WORLD TRADE  
ORGANIZATION  G/SCM/119 
16 November 2006 
 
 (06-5523) 
Committee on Subsidies 
and Countervailing Measures  
 
 
 
CHAIRPERSON'S REPORT TO THE COUNCIL FOR TRADE IN GOODS 
ON TRANSITIONAL REVIEW OF CHINA  
 
 
1. The Committee on Subsidies and Countervailing Measures undertook the fifth 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 26-27 October 2006.   
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 the information in this respect on 23 October 2006, which has been 
circulated in document G/SCM/N/149.  
3. Questions submitted in the context of the 2006 tr ansitional review have been circulated in 
documents G/SCM/Q2/CHN/23 (United States) a nd G/SCM/Q2/CHN/24 (European Communities).  
The statements made in the context of this tran sitional review at the meeting of 26-27 October 2006 
are reflected in the minutes of the meeting, th e relevant paragraphs of which are annexed. G/SCM/119 
Page 2  
 
  Excerpt from the minutes of the regular meeting of the Committee on Subsidies and Countervailing 
Measures held on 26-27 October 2006, (to be circulated as document G/SCM/M/58). 
 
E. 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 accession, 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 rele vant mandate.  This Committee had to report the results of the 
review promptly to the Council for 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 noted that there were no procedures set out in the Protocol for the conduct of 
the transition review, except that China was to provide  relevant information in advance of the review.  
In this regard, Annex 1A specified that China w as 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 existing or any other price contro ls and the reason for their use"; and (b) "pricing 
mechanisms of China's state tradi ng enterprises for exported products".   China's submission, received 
on 23 October 2006, had been circulated as document G/SCM/N/149.  The United States and the 
European Communities had submitted written questi ons (G/SCM/Q2/CHN/23 and 24).  Before 
proceeding to these questions, the Chairman ope ned the floor for any general comments.  
3. The delegate of Canada
 stated that, in the context of th e 2005 transitional review of China, 
Canada, jointly with the United States and Mexico , had submitted questions regarding China's steel 
policy (G/SCM/Q2/CHN/15).  At that time, the dele gate of China had provided partial, oral answers 
to some of the questions.  He reiterated the request that answers to all questi ons be provided in writing 
and he recalled that the joint submission in doc ument G/SCM/Q2/CHN/15 had highlighted some of 
Canada's concerns on China's steel policy announced  in July 2005, which could have significant 
repercussions on the world steel market and on the Canadian steel industry.  These concerns centred 
on the high degree of intervention of the Chinese Government in the direction and decision-making regarding the allocation of resources into and out of the steel industry.  These concerns had been 
expressed in the context of the Working Party re port accompanying China's Protocol of Accession in 
which China had agreed that the Government would not influence directly, or indirectly, commercial 
decisions on the part of state-owned or state-inv ested enterprises and had agreed that state-owned 
enterprises, including banks, should be run on a co mmercial basis.  Canada's concerns were even 
more relevant today given the growing impor tance of China's steel production and capacity. 
4. The delegate of the United States
 said that this was the fifth annual transitional review of 
China and that after this review the Committee wo uld have completed more than one-half of the 
reviews required by China's Protocol of Accession.  The United States continued to believe that the 
transitional review was a useful mechanism that he lped to provide needed additional transparency 
with regard to China's trade regime and that also provided Members with a multilateral forum for 
conveying their concerns with China's WTO complia nce efforts.  As such, the transitional review 
mechanism was a useful supplement to bilateral di scussions with China.  In April 2006 China had  G/SCM/119 
 Page 3 
 
 
  submitted its first subsidy notification since becoming a WTO Member in December 2001.1  T h e  
submission of this document represented an importa nt step for China as the notification obligation 
under the SCM Agreement was one of the more important transparency obligations of WTO 
Members.  The United States welcomed the submissi on of this notification and looked forward to a 
full review of the notification after China had subm itted its written responses to Members' questions.  
However, while the United States appreciated th e efforts China had made with regard to its 
notification obligation, other important obligations  remained of immediate concern to the United 
States.  In this respect, the delegate mentione d the continued existence of prohibited subsidy 
programmes that China had specifically committed to eliminate upon accession to the WTO almost five years ago.  A number of these Chinese programmes, some of which were reported in China's 
notification and some of which we re not, provided subsidies conti ngent upon exportation or upon the 
use of domestic over imported goods.  All of th ese programmes should be terminated without delay 
and without pre-conditions.  
5. The delegate of Japan 
stated that, although Japan had not submitted questions in the context 
of this year's transitional review, Japan shared the concerns expressed by the United States and the 
European Communities in their written submissions.  Japan appreciated the efforts that China had 
made in submitting its first subsid y notification, but there still rema ined uncertainty around China's 
subsidy regime.  Therefore, Japan would like to continue to particip ate in the discussions on this issue 
in this Committee. 
6. The Chairman  then invited the delegation of the Unite d States to introduce the questions in 
document G/SCM/Q2/CHN/23.  
7. The delegate of the United States  said that the questions posed by his delegation pertained to 
prohibited subsidy programmes that had been in exis tence for quite some time and to other possible 
prohibited subsidy programmes.  In this connec tion, the United States had sought clarifications 
regarding disturbing information suggesting that China might be introducing new prohibited subsidies 
that targeted and extended financial support for the expansion of exports in certain industries, such as 
textiles, autos and auto parts, and agriculture.  The United States was disappointed that China's 
subsidy notification did not cover certain types of subsidies.  For example, there was no reporting of 
any subsidies that might have been provided through  China's state-owned banks.  He noted that this 
issue was covered in paragraphs 172 and 173 of Ch ina's Working Party report and that in paragraph 
173 of that report China stated that "it was attemp ting to reduce the availab ility of certain types of 
subsidies, in particular by making government-own ed banks operate on a commercial basis".  China 
had also agreed at the time that it would work toward s a full notification of its subsidies.  Therefore, 
the United States had posed several questions relati ng to the banking and financial sector in China.  
For example, it had asked for an update regarding China's plans for banking reforms and specifically 
about China's plans for meeting its objective that the big four state-owned banks should be run on a 
commercial basis.  It had also enquired about polic ies affecting the big four state-owned banks and 
sales of non-performing loans to China's asset manageme nt companies.  In addition, the United States 
had asked China to explain whether its understanding  was correct that eligib ility for long-term loans 
was generally contingent upon cons istency with state industrial policies and to explain how these 
banks were able to issue loans in a market-oriented manner if, in fact, they were required to take into 
account state industrial policies.  In another part of its written submission, the United States had asked 
China to explain how its new bankruptcy law would, or would not, apply to state-owned enterprises if 
they were insolvent.   
8. The delegate of the United States said that hi s delegation's written submission also addressed 
the important area of export credits, an issue that required more transparency .  Specifically, the United 
                                                      
1 G/SCM/N/123/CHN.  G/SCM/119 
Page 4  
 
  States had asked a number of questions seeking info rmation about the terms and conditions of export 
credit financing provided by China's Exim Bank and by the China Development Bank.  
9. Finally, in reviewing China's subsidy notifi cation, the United States had found no reporting of 
subsidies provided by provincial and local govern ments in China.  Paragraph 173 of China's 
Accession Working Party report highlighted "subsid ies provided by sub-national governments", as an 
area in which reporting was needed. He noted in this  respect that at the special Committee meeting to 
review 2005 new and full subsidy notifications the dele gate of China had indicated that China was in 
the process of preparing a notification with respect to those subsidies.  The United States recognized 
that the compilation of all the information missi ng from China's subsidies notification would require 
significant time and effort, but this did not relieve Ch ina of its obligation to notify all of its subsidy 
programmes as required by Article 25 of the SCM Agreement and the commitments China had 
undertaken in its Protocol of Accession.   
10. In summary, the United States welcomed the subm ission of China's first subsidy notification 
but remained troubled by China's continued use of what appeared to be prohibited subsidy 
programmes.  As a major beneficiary of the multilateral trading system, China bore a responsibility, 
like other major trading powers, to ensure that its trade regime was consistent with the fundamental 
rules.  If China failed to follow the fundamental rule s of the trading system and failed to abide by its 
explicit accession commitments, China risked unde rmining the system itself and diminishing the 
economic and commercial benefits that China deri ved from it.  The United States looked forward to 
China's responses to its written questions. 
11. The delegate of China 
stated that he had listened very a ttentively to the statements made by 
other delegations and that he ha d already provided a detailed expl anation of China's position on the 
issues raised by these delegations in his statemen t at the special Committee meeting to review the 
2005 new and full subsidy notifications.  China was determined to observe the obligations of the SCM 
Agreement but collecting information in a country as large as China posed enormous difficulties.  
China had made great efforts in this respect and had received assistance from the Secretariat to help 
Chinese officials to understand the SCM Agreement a nd determine which policies should be notified.  
Regarding the issues raised by the United State with respect to prohibited subsidies, China had 
explained in bilateral consultations  with the United States why it cons idered that the policies referred 
to by the United States were not subsidies incons istent with the SCM Agreement.  His delegation 
would provide more details on this matter in its forthcoming responses to the questions posed by a 
number of delegations on China's s ubsidy notification.  China was of the view that it had faithfully 
observed its obligations under the SCM Agreement.  A ll subsidies identified in Annex 5(b) to China's 
Protocol of Accession had been eliminated.  While there could be further discussions on whether or 
not certain subsidy programmes were WTO-incons istent, doubts about China's determination to 
observe its WTO obligations were unfounded. 
12. The delegate of China reiterated the positi on of his delegation that reform measures 
concerning the banking sector had no thing to do with the concept of  subsidy as defined in the SCM 
Agreement.  China had repeatedly stressed this poi nt in discussions in this Committee in previous 
years and had provided a substantial amount of information on the banking sector and its reform 
which enabled Members to form an opinion as to whether or not China's state-owned commercial 
banks were operating on the basis of commercial c onsiderations.  With respect to the issue of 
transparency, China considered th at its 2005 new and fully subsidy notification was complete, based 
on the information gathered on subsidies maintained  at the central government level.  He emphasized 
in this respect that the notification covered a part icular time period and th at determining whether a 
measure constituted a subsidy often posed technical difficulties.  
13. Regarding the textiles sector, the delegate of China indicated that, as a consequence of the 
deepening of the reform of the financial sector in China, there were no longer government credit  G/SCM/119 
 Page 5 
 
 
  policies that would direct commercial banks to provide  loans to certain sectors or enterprises.  Policies 
of the Chinese Government that could have an effect on the credit decisions of these commercial 
banks regarding the textiles sector included the D ecision of the State Council on the Reform of the 
Investments Regime, Provisional Regulations on Pr omotion of Industrial Structure Adjustment, and 
Regulations on Guidance on the Direction of Foreign Investment.  The Decision of the State Council 
on the Reform of the Investment Regime specifically  provided that investment projects in the textiles 
sector should be decided by enterprises themselves in accordance with market considerations, with 
loans independently audited and examined by ba nks.  Regarding the question posed by the United 
States in respect of the Notice of Relevant Polici es to Promote Chinese Textile Enterprises to Shift to 
New Ways of Growth and Support Them to Go Globa l, the delegate of China explained that the 
Chinese Government would arrange a special fund to support technology innov ation and research and 
development projects, including with respect to new fibre materials and products and water and 
energy saving techniques.  This very recent progr amme was designed particularly for small and 
medium-size enterprises and was not contingent upon ex port.  It aimed at accelerating the structural 
adjustment and technology upgrading of the textil e sector, in view of the deteriorating trading 
environment and the unfair treatment faced by Chin ese manufacturers.  This was the first programme 
introduced specially for the textiles sector.  Before  the introduction of this  programme , the Chinese 
Government had no policy whatsoever that provided dir ect subsidies specifically to the textiles sector.  
On the question of the United States regarding th e Ten Thousand Miles March for Brand Building, he 
stated that this initiative was not limited to the tex tiles and clothing sector but applied to all industries 
across the board.  This particular programme i nvolved the organization of the participation of 
enterprises in regional, national and internati onal exhibitions, brand pu blicity and promotion 
activities, and exchanges, training and workshops c oncerning brand promotion etc.  Therefore, this 
programme did not involve subsidies as defined in the SCM Agreement. 
14. Regarding the question of the United States conc erning automobiles, the delegate of China 
stated that the Minister of Commerce of Ch ina (MOFCOM) and the National Development and 
Reform Commission (NDRC) had recently identified eight cities namely, Changchun,  Tianjin,  
Taizhou,  Shanghai,  Wuhan,  Xiamen,  Wuhu and Chongqing where production of automobiles and 
components for export were mainly concentrated.  Ho wever, the identification of these eight cities did 
not entail any specific measures to offer incentives. 
15. In response to the question po sed by the United States on Chin a's measures with respect to 
semi-conductors, the delegate of China stated th at China's 2005 new and full subsidy notification 
already contained the information regarding existi ng assistance provided to the semi-conductor sector.   
The Chinese Government was currently studying possibl e further policies related to this sector, which 
would be in accordance with WTO rules and the common practice of other countries.  The Chinese 
Government had long ago abolished the practice of planning the development of individual 
enterprises.  Thus there was no problem of co ordination between central, provincial and local 
government, as implied by the question posed by the United States.  As to the specific point 
mentioned in the question regarding Wuhan city, his authorities had not been able to obtain much detailed information on this issue as they had received the question at a very late stage but preliminary 
responses from relevant sources indicated that th ere was no subsidy involved in this project.  
16. On the question of the United States regarding ag riculture, the delegate of China stated that it 
was true that the NDRC had issued a notice announc ing an exemption from the railway construction 
fund levy for all grains bound for overseas markets.  However, it was important to note that another 
notice issued by NDRC in 2002 announced an exemption from the railway construction fund levy for all imported grains as well as for all grains for sale in the domestic market, effective 1 April 2002.  In 
other words, the exemption from this railway cons truction fund levy of grains bound for the overseas 
market had been introduced after the exemption from th is levy of imported grai ns as well as grains for 
the domestic market.  As to the MOFCOM five-year plan for the export of agricultural products, the 
delegate of China explained that the six measures mentioned in the question of the United States G/SCM/119 
Page 6  
 
  were:  tightening quality and food safety control; pr omoting brand publicity; strengthening training in 
the information services; promoting the establishment of agriculture associations; exploring support measures, and finally intensifying diplomatic effo rts for a sound trading environment.  These were 
measures of a general guidance nature and did not involve specific benefits. 
17. With respect to the issue of export credit, the de legate of China stated that the export credit 
business of the China Export and Import Bank was cons istent with the exception provided in Item k of 
Annex I to the SCM Agreement.  Detailed inform ation on the export credit programmes of the China 
Export and Import Bank was availabl e on its website.  China had pr ovided a long and detailed written 
response to the same questions posed in the framework  of the first Trade Policy Review of China.  
While the details of these programmes were co mplicated, the export credit business of the China 
Export and Import Bank was consistent with the provi sions of the SCM Agreement.  With regard to 
the export credit business of the China Development Bank, after verification, his authorities could 
confirm that the export credit adopted by the Bank was a market-oriented business.   
18. The delegate of China stated that the position of his Government with respect to VAT refund 
schemes was that such schemes did not involve subs idies because the refund ra te was lower than the 
rate levied. 
19. Finally, the delegate of China stated that it appeared that certain Members had strong doubts 
with regard to the subsidy programmes in China and that they considered that China's policies of a 
general guidance nature were subsidies.  China c ould only provide subsidies if legislation existed 
involving the transfer of specific benefits.  In th is regard, consultations with various government 
agencies with regard to some of the questions posed  to China, for example, on the steel development 
policy, revealed little evidence of the existence of s ubsidies.  Thus he considered that Members should 
not exaggerate the situation regarding subsidies in China. 
20. The delegate of the United States
 thanked the delegate of Ch ina for the detailed responses 
given to the questions of the United States.  He noted that on textiles the delegate of China had 
explained that a fund had been ar ranged to finance new product and t echnology developments but that 
none of the funding was inconsistent with WTO ru les and none of the funding was contingent on 
export performance.  In this connection, he w ondered why the Government of China found it 
necessary to subsidize or to provide these funds at all in an industry such as textiles, where China had 
a clear competitive advantage, and given that trad e in textiles was expanding at a very high rate, 
including China's exports.  He also asked how the fact that China's recent measures to cool down the 
economy, specifically to cool down bank lending, ha d entailed the use of administrative means or 
measures could be reconciled with th e claim of the delegate of China that, as a result of reforms of the 
investment regime, there was no longer government  involvement in the provision of credits by 
commercial banks.   
21. With respect to the automob ile sector, the delegate of the United States wondered how 
concentration of production of automobile and autom obile parts could take place if no incentives were 
used.  He wondered whether the delegate of Chin a was suggesting that in China the market just 
happened to determine that produc tion should be located in the eight cities designated by the 
Government. 
22. Lastly, on banking, the delegate of the United States said that there were numerous sources 
including investment banks, NGOs, IGOs and academic studies that all noted problems in China's banking sector, particularly with respect to reform s on the institutional side.  Since there was some 
confusion about the state of affairs in China's ba nking sector, he could perhaps read through some of 
these sources at the next meeting and have the de legate of China respond to them.  All of these 
sources were publicly available.  He asked whether Ch ina agreed with the Unit ed States that when a 
state-owned bank was providing a loan to an uncreditworthy company or was providing loans at  G/SCM/119 
 Page 7 
 
 
  below-market interest rates to specific groups of companies, for example, state-owned enterprises, 
that should considered to be a subsidy.  Sec ondly, the issue of non-performing loans had been 
discussed quite thoroughly in much of the academic  literature and his dele gation understood that 
many of the non-performing loans had been purchased  by asset management companies in China.  
One could perhaps argue that these were prudentia l measures that any government would take to 
provide for the stability of its financial system.  However, the United States was also concerned about 
what the asset management companies were doing w ith the non-performing loans that they purchased.  
Some of the non-performing loans that were pur chased by asset management companies had been 
converted into equity in the companies that had orig inally taken out the loans.  He asked China if it 
could provide any more information on how such co mpanies were chosen in terms of eligibility for 
such debt- equity conversions and on the terms on which such debt equity conversions were made. 
23. With regard to the questions raised by the European Co mmunities in document 
G/SCM/Q2/CHN/24, the delegate of China stated that he had already addressed the issue of VAT 
refund schemes   and had explained the situation re garding subsidy programmes of local governments. 
The support provided by the Guangdong Provincial G overnment, mentioned in Question 4.2 of the 
European Communities, did not constitute an expor t subsidy because this programme was aimed at 
promoting the participation of small and medium-sized  enterprises in the international market and was 
basically the same as the programme that existed at the level of the central government, which had 
been described in the notification recently submitted by China.   
24. In response to the comments of the United Stat es, the delegate of China stated that the 
Chinese textile sector was facing intense competition, particularly in low-end products.  The 
Agreement on Textiles and Clothing required Members to make efforts toward structural adjustment, 
and China was actually making efforts in this regard .  The measures adopted by China in this regard 
were not inappropriate, particularly  in view of the difficulties face d by the Chinese manufacturers in 
the developed markets.   
25. With regard to the questions raised by the United States on measures taken by China to cool 
down its economy, he stated that in this respect China did not employ straightforward administrative 
measures, but relied, instead, on a combination of macro-economic policy measures.  With regard to 
automobiles, the delegate of China stated that  MOFTOC and the NDRC had simply recognized the 
fact that as a result of years of competition production of automobiles in China had become 
concentrated in these eight cities.  However, this did not mean that the Government was providing any 
incentives.  
26. The delegate of China stated that China di ffered with the United States as to whether the 
issues relating to the banking sector should be di scussed in this Committee but that the market 
response to the public listing of the state-owned banks showed that the direction of China's reform of 
the banking sector was sound.  
27. The delegate of the European Communities  noted that the delegate of China had pointed out 
with regard to the VAT refunds that these refunds we re lower than the VAT paid.  In this respect, and 
irrespective of legal assessment of this issue, the European Communities consid ered that such a policy 
was certainly not neutral to trade flows, because if  the refund was lower th an the duty paid, this 
clearly meant that the downstream industry using this product for which this low VAT refund was 
given, was favoured.  The better access enjoyed by the downstream industry to certain products which 
were artificially kept in the country favoured the dow nstream industry also in terms of its consequent 
export performance.  The European Communities shared  the strong concerns that had been expressed 
by many European industries with r espect to the potential, if not actual, trade-distorting effect of this 
practice.  With regard to the response of the delegate  of China to one of the sub-items in Question 4 of 
document G/SCM/Q2/CHN/24,  he asked the delegate of  China to identify the particular programme 
in the full subsidy notification of China to which he had referred.  With regard to the other sub-items G/SCM/119 
Page 8  
 
  of this Question, he noted that these questions were very detailed and identified precisely who was 
providing, or perhaps providing, the assistance whic h looked like an export subsidy on the face of it.  
While it might be difficult for a big country for Ch ina to lay its hands on each  and every subsidy and 
notify this, at least with regard to these three ite ms the European Communities would have very much 
appreciated it to get a more precise reply because it had given a clear indication where China's 
Government could have found, or can still find, mo re information with regard to these issues.   
28. The delegate of China
 stated that he had taken note of the comments of the delegate of the 
European Communities and that the particular qu estions concerning these possible subsidies of the 
local government would be taken in to consideration in the informa tion gathering process with regard 
to subsidies provided at the level of local governments. 
29. The Chairman stated that there were no guidelines for the report contained in the Protocol.  
Following the review at last year's fall meeting, the Chairperson, acting on her own responsibility, had 
prepared a brief, factual report, with references to the documents concerned, and attaching the portion 
of the minutes of the meeting which relate to the transition review.  He proposed that the Committee 
agree to follow the same procedure.  It was so decided .   
 
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