WORLD TRADE  
ORGANIZATION  G/SCM/115 
22 November 2004 
 (04-5071) 
Committee on Subsidies 
and Countervailing Measures  
 
 
 
CHAIRMAN'S REPORT TO THE COUNCIL FOR TRADE IN GOODS 
ON TRANSITIONAL REVIEW OF CHINA  
 
 
1. The Committee on Subsidies and Countervailing Measures undertook the third transitional 
review of China pursuant to Paragraph 18 of the Protocol on the Accession of the People's Republic 
of China (WT/L/432) at its regular meeting on 4 November 2004.   
2. Annex 1A to the Protocol requires China to submit information on the following to this 
Committee:  "Pricing Policies":  (a) "application of ex isting or any other price controls and the reason 
for their use";  and (b) "pricing mechanisms of  China's state trading enterprises for exported 
products".  China submitted a notification in this respect on 1 November 2004.  It can be found in 
document G/SCM/N/120. 
3. Members had submitted questions in the context of the transitional review.  These can be f ound 
in documents G/SCM/Q2/7-8 and /10 (double-symbo lled as a G/SCM/W document) and Corr. 1, and 
/11 (questions submitted by the European Communitie s, the United States, Japan and Chinese Taipei 
respectively). 
4. The statements made at the meeting of 4 Nove mber 2004, at which the transitional review 
was Item M of the agenda, are reflected in the minu tes of the meeting, which will be circulated as 
document G/SCM/M/52.  The relevant paragraphs , which reflect the statements made and the 
discussion at the meeting, are annexed. G/SCM/115 
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Excerpt from the minutes of the regular meeting of the Committee on Subsidies and Countervailing 
Measures held 4 November 2004, to be circulated as document G/SCM/M/52 
 
M. TRANSITION REVIEW UNDER PARAGRAPH 18 OF THE PROTOCOL OF 
ACCESSION OF THE PEOPLE'S REPUBLIC OF CHINA TO THE WORLD TRADE 
ORGANIZATION 
1. The Chairman
 recalled that paragraph 18 of the Protocol of Accession of the People's Republic 
of China to the World Trade Organization provided that all subsidiary bodies, including this Committee, "which have a mandate covering Ch ina's commitments under the WTO Agreement or 
[the] Protocol shall, within one year after accessi on review, as appropriate to their mandate, the 
implementation by China of the WTO Agreement and of the related provisions of [the] Protocol."  
China was to provide relevant information in adva nce of the review, including information specified 
in Annex 1A to the Protocol.  China could also  raise issues relating to any reservations under 
Section 17 or to any other specific commitments made by other Members in the Protocol, in subsidiary bodies which had a releva nt mandate.  The Chairman said that this Committee had to report 
the results of the review promptly to the Council fo r Trade in Goods.  Review was to take place after 
accession in each year for eight years, with a final review in year 10 or at an earlier date decided by the General Council.    2. The Chairman said that there were no procedures set out for the conduct of the transition review in the Protocol, except that China was to provide relevant informa tion in advance of the 
review.  In this regard, the Chairman noted that Annex 1A specifies China is requested to provide 
information on the following to this Committee in  accordance with Article 18.1 of its Accession 
Protocol:  "Pricing Policies":  (a) "application of ex isting or any other price controls and the reason for 
their use";  and (b) "pricing mechanisms of Chin a's state trading enterprises for exported products".  
He said that China had submitted a notification in  this respect on 1 Novemb er 2004, which had been 
circulated as document G/SCM/N/120. 
 3. The Chairman noted that questions and comments submitted by the delegations of the European Communities, the United States, Japan and Chinese Taipei in the context of the transition review, had been circulated in documents G/SCM/Q2/CHN/7-8 and /10 (double-symbolled as a G/SCM/W document) and Corr. 1, and /11.  Befo re proceeding to these questions, the Chairman 
opened the floor for any general comments from Members. 
 4. The delegate of the United States
 stated that the purpose of this transitional review 
mechanism was to review China’s progress in  implementing its obligations under the 
WTO Agreement and its Protocol of Accession on an annual basis.  He noted that now, as the 
US delegation examined China’s third year as a Memb er of the WTO, the US continued to have many 
of the same questions and concerns, in the area of subsidies and countervailing measures, that it raised 
at this time last year and the year before.  The US  noted that China had yet to provide any notification 
of its subsidies as required by Article 25 of th e Agreement on Subsidies and Countervailing Measures 
(SCM Agreement ), and the US delegation continued to see  evidence of government support that China 
had committed to eliminate.  In addition, due to Ch ina’s failure to notify certain legislation, the US 
did not have a clear picture of China’s regime  for handling countervailing duty investigations. 
    5. The delegate of the US observed that Ch ina’s failure to submit the annual subsidies 
notification required of every Member of the Committee under Article 25.1 of the SCM Agreement  is 
a key concern of the US because of the central a nd material role that notifications plays in 
transparency and accountability in internationa l trade.  Although China cited administrative 
difficulties with the start-up of its notification pro cess, the representative of the US commented that 
this explanation is less compelling three years into  China’s WTO Membership.  While the US (and no 
doubt other WTO Members) appreciated the challe nges of assembling a comprehensive subsidies 
notification, the delegate of the US noted that the SCM Agreement  does not provide for exceptions to  G/SCM/115 
 Page 3 
 
 
the notification requirement.  The US noted that  in the years since entry into force of the 
SCM Agreement , many WTO Members, including a number of developing countries, had made 
notable progress in improving their compliance wi th this obligation, notwithstanding the obvious 
difficulties.  The US urged China to comply with its  own obligations on an expedited basis, providing 
full notification of its subsidy programmes. 
 
6. The delegate of the US stated that China’s subsidies to state-owned enterprises running at a 
loss are illustrative of his delegation's concerns with China’s inadequate  disclosure before the 
Committee.  These subsidies were to end in 2000 a ccording to China’s Protocol of Accession.  In 
2002, the representative of China told the Committee that these subsidies had been eliminated in 
2001.  Then, according to the US, during last year’s transitional review, China failed to respond to the 
questions of the US delegation regarding Chinese press reports in 2003 that the government was still 
working to eliminate these subsidies and that it hoped to  do so by 2005.  The delegate of the US asked 
China to provide the Committee with  information on these subsidies. 
 
7. The delegate of the US further noted th at during China’s accession process, Members had 
raised concerns about the financial contributions  provided by China’s state-owned banks, including 
forgiven and non-performing loans.  In response to these concerns, China agreed that its state-owned 
banks should be run on a commercial basis and be re sponsible for their own profits and losses.  Since 
last year’s transitional review before this Co mmittee, however, certain de velopments had raised 
serious concerns.  The US observed that in  December 2003, China undertook two massive bank 
bailouts, injecting USD 45 billion into the Bank of  China and the China Construction Bank.  In 
China’s Northeast region, in Heilongjiang Province, USD 4.4 billion of non-performing loans unpaid by state-owned enterprises had been written off.  The US delegation noted that, while the US did not 
take issue with China’s development objectives,  it had grave concerns with the significant 
subsidization that pursuit of those objectives has enta iled, and with the potential adverse trade effects 
resulting directly or indirectly from this subsidization.  The US commented that the huge, 
unserviceable debts and non-performing loans re presented in these transactions signal severe 
economic viability issues;  yet, the Government of  China continued with its policy of subsidizing 
these enterprises.  Continued interv ention by the Chinese government in this manner, according to the 
US, thwarts the development of instituti onalized market mechanisms in China.  
 
8. The delegate of the US stated that despite its commitments under its Protocol of Accession to 
eliminate all subsidies prohibited within the meaning of Article 3 of the SCM Agreement , it appeared 
that China continued to provide subsidies con tingent upon export performan ce and/or on the use of 
domestic over imported goods.  In the questions posed by the US delegation to China under 
Article 25.8 of the SCM Agreement , the US identified several subs idy programmes in China that 
appeared to fall under the prohibited category as well  as subsidy programmes providing other types of 
assistance to a wide range of industries, including  forest products, textiles, semiconductors, and 
agriculture.  The US noted that the volume of pr ogrammes it had identified highlighted the need for 
China to comply with its commitments on prohibite d subsidies as well as its notification obligations. 
 9. The US noted that China issued a revised Foreign Trade Law and Anti-Subsidy Regulations 
this past year.  During the May 2004 meeting of the Committee, China indicated that certain 
implementing rules had been annulled.  The US stat ed that it did not know whether other rules had 
taken their place.  As a result, significant uncerta inty surrounded China’s countervailing duty regime.  
The US delegate expressed hope that China would soon notify all outstanding measures and help to 
clarify this situation through its  responses to its questions.   
 
10. The US stated that its submission for this transitional review also outlined a series of 
questions concerning price control mechanisms in China.  The number of questions asked and the 
additional information sought highlighted US concer ns with China’s apparent difficulty in meeting 
fundamental transparency obligations.  The US expressed hope that China would provide 
comprehensive and forthcoming respon ses to its price control questions.  G/SCM/115 
Page 4  
 
 11. Finally, the US expressed appreciation for th e difficulty and sensitivity of many of the steps 
that China must take to honor its obligations  under both the Protocol of Accession and the 
SCM Agreement .  However, after three years as a Member of the WTO, the US was of the opinion 
that the Committee should be reviewing China’s progress towards
 meeting those obligations, not its 
rationales for non-compliance.  The US looked forw ard to China’s full and forthcoming responses to 
its transitional review questions before the Co mmittee, as well as to its recent request under 
Article 25.8 of the Agreement.  12. The Chairman
 thanked the United States for its statem ent and invited other delegations to 
make comments.  
 13. The delegate of the European Communities
 stated that in preparing for this agenda item, he 
had reviewed the minutes of last year's Committee m eeting, and in particular, the opening statements 
made by his delegation regarding the very same agenda item.  The delegate of the 
European Communities noted that it was striking that his delegation could have used the statement of 
last year for this year.  The delegate of the Eu ropean Communities commented that this was striking 
but also disappointing.  In his opinion, this m eant that no progress had been made on compliance by 
China with transparency obligations  since last year.  The delegate of the European Communities noted 
that the consequences of China's lack of progress were non-compliance by China of WTO rules in a 
critical area, and an imbalance of information av ailable on subsidies for economic operators.  The 
delegate of the European Communities stated that  these were serious consequences and that they 
continued to be of serious concern to the EC.  14. The delegate of the European Communities me ntioned that his delegation took very good note 
of the point made by the US on the recent worry ing developments in Ch ina's financial sector 
involving significant bail-outs of state-owned banks .  The delegate of the European Communities 
stated that his delegation would listen to China's replies on these issues with great interest since 
subsidies to the financial sector may have dir ect knock-on effects on other sectors of China's 
economy.   15. Finally, the delegate of the European Co mmunities commented that his delegation submitted 
a set of questions on apparent subsidies schemes, noting that for many of these information found on 
the internet indicated that many appeared to be prohibited subsidies.  The delegate of the 
European Communities stated that his delegation ha d also reiterated questions  on subsidies to copper 
scrap imports, which was a matter of particular concern to the EC and an issue that had already been raised by the Japanese delegation, in the cont ext of discussion on a preceding agenda item. 
 
16. The delegate of the European Communities looked forward to Ch ina's replies to these 
questions.  He stated that he wanted to make one po int very clear:  it should not be the EC's task to 
search for Chinese subsidies on its own.  Instead of surfing the web to search for subsidies, the EC's 
task should be to pose questions on China's WTO subsidy notification, like for any other 
WTO Member.  The delegate of the European Comm unities stated that his delegation believed that 
this would be in the interest of everybody in th e Committee including China.  He urged China to bring 
the Committee to a position of doing so sooner rather than later.  
 17. The Chairman
 thanked the European Communities for its statement and invited other 
delegations to make comments.  Th e delegate of China was invited to take the floor to respond to the 
questions and comments that it had received. 
 18. The delegate of China
 thanked the Chairman for givi ng her the floor to address the 
Committee on the implementation of China’s commitmen ts and to respond to the questions raised by 
Members.  
  G/SCM/115 
 Page 5 
 
 
19. Before turning to the specific questions asked by the Members, the delegate of China stated 
that she wanted to first provide an overview of the action China had undertaken in the lead up to this 
review.  Pursuant to Article 32.6 of the SCM Agreement , the Chinese government notified to the 
Committee the newly promulgated regulations of the People's Republic of China on countervailing 
measures in G/SCM/1/CHN/1/Suppl.3 and submitted in formation on price control and export pricing 
policies in the light of the requirements listed in A nnex 1A to the Protocol of Accession of China.  
The delegate of China stated that she hoped this  information would present Members with a clear 
picture of China's countervailing legisla tion and relevant pricing mechanisms. 
 20. The delegate of China noted that her delegati on had, prior to this review, received a number 
of questions and comments from Members with explic it concerns about China's implementation of its 
obligations regarding subsidy notifications.  The delegate of China thanked the Members for their 
questions and stated that it was her delegation's belief that these questions and comments would help 
it collect information on domestic subsidies so as to further improve the implementation of the 
transparency obligations.  
 
21. As regards the notification of subsidies, the de legate of China stated that she wanted to draw 
the Committee's attention to the following:  first, paragraph 10.3 of the Protocol of Accession stipulates that China shall eliminate all subsidy pr ogrammes falling with the scope of Article 3 of the 
SCM Agreement  upon accession.  Since China's accession, Ch ina had implemented this commitment 
seriously and completely, and it had eliminated  all export subsidies and subsidies for import 
substitution.  China had provided numerous clear expl anations of this position in written format in 
two prior transitional reviews conduc ted by this Committee.  At present, China did not maintain 
export subsidies or import substitution subsidies of any form.  China therefore could not undertake 
any obligation of further notification in these two areas.   
22. Secondly, pursuant to Article 25 of the SCM Agreement , China had made all notifications on 
subsidy measures maintained and subsidies to be  phased out.  These notifications were made in 
Annexes 5A and 5B to the Protoc ol of Accession of China.  The two notifications reflected the 
situation with respect to Chinese subsidy measures a ccurately and completely.  The delegate of China 
noted that these two notifications are still current a nd effective, and that they fulfil the notification 
requirements under the SCM Agreement . 
 
23. Thirdly, China emphasized that, as was the case in all other WTO Committees, it placed great 
importance and undertook much effort in implem enting its transparency obligations.  Since its 
accession to the WTO, China had been actively coll ecting subsidy information.  China had invited 
WTO experts on subsidies to various  exchange and consultation activities conducted by the competent 
Chinese authorities, with the most recent session being held last August.  However, the delegate of 
China noted that there was more than one authority responsible for the administration of subsidies in 
China, and that information collecting and sorti ng is a complex and time consuming exercise.  The 
delegate of China stated that many Members face th e same problems, even some developed Members.  
 
Questions with respect to the VAT rebate gr anted for imports of copper raw materials 
 
24. The representative of China stated that this policy was based on a joint notice of the Ministry 
of Finance and the State Taxation Administration.   It applied only to copper raw materials, 
specifically copper waste and scrap, copper ore c oncentrates and raw copper imported by copper 
producing enterprises with a production capacity of mo re than 30,000 tonnes per year.  The delegate 
of China explained that the detailed procedure for obtaining the refund is as follows:  when eligible 
enterprises import copper waste and scrap copper ore concentrates and raw copper, import duties 
including tariff and import VAT are levied by customs.  After clearance of all import customs 
procedures, the enterprises filled in an applica tion form for refund of import duties, which after 
verification by local customs authorities, are submitted to the Ministry of Finance and copied to the 
General Customs Administration.  The Ministry of Finance together with other relevant authorities G/SCM/115 
Page 6  
 
then undertook a verification process.  It would th en respond, by formal correspondence, to the local 
customs office with a copy of the correspondence being sent to the local customs administration and 
other relevant authorities.  The local customs office would then refund 30 per cent of the collected import VAT making specific reference to the formal  correspondence from the Ministry of Finance.  
The delegate of China commented that, as he had explained, all of the procedures implementing the 
VAT refund policy are therefore clear and transparent.  
 25. The delegate of China noted that based on  information he had r eceived from the relevant 
authority, 40 enterprises benefited from this policy in  2003.  At this stage, the total value refunded 
was still unclear because some of the enterprises in question had not yet been refunded.  As to the 
impact of this policy on international trade, the de legate of China stated th at China did not accept that 
this policy deteriorated the international trade envi ronment for copper raw materials.  The delegate of 
China explained that 2.67 million tonnes of copper or e concentrates were imported in 2003;  and that 
of this amount, only 360,000 tonnes (or 13.5 per cent of imports) benefited from the VAT refund 
scheme.  Furthermore, of the 3.16 million tonnes of  copper waste and scrap imported into China last 
year, only 39,000 tonnes (or 1.2 per cent of imports) benefited from the VAT refund scheme.  The 
delegate of China wondered how su ch small amounts could adversely a ffect the international trading 
environment for copper, and stated that the world was undergoing a shortage of copper raw materials, 
not because of China's VAT refund scheme, but  because many mines reduced and/or closed 
production in response to a fall in prices in the late 1990s and also because of the later recession in the 
world economy.  The delegate of China stated that  there was no ground to allege that China's policy 
led to the shortage of copper supply in the world market. 
 26. As regards the consistency of this policy with WTO rules, the delegate of China stated that, 
after detailed study, China believed it did not violat e WTO rules.  The delegate of China noted that 
the Chinese authorities had started a review of the pol icy and that, up to now, no definite conclusions 
have been reached.  
 
Questions with respect to the semiconductor industry 
 
27. The delegate of China confirmed that a National Development and Reform Commission 
official made an announcement some time ago re garding the semiconductor industry.  However, the 
delegate of China pointed out that this announcem ent only concerned considerations related to the 
changes to be made to the previous policy whic h was terminated.  The aspects of the policy being 
considered included providing full VAT refund for export of semiconductor a nd integrated circuit 
products and also other support meas ures regarding research and development and training, etc.  The 
delegate of China stressed that these features of th e policy were only under consideration.  They had 
still to be translated into government decrees and notices, before they could be published and 
implemented.  The delegate of China stated th at when published and implemented, these policies 
would be WTO-consistent.  
Questions with respect to special economic zones 
 28. The delegate of China stated that China di d maintain some preferential tax programmes for 
foreign investors in the special economic zones, and economic and technological development areas.  
These policies were included in Annex 5 of Ch ina's Accession Protocol.  These were being 
implemented and some may have undergone some adjustment sinc e China's accession to the WTO.  
 
29. As regards the questions from Members citi ng information collected from media reports, the 
Chinese delegate mentioned that the WTO is an organization where Members discuss government policies and measures.  He stated that the Chinese government undertook no obligation to verify information published on non-official websites, and it did not accept that such information could be a 
basis for making accusations against China's policies.  The delegate of China noted that given the size 
of China, it was virtually impossible to verify all of the information in the media.  Furthermore, the  G/SCM/115 
 Page 7 
 
 
delegate of China noted that a lot of the inform ation coming from these sources was either inaccurate 
or outdated.  For example, in the semiconductor case, the information that was published reflected only intentions or considerations but not actual implemented policy.  In the Heilongjiang Province 
matter, an extremely important fact was neglected.  For non-performing loans, the Chinese government had followed the practice that the creditor banks and debtor enterprises should 
come to a resolution through negotiations and consul tations between themselves.  When restructuring 
non-performing loans, the creditor banks in China now followed commercial principles, taking into 
consideration the repaying ability , asset quality of the debtor, and their own ability to absorb the 
losses.  The delegate of China stated that in th e restructuring process, the government would neither 
assume the losses nor provide subsidies to th e creditor banks.  With respect to the 
Heilongjiang Province matter, the debt of the state ow ned enterprises was dealt with in the exact same 
fashion, i.e. on a commercial basis.  According to Chin a, the statement that Heilongjiang Province 
agreed to write-off RMB 36 billion worth of non-pe rforming loans unpaid by state owned enterprises 
was not true.  Non-performing loans involved in that  case were only RMB 18 billion.  At present, only 
the Industrial and Commercial Bank of China had begun negotiations with the SOEs in 
Heilongjiang Province.  No scheme has been implemented. 
 
Questions with respect to reform of the financial sector 
 
30. The delegate of China stated that the Chin ese delegation did not think the details of this 
reform were related in any way to  the mandate of the Committee.  However, to facilitate Members' 
understanding of the efforts and resolve of his governme nt, the delegate of China stated that he would 
provide the following information: reform of Chin a's banking system had been considered for some 
time, and it was recognised that it could not be completed overnight.  The delegate of China 
commented that relevant experience would need to be accumulated, step by step.  The delegate of 
China stated that the Chinese government had previ ously adopted a number of reforms toward state 
owned banks, and with these efforts, commercial banks  in China, whether state owned or not, were 
already operating under commercial conditions.  Government intervention has been reduced to a 
minimum level.  31. The latest reorganisation and injection of capital into the Bank of China and the China Construction Bank were considered to  be one of the steps needed in the overall reform of the banking 
sector in China.  The delegate of China noted th at compared with previous reform measures, the 
capital injection measures of December 2003 were  designed and implemented with commercial 
considerations in mind.  The State, through the Ce ntral Weijing Corporation, injected USD 45 billion 
into the two banks to increase their capital funds, with  future dividends expected as a return on this 
investment.  The delegate of China explained that th e action taken was, in nature, an investment, not a 
subsidy.  With this capital injection, the Bank of China and the Construction Bank of China were 
reorganised into shareholding companies.  Corpor ate management mechanisms had been introduced, 
the banks' operations and assets had been restruct ured, quality of assets improved, and the capital 
sufficiency rate increased.  The delegate of Chin a commented that these initiatives were aimed at fully 
commercialising the operations of the two banks and would enable China to accumulate further 
experience for additional reform of the Chinese banking system.  
 
32. The delegate of China noted that there was no major difference between this reform carried 
out by China and reforms carried out by other WTO Members.  Any such reform involved a write-off 
of non-performing loans.  If these types of reforms were labelled subsidies, then this issue was 
definitely not unique to China. 
 
Questions with respect to pricing administration  
 
33. The delegate of China stated that no new law,  regulations or other me asures had been taken to 
change the listing in Annex 4 to the Protocol of  Accession, apart from what was explained in last G/SCM/115 
Page 8  
 
year's review – i.e., that vegetable oil was no longer subject to pricing controls.  The delegate of China 
also stated that China had not implemented any new pricing controls.  
Questions with respect to steel and steel scrap pricing 
 34. The delegate of China stated that prices for st eel and steel scrap were fully liberalised in 1999, 
and that copper and copper scrap pr icing had also been liberalised.  
 
Questions with respect to the pricing mechanism for water 
 35. The delegate of China stated that although wa ter was still subject to state pricing, the pricing 
mechanism had been reformed to re flect market forces and the availability of resources.  The delegate 
of China provided the following details with resp ect to China's pricing mechanism reform:  it was 
aimed at establishing water pricing mechanisms that fully reflect water scarcity  in China, focusing on 
water saving, reasonable allocation of water resources, higher effici ency of water utilisation, and 
facilitation of the sustainable utilisation of water resources. 
 36. The delegate of China noted that the pr inciples underlying a reasonable water pricing 
mechanism included:  first, combining water price adjustment with water price structure 
improvement, establishing a multi-level pricing system according to the capabilities of different users.  
Secondly, water pricing should take into consideration the adjustment of water pricing facilities so as 
to realise a reasonable allocation of water resource s.  Thirdly, reflecting reasonable utilisation of 
water resources with water pollutio n prevention to encourage recycling of waste water.  Fourthly, 
realising sustainable development of water s uppliers through the construction of water saving 
facilities and providing reasonable compensation for th eir cost, facilitating the construction of water 
savings projects and promoting water savings tec hnologies.  Fifthly, combining the water pricing 
mechanism with the operational mechanism of wate r suppliers, pushing forward the operation on a 
commercial basis as enterprises and industry strengt hen cost control through the pricing mechanism 
and bring into play market mechanisms.   
Questions with respect to protective pricing  
 37. The delegate of China stated that the basic pr inciples of protective prices were set out in:  The 
Law of the People's Republic of China on Pricing.  The purchase prices of grains were in general 
subject to supply conditions of the markets.  It  was only when there was a major change in the 
demand/supply situation, in such a way that it was deemed necessary to guarantee market supply and 
to protect the interests of the peasants, that protective prices would be applied. 
 
Questions with respect to the price of coal and oil 
 
38. The delegate of China stated that the pri ce of coal was completely subject to market 
mechanisms.  As regards the prices of land oil, stat e pricing had been eliminated.  The price was now 
determined by enterprises according to commercial negotiations.  The price of offshore oil was 
determined by the market.  The current prici ng mechanism for crude oil applies regardless of 
geographical, industrial or enterprise differences.  39. In conclusion, the delegate of China stated  that it was not hard to imagine the difficulties 
encountered by China as a new Member of the Or ganization to prepare a full and comprehensive 
subsidy notification.  China cited such difficu lties during its accession negotiations, and these were 
recognised in the Working Party Report.  Therefore, the delegate of China continued, it was important 
to realise that China was making all possible efforts.   The delegate of China stressed that China had 
never stated that it would not comply with its transparency obligations.  What China had said was that, as a new Member, it faced a lot of difficu lties, like other Members with better capabilities and 
more experience.  For instance, the US and the EC notifications of their domestic support for 2000  G/SCM/115 
 Page 9 
 
 
and 2001 were only received in  March of 2004.  In China's view, this was also a three year delay.  The 
delegate of China stated that he was highlighting this example not to excuse China's delay in making 
its notification, but so that Members knew that pressure on China on this point would not resolve the 
challenges it faced.  Some of these challenges included needing to educate all of the officials working 
on subsidies policies in China.  In August of 2 004, the Secretariat had held a detailed technical 
workshop with over 20 participants in China.  The de legate of China thanked the Secretariat for all the 
assistance provided.  Other difficulties included domestic negotiations.   40. The delegate of China commented that ever y Member had its own problems, and he asked 
why was it so difficult for other members to reco gnise the challenges curre ntly faced by China, 
particularly as a new Member. Finally, the delegate of China stated that China was in a better position 
today than last year, noting that the spirit of c ooperation from the relevant Ministries was increasing. 
He hoped that the members would be ab le to understand China's difficulties. 
 41. The delegate of China said he was surprised  to see that questions from the delegation of 
Chinese Taipei were listed in the agenda for the meeting. The delegate of China noted that his 
delegation had not received any qu estions from Chinese Taipei.  The delegate of China said his 
delegation could not assume any oblig ation at this meeting to respond to questions which have never 
been delivered to the Chinese delegation.  42. The Chairman
 thanked China for its responses and asked  if any other delegations wanted to 
take the floor. 
 43. The delegate of Chinese Taipei
 said he appreciated the detailed responses provided by the 
Chinese delegation.  He stated that the questions from Chinese Taipei were very clear,  as set out in 
document G/SCM/Q2/CHN/11.  The delegate of Chinese Taipei stated that, if necessary, he could 
read through all of the questions in order to fac ilitate the Chinese delegates' provision of a response. 
 44. The delegate of China requested that the qu estions of Chinese Taipei be delivered to his 
delegation.  45. The Chairman
 asked if there were any other delegati ons that had any questions or comments. 
 
46. The representative of Japan  mentioned that, despite the statement of the Chinese delegate that 
its copper ore VAT refund system was WTO-consis tent, the delegation of Ja pan was still concerned 
about the programme.   The delegate of Japan noted  that Japan's copper sme lting industry believed that 
this system increased the price of copper in the international ma rket, and accordingly, Japan's industry 
had been adversely affected.  The delegate of Japan recalled that at last year's Committee meeting in 
October, the delegation of China mentioned that it wa s ready to undertake a bilateral exchange of views 
on this subject.  In this regard, the delegate of Japan mentioned that a vice-minister level conference 
between the Ministry of Commerce of China and the Ministry of Economy, Trade and Industry of Japan was held in May this year, wh ere China stated that it was consid ering the future treatment of the 
VAT refund system for copper, including a partial el imination of the system and that it would be 
ready to provide relative information at a later stag e.  The delegate of Japan commented that China 
should provide it with all of the information releva nt to this issue, including information on the said 
elimination.   47. The representative of the United States
 initially responded to four points made by China.  First, 
as regards the statement of the delegate of China that the notification provided in the Protocol of 
Accession reflects accurately and co mpletely the current situation and satisfies China's obligations under 
the SCM Agreement , the delegate of the US stated that his delegation could not accept that a notification 
that was supplied in the course of accession sati sfied an ongoing obligation of all WTO Members.  
Secondly, as regards China's commen ts relating to US reliance on me dia reports for information about 
China's subsidy policies, the delegate of the US stated  that the solution to this problem was for China to G/SCM/115 
Page 10  
 
provide a notification.  China was the best sour ce of information with respect to its subsidies 
programmes.  The delegate of the US noted that th e WTO was three years into China's membership and 
China had still not tabled its first subsidies notification.  Thirdly, according to the US delegate, China made the point that it was making a mu ch better effort now than in the past.  However, the delegate of 
the US stressed that despite these apparent efforts, there were no concrete results.  He noted that last 
year the US delegation suggested that China submit a partial notification so that the Committee could 
satisfy itself that ther e was some movement towards Chin a meeting its obligation under the 
SCM Agreement .  Finally, the delegate of the US noted that China made the point that a US notification 
is three years behind.  The US delegate commented, a nd suggested that the Secretariat confirm, that the 
US was up to date with respect to its notifications, in the same way as the EC. 
 
48. As regards the specific comments made by th e Chinese delegate with respect to Members' 
reliance on third-party sources of information, the representative of the US noted the existence of an 
OECD report entitled "China in the World Economy, th e Domestic Policy Challenges".  The delegate of 
the US noted that this report was based on informat ion that post-dates China' s accession to the WTO.  
The delegate read from Chapter 18, entitled "The cu rrent tax system and priorities for reform".  On 
page 625 of the report, the third paragraph read as follows:  
"The current tax system excessively relies on revenues from tax (VAT, business tax, consumption tax).  Revenue from income taxation has been seriously eroded by the 
generous tax incentives provided to forei gn and domestic enterprises and by the high 
threshold in personal income tax. ... some of the tax incentives are clearly violating 
WTO rules and need to be removed." 
49. The delegate of the US quoted further from page 633 as follows: 
 
"Foreign invested enterprises exporting 70% or more of their output in a given year 
are eligible for a 50% tax reduction in that year, even after the expiry of the normal 
tax holiday." 
50. The delegate of the US described what he believed was the overall tax incentive referred to in 
this report: a foreign investment enterprise in Chin a was granted an exemption of all income taxes for 
two years beginning with the year it starts making a profit.  Three years after that, it was granted a 
50% per cent reduction in taxes.  These tax incentives were not con tingent upon export performance.  
The same company was entitled to a 50 per cent reductio n of income taxes after this five year period if it 
exports 70 per cent or more of its  output.  The delegate of the US not ed that these programmes provide a 
powerful incentive for firms to locate in and export from China.  The US delegate further commented 
that his delegation would argue that the latter set of  income tax reductions were inconsistent with the 
SCM Agreement .  
 
51. The delegate of the US then read a passage from page 634 of the report regarding a programme 
described in the report as a "t ax refund on reinvestment".  
 
"Foreign investors or foreign invested enterprise s that invest their share of profits in China 
for a period of no less than five years, may obtain a tax refund of 40% of the income tax 
paid on the amount of reinvestment.  If the reinvestment is made in establishing or 
expanding an export oriented enterprise or a technologically advanced enterprise, the tax 
refund is 100%." 
 52. The delegate of the US noted that the main point he wanted to make was that there was no 
disagreement whether these programmes had existed in the past.  There was some doubt about whether 
they still existed.  The OECD report said that they existed today.  An Economist Intelligence Unit report, 
dated February 2004, descri bed the same programmes.  Thus, the delegate of the US commented that 
two separate independent organisations both stated that the subs idy programmes described continue to  G/SCM/115 
 Page 11 
 
 
exist today.  He stated that all the US was asking China to do was to provide the Committee with information on the legislative measures China had undertaken to eliminate at least these two subsidies upon accession.  53. On the issue of Heilongjiang Province and the northeast revitalisation programme, the 
representative of the US recalled that the Chinese delegate mentione d that the banks were working on a 
commercial basis and that any loan forgiveness that  had taken place had been decided by the banks and 
by the banks only.  The US delegate d commented that if indeed that was the case, it was puzzling to see 
some of the characteristics of the northeast re vitalisation programme.  For instance, the central 
government intended to spend USD 12 billion this year on interest rate reduct ions to fund technological 
upgrades of 100 state-owned enterprises in the re gion.  The central government and the provincial 
governments had also decided to se t up a northeast revitalisation bank th at would finance low interest 
loans to state enterp rises.  The industries that  had been targeted in the northeast region were 
petrochemicals, machinery and equipment and other indus tries that make up the traditional core of these 
economies.  The US delegate asked the Chinese delega tion to explain the rationale of this revitalisation 
programme in light of the statement that the assistance coming from banks in that region was 
commercially based.  The US delegate stated that  his delegation was unclear about the USD 12 billion 
interest rate reductions granted to companies in traditional sectors of  the economy, given that China was 
trying to revitalise a programme along market economy lines, and trying to improve resource 
allocations.  The US delegate commented that one co uld think it would be under standable to establish a 
financing vehicle, if the financing was directed towards the promotion and development of small and 
medium sized enterprises.  On e would also understand why the Ch inese government would want to 
finance the social cost of a structural adjustment.  But, the delegate of the US continued, it was unclear why the Chinese government would do what the government is doing now.  54. The representative of the European Communities
 stated he fully supported the position taken 
by the US with respect to the statement made by  China that the annex to its Accession Protocol 
contains an adequate and complete notification.  Th e delegate of the EC respectfully disagreed with 
China on this point, in particular, because the Chinese delegates informed the Committee at the 
meeting that several of the programmes pertaining to special economic zones contained in the Annex 
have been modified.  The EC delegate stated th at, as he has mentioned in previous meetings, the 
Annex to the Accession Protocol could be a useful starting point for making a partial notification, if 
further elaborated and updated.  This would be a major improvement to the current situation where 
there was nothing to review.  55. The delegate of the EC stated that he found China’s failure to respond to Questions 3 to 7 of 
the EC’s questionnaire, on grounds that the Chin ese government was not in the business of verifying 
information found by other Members on websites, di sappointing.  The EC delegate recalled that he 
did not ask China to verify any websites.  What wa s asked was to respond to certain information that 
had come to the attention of the EC delegation.  Th e EC delegate asked China to provide a response to 
his questions, and in particular, whether or not su ch subsidy programmes existed, yes or no, and if 
they existed to describe them in more detail.  
56. With respect to the copper imports scheme, the EC delegate said that he did not hear an exact 
reference in the Chinese delegate’s address to a te xt or a law which would describe the copper VAT 
reimbursement scheme.  The delegate of the EC al so commented that it would have been interesting 
to receive information on the value of refunds gran ted under the scheme for years prior to 2003, given 
that the Chinese delegate had stated that the sy stem was in place since 2000 and figures for 2003 were 
not available.  The delegate of the EC stressed that, firstly, the overall figures of raw material imports 
had to be looked at over a longer time period, wh ere a strong upwards trend of imports could be 
observed and, secondly, the figures cited by the Ch inese delegate appeared to comprise the overall 
tonnage of raw material and did not reflect the coppe r content.  The numbers held by the EC showed 
that 30 per cent of copper scrap imports and 50 per cent of the copper concentrate imports had 
benefited from the system.  The price reduction for Chinese smelters obtained through the VAT G/SCM/115 
Page 12  
 
refund had also to be seen in terms of treatment a nd refining costs and the metal content.  Finally, the 
delegate of the EC stated that the trade distorti on in this measure resulted from higher buying prices 
for raw materials which were possible through the s ubsidy to the Chinese smelters and which were 
not reflected in equally higher prices for the finished  product.  The EC delegate concluded by stating 
that the EC considered that this trade distorti ng subsidy practice had caused it and other Members’ 
industries serious prejudice and should therefore be eliminated. 
 57. The representative of Japan
 noted that the Japanese government was of the view that the VAT 
refund scheme could also have an adve rse impact on the Japanese industry.   He commented that his 
country was interested in acting jointly agains t this scheme with the EC, who shared a common 
concern about this scheme.  The delegate of Japan urged China to review the situation. 
 58. The delegate of China
 thanked the Members for the questions raised.  The delegate of China 
took note of the concerns and stated that these concerns would be transm itted to the relevant 
departments in Beijing.  Recognising the limited time allocated for transitional re views, China noted that 
it was willing to discuss SCM issues e ither before or after this review. 
 59. The representative of Japan
 thanked China for providing inform ation on its laws and regulations 
on CVD investigations.  However, he noted that Chin a should provide this information according to the 
procedures set by this Committe e.  Otherwise WTO Members coul d not share information on this 
important issue.  
 
60. The representative of the United States  stated that it was troublin g that China did not provide 
responses to the very substantive questions forwarded by the Member s.  The US delegate commented 
that his delegation found this development disturbing.  He noted that the US was willing to work with 
China over time, and also willing to work bilaterally, but China needed to  realise that the issues that had 
been raised were not going to go away.  
 61. The representative of the European Communities
 supported the statements made by Japan and 
the US.  The EC expressed disappointment that the re view process was cut short.  The delegate of the 
EC noted that the Committee was left hanging in th e air with respect to a large number of the 
questions asked, and Members did not really know when the answers would be provided.  Any 
reaction from the Chinese delegation about when they  intend to respond to those questions would be 
very much appreciated.  Finally, the EC delegate  indicated that his delegation was willing to work 
bilaterally with the Chinese side to a dd more value to the review process. 
 62. The Committee took note
 of the statements made.  
 
63. Turning to the Committee's report on the transitional review, the Chairman  noted that there 
were no guidelines for the report contained in the Pr otocol.  Following the re view at last October's 
regular meeting, the Chairman, acti ng on her own responsibility, had pr epared a brief, factual report, 
with references to the documents concerned, and attaching the porti on of the minutes of the meeting 
which related to the transitional review.  The Chai rman asked Members whether this procedure should 
be followed again. 
 64. The Committee so agreed
. 
 
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