WORLD TRADE  
ORGANIZATION  G/SCM/W/548 
7 October 2009 
 (09-4855) 
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  
 
 
 The following communication, dated 6 October 2009, is being circulated at the request of the 
Delegation of the United States.   
 
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Transparency 
 1. China's continued failure to notify any subsidi es administered by sub-central governments, as 
required by Article 25 of the WTO Agreement on Subsidies and Countervailing Measures ("Subsidies 
Agreement"), leaves a fundamental gap in China's ob ligation to fulfil its transparency commitments in 
the area of subsidies.  China's only subsidy notifi cation since joining the WTO in 2001 was submitted 
in 2006 and it did not include a single subsidy program administered by sub-central governments.  In 
prior submissions to this Committee, the United States has explained that it considers subsidies 
administered by provincial and local authorities in China to be a significant problem in light of the 
important role these authorities play in implemen ting industrial policy, including with regard to 
subsidization.  Some sources, for example, indicat e that local governments are responsible for nearly 
20 per cent of China's investment, much of which is misdirected into sectors with excess capacity, 
such as steel.  (See, for example, C. Fred Berg sten, Charles Freeman, Nicholas Lardy and Derek J. 
Mitchell, China's Rise , p. 82).  The continued absence of any information on sub-central government 
subsidy programs is thus particularly troubling.  Confirming the seriousness of this concern, the 
United States and other WTO Members on numerous occasions have identified information indicating 
local and provincial subsidy programs provided to a wide range of industrial sectors and to exporters.  
Notwithstanding repeated requests to provide info rmation regarding these subsidies, China has only 
stated that it continues to work towards providing  a notification, but has not provided any timeframe 
within which it expects to meet its WTO obligations.  (See, for example, G/SCM/Q2/CHN/19, G/SCM/Q2/CHN/23, G/SCM/Q2/CHN/33, and G/SCM/Q2/CHN/41).  Even more troubling are China's most recent statements on this issue at the last Transi tional Review Mechanism, which 
seemed to imply that China's only obligation was to work progressively towards a subsidy 
notification.  (See G/SCM/125).  China is obligated  under Article 25 of the Subsidies Agreement to 
submit a complete  notification covering subsidy programs admi nistered at all levels of government.  
China has now had eight years to meet this  obligation and has failed to do so.   
 
(a) Please describe the steps China has taken in th e last year to meet its obligation to 
compile and submit the requisite info rmation on subsidies, including those 
administered by central and sub-central levels of government?   
 G/SCM/W/548 
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  (b) What is the schedule going forward for China to submit its notification at all levels of 
government in accordance with Article 25 of the Subsidies Agreement?  
 
Export-Contingent Subsidies 
 2. On numerous occasions before this Committe e the United States and other WTO Members 
have asked China about what appear to be un reported subsidy programs at various levels of 
government that are contingent upon export perform ance.  Some of these programs appear to have 
been formulated and adopted under the direction of the central government.    
(a) Could China please explain if there are any mechanisms in place for systematically 
reviewing new central government subsidy pr ograms specifically for consistency with 
the Subsidies Agreement?  Please explain. 
 
(b) Similarly, what efforts has the central government taken to systematically review new 
subsidy programs maintained or created by provincial and local authorities 
specifically for consistency with  the Subsidies Agreement?  
 
Industrial Policy Administration 
 
3. China makes extensive use of industrial policies at both the central- and local-government level.  The United States seeks to understand mo re clearly the relationship between (a) China's 
national five-year plans and specific government indu strial policy or sector-specific measures, such as 
the Order of the National Development and Reform  Commission:  Interim Measures Governing 
National Hi-Tech Industry Development Projects " No. 43, issued 28 February 2006, and (b) how 
industrial policy in China is implemented, with r espect to central and local government coordination 
and enforcement, particularly regarding subsidy programs.   
 
(a) Please explain the relationship between Ch ina's national five-year plans and sub-
central five year plans as well as specific  government industrial policies and sector-
specific measures, particularly in the case of subsidy programs.  How do the central government and the local governments inter act and coordinate to implement and 
enforce the various five-year plans and industr ial policies in China?  To what extent 
are local governments able to develop a nd implement subsidy programs outside of 
national five-year plans and industrial policies?   
 
(b) During the 2008 transitional review before this Committee, China indicated that its 
subsidy programs and industrial policies are not necessarily linked, suggesting that 
not all industrial policies have associated  subsidy programs a nd not all subsidy 
programs are related to industrial policies.  (See G/SCM/125).  Please explain the implementation of five-year plans and i ndustrial policies which include subsidy 
programs.  Please also explain how subsidy programs outside of five-year plans and industrial policy measures are de veloped and implemented.   
 
(c) In the case of subsidy programs administer ed at the sub-central government level, 
how are such programs financed?  To what extent does central government funding support sub-central government initiatives?  To  what extent are there cost-shariong 
arrangements between or among different le vels of government?  How are such 
arrangements administered?   
 
(d) During the 2008 transitional review before th is Committee, China indicated that the 
Government of China was in the process of  devoting more resources to the review of  G/SCM/W/548 
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  local government subsidy programs.  Please describe how this is being done and the 
findings of these reviews to date. 
 
(e) Please identify and provide citations to all of the current provincial five-year plans 
and the current provincial programs and policies for all sectors that the central 
government has deemed a basic, pilla r, strategic or key industry ( e.g., 
telecommunications, civil aviation, machiner y, autos, steel, base metals, chemical, 
etc.) in accordance with Annex 1A(i) of China's Working Party Report and 
Article 18.1 of China's Protocol of Accession.   
 
State-Owned Enterprises  
4. China continues its efforts to streamline stat e ownership of large or strategically important 
state-owned enterprises ("SOEs") at the central, provincial and local levels  of government.  SOEs 
span a wide range of industries, including power ge neration and distribution, oil and petrochemical, 
telecom, coal, civil aircraft, mach inery, autos, information technology, construction, steel, metals and 
chemicals.  Article 7 of the 2004 Constitution  describes the role of the state-owned sector as the 
"leading force in the national economy".  (See also Article 1 of Notice of the State-owned Assets 
Supervision and Administration Commission of the St ate Council on the Relevant Issues concerning 
the Implementation of the Law of the People's Republic of China on the State-Owned Assets of 
Enterprises , Decree No. 194, issued by SASAC on 12 November 2008).  At the last transitional 
review before this Committee, China reaffirmed  its commitment that state owned enterprises' 
decisions were based solely on commercial consider ations and that its SOE reform efforts were in 
accordance with market economy prin ciples.  (See G/SCM/125).  China, however, did not address the 
fundamental issue of how state-owned enterpri ses can operate on a purely commercial basis when 
state-owned enterprises must make investment d ecisions in accordance with government industrial 
policy.  If China's ownership and management deci sions are not based on co mmercial considerations, 
subsidy issues may arise.  This is particularly worrisome given the size and importance of the SOEs, 
the government's heavy reliance on industrial polic ies, the government's e xplicit goal of preserving a 
leading role for SOEs in China's economy, and a recent law that enforces conformity with state 
industrial policies.  As part of its Protocol of  Accession, China committed that SOEs would operate 
solely on a commercial basis and without being infl uenced by the government.  (See paragraph 46 of 
China's Working Party Report).   
 
(a) Please clarify how Article 7 of the Law of the People's Republic of China on the 
State-Owned Assets of Enterprises , adopted 28 October 2008 (replacing the Interim 
Measures for the Supervision and Administration of the Investments by Central 
Enterprises, Decree No. 2006-16 , issued by SASAC in June 2006), which specifies 
that the "state shall take measures to promote the centralization of state-owned 
capital ... and strengthen the control, fo rce and influence of the state-owned 
economy" for "important industries and key fi elds", is consistent with China's WTO 
commitments and China's previously articulat ed efforts to reform SOEs in accordance 
with market economy principles.  (See G/SCM/125). 
 
(b) Please clarify how Article 36 of the Law of the People's Republic of China on the 
State-Owned Assets of Enterprises , which mandates that investment by state-owned 
enterprises shall conform with national industr ial policies, is consistent with China's 
WTO commitments.  Please explain how this mandate is enforced, by whom, and if 
SASAC has any role.  If SASAC does have a role, please explain it. G/SCM/W/548 
Page 4  
 
  Land Administration  
 
5. Given the scarcity of land resources in Chin a, the price of land-use rights and how they are 
allocated are important considerations in terms of subsidy, market access and competition issues.  
Land-use rights in China also implicate a more gene ral concern with regard to resource allocation and 
their effect on production and trade.  Some sources indicate that free or considerably underpriced land 
is a common subsidy local authorities in China offer investors in favored projects.  (See China's Rise , 
p. 82).  At last year's transitional review before this Committee, China indicat ed that the market will 
play the fundamental role in the allocation of resources and noted that industrial land is only provided 
through public bidding procedures.  (See G/ SCM/125).  However, the Chinese government is 
recentralizing control over land administration, with the objective, in part, to ensure that land use-
rights are allocated in accordance with st ate industrial development policies.  (See  Decision of the 
State Council on Promulgating and Implementing the Temporary Provisions on Promoting Industrial 
Structure Adjustment Guo Fa [2005] No. 40, issued in November 2005;  Ministry of Land and NDRC 
Jointly Issued Notification on Issuance and Implementa tion of Catalogue of Restricted and Prohibited 
Land Uses (2006 version) and Catalogue of Restri cted and Prohibited Land Use (2006 version) , Guo 
Tu Zi Fa [2006] No. 296 , issued on 12 December 2006).   
 
(a) Please clarify how China's land recentraliza tion in accordance with state industrial 
development policies is consistent with a llowing the market to allocate land-use and 
determine the price of industrial land.  
 
(b) Please confirm whether, in fact, all industrial land in China is only provided through 
public auction.  If public bidding is de facto the only mechanism available, why does 
China need to recentralize and strengthen land control to ensure that the market plays 
a fundamental role in la nd allocation and pricing? 
 
(c) Please explain how the Circular of the State Council on Strengthening Land Control, 
Guo Fa [2006], No. 31, issued by the State Council in August 2006, is being 
implemented.   
 
(d) Please describe China's compulsory national la nd-use plan, which is used to control 
rural-urban land allocation and ensure that land-use is consistent with industrial 
policies (See Decision of the State Council on Promulgating and Implementing the 
Temporary Provisions on Promoting Industrial Structure Adjustment [2005] No. 40, 
issued November 2005).  Please explain the individual and collective roles of the National Land Superintendency, the Minist ry of Land and Natural Resources, the 
Ministry of Finance as well as the Nationa l Development and Reform Commission in 
implementing the national land-use plan.   
 
Aerospace/Civil Aircraft 
 
6. China's presence in the aero space industry has increased signifi cantly over the past several 
years.  Publicly available information indicates th at the Chinese government has dedicated significant 
resources to the development of domestically designe d and produced civil aircraft.  For example:   
 
• Developing a large passenger airplane was li sted as a priority project in China's 11th 
Five-Year Plan (2006-2010) .   
 
• The State Council has approved the "Large Aircraft Project" as one of 16 Key 
Science & Technology Special Projects ("Key S&T Projects"), as established by the "National Medium- and Long-Term Scie nce and Technology Development Plan  G/SCM/W/548 
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  (2006-2020)".  One State Council document indicates that once the State Council 
approves a key S&T project, special funding becomes available from policy banks, such as the National Development Bank, Ch ina Export & Import Bank (EX-IM Bank) 
and China Agriculture Banks.  (See Notification of a Number of Supporting Policies 
for Implementing the National Medium- and Long-Term Science and Technology 
Development Plan (2006-2020) , Guo Fa [2006] No. 6, 7 February 2006 ("State 
Council Notice No. 6")).   
 
• In May 2009, Premier Wen Jiabao announced that the central government would 
arrange funding in the amount of RMB 32.8 billion for 2009 and RMB 30 billion 
for 2010 to support the implementation of 11 of these Key S&T Projects, including 
the large aircraft program.  (See Executive Meeting of the State Council Makes 
Arrangements to Speed up the Implementa tion of Important National Science and 
Technology Projects , State Council General Office, 13 May 2009, accessed at 
http://www.gov.cn/idhd/2009-05/13/content_1313484.htm).   
 
• State Council Notice No. 6 also provides that the government shall encourage 
commercial financial institutions to provide active support, in the form of loans and 
credits, for high-technology and new technology projects designated by the State and provinces.  This apparently complements or supplements the investment subsidies 
and loan interest subsidies that NDRC o ffers for hi-technology industry development 
projects, which include those in civil aviation.  (See Order of the National 
Development and Reform Commission , No. 43, issued 28 February 2006).   
 
• Perhaps pursuant to State Council Notice No. 6 and the February 2006 NDRC order, 
the General Administration of Civil Aviation of China (CAAC) announced in December of 2007, at the 17th National Congress of the Communist Party of China, that the government would provide RMB 1 billion (US$133 million)  in subsidies for 
the development of regional aviation, about RMB 400 million of which would be 
used to subsidize small and medium-sized airline companies.   
 
• In addition, in 2008, the State-approve d the creation of Commercial Aircraft 
Corporation of China Ltd. (COMAC), a state-owned enterprise responsible for 
developing China's first large commercial aircraft.  In 2009, COMCAC received US$2 billion in government funding for the development of the ARJ21-700 regional 
jet.  Further, the Industrial and Commercial Bank of China (ICBC) has stated that part 
of its mandate is to help indigenous p assenger aircraft programs like the ARJ21, in 
particular by providing helping airlines in other countries to lease the aircraft.  Similar support is likely to be provided for the narrow body C919. 
 
• Moreover, also in 2009, the state-owned China Aviation Industry Corporation 
(AVIC) secured a pledge of up to RMB 176 billion (US$25.7 billion) in domestic 
bank loans, including loans from state-owne d commercial banks, which will be used 
to finance the development of helicopters,  engines, cargo planes and the building of 
passenger aircraft.   
 7.  Given these explicit government policies focu sed on the aerospace/civil aircraft industry, we 
request that China provide further details on these policies and the nature and scope of the 
government support they provide to this sector.    G/SCM/W/548 
Page 6  
 
  (a) Please identify all of the national and prov incial level documents directed to the 
implementation of industrial policy related to the development of China's aerospace 
industry.   
 
(b) Please provide information on government  funds provided to specific aerospace 
projects such as the ARJ21 and the C919.   
 
(c) Please provide information on the terms a nd conditions under which the Government 
of China, including China's EX-IM Bank and state-owned commercial banks such as ICBC, provide investment subsidies loan interest rate subsidies and loan financing for 
commercial aircraft projects. 
 
Subsidies to the Textiles Sector 
 
8. Publicly available information indicates th at numerous provincial and local authorities in 
China have developed textile-specific plans for the period 2009-2011, as directed by the central 
government's " Plan for Adjustment and Revival of Textile Industry".   Several of these provincial and 
local planning documents appear to contain pr ovisions contemplating significant support for the 
textile sector, and some raise concerns, given WTO subsidies rules.   
 9. A July 2009 Wuxi City plan states that "foreign exchange from fibre per ton shall be 
increased by 20 per cent as compared with 2008" and "the ratio of domestic fabric in the clothing for 
export shall reach 90 per cent and above".  (See Adjustment and Promotion Action Plan for the Textile 
and Clothing Industry (2009-2011),  Wu Zheng Fa 2009 (No. 140) ("Wuxi Plan")).  In addition, the 
Wuxi Plan states:  "For the major technologies, projects and enterprises which are included in the 
three-year adjustment & improvement plan, the lands and capital shall be firstly supplied".  A list of 
projects specifying funds to individual compan ies includes, for example, over RMB 411 million 
earmarked for one company specifically for "h igh-grade apparel for foreign trade".   
 
(a) Could China please explain in what ways Wuxi City is seeking to increase "foreign 
exchange from fibre" and promoting "domestic  fabric in clothing for export"?  Please 
explain how these policies are consistent w ith China's obligation under Article 3 of 
the Subsidies Agreement.   
 
(b) Please explain the criteria for providing support for the purpose of "apparel for 
foreign trade".  Is this suppor t contingent upon exportation?   
 10.  A 2009 Hunan Province plan states:  "We w ill offer certain subsidies and rewards for 
products exported by ramie processing companies".  (See Implementation Plan for Reviving Hunan's 
Textile Industry (2009-2011) , Xiang Zheng Fa 2009 (No. 19)).   
 
(a) What "subsidies and rewards" are ava ilable to exporting companies in Hunan 
Province?   
 
(b) Please explain how this plan is consistent with China's obligation under Article 3 of 
the Subsidies Agreement.   
 
11. In Jiangsu Province, the provincial aut horities have outlined policy measures to be 
implemented with regard to the textile industry.  (See Notice of the People's Government of Jiangsu 
Province About Releasing the Guidelines for Ad justing and Reviving Jiangsu's Textile Industry , Su 
Zheng Fa 2009 (No. 84)).  The first of these policy measures is entitled, "Increasing Credit Support".  
It states:  "We will carry out the state credit pol icy for the textile industry, encourage financial 
institutions to increase credit support for textile co mpanies, and provide current capital for companies  G/SCM/W/548 
 Page 7 
 
 
  with good fundamentals but temporary difficulties, and offer more fixed asset loans for major 
technological reform projects that are in line with industrial policies".  Further, it states:  "We will encourage guaranteeing institutions to provide cr edit backing and financing service for textile 
companies".   
 
(a) Please provide examples of how this policy is  being implemented at the provincial 
and local levels in Jiangsu Province.   
 
(b) Please explain what is meant by China's "sta te credit policy for the textile industry".  
Please also describe the manner in which guidance is provided to financial 
institutions to increase credit support for the textile industry.   
 
(c) What criteria are used to determine which companies qualify as "companies with 
good fundamentals but temporary difficulties" ?  Which authorities determine what 
criteria are to be used in identifying these companies?   
 
(d) Please identify and describe the industrial po licies pursuant to which fixed asset loans 
for major technological reform projects can be offered under this policy.   
 12. A Hangzhou City plan states that the city will "o ffer aid or awards in  the form of special 
funds" to the textile sector, and states that the gove rnment will "optimize fiscal and financial credit 
support".  (See Three-year Action Plan for Adjusting and Reviving Hangzhou's Textile and Clothing 
Industry (2009-2011) , Hang Zheng Ban Han 2009 (No. 236)).  The plan also states:  "We will 
increase the input into special fiscal funds fo r textile companies and the 'development fund for 
Hangzhou's silk and women's clothing industry', and increase fiscal support to companies".   
 
(a) Please describe the fiscal and financial cred it support available specifically to textile 
and apparel sector companies in Hangzhou City.   
 
(b) What "aid or awards" are available to Hangzhou City textile sector companies?  What 
criteria must be met to qualify for "aid or awards"?   
 
Fuel Subsidies – Price Controls  
 13. Please describe the current government price controls on oil products and electricity and how 
the government compensates companies for losses incurred due to these price controls.   
 14. What is the current status of China's energy pri ce reform efforts, particularly with respect to 
fuel prices?   
 
Recent Industry Support Plans 
 
15. Aspects of China's recent ten industry support plans raise potential concerns, given the rules 
of the Subsides Agreement.  Specifically, (1) the auto plan discusses support for auto and auto parts 
"export bases";  (2) the shipbuilding plan provid es special credit lines for the purchase of domestic 
ships;  and (3) the machinery plan, inter alia , establishes a risk compensation mechanism to 
encourage the first use of domestically-produced ma chinery.  Please explain how these provisions are 
consistent with China's obligation under Ar ticle 3 of the Subsidies Agreement.   
 
  
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