WORLD TRADE  
ORGANIZATION  G/SCM/118 
9 November 2005 
 (05-5259) 
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 fourth 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 27 October 2005.   
2. Annex 1A to the Protocol requires China to  submit information on the following to this 
Committee:  "Pricing Policies":  (a) "application of existing or any other pri ce controls and the reason 
for their use";  and (b) "pricing mechanisms of  China's state trading enterprises for exported 
products".  China submitted a notification in this respect on 26 October 2005, which has been 
circulated in document G/SCM/N/135.  
3. Members had submitted questions in the context of the transitional review.  These can be f ound 
in documents G/SCM/Q2/CHN/12 (European Communities), G/SCM/Q2/CHN/13 (Japan), G/SCM/Q2/CHN/14 (United States) and G/SCM/Q2/CHN/ 15 (Canada, Mexico and the United States).  
4. The statements made at the meeting of 27 Oct ober 2005, at which the transitional review was 
Item F of the agenda, are reflected in the minutes  of the meeting, which will be circulated as 
document G/SCM/M/54.  The relevant paragraphs , which reflect the statements made and the 
discussion at the meeting, are annexed. G/SCM/118 
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 Excerpt from the minutes of the regular meeting of the Committee on Subsidies and Countervailing 
Measures held on 27 October 2005, to be circulated as document G/SCM/M/54.  
F. TRANSITION REVIEW UNDER PARAGRAPH 18 OF THE PROTOCOL OF 
ACCESSION OF THE PEOPLE'S REPUBLIC OF CHINA TO THE WORLD TRADE 
ORGANIZATION  
1. The Chairperson
 recalled that Paragraph 18 of the Protocol of Accession of the People's 
Republic of China to the World Trade Organization pr ovided 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 have a relevant mandate.  This Committee had to report the results of the 
review promptly to the Council for Trade in Goods.  Review was to take pl ace 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 Chairperson noted that there were no proce dures 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 notification, received 
on 26 October 2005, had been circulated as doc ument G/SCM/N/135.  Written questions and 
comments had been submitted in the context of this transitional review by the European Communities 
(G/SCM/Q2/CHN/12), Japan (G/SCM/Q2/CHN/13), the United States (G/SCM/Q2/CHN/14) and 
Canada, Mexico and the United States (G/SCM/Q2/ CHN/15).  Before proceeding to these questions, 
the Chairperson opened the floor for any general comments. 
3. The delegate of the United States
 said that the WTO was in th e midst of its fourth annual 
transitional review of China's efforts to implement the commitments that it made in its Protocol of 
Accession to the WTO.  In the United States' view, the transitional review remained an important and 
useful mechanism serving both the interests of China and the interests of other WTO Members.  The 
transitional review mechanism provided Members with the opportunity to seek clarifications 
regarding China's policies and practices.  China, in turn, had the opportunity to clarify its policies and 
practices with the goal to prevent misunderstandi ngs that could lead to trade frictions.  The 
transitional review mechanism also allowed Member s to convey to China their views, expectations 
and concerns regarding China's efforts to comply  with its WTO obligations.  China then had the 
opportunity to explain its views and to inform Me mbers about how it had addressed their expectations 
and concerns.  In other words, the transitional review mechanism was an important and useful 
exercise in transparency, one of  the fundamental principles underlying the WTO Agreement.   
4. The purpose of the transitional review before this Committee was to review, on an annual 
basis, China's progress on implementing its obligatio ns under its Protocol of Accession and the SCM 
Agreement.  Unfortunately, as Members neared the end of China's fourth year as a Member of the 
WTO, it remained nearly impossible to evaluate the extent to which China's subsidies regime was in 
compliance with WTO disciplines.  Despite assuran ces China had given before the Council for Trade 
in Goods during the transitiona l review conducted in 2003 China had still not provided its long-
overdue subsidy notification as require d by Article 25 of the SCM Agreement.  In addition, more than 
one year ago, the United States had submitted a request to China under Article 25.8 of the SCM  G/SCM/118 
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 Agreement seeking detailed information on a number of subsidy programmes that had come to its 
attention (G/SCM/Q2/CHN/9).  Article 25.9 stated  that questions that a Member receives under 
Article 25.8 shall be answered as quickly as po ssible and in a comprehensive manner.  The 
programmes subject to the questions posed by the United States under Article 25.8 supported a wide 
range of industries in China including forest pr oducts, textiles, semi-conductors and agriculture.  
China, however, still had not provided any responses to that request.  The absence of a timely 
response was troubling.   
5. Even more troubling were the subsidy program mes that China appeared to maintain, as 
demonstrated by the growing number of questions that the United States and other Members had posed to China, both through the transitional revi ew mechanism and under Article 25.8 of the SCM 
Agreement.  Members continued to see evidence of  government support that China had committed to 
eliminate.  Based on available information, it app eared that China continued to provide tax incentives 
and preferential bank financing to producers of agri cultural and industrial goods that were contingent 
upon export or the use of domestic over imported goods, despite a clear commitment by China four 
years ago to eliminate all prohibited subsidies upon its accession to the WTO.  It also appeared quite 
clear that China continued to provide subsidies to loss-making state-owned enterprises, despite 
making statements to this Committee in 2002 that  these subsidies had been eliminated in 2001 as 
China had indicated it would do in Annex 5 to its Pr otocol of Accession.  In past transitional reviews 
before this Committee, China had dismissed as baseless the claims of the United States that these subsides continued, arguing that multiple media reports and websites were unreliable.  One new 
source could now be added to the long and varied list of publicly av ailable sources describing China's 
continued subsidization of loss-making state-owned enterprises, the OECD's 2005 Economic Survey 
of China .  The United States again urged that China provide information on these subsidies.   
6. The delegate of the United States stated that it also appeared quite clear that the Chinese 
Government continued to provide  massive subsidies to state-owned banks and the state-owned 
enterprises to which they lent, d espite China's contention that th ese banks and enterprises operated on 
a commercial basis and were responsible for thei r own profits and losses.  For example, China 
claimed during last year's transitional review that  the Government's $45 billion capital infusions into 
the Bank of China and the China Construction Bank  in 2003 constituted investments, not subsidies, 
but this claim was exceedingly difficult to accept in light of those banks' financial performance in the 
previous five years, which had been characterized by repeated capital injections by the Government 
and bad-debt transfers to government-owned asset ma nagement companies.  It seemed clear that the 
Government was not seeking to invest in investme nt-worthy companies either in December 2003 or in 
prior years.  Rather, the Government was trying to  keep the banks afloat and the loss-making state-
owned enterprises they supported, regardless of cost.  An example of the type of lending that could 
result from these large and repeated infusions had received widespread attention recently when a 
state-owned oil and gas company had sought to acqui re a foreign competitor.  Two state-owned banks 
had offered what appeared to be billions of do llars of preferential financing to facilitate the 
acquisition.  Even though the acquisition had not ta ke place, the United States found it objectionable 
that the terms and conditions under wh ich the financing was apparently offered were inconsistent with 
commercial considerations.  It was difficult to rec oncile the terms and conditi ons of this financing 
with China's repeated claim that banks in China now extended loans on a purely commercial basis and 
operated free from government influence and control.   The United States was very concerned about 
what these offers of non-commercial financing said about how credit was allocated in China.   
7. The United States also understood that stat e-owned banks were extending subsidized 
financing for large-scale investment projects in China which were designed to increase the 
competitiveness of state-owned enterprises, particularly  in the Northeast, in in dustries such as oil and 
gas, petrochemicals, iron and steel and ship-bu ilding.  In the United States' view, continued 
intervention by the Chinese Government in this manner thwarted the development of institutionalized 
market mechanisms in China.  It also made little sense from an economic restructuring point of view G/SCM/118 
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 for the Government to support continued production by firms of products that were the primary cause 
of the region's problems.  Resources should be flowing out of and away from large inefficient state-owned enterprises in heavy industries to support th e growth and development of small and medium-
sized enterprises and new industries.  Unfortunately , the bank financing to state-owned enterprises in 
the Northeast was doing exactly the opposite, fru strating a more efficient allocation of scarce 
resources and sustaining obsolete state-owned ente rprises that continued to drain resources from the 
region and the rest of China's economy. While the United States did not take issue with China's goal 
of revitalizing the Northeast region, it had grave concerns with the significant subsidization the 
pursuit of those objectives entailed and with the pote ntial adverse trade effects resulting directly or 
indirectly from this subsidization.   
8. The delegate of the United States considered th at similar concerns applied as well to China's 
recently released iron and steel industry development policy ("Steel Policy") and were highlighted in the joint submission from Canada, Mexico and th e United States for this transitional review 
(G/SCM/Q2/CHN/15).  This Steel Policy detailed a series of objectives and initiatives for managing 
the development of China's state-owned steel en terprises.  These objectives and initiatives included a 
broad range of very specific directives which demo nstrated the government's intention to intervene 
directly and extensively in key sectors of the econom y, such as steel.  In particular, the Steel Policy 
prescribed the number and size of steel producers in China, where they would be located, the types of 
products that would and would not be produced a nd the technology that would be used.  Subsidies 
were an integral part of the Steel Policy.  In pa rticular, Article 16 of the Steel Policy specifically 
provided for state support in the form of tax re funds, discounted interest rates, research and 
development and other policy support from major iron and steel projects utilizing newly developed 
domestic equipment.  The United States agreed with the goal of an efficient rationalized steel industry 
envisioned by China's new steel policy but was con cerned about the implemen tation of this initiative 
to the extent that it relied on import substitution me asures, dictated industry outcomes, and involved 
governments making decisions that should be made by the market place.  The likely outcome of the 
Steel Policy was more inefficiency and not less and greater distortions in world steel production and 
trade.  While the United States was aware that the st eel policy might be intended in part to address 
China's ballooning production capacity and China's r ecent emergence as a net steel exporter, it had 
been the United States' experience that subsidy-driven  industrial policies rarely  resulted in expeditious 
or market restructuring.  Rather, they created a significant market distortion and exacerbated trade frictions.   
9. With regard to the area of countervailing m easures, the delegate of the United States 
commended China for taking an important step in  notifying its countervailing duty laws and 
regulations.  The United States had had an active and on-going exchange with China regarding these 
laws and regulations and was encouraged by the tran sparency that such an exchange promoted.  His 
delegation looked forward to Chin a's written responses to its most recent set of follow-up questions 
(G/SCM/Q1/CHN/57).  The United States remained concerned that China's current countervailing 
duty regulations lacked sufficient detail to make clear to interested parties what procedures the 
administrative authority would follow and conduct in c ountervailing duty cases. 
10. The delegate of the United States said that one final area addressed in his delegation's 
submission for this transitional review involved pric e controls.  In this regard, the United States had 
asked a series of questions seeking clarification or  updates regarding the pricing of coal, rice, steel, 
copper scrap, fertilizer and water.   
11. The delegate of the United States concluded by saying that the United States' chief concern at 
the time of this year's transitional review eman ated from China's continuing and seemingly growing 
use of subsidies, including prohibited subsidies.  When coupled with China's on-going failure to 
submit a subsidy notification required of every WTO Member and answers to the questions posed by 
the United States under Article 25.8, this raised ser ious questions about how committed China was to  G/SCM/118 
 Page 5 
 
 
 meeting its obligations under its Protocol of A ccession and the SCM Agreement.  The United States 
appreciated the difficulties and sensitivities inherent in  many of the steps that China had to take to 
honour its WTO obligations.  However, other Member s faced similar challenges.  He therefore urged 
China to take immediate action to demonstrate its  commitment to the WTO subsidy disciplines.  The 
first step should be the submission of China's long- overdue subsidy notification and of answers to the 
Article 25.8 questions which the United States had submitted in 2003. 
12. The delegate of Japan  stated that his delegation totally agreed with the view of the United 
States on the importance of the transitional review mechanism in the WTO system.  As reflected in 
the written questions submitted by  his delegation (G/SCM/Q2/CHN/12), Japan was interested in 
getting answers with regard to two aspects of China' s position in the subsidies area.  The first aspect 
was the notification of subsidies.  While the subs idy notifications required by Article 25 of the SCM 
Agreement were of great importance for the purpo se of improving transparency, China had not yet 
provided any further subsidy notification after its  accession to the WTO.  With reference to a 
statement by China at last year's Committee meeti ng that it was internally collecting information for 
its subsidy notification, he asked China to indicate the timing of its full subsidy notification.  Second, 
Japan was interested in China's VAT refund scheme for copper.  The Japanese industry, especially the 
smelting copper industry, had serious  concerns on this VAT refund scheme.  If, as China had stated, 
the refund scheme was WTO-consistent, any detaile d information or documents would be greatly 
appreciated in order that Japan could explain the scheme to its industry and allay the industry's concerns regarding this scheme.  In light of statem ents made last year by China that it was reviewing 
the refund scheme and considering its possible abo lition, he asked whether there had been further 
developments in this regard.   
13. The delegate of Canada
 shared the views of the United States and Japan on the importance of 
the transitional review mechanism.  Canada al so shared the concerns expressed by Japan, the 
United States and the European Co mmunities, in writing, regarding the failure of China to fulfil its 
obligations by providing a new and full notification of its subsidies.  Canada therefore encouraged 
China to provide such a notification as soon as possible.   Canada was participat ing in this transitional 
review mechanism with a joint submission with Me xico and the United States regarding China's Steel 
Policy announced last July  (G/SCM/Q2/CHN/15).  Given the importance of China's steel production, 
this new policy could have repercussions on th e world market, including Canada's industry and 
markets.  Canada's concerns were centred on the degree of intervention of the Chinese Government in 
the direction and decision-making of its steel industr y, and Canada questioned the compliance of such 
intervention with the commitments undertaken by  China in the Accession Working Party Report.  
Canada was therefore looking forward to receiving cl arifications from the Government of China on 
the issues raised in the submission. 
14. The delegate of the European Communities  fully supported the statements made by the 
United States, Japan and Canada and shared all the concerns they had expressed.  He appealed to 
China to strictly comply with its obligations r esulting from the WTO membership, particularly in the 
area of subsides, including the provision of the long -outstanding subsidy notification.  He hoped that 
at the present meeting China would provide meaningf ul replies to questions posed by the European 
Communities and other Members.  While he realized that China, according to the agreed procedures, 
had no obligation to supply written replies, it would al ready be very helpful to have a room document 
with the properly prepared answers. 
15. The delegate of Mexico  stated that like the previous delegations, Mexico was concerned 
about the Steel Policy of China and was also expe cting the notifications on subsidies which China 
should have presented.  His delegation looked fo rward to receiving answers from China to the 
questions asked jointly by Canada, Mexico a nd the United States on China's Steel Policy.  G/SCM/118 
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 16. The delegate of China
 stated that while he had taken note of the comments and concerns 
raised by Members with regard to the issue of Ch ina's subsidy notification, in previous years his 
delegation had repeatedly stressed the enormous di fficulties facing China in the information-gathering 
process for the preparation of such a notification.  China was firmly committed to the principle of 
transparency in this regard.  The serious practical  problems and difficulties raised by the preparation 
of the subsidy notification had been recorded dur ing the accession negotiations  in the Working Party 
Report and had also been recognized by many Memb ers in this Committee.  During the last three 
years, China had been educating and training officials in relevant government agencies and 
mobilizing them to review through hundreds of pieces of regulations, department rules and policies to 
examine whether they were relevant to the SCM Agre ement.  This process had so far concentrated on 
the central government level.  Questions raised by  Members on some specific policies and measures, 
including the questions raised by the United Stat es under Article 25.8 of the SCM Agreement, were 
all taken into account in this internal informa tion-gathering process.  There had been intense 
discussion on all the technical details of the inform ation gathered to determine whether particular 
measures fell within the scope of the notification obligation, in view of the fact that the SCM 
Agreement required only notification of subsidy pr ogrammes which were specific, as defined by the 
Agreement.  As a result of these efforts of the last  years, China was now in the process of finalizing a 
draft of its subsidy notification, which at this stage was still in Chinese.  China would submit this 
notification without prejudice to its position as to whether the policies and programmes to be notified 
were subsidies or whether they were specific, as defined in the SCM Agreement.  Subject to inter-
agency procedures and translation, which was extrem ely important and required absolute accuracy to 
reflect exactly what the policies were and to avoi d misunderstanding, China was prepared to submit 
the full subsidy notification to the Committee before the end of this y ear.  With this notification China 
would like to clarify as much as possible its policy in  this regard and reiterate its strong commitment 
to the fundamental WTO principle of transparency  to which China had always adhered since its 
accession.  
17. The delegate of China stated that on some of the questions raised by Members in their written 
questions, for example with respect to developm ents in the financial sector, China had strong 
reservations as to whether they fell within the ma ndate of this Committee or whether they were 
subsidies or specific.  However, in a spirit of co -operation and professionalism,  China had in the past 
few years provided information with regard to th e reform process of China's banking and financial 
sector and would continue to do so at the present mee ting.  The delegate of China also pointed to the 
fact that some Members had repeatedly raised the same questions, which had disturbed China's 
internal efforts to gather the in formation necessary for the submission of a subsidy notification.  On 
some of these questions, Members would find re levant information in the minutes of previous 
Committee meetings. Some of the questions posed  by Members had only arrived at China's 
Permanent Mission very shortly in advance of th e meeting, which had caused great difficulties for 
China in preparing comprehensive and detailed answer s.  Nevertheless, in a spirit of co-operation and 
transparency, China had made every effort to coordi nate the relevant competent authorities to address 
these questions.  
18. The delegate of China then proceed to answer specific questions submitted by the delegations 
of Canada, the European Communities, Jap an, Mexico and the United States.  
Countervailing duty legislation  
19. Regarding China's laws and regulations on c ountervailing measures, the delegate of China 
noted that the Foreign Trade Law, revised on 6 Ap ril 2004, which had been referred to by a Member 
as not being notified, had been notified to  the Committee on 22 November 2004 (document 
G/SCM/N/1/CHN/1/Suppl.4).  While there were no "Anti-Subsidy Regulations" in China, it was 
possible that the Member had used this term to re fer to the regulations of the People's Republic of 
China on countervailing measures, which had b een revised on 31 March 2004 and which China had  G/SCM/118 
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 notified on 18 October 2004 (document G/SCM/N/1/C HN/1/Suppl.3).  In addition to the above laws 
and regulations, China's existing laws and regulations on countervailing measures included:  (1) 
provisional rules for initiation of count ervailing investigations, (document 
G/SCM/N/1/CHN/1/Suppl.1), which had come into force on 13 March 2002;  (2)  provisional rules on 
questionnaires in countervailing investigations (d ocument  G/SCM/N/1/CHN/Suppl.1), which had 
come into force on 15 April 2002; (3) provisional rules for the conduct of public hearings in 
countervailing duty investigations  (document G/SCM/N/1/CHN/1/Suppl.1), which had come into 
force on 13 March 2002; (4) provisional rules for on -the-spot verifications in countervailing 
investigations (document G/SCM/N/1/CHN/1/Suppl.1 ), which had come into force on 15 April 2002; 
and (5) rules on investigations and determinations  of industry injury for countervailing measures 
(document G/SCM/N/1/CHN/1/Suppl.2), which had en tered into force on 15 January 2003.  As the 
newly promulgated regulation was still under transla tion, China would notify it to the Committee once 
the translation was finished.   
VAT refund scheme for imports of copper raw materials 
20. The delegate of China stated that China had provided detailed informa tion on the VAT rebate 
scheme for copper raw materials in last year's tr ansitional review mechanis m of this Committee.  
Considering the crucial importance of copper on national economy and national security, the purpose 
of this VAT refund scheme was to improve the t echnology and management of the copper refinery 
industry.  China's imports of copper raw material only accounted for a small proportion of the world's 
total trade in copper and would not distort the inte rnational market.  At present, the policy was under 
review. 
Preferential tax treatment of foreign-owned enterprises 
21. With regard to the preferential tax treatment of  foreign invested enterprises, the delegate of 
China considered that such preferential treatme nt of foreign investment was a common practice 
internationally and was not specific in nature, as defined in the SCM Agreement.  Detailed 
information on the preferential tax  treatment of fo reign investment was alr eady contained in Annex 5 
of China's Accession Protocol.  To remain consiste nt with the existing notification, and to clarify 
further China's policies, China would include this  detailed information on preferential tax treatment 
for foreign investments in its forthcoming subsidy no tification.  Some of the specific provisions in the 
existing legislation were also being examined in  the context of China's tax reform, which was 
currently under preparation.  A major step to be taken in this reform was to unify the income tax 
system for domestic enterprises and enterprises with  foreign investment, following the principles of 
fair competition and national treatment.  In that pr ocess, consistency of China's tax policies with the 
SCM Agreement would also be stressed and observed. 
Measures applied by local governments  
22. The delegate of China stated that there we re great difficulties in collecting relevant 
information on policies applied at various levels of local government in China.  However, the 
available information indicated that the supportive policies of China's local governments referred to 
by a Member were of two types.  First, in orde r to promote and harmonize  the economic development 
of under-developed areas and raise their agricultu ral productivity, local governments formulated 
policies to enhance the reconstruction of the agricu ltural infrastructure, to  subsidize the introduction 
of new species, to promote new technology and technical training, to purify and upgrade the local superior species and to establish service systems, such as the prevention and cure for plant diseases 
and insect pests, the information supply system, the qua lity standard and testing systems, etc.  Second, 
some policies of local governments might be supporting the small and medium enterprises (SMEs), to explore international markets, such as supporti ng SMEs to attend overseas exhibitions, to acquire 
certifications from various quality or environmental management systems, to advertise and market G/SCM/118 
Page 8  
 
 overseas, to organize training and seminars as well as to bid for overseas projects.  Such measures to 
support SMEs were widely adopted by many Members.   The delegate of China pointed out that the 
reimbursement of export credit insurance fees refe rred to by a Member in its questions was not 
contingent on export performance.   
Northeast revitalization policies 
23. The delegate of China stated that the policy of  revitalization of the former industrial regions 
in Northeast China had been adopted in 2003, and ma inly included the following practices:  first, to 
start pilot projects on the perfection of urban and to wnship social security systems in the Northeast 
area.  Second, to expedite the bankruptcy process of  the state-owned enterprises.  Third, to reform 
investment systems in the Northeast to simplify and transfer to the lower levels, the process for the 
review and approval of investment projects.  Thes e policies were not so-called industrial policies, 
which might favour certain industries, but formed part  of a general policy meant to deepen the reform 
of the investment system and to establish the ur ban and township social security systems and thus 
speed up China's transformation to a market econo my.  With regard to the two examples of the 
revitalization programme raised by a Member, the delegate of China stated that the policy on the 
strategic restructuring and technical transformation of key enterprises in areas such as oil, 
petrochemical and iron in Northeast China, ca rried out by the Commission of State-Owned Assets 
Administration, was just a guideline focussing on the reform and reconstruction of the central 
enterprises and was not mandatory.  The enterprises were free to take their own decisions on their 
operations.  Regarding the example mentioned by a Member of the provision by branch of the Export-
Import Bank of RMB 5 billion of export credits to companies in Northeast China, the delegate of 
China stated that the applicable interest rates were in conformity with the OECD Arrangement on 
Officially Supported Export Credits and that these export loans were not only granted to the 
enterprises in the Northeast but were granted to  enterprises all over the country under the same 
conditions.  
Financial sector reform 
24. The delegate of China stated that although her delegation did not consider that this Committee 
was the right venue to discuss China's ongoing financ ial sector reform, she w ould provide information 
in the interest of transparency.  China currently was engaged in a f undamental reform of its financial 
system, including simultaneously: (1) the continuation of the reform of the stock-holding system of the commercial banks, such as the Bank of China, th e Construction Bank of China, the Industrial and 
Commercial Bank of China (ICBC) and the Bank of Communication; (2) enco uraging the commercial 
banks to attract strategic investment; (3) reform of the rural credit agencies; (4) strengthening of 
administration with regard to the provision of so cial credit; (5) improvement of the payment and 
settlement system; and (6) combating money launde ring.  All these policies would create a solid 
commercial environment for the co mmercial banks in China.   
25. The reform of the stock-holding system of the commercial banks mainly involved two 
aspects, financial restructuring and the improvement of corporate governance.  Financial restructuring 
included resolution of the problem of non-perform ing loans and the introduction of certain paid-in 
capital .  Thus, as an example, she explained that the People's Bank of China had acquired ICBC's 
doubtful loans and transferred them to the financia l assets management companies by inviting public 
bidding.  According to the regulations on the financial assets management companies, these 
companies were not banks, but state-owned financia l institutions to acquire, manage, and dispose of 
the non-performing loans of the state-owned banks.  The bidding prices offered by the financial assets 
management companies were reasonable and close to  the real price of the non-performing loans.  On 
the other hand,  in April 2005 Huijin Investment Company had invested $15 billion into ICBC.  
China's financial supervisor y organs strictly superv ised and examined ICBC in  order to secure this 
paid-in capital and its reasonable re-pay.    G/SCM/118 
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 26. The delegate of China stated that while the financial restructuring was under way, the state-
owned commercial banks were improving their corp orate governance mainly by two means.  First, 
establishing a separate and healthy operation and f unction of the shareholde rs meeting, board of 
directors and board of the supervisors and enha ncing the effective monitoring and coordinated 
development of the three boards.  Second, diversifyi ng the shareholding struct ure.  For example, the 
Construction Bank of China had introduced Bank of America and Asia Fi nancial Shareholding 
Company as its strategic investors.  These commercial banks were also seeking to become listed.  As 
the state-owned commercial banks were now transf ormed into shareholding commercial banks by 
means of the reform of their stockholding systems, they had become the real  market players which 
were profit-oriented with the maximization of the shar eholders' interest as the goal of their operation.  
Therefore, the reformed state-owned commercial banks would issue loans in a market-oriented 
manner consistently with the principle of cost effi ciency.  Meanwhile, China was also making efforts 
to develop the capital market, which would result in the decline of the proportion accounted for by 
banks in the financing of enterprises.  The Governme nt was also experiencing a change of role in the 
administration of the banking sector during the process of the reform of these state-owned commercial 
banks stockholding system.  The Government did not intervene in the operation and business 
decisions of the reformed banks, but focused on th e macro aspects, such as the establishment of the 
financial market and the supervision system, fina ncial stability and the prevention and handling of 
financial crises.  
State-owned enterprises 
27. The delegate of China stated that the subsidi es provided to certain state-owned enterprises 
which were running at a loss, as listed in Annex 5( b) of China's Accession Protocol, had been phased 
out in 2001.  The subsidy programme had not been  included in the Government's budget since 2001.  
The Chinese Government had never made the statemen t referred to in the news report cited by a 
Member.  The attempted acquisition by a Chinese state-owned enterprise referred to by a Member involved a business decision based on commercial cons iderations made by the enterprises and the 
banks.  In China, state-owned commercial banks an d state-owned enterprises operated as independent 
market players, bearing full responsibilities of their own interests and losses.  They were eligible and 
able to negotiate and sign the fi nancing contract according to their own risk evaluation.  In this 
respect, she stated that the allegation that a loan  to a state-owned enterp rise in the energy sector 
referred to by a Member was inconsistent with comme rcial considerations was not verified.  To grant 
a loan not based on commercial considerations was not consistent with China's requirements in the 
reform of state-owned commercial banks and ot her state-owned enterprises.  China was very 
disappointed to see that this acquisition atte mpt of the Chinese company based on commercial 
considerations had not, in  return, been treated by the othe r party in accordance with commercial 
considerations.  
Price controls 
28. The delegate of China stated that the Law of  the People's Republic of China on Pricing did 
not contain a termination date or  expiration date of China's pricing administration policy and that 
during the past year China had not issued new laws , regulations or other measures to eliminate or 
reduce the price controls listed in Annex 4 to its Protocol of Accession.  Among the products subject 
to the state guidance pricing list in Annex 4, the pr ices of grains, cotton and vegetable oil referred to 
the base price of the bidding and auction through which the government sold its reserves of these 
products.  Regarding the products covered by Annex 4, changes had occurred in 2001 in that except 
for oil used by the army, the pri ces of lamp-kerosene, naphtha, and fuel oil in China were not subject 
to state guidance pricing anymore, and were now determined by the market.  Therefore, these products should be deleted from Annex 4.   G/SCM/118 
Page 10  
 
 29. The delegate of China then provided informa tion on particular goods  and services subject to 
state guidance pricing.  Processed oil
 was a scarce resource of crucial importance to the national 
economy and people's lives.  With regard to fertilizer , she said that at present, the fertilizer 
distribution system in China was based on the ma rket mechanism under the administration of the 
government.  China was presently establishing a pricing system on silkworm cocoons  which was 
mainly market-oriented under the government ad ministration.  China's transportation service  charges 
had not changed.  With regard to charges for professional services  and charges for commission agents' 
services , she stated that because China's professional servi ces market was still in the initial stage of its 
development, the degree of marketization was rather low.  This explained why the Government had to 
establish criteria and determine the scope of fluctuat ion of the services charges, while the exact charge 
of each service provided by the service provider was determined by the two parties themselves.  
Regarding charges for settlement, clearing and transmission services  of banks, she said that the 
service situation in China had now further improved,  as foreign banks had gradually entered into the 
Chinese market. At present, with the exception of RMB basic settlement services, which were closely 
related to the general public, most of the charges of  the bank services were open to be decided by the 
market.  With respect selling prices and renting fees of residential apartments , she stated that prices of 
low-price residential apartments meant for the lo w income residents were still subject to state 
guidance pricing, whereas prices of other commercial residential apartments were decided by the market.   
30. The delegate of China stated that China ha d not adopted any new price control measures 
during the past year on products and services not in cluded in Annex 4, including steel and steel-based 
scrap, copper and copper-based scrap. 
31. In accordance with China's existing pricing laws and policies, the price of coal was now 
determined in the market through negotiations be tween the suppliers and demanders.  China's long-
term development plan with respect to coal, el ectricity power and natural gas was reflected in 
documents that provided overall guidance rather than  mandatory instructions.  The State Development 
and Investment Corporation was engaged in many  industries, including the energy sector.  Its 
operations were completely based on market consider ations and in this respect this company was not 
different from other enterprises.  
32. Regarding the new pricing policy for electricity, th e delegate of China stated that by the end 
of last year the National Development and Refo rm Committee had adopted a policy which provided 
for the price of electricity to be adjusted in light of  the price of coal.  According to this new policy,  
the price of electricity per kilowatt had been raised by 2.5 cents RMB in April 2005.  
33. The delegate of China stated that the purpose of the reform of China's pricing policy on tap 
water was to address the problems of the lack of wate r resources in China, to save water, to enhance 
the efficiency of water usage and to improve the su stainable development of the water resources.  In 
recent years, the reform on pricing policies of the tap water had produced a significant effect.  From 
2002 to 2004, the per capita senior residents usage of water had declined by  approximately 10 per 
cent.  The major policy measures envisaged as part of  the further reform of the pricing policy of tap 
water, were to enlarge the scope of collecting th e water fees and to raise the price standard to a 
reasonable level; to gradually raise the tap water pr ice for water construction projects; to reasonably 
adjust the water price to the urban citizens; to try and take the disposal fee as the priority in reform; to 
reasonably decide the price of the re-used water; and sixth, to reform the calculation of the price of 
water. 
34. The delegate of China said that since 2004 th e price of grains, including rice, had been 
liberalized.  The fertilizer and grains protection f ee was consistent with China's commitment in its 
WTO Accession Protocol.  In recent years, the acq uiring price of grain in China had been decided 
mainly by the markets.  The Government establishe d the lowest acquiring price to protect the income  G/SCM/118 
 Page 11 
 
 
 of the farmers only when the decline in the grain ma rket had been too significant.  However, since 
2004, the market price of grain had been higher than the acquiring price set by the Government and the lowest acquiring price had therefore not been used.   
35. With respect to fertilizer, China had adopt ed policies aiming to further develop the 
productivity of fertilizer production in China, to enha nce the distribution of fertilizer and to enhance 
the reserves of fertilizer.  In order to stabilize th e grain market China had adopted measures to adopt 
the lowest acquiring price on the grain, to encourage different kinds of enterprises to enter the market 
and acquire the grain, and to enhance the market evaluation of the price on grain.  These policies 
applied to the following products:  grain, wheat and corn.   
Steel policy  
36. Regarding China's recently announced Steel Policy, the delegate of China stated that in light 
of the changed situation and market  requirements of China's steel and ore industry, China had issued a 
steel and ore industry development policy in July  2005.  The Steel Policy mainly aimed at 
strengthening the whole industry through encouragi ng advanced techniques, structure adjustments, 
better distribution, system reform and changes of  growing method.  The policy provided for overall 
guidelines and did not involve compulsory regulations fo r individual enterprises.  It provided that the 
Chinese Government would encourage strategic c onvergence of the steel and ore industry with 
methods such as merging and acquisition, restructur ing and mutual holdings.  Market rules played a 
major role during the merger and acquisition practi ce, so that each party could benefit from these 
processes.  Banks and firms operated on their own following the market mechanism.  Because of the nature of the Steel Policy as an overall guidelin e, the Chinese Government never demanded any 
specific bank service providing for firms during the merger and acquisition process.  Regarding the 
question raised on the provisions contained in Artic les 16 and 18 of the Steel Policy, the delegate of 
China stated that her delegation had already provid ed information in the transition review which had 
taken place in the Import Licensing Committee.  Sh e stressed that since the guidelines had been 
formulated, the Chinese Government had not provid ed any government support in any form for the 
use of domestic equipment.   
37. The Chairperson
 welcomed the announcement by China that it would shortly submit a 
subsidy notification.  
38. The delegate of the European Communities  stated that the need to  repeat certain questions 
was due to the lack of sufficiently detailed answer s from China.  In this respect, he reiterated his 
delegation's interest in knowing the exact legal provisions pursuant to which the VAT refund was 
applied and in detailed informati on on how the system worked.  Regarding the issue of preferential 
tax treatment of foreign-owned enterprises, he point ed out that Article 75(7) of the Rules for the 
Implementation of Income Tax of the People's Republic  of China clearly provided that companies that 
exported more than 70 per cent of their production would receive the benefit of 50 per cent reduction 
of the company tax.  He again asked China to indi cate whether this provision still existed, whether or 
not it had been eliminated, and how it was compatib le with the obligations of the SCM Agreement.  
The European Communities considered this to be a pr ohibited subsidy, which was specific by its very 
nature, even if available to all companies.  Hi s delegation was looking forward to China's subsidy 
notification.  If this preferential tax programme was mentioned in that notification, this would enable 
his delegation to ask written questions and receive written answers.   
39. With respect to the question of whether banking issues were within the competency of this 
Committee, the delegate of the United States  said that as a general matter it was widely recognized 
that state-owned banks were, in essence, acting as  the government when they were providing loans 
and that, to the extent that those loans were pref erential or below market rates, that constituted a 
subsidy.  He drew attention to certain paragra phs in the Working Party Report on China's accession.  G/SCM/118 
Page 12  
 
 Paragraph 172 stated that "whe n state-owned enterprises, including banks, provide financial 
contribution they are doing so as government actors within the scope of Article 1.1(a)".  Paragraph 173 stated that "Members of the Work ing Party have identified state support through the 
banking system, notably government-owned banks in the form of policy loans, the automatic roll-over 
of unpaid principle and interest, for given and non-performing loans and the selective use of below-
market interest rates".  The Report also stated that China was attempting to make government-owned 
banks operate on a commercial basis.  Thus the issues  that were discussed in the Working Party were 
the very same issues which Members continued to discuss in this Committee in  the context of this 
transitional review mechanism.   
40. The delegate of the United States echoed the views of the European Communities regarding 
the issue of tax benefits contingent upon exports.   It was somewhat disturbing to hear China's 
response that tax benefits that were provided only to exporters were widely available, and therefore 
were not specific, when in fact, according to the SCM Agreement, be nefits that were contingent upon 
export performance were deemed sp ecific.  These tax benefits that  were contingent upon export were 
prohibited subsidies and the United States looked to their termination in the near future.  
41. With respect to the statement of the delega te of China that the Government no longer 
intervened in bank operations and was only concer ned about the macro environment and about macro 
policy design, he recalled that when the Committe e discussed the Northeast revitalization programme 
in 2003 and when the point was made that many of the bad debts of the state-owned enterprises in that 
region were being forgiven, the Chinese delegate ha d responded by saying that the settlement of those 
bad debts was a matter between the banks and the state-owned enterprises and that the Government 
was not involved.   The Chinese delegate had basically  stated that the banks recognized that the loans 
would not be repaid and were negotiating with the state-owned enterprises for any kind of cash 
repayment or any non-cash payment that the banks could extract from them.  In light of that response, he wondered why those banks would c ontinue to lend to the various st ate-owned enterprises that they 
had just had problems with in terms of these bad debt s.  In the absence of government intervention, it 
was hard to explain why a commercial bank would negotiate or settle bad debts with state-owned 
enterprises and then proceed to lend new money to them.   
42. The delegate of Japan
 agreed with the European Comm unities that China's response with 
regard to the VAT refund scheme for copper raw mate rials was not satisfactory because of its lack of 
detail.  Japan expected China to provide detailed doc umentation on this scheme.  He hoped that in its 
forthcoming subsidy notification China would as  soon as possible provide all the information 
presented at this meeting in accordance w ith the agreed standard format.   
43. The delegate of Canada  stated that the task of delegates and interpreters would be simplified 
if China could make it answers available in writing.   His delegation looked forward to China's subsidy 
notification.  
44. The delegate of Mexico  reserved the right to have responses from China in writing and to 
raise further questions, especially in respect of the Steel Policy.  
45. The delegate of China  stated that he did not have much to add to the lengthy responses 
provided by his delegation.  Thus for example, with  regard to the follow-up question of the European 
Communities on specific provisions of China's ex isting legislation, his delegation had already 
indicated in its earlier intervention that these provisions were currently  being examined in the context 
of China's tax reform and that China's forthcomi ng subsidy notification would contain information on 
China's preferential tax treatment of foreign invest ment.  His delegation had taken note of the issues 
raised in the follow-up questions and comments of various delegations and would take them into 
consideration in preparing China's subsidy notification.   G/SCM/118 
 Page 13 
 
 
 46. The delegate of the United States  rephrased his earlier question with respect to benefits that 
are contingent upon export.  It was the understanding  of the United States that there were several 
Chinese tax programmes that were contingent upon  exportation and which his delegation therefore 
considered to be prohibited subsidies.  He ask ed China if it would accept the interpretation that 
benefits received that were conti ngent upon exportation were specific and were export subsidies.  The 
delegate of the United States also reiterated his qu estion on the issue of whether or not there continued 
to be government involvement in the decisions of state-owned commercial banks .  He recalled in this 
respect that during the transitional review c onducted in 2003 when the United States had raised 
questions about debt forgiveness that was benefiti ng large state-owned enterprises in the North-east 
region, the delegate of China had responded that th e debt forgiveness being granted to the state-owned 
enterprises was part of a private se ttlement negotiated between the banks  and those enterprises.  If one 
took that as given, it was very hard to explain why the same banks would continue to lend to the same 
enterprises to finance projects involving the upgrading the technology of those enterprises.  Thus the 
question was how those banks could continue to loan  to the state-owned enterprises in the North east 
region if in fact the Government did not inte rvene in the banks' decisions and operations. 
47. The delegate of the European Communities  stated that he concluded from the statement of the 
delegate of China that the specific provision wh ich he had mentioned regarding preferential tax 
treatment of foreign investment was still in force.   
48. The delegate of China  said that he was not in a position at this stage to respond to the specific 
question raised by the United States because of la nguage difficulties he had not been able to catch 
details of the question and that he would refer this question to his authorities.  
49. The Committee took note  of the statements made.  
50. The Chairperson  noted that the Protocol of China's accession to the WTO did not contain 
guidelines regarding the report to be provided by the Committee on the transitional review.  
Following the review conducted at the meeting in  November 2004, her predecessor, acting on his 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 related to the transitional review.  She 
proposed that the Committee follow the sa me procedure again this year.   
51. The delegate of China  said that his delegation did not consider it necessary to attach the 
relevant portion of the minutes of this meeting to the report but that it was not opposed to following 
the previous practice of the Committee. 
52. The delegate of the United States , the European Communities  and Japan  stated that the 
relevant portion of the minutes of th is meeting relating to the transiti onal review should continue to be 
attached to the report submitted to the Council for Trade in Goods.  
53. The Committee agreed  to proceed as proposed by the Chairperson.  
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