WORLD TRADE  
ORGANIZATION  G/SCM/Q2/CHN/33 
11 October 2007 
 (07-4364) 
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 8 October 2007, is being circulated at the request of the Delegation of the United States.   
 
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  Transparency 
 1. The United States appreciates China's recent r esponses to detailed questions posed by the 
United States regarding China's first subsidies notif ication to the WTO.  Although the United States 
recognizes the difficulties China has identified in coll ecting this information from various levels of 
government, the United States is concerned by China's continued failure to notify any sub-national 
subsidies, leaving a significant gap in China's acc ounting of the full range of its subsidy programs.  
The difficulties China has identified in notifying su bsidies administered by sub-national authorities 
are not unique to China.  Moreover, China has be en a WTO Member since 2001 and therefore, has 
had a significant period of time to educate sub- national authorities.  Numerous WTO Members, 
including the United States, have identified a wide range of subsidy programs – some of which appear 
to be prohibited --administered by local or provinc ial authorities in China.  At a minimum, China 
could have addressed these specific questions.   
 
2. Could China please explain when it expects thes e programs to be notified in accordance with 
Article 25 of the WTO Agreement on Subsidi es and Countervailing Measures ("Subsidies 
Agreement") and when it expects to respond fully to questions posed by the United States and other 
Members regarding these subsidies?   
 
3. In connection with last year's transitional re view before this Committee, the United States 
notes that it requested information from China re garding important issues in a number of areas, 
including the banking and financial sector, state-owned enterprises (SOEs), the Northeast Revitalization Program and price controls, but recei ved incomplete responses or, in some cases, no 
response at all.  These issues are of continued im portance to the United States.  The United States sets 
out the outstanding questions and follow-up questions  below and looks forward to China's responses 
and a full and constructive discussion of these issues in the upcoming meeting of this Committee.   
 
Textiles 
 4. Notwithstanding statements by China that it has eliminated prohibited export-contingent 
programs targeting the textile sector, the United States remains concerned that such programs may G/SCM/Q2/CHN/33 
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  continue to exist.  The United States identified a number of these programs and submitted numerous 
questions about them in G/SCM/Q2/CHN/23.  The United States continues to look forward to China's 
responses to those specific questions.    5. The United States has identified a number of additional programs under which China appears 
to provide export-contingent  subsidies to Chinese textile sector companies.  For example, according to 
Xiang Zheng Fa (2007) No. 1, the Ningbo Xi angshan County Forei gn Trade and Economic 
Cooperation Bureau offered a new subsidy, effective beginning 1 January 2007.  A stated goal of this 
program is to "accelerate exports", and it specifies va rious awards, which are co ntingent upon export.  
Textile companies receive "additional awards" of RMB 0.02 for each US dollar above the previous 
year's actual exports for "non-quota" textile s ector goods exported to "quota areas" (e.g., the 
United States and the European Union).  In additi on, certain textile sector companies that export to 
"quota areas" are eligible for an "award" of up to RMB 20,000 for a portion of the cost to purchase export quota rights.    
a. Please describe the specific benefits that  are available to textile and apparel 
companies under this program.  Are these benefits contingent upon export?   
 
b. Please describe what steps the central government is taking to prevent and discourage 
provincial and sub-regional governments from establishing WTO-prohibited subsidy programs targeting the textile and apparel industry.   
6. Information available to the United States indicates that the Management Measures for the 
Xiamen City Key Exporting Enterprises Support Fund , issued by the Xiamen City Trade Development 
Bureau and the Xiamen City Financial Administra tion Bureau on 5 July 2006, provides grants to 
exporting enterprises where the level of benefits is determined by the enterprise's level of exports.  
This measure stipulates that "Xiamen Exporting Backbone  Companies" are eligible for grants of up to 
RMB 600,000 depending on certain criteria, including:  (1) the level of exports, (2) export growth, 
(3) ranking among the city's top exporters, (4) the enterprise's export plan for 2006-2010, and (5) Xiamen export content.  Enterprises from 18 listed sectors, including the textiles and apparel 
sectors, are given preferential treatment under this measu re.  One of the stated goals of this measure is 
to encourage enterprises to expand exports of key products defined in the relevant 11th Five-Year 
Plans.   The measure also provides a one-time award of RMB 500,000 to enterprises with exported 
products of at least $100,000,000 per year and MO FCOM assessment as a "Famous Export Brand".  
Enterprises that export at lower levels receive le sser awards.  Other provisions in this measure 
addressing "Xiamen Famous Export Brands" provide grants of up to RMB 500,000 to eligible 
enterprises exporting over $3,000,000.  Finally, on e other provision states that enterprises with "big 
export development potential" are eligib le for support of RMB 1,000,000.   
a. Please describe the specific benefits th at are available to textile and apparel 
enterprises under this measure.  Are these benefits contingent upon export?   
 
b. Please describe the relationship between central government policies and programs, 
such as those contained in relevant Five -Year Plans, and the export-contingent 
benefits that sub-national govern ments provide to enterprises.   
 
c. What is the funding source for the bene fits available under the measure described 
above?   
 
d. Please describe the relationship, if any, between the Xiamen City Key Exporting 
Enterprises Support Fund and the Textile  Support Fund the Chinese representative 
described in G/SCM/119 No. 14?    G/SCM/Q2/CHN/33 
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  Technology – Software and Integrated Circuits 
 
7. In 2000, the State Council issued the  Notice of the State Council on Issuing Relevant Policies 
on Encouraging the Development of Software and IC Industry  (Guo Fa (2000) No. 18), which sets out 
a plan to encourage and promote China's software an d integrated circuit (IC) industries.  Information 
available to the United States indicates that Chin a has introduced a number of programs in order to 
implement the policies set forth in the  Notice of the State Council on Issuing Relevant Policies on 
Encouraging the Development of Software and IC Industry .   
 8. The United States understands that purs uant to the policies set forth in the  Notice of the State 
Council on Issuing Relevant Policies on Encouraging  the Development of Software and IC Industry , 
the Outline of Software Industry Revitalization Movement (2002-2005)  (Guo Fa 2002 No. 47) was 
issued on 24 July 2002.  It is also the United States' understanding that the Outline of Software 
Industry Revitalization Movement  details goals for export growth targets through the implementation 
of policies, including the establishment of several software export bases.  The Outline of Software 
Industry Revitalization Movement  further seeks the establishment of a number of funds, including the 
Electronic Information Industry Development Fund,  the 863 Fund, the State Science and Technology 
Fund, the Industry Technology Research and Devel opment Fund, and the Scientific Medium and 
Large-Sized Creation Fund.  In June 2006, an official from China's Ministry of Commerce 
(MOFCOM) stated that China would establish 15 software export bases pursuant to the 11
th Five-Year 
Program (2006-2010).  (See  "China to Establis h 15 Software Export Bases in 2006-2010", Asia 
Pulse, 22 June 2006).  On 1 December 2006, MOFCOM  designated the cities of Guangzhou, Nanjing, 
Hangzhou, Chengdu and Jinan as "National Softwa re Export Bases".  (See "Report on Chinese 
Subsidies for Period Ending December 8, 2006", available at www.mofcom.gov.cn/aarticle/difang/yunnan/20 0611/20061103649443 html).  The MOFCOM 
official indicated that MOFCOM will provide more support to the  national software export bases in 
the form of interest rebates, R&D funding, pe rsonnel training, export credit loans and credit 
insurance.   
a. What specific incentives are offered to  software manufacturers/exporters under the 
Outline of Software Indust ry Revitalization Movement  and the various funds and 
programs identified above?   
b. Are any of the offered incentives contingent upon export performance?   
 
9. In a notice issued on 1 August 2007, and poste d on the website of the National Development 
and Reform Commission ("NDRC"), the NDRC, the Mi nistry of Information Industry, the General 
Customs Administration and the State Administration of Taxation released its list of 94 semiconductor manufacturers, chip packaging and testing enterpri ses and silicon material producers 
that have been designated as "state-encour aged" integrated circuit enterprises (see 
www.ndrc.gov.cn/zcfbtz/2007tongzhi/t 20070814_153464.htm).  It is the United States' understanding 
that this designation was based on the certification ru les from state-encouraged IC enterprises issued 
in 2005.  According to the 1 August 2007 notice, the 2005 rules were issued to implement the  Notice 
of the State Council on Issuing Relevant Polic ies on Encouraging the Development of Software 
Industry and IC Industry  (Guo Fa (2000) No.18) policies to encourage the software and IC industries.   
 
a. What specific incentives ar e offered to the "state-encouraged" integrated circuit 
enterprises?   
b. Are any of the offered incentives contingent upon export performance?   
 G/SCM/Q2/CHN/33 
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  Banking and Financial Sector  
 
10. In the Working Party Report accompan ying China's Protocol of Accession 
(WT/ACC/CHN/49, para. 172), China's representative  "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 representativ e also stated that "[t]he state-owned banks had 
been commercialized . . . ".  In connection with p ast transitional reviews before this Committee, the 
United States has sought information about the Chin ese government's efforts to move 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) toward running on a more commercial 
basis.  The United States has commented that the Chinese government's attempts to improve corporate 
governance, loan classification standards and pruden tial rules and regulations were well-intentioned 
and welcome, but it also appeared that more funda mental reforms and stronger enforcement were still 
needed, particularly on the institutional side.    
a. Please provide an update on whether Ch ina is contemplating more fundamental 
banking reforms.  If so, please describe those pl ans.  If not, what are China's plans for 
meeting its objective that the Big Four banks should be run on a commercial basis and that bank lending be more consis tent with commercial practices?   
 
b. The United States notes that Article 34 of the Commercial Bank Law states that 
commercial banks shall conduct their lendi ng business in accordance with national 
and social-development needs and under the guidance of the industrial policies of the 
State.  Please explain how Article 34 is c onsistent with the objective of the Big Four 
banks operating on a commercial basis.   
 
11. The United States understands that eligibility fo r long-term loans for fixed-assets and project 
financing from the Industrial and Commercial Bank of China, the China Construction Bank and the 
Bank of China must be consistent with state industr ial policies.  Is that correct?  If so, please explain 
how these banks are able to issue lo ans in a market-oriented manner if they are required to take into 
account state industrial policies.   
12. Please explain why state-owned commercial ba nks continue to lend primarily to SOEs and 
why only a small percentage of lending is provided to private businesses.   
 
State-Owned Enterprises 
 13. China revised its Company Law, effective 1 January 2006.  Please describe the changes that 
were made with regard to permissible levels of  foreign investment, business registration requirements 
and shareholder protection with rega rd to SOEs.  What measures has China issued, or does China plan 
to issue, to implement these changes?  Please explain.   
 14. What plans does China have to furthe r improve corporate governance and increase 
accountability in large SOEs?   
 15. Does China plan to implement a formal priv atization program in the future where it sells 
majority ownership in large SOEs to private entit ies?  If so, when does it expect to begin this 
program?   
 
16. How will the new Bankruptcy Law affect SOEs ?  Will SOEs be allowed to go bankrupt if 
they are insolvent?  What criteria will be used to determine if a company can go bankrupt, and who 
will make the decision to allow bankruptcy of an SO E?  Please also describe the rights and obligations 
of creditor-banks with regard to SOEs  that have declared bankruptcy.    G/SCM/Q2/CHN/33 
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  17. The United States understands that SOEs in China have been exempt from paying any 
dividends to the state since at least 1994.  This exemption apparently rema ins in place even though a 
number of large SOEs in China are highly profitabl e, contributing to more than 6 percent of GDP 
in 2004 according to some estimates.  Given the clear link established between the exemption of 
dividend payments and conti nued overinvestment by SOEs, as well as the documented link between 
dividend pay-outs and good corporate governance, what steps, if any, are being taken by China to 
change this policy?    18. The United States is familiar with the Rules on Accounting Practices of Financial Asset 
Management Companies , issued by the Ministry of Finance ("MOF") on 30 June 2000, and the Rules 
on the Disposition of Assets by Financial Asset Management Companies , issued by MOF on 
8 November 2000).  Please explain how it is determin ed which companies with non-performing loans 
("NPLs") are eligible for debt-to- equity conversions.  Are there different rules for SOEs and private 
companies?    
19. The United States understands that the government is using debt-for-equity swaps to keep 
certain SOEs out of bankruptcy and specifically cho se 580 SOEs and converted their debt claims into 
asset management company-held equity stakes.  Is this understanding correct?  If not, please explain.   
 20. The United States also understands that the SOEs  that participated in a debt-for-equity swap 
will be required to repurchase their asset management company-held equity stakes within ten years.  
Please describe the terms and conditions under whic h these equity stakes will be repurchased.   
 21. The United States notes that China's asset mana gement companies were originally intended to 
be in existence for ten years.  Is it still the Chin a's intention to liquidate or otherwise terminate the 
operations of the asset management companies after ten years?   
 
Northeast Revitalization Program 
 
22. According to a World Bank report, northeast Ch ina has significant potential for growth but its 
growth has consistently been lower than that of Ch ina's southeastern provinces.  This report notes that 
the northeast region would benefit from less government intervention and more emphasis on 
developing the private sector.  Instead, the SOE sect or, with government financ ial support, crowds out 
private sector development and hinders growth.  Moreover, a 21 August 2007 report in the China 
Daily notes that a "blueprint for the Northeast revita lization program . . . was formally released at a 
press conference held by the State Council Information Office yesterday" (see "Northeast's Revival Tied to Private Investment," China Daily, 21 August 2 007).  In an effort to attract private investment, 
the blueprint notes that private capital will be gran ted "the same tax exemptions, land use and loan 
policies as the State firms being restructured".    
a. Please explain the extent to which governme nt plans for the revitalization of northeast 
China include maintaining ownership of SOEs in the region.  What is the policy justification for maintaining owne rship of SOEs in the region? 
 
b. What specific types of incen tives, e.g., tax exemptions, land use and loan policies, are 
provided to SOEs and private firms investing in the northeast, as provided for in the blueprint for the revitalization plan? 
 Price Controls 
 
23. 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.   G/SCM/Q2/CHN/33 
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  24. Annex 4 of China's Protocol of Accession lists  the goods and services subject to government 
guidance pricing.  Have any goods or services be en removed from this list, or has the pricing 
mechanism otherwise changed, such as from guidance pricing to free-market pricing or direct price 
setting during the past year?    
 
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