certain enterprises, i.e., large-sized
state-owned enterprises and large-sized state holding enterprises among
the 512 key enterprises, 120 pilot enterprise groups and the leading
enterprises in industries, and, hence, are specific under section
771(5A)(D)(i) of the Act.
    According to the GOC, the program is intended to provide one-time
assistance and each project funded by the a grant requires a separate
application and approval. Therefore, consistent with 19 CFR
351.524(c)(1), we are treating the grant received under this program as
``non-recurring.'' We do not have the information needed to perform the
``expensing'' test described in 19 CFR 351.524(b)(2), and for purposes
of this preliminary determination have allocated the benefit over the
AUL.
    To calculate the countervailable subsidy, we used our standard
grant methodology. Because the approved project was for CFS, we divided
the benefits attributable to the POI by the total value of Chenming's
sales of CFS during that period. On this basis, we preliminarily
determine the countervailable subsidy to be 1.28 percent ad valorem for
Chenming.
    As noted above, the grants provided under this program are to cover
interest owed on loans. Our regulations provide differing allocation
methodologies for interest assumptions, depending on whether the
recipient knew of the assumption before taking out the loan. See 19 CFR
351.508(c)(2). We intend to seek further information on this issue for
our final determination.
B. Government Policy Lending Program
    Petitioner has alleged a GOC lending program to provide loans at a
discount to the forestry and paper industry in accordance with the
GOC's industrial policy, as set out, inter alia, in ``The PRC Civilian
Economy and Social Development 10th Five-Year Plan Outline'' and ``The
Tenth Five-Year and 2010 Special Plan for the Construction of National
Forestry and Papermaking Integration Project.'' Petitioner further
[[Page 17492]]
alleges that discounted loans, interest subsidies, and debt forgiveness
are provided through policy banks and state-owned banks providing
policy loans.
    Chenming and Gold East have stated that they did not receive any
preferential policy loans. In its response, the GOC states that the
Five-Year plans are a ``projection of the {state-council's{time}
economic work in the forthcoming years'' and are ``not necessarily
translated into any specific action.'' As such, the GOC asserts that it
does not normally provide loans to industries; rather, banks provide
loans and operate as independent commercial entities, typically basing
their decision to provide a loan on commercial and risk assessment
factors.
    To determine whether the program alleged by petitioner confers
countervailable subsidies on the producers and exporters of the subject
merchandise, the Department must first ascertain whether the GOC has a
program in place to support the development of the paper industry.
Specifically, the Department must determine whether record evidence
supports the conclusion that the GOC carries out industrial policies
that encourage and support the growth of the paper sector through the
provision of preferential loans.
    Petitioner has claimed that the GOC has an explicit policy of
supporting the paper industry with preferential loans. To support this
assertion, petitioner cites to the ``The PRC Civilian Economy and
Social Development 10th Five-Year Plan Outline'' (10th Five-Year Plan)
and ``The Tenth Five-Year and 2010 Special Plan for the Construction of
National Forestry and Papermaking Integration Project'' (10th Five-Year
Plan for the Forestry and Paper Industry), among other administrative
measures.
    One of the goals of the 10th Five-Year Plan is to ``accelerate
reform and renovation'' of certain industries, including the ``wood
pulp, high quality paper and paperboard'' industry. Subsequent Five-
Year Plans have reaffirmed this goal. Taking into consideration the
broad goals set out in the 10th Five-Year Plan, in March 2001 the GOC
released the 10th Five-Year Plan for the Forestry and Paper Industry.
This plan was developed ``in order to ensure the smooth construction of
our national forestry and papermaking integration project, to make
comprehensive plans, to take actions according to local circumstances,
to make decisions on scientific bases, and for the government to play
the role of macroeconomic readjustment and control'' (emphasis added).
In addition, the government has established specific production
capacity targets in this Plan, stating that ``{w{time} e plan to
construct pulp producing capacity of 1.13 million ton'' and after 2010
``we can build a pulp producing capacity of more than 2.15 million ton
* * * and a matching paper making capacity of about 2.3 million ton.''
Further, the GOC estimates that the amount of investment required
during the period of the 10th and 11th Five-Year Plans will be RMB
244.3 billion, stating that, ``{t{time} herefore, investment has to be
strengthened vigorously and financing channels are to be widened * *
*'' As such, this Plan specifically contemplates policy measures that
are necessary to achieve these goals, including the provision of
``appropriate financial support to the construction of forestry and
papermaking integration in its early phase by way of infusing capital
in cash or loans with discount.''
    In addition to the 10th Five-Year Plan and the 10th Five-Year Plan
for the Forestry and Paper Industry, in August 2001, the State Economic
and Trade Commission released the ``10th Five-Year Plan in the Paper
Production Industry.'' The purpose of this Plan is to outline goals of
the paper production industry over the next 5 years. A key policy
recommendation addressed in the plan is increased access to financial
resources, including: (1) Opening essential financing channels for
adjustment and development of the industry; (2) encouraging the opening
of multilateral investment and financing channels to increase
technological restructuring and rapid growth; and (3) providing
discounted loans with special terms for environmental conservation
projects.
    Beyond the various Five-Year Plans mentioned above, several
additional administrative measures released by the GOC demonstrate a
clear governmental policy or program of support to the forestry and
paper industry. For example, in June 2000, The PRC's National Key
Economy and Trade Committee released the National Key Technology
Renovation ``Shuang Gao Yi You'' Project. The purpose of this measure
was to outline key areas of economic structural adjustment needed by
enterprises to increase technology renovation, technical and industrial
advancement. One of the stated goals was to ``emphatically select key
paper enterprises which produce high quality newspaper, high class
culture paper product (LWC), high class packaging paperboard (carton
paperboard), and enterprises that produce paper making machine and
other supporting networks; eliminate backward equipment and products
which are not market suitable.''
    On the basis of the record information cited above, we
preliminarily determine that the GOC has a specific and detailed policy
to encourage and support the development of the domestic forestry and
paper industry. The GOC itself has stated that Five-Year Plans are a
``projection of the [state-council's] economic work in the forthcoming
years.'' In order to implement the policies enumerated in the Five-Year
Plan, the GOC's policy specifically calls for the provision of
discounted loans and other financing in order to support the growth and
development of this industry.
    The GOC has further stated in its March 15 questionnaire response
that ``the administrative system ensures that provincial and local
policy goals and objectives are in conformity with the central policy
goals and objectives.'' According to the 1979 Law of Local People's
Congresses at Various Levels and Local People's Government at Various
Levels of the PRC, as amended, local governments must follow the laws
and regulations made by the central government. See Chinese Law and
Legal Research, Wei Luo, at 31 (2005). Further,
the State Council guides the local administration in terms of
policies and assigns tasks to local governments in terms of plans.
In doing so, the central government confers on the local governments
the necessary authorities to carry out the policies of the central
government. The central government also evaluates the local
governments' application of policies, laws and plans made by the
central government. See id. (emphasis added.)
In other words, local governments must align their industrial policies
with stated central government policies and carry out those polices to
the extent that such measures affect their locality. As such, based on
record statements, Five-Year Plans should be considered a central
government policy or program that local governments adopt and implement
through SOCBs.
    Having determined that the record evidence establishes a government
policy or program to support the forestry and paper industry, the
Department next turns to whether these policies were carried out by the
central and local governments through the provision of loans extended
by GOC policy banks and SOCBs. Under the Department's practice, loans
provided by government policy banks, such as the China Development
Bank, are considered government loans and, thus, constitute direct
financial contributions under the Act. See, e.g., Dynamic
[[Page 17493]]
Random Access Memory Semiconductors from the Republic of Korea: Final
Results of Countervailing Duty Administrative Review, 72 FR 7015,
February 14, 2007, and accompanying Issues and Decision Memorandum, at
6. Loans by SOCBs, however, are not necessarily treated as government
loans because these banks often operate on a commercial basis in many
countries. See Preamble, 63 FR at 65363. However, as discussed below,
the PRC's banking system presents a significantly different fact
pattern than those in market economy countries that the Department has
previously encountered and that were contemplated in the Preamble.
Information on the record indicates that the PRC's banking system
suffers from a legacy of complete state control, the vestiges of which
allow for continued government control, especially at the local level,
resulting in the allocation of credit in accordance with government
policies.
    As discussed in the Georgetown Memo and the Department's memoranda
from the investigation on Certain Lined Paper Products from the PRC
regarding the PRC's status as a non-market economy, the PRC's banking
system is more flexible than the Soviet-style banking sectors, where
central banks directly allocated all credit in accordance with the
wishes of the party and the central planners. The GOC abolished the
mandatory credit plan in 1997, under which the People's Bank of China
(PBOC) directly allocated credit to specific sectors, often supporting
the operations of loss-making state-owned enterprises (SOEs). The
credit plan was replaced with non-binding targets, which were to serve
as guidance for credit allocation. See August 30 Memorandum, at 51.
SOCBs were afforded legal autonomy from the state in most matters,
which allowed them to lend, at least in theory, on terms and conditions
consistent with commercial considerations. Current law, however,
remains contradictory with regard to the SOCB's independence from the
state. Under the 1995 Commercial Banking Law of the People's Republic
of China, commercial banks are responsible for their own profits and
losses, must protect the interests of their depositors, and are
protected from government influence. However, Article 34 of the
Commercial Bank Law paradoxically states that banks are required to
adhere to the PRC's ``national industrial policies.'' See August 30
Memorandum, at 53.
    Notwithstanding certain dictates that the SOCBs act independently
of the government, as discussed in the ``Benchmark'' section of this
notice, the near-complete state ownership over these banks enables the
GOC to utilize SOCBs as policy instruments and, thus, to allocate
credit in accordance with its policies, as enumerated in the Five-Year
Plans. Specifically, the Department found that ``{w{time} hile the Big
Four (along with smaller regional banks and cooperatives) now have
greater autonomy than in the past, government interests at both the
central and local levels still exercise a great deal of control over
banking operations and lending decisions.'' See May 15 Memorandum, at
5. As noted by the IMF, ``{r{time} ooting out the legacy of government
directed lending, and training banks to make lending decisions based on
purely commercial considerations, with adequate regard to viability and
riskiness of projects remains a major reform challenge.'' See August 30
Memorandum, at 52, n. 248, citing Finance and Development, Next Steps
for China, Washington, DC: International Monetary Fund, (September
2005).
    State-direction of credit as well as protracted lending on a non-
commercial basis has been evidenced by repeated cycles of the
accumulation of a large number of non-performing loans and government
bailouts of the banking sector. See ``Benchmark'' section above. For
example, wholly- and partially-owned SOEs continue to receive a
disproportionate share of credit, in line with industrial policy
objectives to maintain a central role for the state-owned sector of the
economy. See May 15 Memorandum, at 5; and August 30 Memorandum, at 59.
    Some of the misallocation of resources may be attributed to lack of
experience or inertia. However, as discussed above in the
``Benchmarks'' section, the continued government intervention in bank
operations, especially by local governments, acts as a significant
impediment to true commercialization of the banks. Prior to reforms,
local governments utilized SOCB branch offices as the main source of
capital to fund policy-driven investment projects and support local
SOEs, which in turn provided local employment and government revenue.
Although SOCBs are no longer the sole instrument by which to allocate
funds, local governments continue to guide and direct the allocation of
credit through their local bank branches. See August 30 Memorandum, at
60.
    Third-party commentators have arrived at similar conclusions
regarding the state's continued influence, especially at the local
level, on SOCB operations. For example, a 2005 Organization for
Economic Cooperation and Development (OECD) report found that,
    The chief executives of the head offices of the SOCBs are
government appointed and the party retains significant influence in
their choice. Moreover, the traditionally close ties between
government and bank officials at the local level have created a
culture that has given local government officials substantial
influence over bank lending decisions. See August 30 Memorandum, at
60, n. 294 and 301, citing to Economic Survey of China, Paris:
Organization for Economic Cooperation and Development, at 140-141
(2005).
    A 2005 IMF Staff Report concurred, stating that, {t{time} he staff
acknowledged the progress made in reducing government involvement in
management and business operations of banks. However, more needs to be
done, particularly with regard to local governments, to remove this
serious impediment to fully commercializing banks.'' See the August 30
Memorandum at 60, citing People's Republic of China: 2005 Article IV
Consultation--Staff Report; Staff Supplement; and Public Information
Notice on the Executive Board Discussion, Washington, DC, International
Monetary Fund, at November 2005), p. 19.
    As the Department found in its May 15 Memorandum, ``the continued
significant government involvement in the PRC's banking sector reflects
an assumption that the state, not markets, should determine the growth
sectors or individual companies that deserve access to credit.'' See
May 15 Memorandum, at 8. On the basis of the evidence cited above, the
Department determines for the purposes of this preliminary
determination that the GOC continues to use its ownership of and
influence over SOCBs to guide and direct the allocation of credit in
accordance with its stated policy objectives, including those contained
in the 10th Five-Year Plan for the Forestry and Paper Industry. In
addition, evidence on the record also indicates that the above-
mentioned Five-Year Plans are in fact implemented by paper companies.
For example, Chenming's 2005 Annual Report states that, ``{a{time} ll
of the projects the Company had launched were those which satisfying
the national industrial policy and to be replacing the imported
products and high in value adding.'' In addition, this report states
that, ``the Company will keep studying and following with the national
policies to grasp the trend of overall planning, to make sure the
Company's development is complying with the national policy on the
industry.'' As such, the
[[Page 17494]]
Department preliminarily finds that the PRC's SOCBs should be
considered extensions of the government and are the instruments by
which the government implemented the preferential lending component of
the program described above.
    For the reasons stated above, the Department preliminarily
determines that loans provided by Policy Banks and SOCBs in the PRC
constitute government-provided loans pursuant to section 771(5)(D)(i)
of the Act. We further preliminarily determine that this loan program
is specific in law because the GOC has a policy in place to encourage
and support the growth and development of the forestry and paper
industry. See section 771(5A)(D)(i) of the Act. Finally, this program
provides a benefit to the recipients, equal to the difference between
what the recipient paid on the loan and the amount the recipient would
have paid on a comparable commercial loan. See section 771(5)(E)(ii) of
the Act.
    Chenming, Gold East, and certain of Gold East's cross-owned
companies had outstanding loans under this program during the POI.
    To calculate the benefit, we used the interest rates described in
the ``Benchmark'' section above and the methodology described in 19 CFR
351.505(c)(1) and (2). On this basis, we preliminarily determine that a
countervailable benefit of 3.15 percent ad valorem exists for Chenming
and a countervailable benefit of 14.02 percent ad valorem exists for
Gold East for this program.
C. Income Tax Programs
The ``Two Free, Three Half'' Program
    The Foreign Invested Enterprise and Foreign Enterprise Income Tax
Law (FIE Tax Law), enacted in 1991, established the tax guidelines and
regulations for FIEs in the PRC. The intent of this law is to attract
foreign businesses to the PRC.
    According to Article 8 of the FIE Tax Law, FIEs that are
``productive'' and scheduled to operate not less than 10 years are
exempt from income tax in their first two profitable years and pay half
of their applicable tax rate for the following three years. FIEs are
deemed ``productive'' if they qualify under Article 72 of the Detailed
Implementation Rules of the Income Tax Law of the People's Republic of
China of Foreign Investment Enterprises and Foreign Enterprises. This
provision specifies a list of industries in which FIEs must operate in
order to qualify for benefits under this program. The activities listed
in the law are: (1) Machine manufacturing and electronics industries;
(2) energy resource industries (not including exploitation of oil and
natural gas); (3) metallurgical, chemical and building material
industries; (4) light industries, and textiles and packaging
industries; (5) medical equipment and pharmaceutical industries; (6)
agriculture, forestry, animal husbandry, fisheries and water
conservation; (7) construction industries; (8) communications and
transportation industries (not including passenger transport); (9)
development of science and technology, geological survey and industrial
information consultancy directly for services in respect of production
and services in respect of repair and maintenance of production
equipment and precision instruments; (10) other industries as specified
by the tax authorities under the State Council. The GOC, in its
response, has stated that if a FIE meets the above conditions,
eligibility is automatic and the amount exempted appears on the
enterprise's tax return.
    Gold East reported that, during the POI, Gold East and certain of
its cross-owned companies filed tax statements for a ``free'' year
under this program. Chenming reported that its eligibility for
participation in this program ended in 2001 and that the company did
not receive any benefits under this program during the POI.
    We preliminarily determine that the exemption or reduction in the
income tax paid by ``productive'' FIEs under this program confers a
countervailable subsidy. The exemption/reduction is a financial
contribution in the form of revenue forgone by the GOC and it provides
a benefit to the recipients in the amount of the tax savings. See
section 771(5)(D)(ii) of the Act and 19 CFR 351.509(a)(1). We further
preliminarily determine that the exemption/reduction afforded by this
program is limited as a matter of law to certain enterprises,
``productive'' FIEs, and, hence, is specific under section
771(5A)(D)(i) of the Act.
    The GOC claims that FIEs are a separate type of business operation
under Chinese law, similar to partnerships, proprietorships, domestic
corporations, for example, and that differences in tax liabilities for
these different types of businesses do not make the income tax rate
applicable to FIEs specific. The GOC further claims that the large
number of FIEs and the vast number of industries they participate in
further indicate that this program is not specific. However, we have
preliminarily determined that limiting a program to ``productive'' FIEs
is a sufficient basis to find specificity and, having found specificity
as a matter of law, it is not necessary to reach the issue of whether
the subsidy is specific in fact. See Statement of Administrative Action
accompanying the Uruguay Round Agreements Act, H.R. Doc. No. 103-316,
at 930 (1994) (``SAA'').
    To calculate the benefit from this program, we treated the income
tax exemption enjoyed by Gold East its cross-owned companies as a
recurring benefit, consistent with 19 CFR 351.524(c)(1). To compute the
amount of tax savings, we compared the rate paid by the Gold East
companies (zero percent) to the rate that would be paid by a domestic
corporation in the PRC (30 percent). We attributed the tax savings
received by Gold East and GHS to the combined sales of the two
companies. Additional information on this calculation is provided in
the Calculation Analysis memorandum for Gold East. On this basis, we
preliminarily determine that a countervailable benefit of 2.88 percent
ad valorem exists for Gold East for this program.
Reduced Income Tax Rates for FIEs Based on Location
    FIEs are encouraged to locate in designated coastal economic
development zones, special economic zones, and economic and technical
development zones in the PRC through preferential income tax rates.
This program was originally created in 1988 under the Provisional Rules
on Exemption and Reduction of Corporate Income Tax and Business Tax of
FIE in Coastal Economic Zone of the Ministry of Finance and is
currently administered under the FIE Tax Law, and Decree 85 of the
State Council of 1991 (Decree 85). Under Article 7 of the FIE Tax Law
and Article 71 of Decree 85, ``productive'' FIEs located in the
designated economic zones pay corporate income tax at a reduced rate of
either 15 or 24 percent, depending on the zone.
    For the income tax return filed during the POI, Chenming paid
income tax at a reduced rate of 24 percent, based on its location in a
Economic and Technical Development Zone. Because Gold East and GHS did
not pay income taxes during the POI (due to their participation in the
Two Free, Three Half program), we are treating this program as not used
by Gold East during the POI.
    We preliminarily determine that the reduced income tax rate paid by
``productive'' FIEs located in certain zones confers a countervailable
subsidy. The reduced rate is a financial contribution in the form of
revenue
[[Page 17495]]
forgone by the GOC and it provides a benefit to the recipients in the
amount of the tax savings. See section 771(5)(D)(ii) of the Act and 19
CFR 351.509(a)(1). We further preliminarily determine that the
exemption/reduction afforded by this program is limited to enterprises
located in designated geographical regions and, hence, is specific
under section 771(5A)(D)(iv) of the Act.
    To calculate the benefit, we treated the income tax savings enjoyed
by Chenming as a recurring benefit, consistent with 19 CFR
351.524(c)(1), and divided the company's tax savings received during
the POI by Chenming's total sales during that period. To compute the
amount of tax savings, we compared the rate paid by Chenming (24
percent) to the rate that would be paid by a domestic corporation in
the PRC (30 percent). On this basis, we preliminarily determine that a
countervailable benefit of 0.34 percent ad valorem exists for Chenming
for this program.
Local Income Tax Exemption and Reduction Program for ``Productive''
FIEs
    Under Article 9 of the FIE Tax Law, the governments of the
provinces, the autonomous regions, and the centrally governed
municipalities have been delegated the authority to provide exemptions
and reductions of local income tax for industries and projects for
which foreign investment is encouraged. As such, the local governments
establish the eligibility criteria and administer the application
process for any local tax reductions or exemptions. Therefore, the
requirements and application procedures for this program may vary
between jurisdictions.
    Chenming, Gold East, and GHS reported receiving local income tax
exemptions under this program. Chenming's local tax authority granted
the company an exemption because Chenming was an FIE located in a
coastal economic zone, specifically, in an Economic and Technical
Development Zone.
    Gold East references Article 3 of the Regulations for the Local
Income Tax Exemption and Reduction of Jiangsu Province for Enterprises
with Foreign Investment as the basis for its local tax exemption. Under
these provincial regulations, productive FIEs in the Jiangsu Province
are exempt from local income taxes during the period in which they use
the ``Two Free, Three Half'' program. Because Gold East and GHS
participated in the ``Two Free, Three Half'' program during the POI,
they were exempt from the local income tax.
    We preliminarily determine that the local tax exemption and
reduction program confers a countervailable subsidy. The exemption/
reduction is a financial contribution in the form of revenue forgone by
the local governments and it provides a benefit to the recipients in
the amount of the tax savings. See section 771(5)(D)(ii) of the Act and
19 CFR 351.509(a)(1). We further preliminarily determine that the
exemption afforded to Chenming by this program is limited to
enterprises located in designated geographical regions and, hence, is
specific under section 771(5A)(D)(iv) of the Act. In the case of Gold
East, we preliminarily determine that the program is limited as a
matter of law to certain enterprises, i.e., productive FIEs, and is
specific under section 771(5A)(D)(i) of the Act for the reasons
explained above.
    To calculate the benefit, we treated the income tax savings enjoyed
by the companies as a recurring benefit, consistent with 19 CFR
351.524(c)(1). To compute the amount of tax savings, we compared the
zero percent rate paid by Chenming, Gold East and GHS to the rate that
would otherwise be paid by a domestic corporation in the PRC (3
percent). For Chenming, we divided the income tax savings during the
POI by Chenming's total sales. For Gold East, we attributed the tax
savings received by Gold East and GHS to the combined sales of the two
companies. On this basis, we preliminarily determine that a
countervailable benefit of 0.17 percent ad valorem exists for Chenming
and a countervailable benefit of 0.31 percent ad valorem exists for
Gold East.
Income Tax Credits on Purchases of Domestically Produced Equipment by
FIEs
    Provisions in GUOSHUIFA (2000) No. 90, Administrative Measures on
Enterprise Income Tax Credits for Purchase of Domestic Equipment by
FIEs and Foreign Enterprises, and CAISHUI (2000) No. 49, Circular of
the Ministry of Finance and the State Administration of Taxation on
Enterprise Income Tax Credits for Purchase of Domestic Equipment by
Foreign Invested Enterprises and Foreign Enterprises, permit FIEs to
obtain tax credits of up to 40 percent of the purchase value of
domestically produced equipment. Specifically, the tax credit is
available to FIEs and foreign-owned enterprises whose projects are
classified in either the Encouraged or Restricted B categories of the
Catalog of Industrial Guidance for Foreign Investment. The credit
applies to any domestically produced equipment so long as the equipment
is not listed in the Catalog of Non-Duty-Exemptible Articles of
Importation. The program has been in effect since 1999 and its purpose,
according to the GOC, is to attract foreign investment.
    To receive a tax credit under this program, requesting enterprises
must submit an application to the local tax authority within two months
of purchasing the equipment. Once approved, the credit can be claimed
on the enterprise's income tax return. The amount of the credit is
limited to the lesser of 40 percent of the purchase price of the
domestically produced equipment or the incremental increase in income
taxes owed over the previous year.
    Chenming reported receiving tax credits under this program during
the POI; Gold East did not.
    We preliminarily determine that income tax credits on the purchase
of domestically produced equipment by FIEs are countervailable
subsidies. The tax credits are a financial contribution in the form of
revenue forgone by the local governments and they provide a benefit to
the recipients in the amount of the tax savings. See section
771(5)(D)(ii) of the Act and 19 CFR 351.509(a)(1). We further
preliminarily determine that these tax credits are contingent upon use
of domestic over imported goods and, hence, are specific under section
771(5A)(C) of the Act.
    To calculate the benefit, we treated the income tax savings enjoyed
by Chenming as a recurring benefit, consistent with 19 CFR
351.524(c)(1), and divided the benefit received during the POI by
Chenming's sales of CFS during that period. On this basis, we
preliminarily determine that a countervailable benefit of 2.98 percent
ad valorem exists for Chenming for this program.
D. VAT and Duty Exemptions
VAT Rebates on Purchases of Domestically Produced Equipment
    As outlined in GUOSHUIFA (1999) No. 171, Trial Administrative
Measures on Purchase of Domestic Equipment by Projects with Foreign
Investment (1999 VAT Measures), the GOC refunds the VAT on purchases by
FIEs of certain domestically produced equipment. Article 3 of the 1999
VAT Measures specifies that this program is limited to FIEs including
exclusively foreign-owned enterprises. Article 4 of the 1999 VAT
Measures defines the type of equipment eligible for the VAT exemption,
which includes equipment falling under the Encouraged and
[[Page 17496]]
Restricted B categories listed in the Notice of the State Council
Concerning the Adjustment of Taxation Policies for Imported Equipment
(No. 37 (1997)) and equipment for projects listed in the Catalogue of
Key Industries, Products and Technologies Encouraged for Development by
the State. Based on the GOC's and companies' responses, the receipt of
the VAT rebates on domestically produced equipment is granted to FIEs
upon presentation of documents showing their FIE status.
    Chenming, Gold East, and certain of Gold East's cross-owned
companies reported receiving VAT rebates on their purchases of
domestically produced equipment during the POI.
    We preliminarily determine that the rebate of the VAT paid on
purchases of domestically produced equipment by FIEs confers a
countervailable subsidy. The rebates are a financial contribution in
the form of revenue forgone by the GOC and they provide a benefit to
the recipients in the amount of the tax savings. See section
771(5)(D)(ii) of the Act and 19 CFR 351.510(a)(1). We further
preliminarily determine that the VAT rebates are contingent upon the
use of domestic over imported goods and, hence, specific under section
771(5A)(C) of the Act.
    To calculate the benefit, we treated the VAT rebates as a recurring
benefit, consistent with 19 CFR 351.524(c)(1). For Chenming, we divided
the VAT rebates received during the POI by Chenming's sales of CFS in
that period. For Gold East, we calculated the benefit in accordance
with the attribution rules described in 19 CFR 351.525(b)(6). On this
basis, we preliminarily determine that a countervailable benefit of
1.45 percent ad valorem exists for Chenming and a countervailable
benefit of 0.35 percent ad valorem exists for Gold East for this
program.
    The GOC has claimed that the goal of this program is to equalize
the tax burden on the purchase of domestically produced and imported
equipment by FIEs. (As explained below, FIEs are also exempt from
paying the value added tax on imported equipment.) Thus, the GOC
argues, the Department should not find the VAT rebates on domestically
produced equipment to be an import substitution subsidy.
    Although the VAT rebates are available to FIEs on both domestically
produced and imported equipment, the GOC has not demonstrated that both
rebates are integrally linked. In accordance with 19 CFR 351.502(c),
the Department will consider whether two programs are integrally linked
for purposes of making its specificity determination, but the burden
lies with the GOC to claim that the VAT exemptions/rebates are linked
and to provide evidence in support of the claim. That burden has not
been met. Moreover, as explained above, we are preliminarily
determining that FIEs constitute a specific group of enterprises.
Consequently, even if we were to treat the VAT rebate and exemption
programs as integrally linked, we would still find the benefits to be
specific.
VAT and Tariff Exemptions on Imported Equipment
    Enacted in 1997, the Circular of the State Council on Adjusting Tax
Policies on Imported Equipment (GUOFA No. 37) (Circular No. 37) exempts
both FIEs and certain domestic enterprises from the VAT and tariffs on
imported equipment used in their production. The objective of the
program is to encourage foreign investment and to introduce foreign
advanced technology equipment and industry technology upgrades.
    Chenming, Gold East and certain of Gold East's cross-owned
companies received VAT and duty exemptions under this program due to
their status as FIEs. Specifically, the companies are authorized to
receive the exemptions based on their FIE status and the list of assets
approved by the GOC at the time their FIE status was approved. Domestic
enterprises eligible for the VAT and duty exemptions must have
government-approved projects that are in line with the current
``Catalog of Key Industries, Products, and Technologies the Development
of Which is Encouraged by the State.'' Whether an FIE or domestic
enterprise, only equipment that is not listed in the Catalog on Non-
Duty Exemptible Article for Importation is eligible for the VAT and
duty exemptions. (Different Catalogs are prepared for FIEs and domestic
enterprises.) To receive the exemptions, a qualified enterprise only
has to show a certificate provided by the National Development and
Reform Commission (``NDRC''), or its provincial branch, to the customs
officials upon importation of the equipment.
    We preliminarily determine that VAT and tariff exemptions on
imported equipment confer a countervailable subsidy. The exemptions are
a financial contribution in the form of revenue forgone by the GOC and
they provide a benefit to the recipients in the amount of the VAT and
tariff savings. See section 771(5)(D)(ii) of the Act and 19 CFR
351.510(a)(1).
    With regard to specificity, certain domestic enterprises are
eligible to receive VAT and tariff exemptions under this program as
well as FIEs. Based on the information provided by the GOC, it does not
appear that the addition of these domestic enterprises broadens the
reach or variety of users sufficiently to render the program non-
specific. For example, to be eligible, the domestic enterprise must
have been involved in an investment project that was ``in line with''
the Current Catalog of Key Industries, Products and Technologies the
Development of Which is Encouraged by the State. While this Catalog was
reportedly revoked in 2005, the projects still must apparently be
approved by the State Council, the NDRC, or an agency to which
authority has been delegated (see Certificates for State-Encouraged
Foreign-or Domestically-Invested Projects for Domestically-Invested
Enterprises FAGAIGUIHUA (2003) 900). Therefore, we preliminarily find
the VAT and tariff exemptions to be specific under section
771(5A)(D)(iii)(I). To calculate the benefit, we treated the VAT and
tariff exemptions as a recurring benefit, consistent with 19 CFR
351.524(c)(1). For Chenming, we divided the amount of the VAT and
tariff exemptions enjoyed by Chenming during the POI by the company's
sales in that period. For Gold East, we calculated the benefit in
accordance with the attribution rules described in 19 CFR
351.525(b)(6). On this basis, we preliminarily determine that a
countervailable benefit of 0.10 percent ad valorem exists for Chenming
and a countervailable benefit of 2.60 percent ad valorem exists for
Gold East for this program.
E. Domestic VAT Refunds for Companies Located in the Hainan Economic
Development Zone
    According to Yangpu local tax regulations, enterprises located in
the Economic Development Zone of Hainan may enjoy several tax
preferences. These preferences are described in Preferential Policies
of Taxation, which includes the eligibility criteria needed to qualify
for the preferences. Under ``Preferential Policies Regarding Investment
by Manufacturer,'' high-tech or labor intensive enterprises with
investment over RMB 3 billion and more than 1000 local employees may be
refunded 25 percent of the VAT paid on domestic sales (the percentage
of the tax received by the local government) starting in the first year
the company has production and sales. The VAT refund can continue for
five years.
    One of Gold East's cross-owned companies was a qualifying
manufacturing enterprise in the Economic Development Zone of Hainan
[[Page 17497]]
and reported that it received the VAT refund in the POI. The cross-
owned company further added that becaue the capital and number of
employees are registered with the local government, the tax refund is
automatically granted.
    We preliminarily determine that the domestic VAT refunds confer a
countervailable subsidy. The refund is a financial contribution in the
form of revenue forgone by the local government and it provides a
benefit to the recipient in the amount of the refunded taxes. See
section 771(5)(D)(ii) of the Act and 19 CFR 351.510(a). In addition to
the investment and employee eligibility criteria described above, it
appears that recipients must be located in the Economic Development
Zone because these enterprises also pay income tax at a regionally-
reduced rate. See ``Reduced Income Tax Rates for FIEs Based on
Location,'' above. Therefore, we preliminarily determine that the
program is limited to enterprises located in a designated geographical
region and, hence, is specific under section 771(5A)(D)(iv) of the Act.
    To calculate the benefit, we treated the VAT refund received by the
cross-owned company as a recurring benefit, consistent with 19 CFR
351.524(c)(1). We then attributed the benefit to sales of the input and
the downstream products. On this basis, we preliminarily determine that
a countervailable benefit of 0.19 percent ad valorem exists for Gold
East.
F. Other Subsidies (Chenming)
    Chenming reported four additional programs in which it
participated. These programs may be connected to programs discussed
above, but the information on the current record does not allow us to
decide that. Chenming cited municipal government circulars relevant to
these programs, but neither Chenming nor the GOC provided copies of
these documents. However, based on the information submitted by
Chenming, we preliminarily determine that these programs constitute
countervailable subsidies within the meaning of section 771(5) of the
Act.
    Due to Chenming's request that the Department treat information
about these four programs as business proprietary, we discuss these
additional programs in more detail in the Proprietary Analysis
Memorandum, at xx. As calculated in the Proprietary Analysis
Memorandum, we determine the combined countervailable subsidy for these
programs to be 1.45 percent ad valorem for Chenming.
II. Programs Preliminarily Determined To Be Not Countervailable
A. Debt-to-Equity Swap for APP China
    In 2001, Asia Pulp & Paper (APP) defaulted on nearly $14 billion of
debt. A portion of the debt was owed by one of APP's subsidiaries, APP
China. According to petitioner, in 2003, APP China agreed to a debt-to-
equity swap in which the Chinese creditors participated. The petitioner
alleges that APP China was unequityworthy at the time of the equity
infusion and that the transaction was at the discretion of the GOC
state-owned banks, as well as being inconsistent with the usual
investment practice of private investments.
    In response to our original and supplemental questionnaires, the
GOC and Gold East have asserted that no GOC banks were involved in a
debt-to-equity swap with APP or any of its Chinese subsidiaries,
including Gold East. Furthermore, Gold East has provided additional
proprietary information regarding the above allegation.
    Based on record information, we preliminarily determine that GOC
state-owned banks were not involved in a debt-to-equity swap with APP
China or any of its subsidiaries. Therefore, we do not find this
program countervailable. Our analysis is presented in a separate
memorandum because of the proprietary nature of the issue. See
Memorandum to Susan Kuhbach, ``APP Debt-to-Equity Analysis'' (March 29,
2007) (memorandum is on file in Department's CRU).
III. Programs Preliminarily Determined To Be Not Used
Clean Production Technology Fund
    The purpose of this program is to provide incentives and rewards
(monetary or non-monetary) to encourage enterprises to conduct clean
production inspections, with the goal of protecting the environment.
The program entered into force in October 2004, and was authorized by
Decree No. 16 of the NDRC and the National Administration of
Environmental Protection entitled Provisional Measures on Clean
Production Inspection (Decree No. 16).
    Any payments under this program are made at the local level.
Shouguang City, the relevant authority for Chenming, reported that it
made no grants under this program during 2004 and 2005. Gold East
reported that it received a grant under this program.
    Based on our analysis, any potential benefit to Gold East under
this program is less than 0.005 percent. Where the countervailable
subsidy rate for a program is less than 0.005 percent, the program is
not included in the total countervailing duty rate. See, e.g., Final
Results of Countervailing Duty Administrative Review: Low Enriched
Uranium from France, 70 FR 39998 (July 12, 2005), and the accompanying
Issues and Decision Memorandum, at ``Purchases at Prices that
Constitute `More than Adequate Remuneration' '' (citing Final Results
of Administrative Review: Certain Softwood Lumber Products from Canada,
69 FR 75917 (December 20, 2004), and the accompanying Issues and
Decision Memorandum, at ``Other Programs Determined to Confer
Subsidies''). Therefore, we do not plan to pursue this alleged subsidy
further in this investigation.
    We preliminarily determine that the producers/exporters of CFS did
not apply for or receive benefits during the POI under the programs
listed below.
    A. Direction Adjustment Tax on Fixed Assets
    B. Income Tax Exemption Program for Export-oriented FIEs
    C. Corporate Income Tax Refund Program for Reinvestment of FIE
Profits in Export-oriented Enterprises
    D. Discounted Loans for Export-Oriented Enterprises
    E. Exemption from Payment of Staff and Worker Benefits for Export-
oriented Enterprises
    F. Subsidies to Input Suppliers \5\
---------------------------------------------------------------------------
    \5\ For a discussion of these programs, please see the ``Input
Products'' section above.
---------------------------------------------------------------------------
    1. Preferential tax policies for FIEs engaged in forestry and
established in remote underdeveloped areas.
    2. Preferential tax policies for enterprises engaged in forestry
    3. Special fund for projects for the protection of natural forestry
    4. Compensation fund for forestry ecological benefits
    For purposes of this preliminary determination, we have relied on
the GOC's and respondent companies' responses to preliminarily
determine non-use of the programs listed above. During the course of
verification, the Department will examine whether these programs were
used by respondent companies during the POI.
Verification
    In accordance with section 782(i)(1) of the Act, we will verify the
information submitted by the respondents prior to making our final
determination.
Suspension of Liquidation
    In accordance with section 703(d)(1)(A)(i) of the Act, we
calculated
[[Page 17498]]
an individual rate for each exporter/manufacturer of the subject
merchandise. We preliminarily determine the total estimated net
countervailable subsidy rates to be:
------------------------------------------------------------------------
                                                            Net subsidy
                  Exporter/manufacturer                        rate
                                                             (percent)
------------------------------------------------------------------------
Gold East Paper (Jiangsu) Co., Ltd......................           20.35
Shandong Chenming Paper Holdings Ltd....................           10.90
All Others..............................................           18.16
------------------------------------------------------------------------
    In accordance with sections 703(d) and 705(c)(5)(A) of the Act, for
companies not investigated, we have determined an ``all others'' rate
by weighting the individual company subsidy rate of each of the
companies investigated by each company's exports of the subject
merchandise to the United States, if available, or CFS exports to the
United States. The all others rate does not include zero and de minimis
rates or any rates based solely on the facts available.
    In accordance with sections 703(d)(1)(B) and (2) of the Act, we are
directing CBP to suspend liquidation of all entries of CFS from the PRC
that are entered, or withdrawn from warehouse, for consumption on or
after the date of the publication of this notice in the Federal
Register, and to require a cash deposit or bond for such entries of
merchandise in the amounts indicated above.
ITC Notification
    In accordance with section 703(f) of the Act, we will notify the
ITC of our determination. In addition, we are making available to the
ITC all non-privileged and non-proprietary information relating to this
investigation. We will allow the ITC access to all privileged and
business proprietary information in our files, provided the ITC
confirms that it will not disclose such information, either publicly or
under an administrative protective order, without the written consent
of the Assistant Secretary for Import Administration.
    In accordance with section 705(b)(2) of the Act, if our final
determination is affirmative, the ITC will make its final determination
within 45 days after the Department makes its final determination.
Public Comment
    Case briefs for this investigation must be submitted no later than
one week after the issuance of the last verification report. Rebuttal
briefs must be filed within five days after the deadline for submission
of case briefs, pursuant to 19 CFR 351.309(d)(1). A list of authorities
relied upon, a table of contents, and an executive summary of issues
should accompany any briefs submitted to the Department. Executive
summaries should be limited to five pages total, including footnotes.
    Section 774 of the Act provides that the Department will hold a
public hearing to afford interested parties an opportunity to comment
on arguments raised in case or rebuttal briefs, provided that such a
hearing is requested by an interested party. If a request for a hearing
is made in this investigation, the hearing will tentatively be held two
days after the deadline for submission of the rebuttal briefs, pursuant
to 19 CFR 351.310(d), at the U.S. Department of Commerce, 14th Street
and Constitution Avenue, NW., Washington, DC 20230. Parties should
confirm by telephone the time, date, and place of the hearing 48 hours
before the scheduled time.
    Interested parties who wish to request a hearing, or to participate
if one is requested, must submit a written request to the Assistant
Secretary for Import Administration, U.S. Department of Commerce, Room
1870, within 30 days of the publication of this notice, pursuant to 19
CFR 351.310(c). Requests should contain: (1) The party's name, address,
and telephone; (2) the number of participants; and (3) a list of the
issues to be discussed. Oral presentations will be limited to issues
raised in the briefs.
    This determination is published pursuant to sections 703(f) and
777(i) of the Act.
     Dated: April 2, 2007.
Stephen J. Claeys,
Deputy Assistant Secretary for Import Administration.
[FR Doc. E7-6498 Filed 4-6-07; 8:45 am]
BILLING CODE 3510-DS-P