WORLD TRADE  
ORGANIZATION  G/SCM/Q2/CHN/23 
16 October 2006 
 
 (06-4968) 
Committee on Subsidies 
and Countervailing Measures Original:   English 
 
 
 
TRANSITIONAL REVIEW MECHANISM PURSUANT TO 
PARAGRAPH 18 OF THE PROTOCOL ON THE ACCESSION OF 
THE PEOPLE’S REPUBLIC OF CHINA (“CHINA”)  
 
Questions from the UNITED STATES to CHINA1 
   The following communication, dated 13 October 2006, is being circulated at the request of the Delegation of the United States. 
 
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Transparency  
 1. Transparency is one of the fundamental principles underlying the WTO Agreement.  Without 
sufficient transparency, the ability of Members to  assess China’s complianc e with its obligations 
under the Subsidies Agreement is compromised.    2. In April 2006, China submitted its first subsid ies notification to the WTO since its accession 
in December 2001.  While the United States appreciat es the effort that it took to complete and 
translate this notification, the United States is c oncerned because the notification is incomplete, as it 
omits substantial subsidies that China maintains.  Ch ina also notified several subsidies that appear to 
be prohibited, but without making any commitment to withdraw them, while China failed to notify 
other subsidies that appear to be prohibited.    
3. In addition, China still has not responded in  writing to questions that the United States 
submitted pursuant to Article 25.8 of the Subsidies Agreement in October 2004 (G/SCM/Q2/CHN/9).   
 4. In July 2006, the United States submitted ex tensive comments and questions regarding these 
matters.  We look forward to receiving China’s responses.  
   
Industry Issues  
 
Textiles  
 5. In WT/TPR/M/161/Add.2, page 77, China states, “The government has no policy whatsoever 
that provides direct subsidy to textile and a pparel companies.”  The United States has specific 
information on sub-central government level subsidy programmes that appear to be export-contingent 
and only available to textile and apparel exporters.  One example i nvolves the subsidies provided by 
Ningbo City, as described in G/SCM/Q2/CHN/19.  How does the central government monitor 
                                                     
 
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  provincial and local government policies targeting te xtiles and apparel exporters to ensure compliance 
with China’s WTO obligations?  When does Chin a intend to withdraw the Ningbo City programme? 
 6. In a 2004 China Daily article, Gao Fang, secret ary-general of the China Cotton Association, 
referred to “excessive lending to the textile industry”.  The article also said, “It has been reported that 
the Chinese Government will loosen up credit lending controls to textile companies.”   
 
(a) What guidance has the Chinese government provided to state-owned commercial 
banks with regard to loans to textiles a nd apparel companies?  Please identify all 
relevant notices, directives, etc. provi ding guidance specific in this area.  
 
(b) What is the percentage of loans in the textiles and apparel sectors that are non-
performing? 
  
7. Earlier this year, the Ministry of Comme rce (“MOFCOM”) issued a notice on “Sell Well” 
brands and a notice on a programme entitled “Ten Thousand Miles March for Brand Building”, which 
involves brand appraisal, brand promotion, brand marketing and brand protection for 45 types of 
products, including apparel products  such as shirts and suits.   
 
(a) Please describe the benefits provided under this programme. 
 
(b) Please explain how the notices referenced above relate to China’s programme to 
promote famous name brands.  
 8. Recently, the Ministry of Finance, the National Development and Reform Commission 
(“NDRC”) and MOFCOM jointly issued the “Notice of  Relevant Policies to Promote Chinese Textile 
Enterprises to Shift to New Ways of Growth and Support Them to Go Global”.  Among other 
purposes, this measure is designed to support t echnology innovation and development of core 
technologies and equipment in the textiles sector.  Th is measure is also designed to provide funds to 
textiles companies that set up distribu tion channels in overseas markets.  
  (a) Please describe the specific benefits pla nned under this measure.  Are these benefits 
contingent upon export? 
 
(b) Given the substantial increases in e xports of textiles and apparel products from 
Chinese textile enterprises in recent y ears, please explain why the Chinese 
government would issue a measure providi ng new funds encouraging exports by 
Chinese textiles companies.  
  
(c) Please explain how the issuance of this me asure conforms with China’s statement in 
WT/TPR/M/161/Add.2, page 77 that, “The government has no policy whatsoever that 
provides direct subsidy to textile and apparel companies.”   
 Automobiles  
 
9. On 18 August 2006, the Financial Times  reported that, in order to become a bigger exporter 
of cars and parts, the Chinese government announced th at eight cities have been designated as special 
zones for sales overseas of cars and components.  Under the policy announced by MOFCOM Minister 
Bo Xilai, favoured companies would receive preferential loans and export tax rebates. 
 (a) Please identify the eight cities that have been designated as speci al zones for overseas 
sales. 
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  (b) Please describe the incentives being offered to manufacturers/exporters of 
automobiles and components, and the eligibility criteria that must be met in order for companies to qualify for these incentives. 
 
(c) Please explain the relationship between the creation of the special zones for overseas 
sales of automobiles and auto components and Chinese government national 
development policies for the Chinese automobile industry. 
 
Semiconductors  
 10. On 20 July 2006, the China Daily  reported that the NDRC is developing a new aid policy for 
semiconductors.  Among the key components of the plan  are income tax reduc tions and exemptions.  
The plan also includes research loans and using resear ch expenditures to offset taxes (in addition to 
the RMB 500 million fund previously established to he lp semiconductor companies’ research).  Other 
proposals include allowing tax reductions on impor ted equipment and setting up a specific fund for 
integrated circuit design.   
 
(a) What is the time frame for an announ cement from the NDRC on this new aid policy 
for the Chinese semiconductor industry? 
 
(b) What types of incentives will be included in this new policy?   
 
11. On 16 May 2006, the International Herald Tribune  reported that the Wuhan city government 
will spend between $1.5 billion and $3.0 billion to bui ld a semiconductor plant that will make 12-inch 
wafers.  The Semiconductor Manuf acturing International Corp (“SMIC”) will design, build and 
manage the plant. 
 
(a) What is the specific ownership and invest ment role of the Wuhan government in this 
project? 
 
(b) What are the specific terms and conditions of SMIC’s participation in this project? 
 
12. Please explain how the central, provincia l and local governments have coordinated 
development plans for the semiconductor industry.  
Agriculture 
 13. The NDRC issued a notice that became effective on 20 August 2006, announcing an 
exemption from the railway construction fund levy fo r all grains bound for overseas markets.  Please 
explain how this support is consis tent with China’s WTO obligations, including those under Article 3 
of the Subsidies Agreement and paragraph 12.1 of China’s Protocol of Accession. 
 14. MOFCOM released its first agricultural export five-year plan on 24 August 2006.  Six 
measures to support agriculture exports were in cluded in the announcement, including expanding 
agricultural export support systems and increasing diplomatic representations.  
(a) Please describe the nature of the be nefits to be provi ded under MOFCOM’s 
agricultural export support plans. 
 
 (b) Please explain how this support is c onsistent with China’s WTO obligations, 
including those under Article 3 of the Subs idies Agreement and paragraph 12.1 of 
China’s Protocol of Accession.  
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  15. In connection with last year ’s transitional review before this Committee, the United States 
submitted questions to China regarding export s upport programmes in Jiangxi Province and Henan 
Province (G/SCM/Q2/CHN/14).  To date, China has not responded to those questions.  Please provide 
responses to those questions, explaining how th ese programmes are consistent with China’s 
obligations under Article 3 of the Subsidies Agre ement and paragraph 12.1 of China’s Protocol of 
Accession. 
 
Banking and Financial Sector  
 
16. In the Working Party Report accompanying 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 representative also stated that “[t]he state-owned banks had 
been commercialized . . . ”.  In connection with last  year’s transitional review before this Committee, 
the United States 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 comment ed 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.  Please provide an update on whether China is 
contemplating more fundamental banking reforms.  If so, please describe those plans.  If not, what are 
China’s plans for meeting its objective that the Bi g Four banks should be run on a commercial basis 
and that bank lending be more cons istent with commercial practices? 
 17. In previous transitional reviews before this Committee, the United States has submitted 
questions about China’s policies towards the Big Four state-owned banks and non-performing loans 
(NPLs) as well as China’s asset management companies.   The United States appreciates the responses 
that China has previously provided.  At this time,  the United States seeks the following clarifications:  
  
(a) Please describe how loans are chosen to be  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 how the operation and functions of China’s asset management 
companies are evolving, consistent with th e objective that state-owned banks be run 
on a commercial basis. 
 
(c) 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 determined which companies with NPLs are eligible for debt-to-equity 
conversions.  Are there different rules for state-owned enterprises (SOEs) and private 
companies? 
 18. 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.
  
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  Export Credits  
 
19. According to publicly available information, China Exim Bank offers loans at low interest 
rates to finance manufacturing projects that are ab le to generate favourable  economic returns with 
secured repayment capacity and are tied to Chinese expor ts of mechanical and electronic products and 
complete sets of equipment, and may be considered  as official development assistance.  The Chinese 
companies implementing these projects should be medium-sized and large SOEs.  The loans appear to be on advantageous terms and conditions.  There also appears to  be an absence of any risk/exposure 
fees to compensate for future potential losses a nd the operational cost of the programme. 
 
(a) Please describe the terms and conditions of these loans. 
 (b) Please explain how this programme is consis tent with the disciplines of the Subsidies 
Agreement. 
 
(c) Please clarify the definition of “official  development assistance” that the China Exim 
Bank uses to classify this programme as official development assistance. 
 20. The China Exim Bank, in order to support th e Chinese government’s “going global” strategy, 
provides loans on advantageous term s and conditions to selected stat e-owned enterprises in certain 
selected sectors to support their in ternational strategies.  Selected sectors include construction, 
electronics, mechanical, high and new technology  products/capital goods, and telecommunications 
and power equipment.  While the China Exim Ba nk typically charges a competitive interest rate 
(which the China Exim Bank defines as either a fi xed rate based on the OECD Commercial Interest 
Reference Rate for the currency or a floating rate of Libor + spread), there appear to be provisions 
made for special cases in which a “preferential” interest rate is  charged, longer than standard 
repayment terms are offered and/or certain fees are waived.   
 
(a) Please describe the terms and conditions of the loans provided under “preferential” 
circumstances and what criteria are used for determining preferential treatment.   
  
(b) Please explain how this programme is consis tent with the disciplines of the Subsidies 
Agreement.    
 21. The China Development Bank h as reportedly expanded its focu s to support sectors that are 
considered to be essential to China’s long-te rm competitiveness and specifically for companies 
engaging in research and development, Chinese “b rand name” companies and certain companies in 
their overseas expansion.  In part, this support ta kes the form of export credits.  Please describe the 
terms and conditions of this fina ncing and explain how this progra mme is consistent with China’s 
obligations under the Subsidies Agreement.  
State-Owned Enterprises  
 22. Does China plan to implement a formal priva tization programme in the future where it sells 
majority ownership in large SOEs to private entit ies?  If so, when does it expect to begin this 
programme?     23. 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 th ese changes?  Please explain. 
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  24. What plans does China have to furthe r improve corporate governance and increase 
accountability in large SOEs?  25. 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 SO Es that have declared bankruptcy. 
 26. 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 profitable,  contributing to more than 6 percent of GDP in 
2004 according to some estimates.  Given the cl ear 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, please explain what steps, if any, are being taken 
by China to change this policy.   
 
27. 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. 
 
(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) Considering that the private sector has been  an important engine of growth in China, 
please explain what measures the government is taking to encourage the growth of the private sector in China’s northeast region as part of its revitalization plans. 
 
Price Controls 
 28. 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.  29. Annex 4 of China’s Protocol of Accession lis ts 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?  30. Has China implemented any new price controls  or other regulatory measures affecting pricing 
with regard to any goods not listed in Annex 4? 
 
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