WORLD TRADE  
ORGANIZATION  G/SCM/Q2/CHN/14 
29 September 2005 
 (05-4305) 
Committee on Subsidies 
and Countervailing Measures Original:   English 
 
 
 
 
TRANSITIONAL REVIEW MECHANISM PURSUANT TO 
SECTION 18 OF THE PROTOCOL ON THE ACCESSION 
OF THE PEOPLE'S REPUBLIC OF CHINA 
 
Questions from the UNITED STATES to  
CHINA Concerning Subsidies and Price Controls  
 
 
 The following communication, dated 28 Septembe r 2005, is being circulated at the request of 
the Delegation of the United States.  
_______________ 
 
 Subsidy Notification  
 
1. Article 25 of the Agreement on Subsidies and Countervailing Measures (SCM Agreement) 
requires all Members to notify any subsidy as defined in paragraph 1 of Article 1, which is specific 
within the meaning of Article 2, granted or maintain ed within their territories.  During the 31 October-
1 November 2002 meeting of the Committee on Subsidies and Countervailing Measures (the 
Committee), China stated that it would submit the required notification when the information was 
accurate and complete (G/SCM/49).  During the 18 November 2003 meeting of the Committee, China 
declared that it was unable to provide a specifi c time frame for completion of its notification 
(G/SCM/111).  At the 25 November 2004 Counc il on Trade in Goods meeting (G/L/722), China 
stated that it planned to submit its subsidies notifi cation in 2005. To date, China has failed to notify 
any of its subsidies.  The United States therefore urges China to comply with its obligations under 
Article 25 of the SCM Agreement, which are re iterated in the Working Party Report accompanying 
China’s Protocol of Accession, to provide a full acc ounting of any subsidies it maintains.  A subsidy 
notification, as required by all WTO Members, helps to ensure the transparency th at is so vital to the 
functioning of the world trading system.  Please indicate when China intends to submit its subsidy 
notification. 
 
Export Subsidies  
 
2. The United States has documented several in stances where China appears to administer 
programmes that may provide subsidies con tingent upon export.  (See, for example, 
G/SCM/Q2/CHN/2; G/SCM/Q2/CHN/8; and “China and the WTO: Accession, Policy Reform, and 
Poverty Reduction Strategies”, edited by Deepak Bh attasali, Shantong Li, and Will Martin, 2004.)  
The Working Party Report on the Accession of Ch ina (WT/ACC/CHN/49, paragraph 167), states 
“that China would, by accession, cease to maintain  all pre-existing export subsidy programmes and, 
upon accession, make no further payments or disburseme nts, nor forego revenue or confer any other 
benefit, under such programmes.  This commitmen t covered subsidies granted at all levels of 
government which were contingent, in law or in f act, upon an obligation to export”.  The commitment G/SCM/Q2/CHN/14 
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made by China did not allow for the phase-out of su ch subsidies or for the continued allowance of 
programmes already in place for a specific period of time.  
(a) Please clarify the status of all export subsidy programmes maintained in China. 
 
(b) What steps is China taking to  eliminate all export subsidies? 
 
(c) When does China intend to eliminate all export subsidies programmes as it is 
obligated to do? 
 Export Support to Agricultural Products 
 
3. In its Protocol of Accession, China agreed th at it would “not maintain or introduce any export 
subsidies on agricultural products”. (WT/L/432, Part 1, paragraph 12.1.)  However, China still appears 
to maintain several export subsidy programmes fo r agricultural products.  For example, Jiangxi 
Province has issued policies to encourage exports  of agricultural products.  Under these policies, 
according to the Ministry of Commerce (MOFCO M) website, the province provides capital support 
for exporting bases and leading exporting enterprises; grants discount loans for exporters; assists small/medium sized enterprises in attending intern ational exhibitions and new product promotional 
activities; grants cash rewards fo r exporters with annual export re venue of US$5 million (growth of 
the export revenue should exceed 30%);  reimburse s 20% to 30% export credit insurance fees for 
exporters.  The province provides capital support for export-oriented projects and technological 
upgrading projects and provides loans to enterprises presenting export orders or export letters of 
credit.  The province also guides enterprises in avoiding export credit risks and assists them in 
reducing export costs.  In another example, Henan Province set up a special purpose fund to encourage the export of foreign exchange-earning agricultural products.  The special purpose fund 
reportedly provides low-interest loans for processo rs of agricultural products which met specific 
direct export volume levels.  The support provided pu rsuant to these and other provincial and central 
government policies appear to be inconsistent with the commitments contained in China’s Protocol of 
Accession and with its obligations under Article 3 of the SCM Agreement not to maintain export 
subsidies.  
(a) Please clarify how these programmes are compliant with China’s Protocol of 
Accession and with China’s obligations under the SCM Agreement. 
 
(b) Please indicate when China will notify these programmes. 
 Northeast Revitalization Industrial Policies  
 
4. China has undertaken increasing industrial policy actions with regard to the Northeast area of 
China.  These policies, often under the auspices  of “Northeast Revitalization”, seem to provide 
potentially unfair advantages to businesses locating to or operating in Northeast China.  For example, 
a report on the MOFCOM website noted that th e Dalian Branch of the Export-Import Bank would 
provide RMB 5 billion of export credits to compani es in Northeast China to enter global markets.  
The report went on to explain that since Novemb er 2003 “low-cost credit provided by the bank has 
saved the enterprises [RMB] 150 million interest”.  In addition, in 2004, according to China’s State 
Property Commission, China was carrying out “strategic restructuring and technical transformation of key enterprises in the areas of oil, petrochemical, iron and steel, automotive, shipbuilding and aircraft 
products manufacturing sectors in Northeast China in a bid to establish production bases of advantage 
industries”.  While efforts at restructuring the economy to operate on a more commercially driven 
basis are admirable objectives, these and other repor ts indicate that China continues its industrial 
policy drives, especially in the Northeast region, with potentially problematic aid and assistance, as 
well as direct government intervention in specific Chinese manufacturing industries. 
  G/SCM/Q2/CHN/14 
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(a) Please provide a complete description of Ch ina’s industrial policy as it relates to the 
Northeast region of China. 
 
(b) Please identify any corresponding laws and regulations. 
 
(c) Please clarify how China’s policies in  the Northeast are market-driven and 
undertaken on a commercial basis. 
 (d) Will these programmes be included in Chin a’s subsidies notification as required by 
Article 25 of the SCM Agreement? 
 
Banking and Financial Sector  
 
5. In the Working Party Report accompanying China’s Protocol of Accession (WT/ACC/CHN/49, paragraph 172), China’s representa tive “pointed out that China’s objective was 
that state-owned enterprises, including banks, should  be run on a commercial basis and be responsible 
for their own profits and losses”. China’s representative  also stated that “[t]he state-owned banks had 
been commercialized . . . .”   Meanwhile, the Ch inese government’s efforts to place the “Big Four” 
state-owned commercial banks (the Industrial and Commercial Bank of China, the China Construction 
Bank, the Bank of China and the Agricultural Bank of China) on a sound commercial footing have 
been ongoing since 1994.  Despite these efforts, it appears that bank lending on terms inconsistent 
with commercial consideration h as continued unabated and government  bailouts of the banks have 
grown over time in frequency and magnitude.  Si nce 1998, these banks collectively have reportedly 
benefited from repeated government capital injec tions and non-performing loan purchases in excess 
of $250 billion.  Thus, while the Chinese government ’s attempts to improve corporate governance, 
loan classification standards and prudential rul es and regulations are well-intentioned and are 
welcome, it appears that more fundamental re forms and stronger enforcement are still needed, 
particularly on the institutional side.    
(a) Is China contemplating more fundamental reforms?  If so, what are those plans?  If 
not, what are China’s plans for placing the Big Four banks on a sound commercial footing? 
 
(b) In the context of China’s unfinished banking  sector reforms, and in view of the fact 
that banks account for a large share of inv estment financing in China, what are the 
government’s expectations for the newly in itiated efforts to refo rm the investment 
regime, with respect to making bank le nding more consistent with commercial 
considerations? 
 6. During last year’s transitional review befo re this Committee, the United States raised a 
number of questions about China’s pe rsistent bailouts of the Big Four  state-owned banks and the large 
number of non-performing loans involved, particul arly a $45 billion injection by the central 
government into the Bank of China and the China Construction Bank in 2003.  At the time, China 
stated that, compared with previous reform m easures, the 2003 injection measures were designed and 
implemented with commercial considerations in  mind (G/SCM/115, paragraph 31).  While some 
recent reports have suggested that non-performi ng loans in China have decreased, we remain 
concerned that the lending policies of the Big Four  state-owned commercial banks are carried out on a 
non-commercial basis.  It appears that state-owned banks continue to make policy-driven loans that 
are not commercially justified, and when those loan s fail, the loans are written-off and passed to the 
asset management companies to be dealt with.  Th e recent inauguration of Huida Asset Management 
Ltd., set up to specifically deal with the non-perfo rming loans of the state-owned People’s Bank of 
China is one such example.  G/SCM/Q2/CHN/14 
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(a) Please describe how loans are sold from a state-owned bank to an asset management 
company.  Please also explain how the value of such loans from a state-owned bank is determined. 
 
(b) Please describe the operation and functions of China’s asset management companies. 
 
7. During last year’s transitional review, Chin a stated that its banks were operating under 
commercial conditions, and that government in tervention had been reduced to a minimum 
(G/SCM/115, page 7).  However, in May 2005, China injected $15 billion of foreign exchange 
reserves into the Industrial and Commercial Ba nk of China (ICBC), which in April 2005 had 
acknowledged that about 19 percent of its loans were non-performing. 
 
(a) Please provide details on the Chinese government’s $15 billion infusion into the 
ICBC. 
 
(b) During last year’s transitional review, China stated that government support for the 
Bank of China and the Construction Bank of China had resulted in these banks’ 
conversion into shareholding companies (G /SCM/115, paragraph 31).  Please explain 
whether the recent infusion into the ICBC resulted in a similar share conversion. 
 
(c) On what terms were these conversions undertaken? 
 
(d) How did the role of the Chinese governme nt in the operation of these banks change 
following these interventions? 
 
State-Owned Enterprises  
 
8. The United States continues to  seek responses from China to qu estions raised in connection 
with last year’s transitional review before this Committee (G/SCM/Q2/CHN/8, paragraph 6) 
regarding loss-making state-owned enterprises.  Pl ease provide responses to these questions.     
 9. In addition to China’s statements in the Working Party Report accompanying China’s 
Protocol of Accession (WT/ACC/CHN/49, paragraph 172) “that China’s objective was that state-
owned enterprises, including banks, should be run on  a commercial basis and be responsible for their 
own profits and losses”, China also stated that “[t] he state-owned banks had been commercialized and 
lending to state-owned enterprises took place exclusiv ely under market conditions”.  In one recent 
example, state-owned banks supported the efforts of  a state-owned company in the energy sector to 
acquire the assets of a US firm.  This support re portedly included approximately $13 billion in loans 
that appeared to be on terms that were inconsiste nt with commercial considerations.  Please explain 
how this type of support to a state-owned enterpri se is consistent with Ch ina’s Working Party Report 
statements regarding the operation of state-owne d enterprises and the role of state-owned banks. 
 10. According to MOFCOM’s website, “China need s to find ways to support certain state-owned 
enterprises (SOEs) to help them remain competitive in the retail distribution market.  MOFCOM will 
seek to address problems such as the need to consol idate tax tables and tax payments made by chain 
stores and other policy obstacles, will reduce or exempt certain SOE distribution firms from re-
payment of non-performing loans, and provide a debt-to-equity swap policy.  The policies will support firms’ trans-regional development, make good use of domestic and foreign trade development 
funds, provide subsidized interest for technical  innovation loans, and accelerate infrastructure 
development.”  These statements indicate that Chin a’s state-owned enterprises have benefited and will 
continue to benefit from preferential government  treatment.  Please describe how this policy is 
consistent with the statements made by China in the Working Party Report. 
   G/SCM/Q2/CHN/14 
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Price controls  
 
11. China stated in document G/SCM/N/120 that the Law of the People’s Republic of China on Pricing is the legal basis of China’s pr icing administration and pricing policies. 
 
(a) Is there an expected termination date  or expiration date of China’s pricing 
administration policy?  If so, when will that be? 
 
(b) Please describe any new laws, regulations or other measures, including administrative 
actions, that China has issued or taken to eliminate or reduce the price controls listed 
in Annex 4 to its Protocol of Accession during the past year. 
  12. Annex 4 of China’s Protocol of Accessi on also lists the goods and services subject to 
government guidance pricing.    
(a) Have any goods or services been removed from this list, or has the pricing 
mechanism otherwise changed, such as fro m guidance pricing to free-market pricing 
or direct price setting during the past year? 
 
(b) Please describe the macroeconomic or social circumstances justifying the 
continuation of guidance prici ng on each of the goods or services that remains subject 
to government guidance pricing. 
 13. According to Annex 5A to China’s Protocol  of Accession, a programme listed as “Subsidies 
from Local Budget Provided to Loss Making State-Own ed Enterprises” provides subsidies to severely 
loss-making state-owned enterprises due to either the fixed price of the products they produce or the 
increasing cost of exploitation of the resources a nd restructuring of state-owned enterprises.   
  (a) Please identify the enterprises that are producing goods at fixed prices.   (b) What policy actions is the Chinese gov ernment taking to allow these enterprises to 
operate without the need for subsidization? 
 
 (c) If these firms are selling at market pri ces, please explain the need for continued 
subsidization. 
 14. Has China implemented any new price controls  or other regulatory measures affecting pricing 
with regard to any goods not listed in Annex 4, esp ecially industrial inputs such as steel or steel-based 
scrap and copper or copper-based scrap during the past year?  15. At last year’s transitional review before this  Committee, the delegate from China stated, “. . . 
the price of coal in China is completely subj ect to market mechanisms”.  The United States 
understands, however, that certain local governments in China continue to regulate the price of coal 
supplied to power generators.   
  (a) Please clarify the pricing situation with respect to coal.        (b) Please describe the Chinese government’s c ontinued plans for the development of the 
coal and power industries, including the role of the State Development and 
Investment Corporation.   
  (c) We note that, in April 2005, the Ch inese government announced a new pricing policy 
with regard to electricity.  Please provide  additional details on this new policy. 
 G/SCM/Q2/CHN/14 
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16. In last year’s transitional review before this Committee, the delegate from China explained 
that while water remains subject to  state pricing, the pricing mechanism has been reformed to reflect 
market forces and the availability of resources.  The delegate from China further explained that the 
government’s goal is water prices that fully reflect  resource scarcity and encourage efficient and 
sustainable use.  Please explain the water pr icing reforms that the Chinese government has 
implemented in the past year and the progress made  toward achieving the government’s water pricing 
goals.    17. The report of then Premier Zhu Rongji on the tenth five-year plan (2001-2005) states that “farmer’s surplus grains were purch ased without restriction at a prot ective price”.  The United States 
understands that China has been phasing out protectiv e prices for most grains.  One exception is rice. 
  (a) Please explain how a protective price for rice is set.   (b) Please explain whether the protective price for rice will be phased-out.  If so, when 
will this phase-out occur?  If not, please explain how the protective price for rice is 
consistent with the WTO Agreement and, in particular, Article III of the General 
Agreement on Tariffs and Trade 1994. 
 18. According to the State Development and Reform Commission, “[t]o further reduce the 
farmers’ burdens, the government will help stabilize the market prices of chemical fertilizers and the 
purchasing price of grain” in 2005. 
  (a) Please explain how this policy is consiste nt with China’s obligation to phase-out its 
protective prices. 
 
 (b) How does China intend to stabilize the ma rket prices of chemical fertilizers and the 
purchasing price of grains?   
  (c) Please identify the specific grains that  are being addressed by this policy. 
 
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